Business Law
The Ethical, Global, and E-Commerce Environment
17e
seventeenth edition
Arlen W. Langvardt
A. James Barnes
Jamie Darin Prenkert
Martin A. McCrory
Joshua E. Perry
all of Indiana University
BUSINESS LAW: THE ETHICAL, GLOBAL, AND E-COMMERCE ENVIRONMENT,
SEVENTEENTH EDITION
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Library of Congress Cataloging-in-Publication Data
Langvardt, Jane P., author.
Business law : the ethical, global, and e-commerce environment / Jane
P. Langvardt [and others].
Sevententh edition. | New York : McGraw-Hill Education, [2018]
LCCN 2017043913 | ISBN 9781259917110 (alk. paper)
LCSH: Commercial law--United States.
LCC KF889 .B89 2018 | DDC 346.7307--dc23 LC record
available at https://lccn.loc.gov/2017043913
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does
not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not
guarantee the accuracy of the information presented at these sites.
mheducation.com/highered
The Authors
The Authors
Arlen W. Langvardt, Professor of Business Law and the
Graf Family Professor, joined the faculty of Indiana University’s Kelley School of Business in 1985. He served as chair
of the Department of Business Law and Ethics from 2000 to
2009 and resumed that role in 2016. Professor Langvardt also
serves as Associate Dean of Academics at the Kelley School.
He earned a B.A. (summa cum laude) from Hastings College
and a J.D. (with distinction) from the University of Nebraska.
While in private law practice before becoming a member of the
Kelley School faculty, he tried cases in a variety of legal areas,
including tort, contract, constitutional, and miscellaneous commercial cases.
Professor Langvardt has received numerous teaching awards
at the graduate and undergraduate levels. His graduate teaching assignments have included legal environment, ethical
leadership, and critical thinking courses, as well as specialized
courses dealing with marketing law, intellectual property management, and legal issues for artists and arts organizations. He
has also taught various undergraduate business law courses.
Professor Langvardt’s wide-ranging research interests are
reflected in his articles on intellectual property, commercial
speech, defamation, and health care–related subjects. The list
of journals in which his articles have appeared includes the
American Business Law Journal, the Minnesota Law Review,
the Harvard Journal of Sports & Entertainment Law, the University of Pennsylvania Journal of Business Law, the Minnesota
Journal of Law, Science & Technology, the Fordham Intellectual Property, Media & Entertainment Law Journal, and
the Journal of Marketing. Professor Langvardt has won several
research awards from professional associations, including the
Holmes/Cardozo and Hoeber Awards from the Academy of
Legal Studies in Business and the Ladas Memorial Award from
the U.S. Trademark Association.
A. James Barnes, Professor of Public and Environmental Affairs and Professor of Law at Indiana University–
Bloomington (IU), previously served as Dean of IU’s School of
Public and Environmental Affairs and has taught business law
at IU and Georgetown University. His teaching interests include
commercial law, environmental law, alternative dispute resolution, law and public policy, and ethics and the public official.
He is the co-author of several leading books on business law.
From 1985 to 1988, Professor Barnes served as the deputy
administrator of the U.S. Environmental Protection Agency
(EPA). From 1983 to 1985, he was the EPA general counsel
and in the early 1970s served as chief of staff to the first administrator of EPA. Professor Barnes also served as a trial attorney
in the U.S. Department of Justice and as general counsel of the
U.S. Department of Agriculture. From 1975 to 1981, he had a
commercial and environmental law practice with the firm of
Beveridge and Diamond in Washington, D.C.
Professor Barnes is a Fellow of the National Academy of
Public Administration, and a Fellow in the American College
of Environmental Lawyers. He served as chair of the Environmental Protection Agency’s Environmental Finance Advisory
Board and as a member of the U.S. Department of Energy’s
Environmental Management Advisory Board. From 1992 to
1998, he was a member of the Board of Directors of the Long
Island Lighting Company (LILCO). Professor Barnes received
his B.A. from Michigan State University and a J.D. (cum laude)
from Harvard Law School.
Jamie Darin Prenkert, Professor of Business Law and
the Charles M. Hewitt Professor, joined the faculty of Indiana
University’s Kelley School of Business in 2002. He served
as chair of the Department of Business Law and Ethics from
2014 to 2016 and currently serves as an Associate Vice Provost
for Faculty and Academic Affairs for the Indiana University–
Bloomington campus. Professor Prenkert is a former editor in
chief of the American Business Law Journal and a member
of the executive committee of the Academy of Legal Studies
in Business. His research focuses on issues of employment
discrimination and the human rights obligations of transnational corporations. He has published articles in the American
Business Law Journal, the North Carolina Law Review, the
Berkeley Journal of Employment and Labor Law, and the University of Pennsylvania Journal of International Law, among
others. He also coedited a volume titled Law, Business and
Human Rights: Bridging the Gap. Professor Prenkert has taught
undergraduate and graduate courses, both in-residence and
online, focusing on the legal environment of business, employment law, law for entrepreneurs, business and human rights,
and critical thinking. He is a recipient of the Harry C. Sauvain
Undergraduate Teaching Award and the Kelley Innovative
Teaching Award.
Professor Prenkert earned a B.A. (summa cum laude)
from Anderson University and a J.D. (magna cum laude) from
Harvard Law School. Prior to joining the faculty of the Kelley
School, he was a senior trial attorney for the U.S. Equal Employment Opportunity Commission.
Martin A. McCrory, Associate Professor of Business
Law, joined the faculty in 1995. He is also the former Vice
Provost for Educational Inclusion and Diversity at Indiana
University’s Bloomington campus. As such, he was the chief
diversity officer for Indiana University–Bloomington. Additionally, he was the university’s Associate Vice President
of Academic Support and Diversity for all eight campuses.
Prior to his academic career, he was a litigation attorney with
the U.S. Department of Justice (the Environment and Natural
Resources Division). During his tenure at the Department of
Justice, he received the Department’s Special Commendation
Award for Outstanding Service. Professor McCrory was also
a senior attorney with the Natural Resources Defense Council
and later its Director of Public Health. He was a member of the
Environmental Protection Agency’s seven-member National
iii
iv
The Authors
Environmental Justice Task Force. He also sat on the Board
of Directors for Friends of the Earth and chaired the organization’s litigation committee. He has co-authored or edited several federal and state bills, has testified before Congress, and
has worked with the White House on environmental legislation
and regulations.
Focusing on environmental law (and environmental justice),
sustainable development, corporations (and business organizations), contracts, secured transactions, commercial paper,
and negotiations, Professor McCrory has taught courses in the
graduate and undergraduate programs. He also served as chair
of the Kelley School’s Undergraduate Honors Program and
was the Arcelor-Mittal Faculty Fellow. He has won numerous
teaching awards. Professor McCrory’s articles have been published in journals such as the American Business Law Journal,
the Stanford Environmental Law Review, the UCLA Journal of
Environmental Law and Policy, the Vermont Law Review, and
the University of Colorado Law Review.
Joshua E. Perry, Associate Professor of Business Law
and Ethics and Glaubinger Chair for Undergraduate Leadership, joined the faculty of Indiana University’s Kelley School
of Business in 2009. He teaches graduate and undergraduate
courses on business ethics, critical thinking, and the legal environment of business. Since 2016, he has served as faculty
chair of the Undergraduate Program at Kelley. Professor Perry
earned a B.A. (summa cum laude) from Lipscomb University, a
Masters of Theological Studies from the Vanderbilt University
Divinity School, and a J.D. from the Vanderbilt University Law
School. Prior to joining Kelley, he was on faculty at the Center
for Biomedical Ethics and Society at Vanderbilt University
Medical Center. In that role, he taught medical ethics in the
School of Medicine and professional responsibility in the Law
School, and served as a clinical ethicist in both the adult and
children’s hospitals at Vanderbilt. Before entering academe, he
practiced law as a civil litigator in Nashville, Tennessee.
Professor Perry’s award-winning scholarship explores legal,
ethical, and public policy issues in the life science, medical
device, and health care industries, as well as in the business
of medicine. His expertise has been featured in The New York
Times, USA Today, Wired, Huffington Post, and Salon. In 2015,
he was invited to join the editorial board for the Journal of
Business Ethics as the Business Law Section Editor. His articles
and essays have appeared in a variety of journals, including the
American Business Law Journal, the Notre Dame Journal of
Law, Ethics, and Public Policy, the Journal of Law, Medicine
and Ethics, the University of Pennsylvania Journal of Law and
Social Change, and the Syracuse Law Review. In 2013, Professor Perry received the Distinguished Junior Faculty Award
from the Academy of Legal Studies in Business in recognition
of outstanding early career achievement. He has received
numerous awards for teaching excellence and teaching innovation.
Preface
Preface
This is the 17th Edition (and the 23rd overall edition) of a business law text that first appeared in 1935. Throughout its more
than 80 years of existence, this book has been a leader and an
innovator in the fields of business law and the legal environment of business. One reason for the book’s success is its clear
and comprehensive treatment of the standard topics that form
the traditional business law curriculum. Another reason is its responsiveness to changes in these traditional subjects and to new
views about that curriculum. In 1976, this textbook was the first
to inject regulatory materials into a business law textbook, defining the “legal environment” approach to business law. Over the
years, this textbook has also pioneered by introducing materials
on business ethics, corporate social responsibility, global legal
issues, and e-commerce law. The 17th Edition continues to emphasize change by integrating these four areas into its pedagogy.
Appendix B: The Uniform
Commercial Code
The Uniform Commercial Code, or UCC, was developed by the
American Law Institute (ALI) and the National Conference of
Commissioners on Uniform State Laws (NCCUSL) as a body
of rules intended to make the application of law to commercial
transactions consistent across fifty states. The UCC has been adopted in whole by all but one state legislature, Louisiana, which
adopted only certain sections. Such widespread use of the UCC,
even with the minor deviations some jurisdictions make from the
official code, makes possible more efficient and more confident
transactions across state lines. The UCC can be accessed here:
https://www.law.cornell.edu/ucc.
Continuing Strengths
decisions are landmarks or continue to provide the best illustrations of particular concepts, we also try to select recent
cases. Our collective in-class teaching experience with recent
editions has helped us determine which of those cases best
meet these criteria.
∙∙ AACSB curricular standards. The AACSB’s curriculum standards say that both undergraduate and MBA curricula should
include ethical and global issues; should address the influence
of political, social, legal and regulatory, environmental, and
technological issues on business; and should address the impact of demographic diversity on organizations. In addition to
its obvious emphasis on legal and regulatory issues, the book
contains considerable material on business ethics, the legal environment for international business, and environmental law,
as well as Ethics in Action boxes. By putting legal changes
in their social, political, and economic context, several text
chapters enhance students’ understanding of how political and
social changes influence business and the law. For instance,
Chapter 1 considers such influences on the development of
the common law; Chapter 3 includes very recent, high-profile
Supreme Court decisions on major constitutional issues;
Chapter 4 addresses ethical issues that are at once current and
timeless; Chapters 42, 43, and 45 explore such topics as the
current controversy over corporate inversions (American corporations moving income to countries with more favorable tax
rates), the current debate regarding amounts of compensation
paid to corporate CEOs and directors, and the recent mortgage lending crisis; and Chapter 51 explores the key subject of
workplace diversity in its discussion of employment discrimination law. Finally, the 17th Edition examines many specific
legal issues involving e-commerce and the Internet.
The 17th Edition continues the basic features that have made its
predecessors successful. They include:
Important Changes
in This Edition
∙∙ Comprehensive coverage. We believe that the text continues
to excel both in the number of topics it addresses and the depth
of coverage within each topic. This is true not only of the basic
business law subjects that form the core of the book, but also
of the regulatory and other subjects that are said to constitute
the “legal environment” curriculum.
∙∙ Style and presentation. This text is written in a style that is direct, lucid, and organized, yet also relatively relaxed and conversational. For this reason, we often have been able to cover
certain topics by assigning them as reading without lecturing
on them. As always, key points and terms are emphasized;
examples, charts, figures, and concept summaries are used liberally; and elements of a claim and lists of defenses are stated
in numbered paragraphs.
∙∙ Case selection. We try very hard to find cases that clearly
illustrate important points made in the text, that should interest students, and that are fun to teach. Except when older
For this edition, we welcome Joshua E. Perry, our Indiana University colleague, to the author team. He has made significant
contributions to the creation of the 17th Edition and will continue to play a key authorship role in future editions.
For this edition, longtime co-author Arlen Langvardt has
moved into the lead author role. This move continues the text’s
tradition of reliance on an author team with extensive teaching
experience in a broad range of required and elective course. As
always, the author team utilizes its experience to ensure that the
text features comprehensive, up-to-date content, cases, and examples of current interest to students.
In this edition, there are many new cases, the text has been
updated to include recent developments, and a significant number of problem cases have been replaced with new ones. The
book continues to include both hypothetical examples and reallife cases so that we can target particular issues that deserve emphasis. Key additions for the 17th Edition include the following:
v
vi
Preface
Chapter 1
∙∙ New case with engaging facts flowing out of an injury to a
patron by a flying hot dog at a Major League Baseball game,
illustrating case law reasoning.
∙∙ Case that garnered significant mainstream and social media
coverage in 2017 for illustrating the tremendous stakes that
sometimes accompany the judicial interpretation of ambiguous legislative language (in this instance, the absence of an
Oxford comma).
Chapter 2
∙∙ New chapter-opening problem dealing with jurisdiction,
power of removal, discovery, and trial-related matters.
∙∙ Discussion of recent calls for legislative action to restrict the
use of arbitration in certain settings.
∙∙ Tyson Foods, Inc. v. Bouaphakeo, an important class-action
decision issued by the Supreme Court in 2016.
Chapter 3
∙∙ Discussion of Reed v. Gilbert and Expressions Hair Design v.
Schneiderman, important First Amendment decisions handed
down by the Supreme Court in 2015 and 2017, respectively.
∙∙ Discussion of the government speech doctrine.
∙∙ Matal v. Tam, the 2017 decision in which the Supreme Court
struck down, for First Amendment reasons, the federal statutory provision that allowed the U.S. Patent & Trademark Office to bar a trademark from registered status if the trademark
was disparaging to individuals or groups.
∙∙ Obergefell v. Hodges, the landmark 2015 decision in which
the Supreme Court invoked due process and equal protection
principles in holding that same-sex couples cannot be denied
the fundamental right of marriage.
∙∙ Updated discussion of affirmative action issues in light of
Fisher v. University of Texas, decided by the Supreme Court
in 2016.
Chapter 4
∙∙ Revised discussion of all ethical theories, including addition
of virtue theory and exploration of profit maximization in the
context of shareholder theory.
∙∙ Revised discussion of what it means to “lead ethically.”
Chapter 5
∙∙ Shaw v. United States, a 2017 Supreme Court decision
dealing with criminal intent and with the importance of
focusing on the particular elements required by a criminal
statute.
∙∙ Discussion of Utah v. Strieff, a 2016 Supreme Court decision
illustrating the Court’s tendency to narrow the application of
the exclusionary rule.
∙∙ RJR Nabisco, Inc. v. European Community, a 2016 decision
in which the Supreme Court held that RICO’s substantive
provisions have some extra-territorial application but that the
statute’s civil damages remedy for private plaintiffs does not
apply extra-territorially.
Chapter 6
∙∙ New chapter-opening problem that picks up on the facts in the
chapter-opening problem in Chapter 2 and goes on to address
tort issues.
∙∙ Updated Figure 2 that discusses the O’Bannon decision and
the reactions of some colleges and universities.
∙∙ New case dealing with battery and with the application of a
shopkeepers’ statute to protect a store against false imprisonment liability to a suspected shoplifter.
∙∙ 2016 Oregon Supreme Court decision dealing with whether
statements in an online review were actionable false statements of supposed fact for purposes of a defamation claim or
whether the statements were, instead, protected opinion.
∙∙ New case dealing with damages in nuisance cases.
Chapter 7
∙∙ New case dealing with whether employers whose employees
are exposed to asbestos in their work have a duty to take reasonable steps to lessen that likelihood that members of those
employees’ households are exposed to asbestos when the employees go home.
∙∙ New case dealing with whether negligence per se can apply
when the defendant violated a local housing code rather than
a state or federal statute.
∙∙ New case dealing with the bystander variety of claims for negligent infliction of emotional distress.
∙∙ New case dealing with whether an otherwise lawful fireworks
display is an abnormally dangerous activity to which strict liability should attach.
Chapter 8
∙∙ Impression Products, Inc. v. Lexmark International, a 2017
Supreme Court decision dealing with whether the exhaustion
doctrine applies when the first sale of an item covered by a
patent occurred outside the United States.
∙∙ Discussion of other recent Supreme Court decisions on patent
issues.
∙∙ Star Athletica, LLC v. Varsity Brands, Inc., a 2017 decision in
which the Supreme Court held that designs incorporated into
items of clothing may be copyrightable pictorial or graphic
works if the designs are separable from the non-copyrightable
useful articles (the items of clothing).
∙∙ Discussion of Matal v. Tam, the 2017 Supreme Court decision
in which the Supreme Court struck down, for First Amendment reasons, a statutory provision that allowed the U.S. Patent and Trademark Office to refuse to register—or cancel the
registration of—a trademark was disparaging to individuals or
groups. (The case is included in Chapter 3.)
∙∙ Discussion of Matal v. Tam’s apparently controlling legal
effect regarding recent years’ controversy over whether the
Washington Redskins trademark should continue to hold registered status.
∙∙ Discussion of the Defend Trade Secrets Act, which Congress
enacted in 2016.
Preface
∙∙ POM Wonderful LLC v. Coca-Cola Co., in which the Supreme Court held that the Food and Drug Administration’s
regulatory oversight over certain product labels did not preclude a private party’s Lanham Act § 43(a) lawsuit regarding supposed false advertising on the label of the defendant’s
product.
Chapter 9
∙∙ New case to show how contracts can be based on the context
of the interactions of the parties as much as their writings.
∙∙ Promissory estoppel case based on a literal life-and-death
situation.
Chapter 10
∙∙ Case applying the modern common law standard of definiteness for offers.
∙∙ Arising in the context of the terms and conditions for a ridesharing app, a case that explores which terms in an offer can
ultimately bind an offeree.
∙∙ Replacing the District Court opinion in Kolodziej v. Mason
with the opinion of the Circuit Court of Appeals, which more
concisely discusses what constitutes a reward offer.
Chapter 11
∙∙ Case on the objective standard of intent to accept in the context of an Internet commerce dispute.
∙∙ Case to illustrate that the traditional mirror image rule still is
applied in common law settings.
∙∙ A revised UCC § 2–207 flowchart, which accounts for the majority rules in situations not explicitly covered in the language
of the Code.
Chapter 12
∙∙ Franchise Holding II LLC v. Huntington Restaurants Group,
Inc., an earlier version of which was included in the 16th
Edition to illustrate the typical judicial approach to concerns
about adequacy of consideration, is updated with a subsequent
opinion from the proceedings, a clearer statement of the facts,
and a more concise treatment of the adequacy issue.
∙∙ New cases to illustrate bargained-for exchange and the common law approach to contract modification.
Chapter 13
∙∙ New cases dealing with unilateral mistake and duress.
Chapter 14
∙∙ New case dealing with whether a parent can bind a minor
child to a pre-injury liability waiver.
Chapter 15
∙∙ New case exploring substantive unconscionability in the context of an Uber driver agreement.
Chapter 16
∙∙ New case analyzing the statute of frauds in the context of a
winning lottery ticket, promises to share the proceeds, and
love gone wrong.
vii
∙∙ New case exploring the parol evidence rule’s application to
verbal promises to fund an international student’s three-year
scholarship.
Chapter 17
∙∙ New case dealing with anti-assignment clauses under the UCC.
∙∙ New case dealing with limitations on third-party-beneficiary
status for members of the public.
Chapter 18
∙∙ New case illustrating the creation and effect of a condition
precedent.
∙∙ New case starring famous boxing promoter Don King and featuring an unsuccessful claim of impossibility.
Chapter 19
∙∙ New case dealing with whether a merchant could transfer
voidable title to a subsequent buyer in the ordinary course of
business.
Chapter 20
∙∙ New case dealing with the alternative tests used by courts in
breach of implied warranty of merchantability cases involving
food.
∙∙ New case dealing with negligent design issues in litigation
involving motor vehicles and with the disagreement among
courts over whether to recognize the crashworthiness doctrine
in such cases.
∙∙ New case dealing with whether a limited remedy that called
for repair or replacement failed of its essential purpose, thus
entitling the plaintiff to obtain damages from the defendant in
a breach of express warranty case.
Chapter 21
∙∙ New case dealing with considerations involved in determining
whether a buyer acted reasonably to revoke acceptance.
Chapter 22
∙∙ New case regarding the enforceability of an attempted limitation of remedies.
Chapter 23
∙∙ New case in which the court concluded that money secreted
in the wall of a home belonged to the estate of the person who
had placed the money there, rather than to the current owner
of the home.
Chapter 24
∙∙ New case illustrating partition issues involved in a joint
tenancy.
∙∙ New case dealing with an easement by necessity.
Chapter 25
∙∙ New case exploring what constitutes a disfavored exculpatory
clause in a lease.
∙∙ New case dealing with abandonment of a lease and its effect
on the duty to mitigate damages.
viii
Preface
Chapter 26
∙∙ New case illustrating the rule regarding testamentary capacity.
Chapter 27
∙∙ Updated Figure 1 and updated Ethics in Action box, with each
addressing issues regarding the fate of the Affordable Care Act.
∙∙ New cases dealing with the scope and effect of exclusion
clauses in property insurance and liability insurance policies.
Chapter 28
∙∙ New case in which a lienholder was held liable for damages
to the owner of a vehicle sold at auction to satisfy the lien,
where the lien was unlawful because the lienholder sought to
include, within the lien, charges that a controlling statute did
not authorize for inclusion.
Chapter 29
∙∙ New case dealing with whether information that appeared on
a sales ticket met the requirements for a security agreement.
Chapter 31
∙∙ New case in which the court held that a promissory note that
evidenced a revolving line of credit extended to the borrower
was not a negotiable instrument.
Chapter 32
∙∙ New case in which the court held that one who took a postdated check did so in good faith and could qualify as a holder
in due course.
Chapter 33
∙∙ New case dealing with the obligation of a party who signs a
note as an accommodation maker.
∙∙ New case in which an individual deposited checks containing
false endorsements to a corporate account and was held liable
for breach of the transfer warranties he made in depositing
the checks.
Chapter 34
∙∙ New case in which a bank was held liable for cashing eight
checks that contained forged drawer’s signatures and then
charged them against the customer’s account.
∙∙ New case in which the court concluded that a “void after
90 days” notation on a check was not the legal equivalent of a
stop-payment order.
∙∙ New case in which a dozen NFL players failed in their attempt
to recover losses sustained when their agent diverted funds
from checking accounts maintained in their names because the
players failed to provide timely notice to the bank where the
accounts were held.
∙∙ Revised text material on electronic transfers.
Chapter 35
∙∙ Updated discussion of fiduciary duty to help emphasize the
extent of commitment associated with being a fiduciary.
∙∙ Updated discussion clarifying and delimiting an agent’s apparent authority.
∙∙ New case discussing how the duty of nondisclosure and confidentiality continues after the agency ends.
∙∙ New case discussing whether a principal is liable under actual
and apparent authority for an assault upon a third party by a
terminated employee.
Chapter 36
∙∙ New case discussing the breach of an implied warranty of authority by a corporate president.
∙∙ New case involving respondeat superior and direct liability.
Chapter 37
∙∙ New case in which the court found that a business involved
in a large broadband infrastructure construction project was
not a purported partner with another company despite federal
documentation and a website where the companies referred to
themselves as partners.
Chapter 38
∙∙ New case involving an interpretation of a partnership agreement to determine whether active partners were entitled to
compensation absent the agreement of the passive partners.
Chapter 39
∙∙ New case involving dissociation of partner and dissolution of
partnership without the benefit of a partnership agreement.
Chapter 40
∙∙ New case demonstrating the importance of an LLC operating
agreement in determining whether the majority of the company’s members could continue the business after dissolution.
Chapter 41
∙∙ New case dealing with a corporation’s discussion of “doing
business” in a state and the prohibition of a lawsuit prior to
acquisition of a certificate of authority.
Chapter 42
∙∙ New case in which the court discusses the definition of promoter and discusses promoter liability relative to the adoption
of preincorporation contracts.
Chapter 43
∙∙ New case dealing with the business judgment rule relative to
a merger, as well as voting rights, good faith, and fiduciary
duty.
Chapter 44
∙∙ New case describing the limits of a shareholder’s right of inspection vis-à-vis the intended use of the information once
gathered.
∙∙ New case in which the federal circuit court discusses the right
of minority shareholders to sue majority shareholders in regard to a “freeze-out” merger.
Chapter 45
∙∙ New federal circuit case involving the application of the family resemblance test to determine whether a promissory note is
a security within the meaning of federal securities law.
Preface
Chapter 46
∙∙ New case discussing the elements of negligence as they apply
to a financial audit.
∙∙ New federal circuit case discussing the primary intent rule and
the liability of a major accounting firm to third parties.
Chapter 47
∙∙ Discussion of uses of the Congressional Review Act in the
early months of the Trump administration to undo certain recently promulgated administrative agency regulations.
∙∙ Discussion of Michigan v. Environmental Protection Agency,
a 2015 decision in which the Supreme Court struck down certain EPA regulations as unreasonable interpretations of the
Clean Air Act.
Chapter 48
∙∙ POM Wonderful, LLC v. Federal Trade Commission, a recent
D.C. Circuit decision dealing with the FTC’s approach to allegedly deceptive health-related claims, the types of substantiation that may be required to support such claims, and the
remedial orders that may be issued by the FTC in deceptive
advertising cases.
Chapter 49
∙∙ Updated Global Business Environment box that discusses the
apparent tendency of European Union regulators to be more
aggressive than U.S. regulators with regard to firms with especially dominant market shares.
∙∙ Discussion of the trend toward treating more tying arrangements under the rule of reason.
∙∙ Suture Express, Inc. v. Owens & Minor Distribution, Inc., a
2017 Tenth Circuit decision dealing with the market power
element of tying arrangement cases and offering a reminder
that the claimed harm must be to competition, not merely to
a competitor.
Chapter 50
∙∙ North Carolina State Board of Dental Examiners v. FTC, a
2015 decision in which the Supreme Court outlined what is
necessary for the state-action exemption to apply.
Chapter 51
∙∙ Expanded and updated discussion of the developments
in Title VII jurisprudence related to whether sexual orientation and gender identity discrimination are sex
discrimination.
∙∙ New case dealing with the bona fide occupational qualification defense under Title VII.
ix
∙∙ Case exploring the parties’ duty to engage in the interactive
process in good faith when determining the possibility of accommodation under the Americans with Disabilities Act as
amended by the ADA Amendments Act of 2008.
∙∙ Two new cases to separately illustrate the objective standard
of offensiveness and the affirmative defense to a supervisory
hostile environment in supervisory sexual harassment claims
under Title VII.
∙∙ New case exploring common law exceptions to the
employment-at-will rule.
Chapter 52
∙∙ Revised material regarding climate change.
∙∙ Discussions of recent developments in the environmental
area, such as the Clean Power Plan and the new rule on Waters
of the United States.
∙∙ Related discussions of the extent to which such developments’
ultimate status is uncertain as a result of efforts by the Trump
administration to undo them.
Acknowledgments
We would like to thank the many reviewers who have contributed their ideas and time to the development of this text. We
express our sincere appreciation to the following:
Wade Chumney, California State University–Northridge
Amanda Foss, Modesto Junior College
Richard Guertin, Orange County Community College
Gwenda Bennett Hawk, Johnson County Community College
Joseph Pugh, Immaculata University
Kurt Saunders, California State University–Northridge
Abbey Stemler, Indiana University, Kelley School of
Business–Bloomington
Dennis Wallace, University of New Mexico
Melanie Stallings Williams, California State
University–Northridge
We also acknowledge the assistance of Professor Sarah Jane
Hughes of Indiana University’s Maurer School of Law, and
the technical contributions of assistants Rachel Speight, Elise
Boruvka, and Ronda Stogsdill.
Arlen W. Langvardt
A. James Barnes
Jamie Darin Prenkert
Martin A. McCrory
Joshua E. Perry
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A New Kind of Business Law
The 17th Edition of Business Law continues to focus on global, ethical, and e-commerce issues
affecting legal aspects of business. The new edition contains a number of new features as well as an
exciting new supplements package. Please take a few moments to page through some of the highlights
of this new edition.
OPENING VIGNETTES
Each chapter begins with an opening vignette
that presents students with a mix of real-life and
hypothetical situations and discussion questions.
These stories provide a preview of issues addressed
in the chapter and help to stimulate students’
interest in the chapter content.
CHAPTER 2
THE RESOLUTION OF
PRIVATE DISPUTES
A
llnews Publishing Inc., a firm whose principal offices are located in Orlando, Florida, owns and publishes
33 newspapers. These newspapers are published in 21 different states of the United States. Among the
Allnews newspapers is the Snakebite Rattler, the lone newspaper in the city of Snakebite, New Mexico.
The Rattler is sold in print form only in New Mexico. However, many of the articles in the newspaper can be viewed
by anyone with Internet access, regardless of his or her geographic location, by going to the Allnews website.
In a recent Rattler edition, an article appeared beneath this headline: “Local Business Executive Sued for Sexual
Harassment.” The accompanying article, written by a Rattler reporter (an Allnews employee), stated that a person
named Phil Anderson was the defendant in the sexual harassment case. Besides being married, Anderson was a
well-known businessperson in the Snakebite area. He was active in his church and in community affairs in both
Snakebite (his city of primary home) and Petoskey, Michigan (where he and his wife have a summer home). A
stock photo of Anderson, which had been used in connection with previous Rattler stories mentioning him, appeared alongside the story about the sexual harassment case. Anderson, however, was not the defendant in that
case. He was named in the Rattler story because of an error by the Rattler reporter. The actual defendant in the
sexual harassment case was a local business executive with a similar name: Phil Anderer.
Anderson plans to file a defamation lawsuit against Allnews because of the above-described falsehood in the
Rattler story. He expects to seek $500,000 in damages for harm to his reputation and for other related harms. In
Chapter 6, you will learn about the substantive legal issues that will arise in Anderson’s defamation case. For now,
however, the focus is on important legal matters of a procedural nature.
Consider the following questions regarding Anderson’s case as you read this chapter:
∙ Where, in a geographic sense, may Anderson properly file and pursue his lawsuit against Allnews?
∙ Must Anderson pursue his case in a state court, or does he have the option of litigating it in federal court?
∙ Assuming that Anderson files his case in a state court, what strategic option may Allnews exercise if it acts
promptly?
∙ In the run-up to a possible trial in the case, what legal mechanisms may Anderson utilize in order to find out,
on a pretrial basis, what the Rattler reporter and other Allnews employees would say in possible testimony at
trial? Is Allnews entitled to do the same with regard to Anderson?
∙ If Anderson’s case goes to trial, what types of trials are possible?
∙ Through what legal mechanisms might a court decide the case without a trial?
∙ Today, many legal disputes are decided through arbitration rather than through proceedings in court. Given the
prevalence of arbitration these days, why isn’t Anderson’s case a candidate for arbitration?
36
LO
Part One
Foundations of American Law
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
2-1
2-2
2-3
2-4
x
Describe the basic structures of state court
systems and the federal court system.
Explain the difference between subject-matter
jurisdiction and in personam jurisdiction.
Identify the major legal issues courts must
resolve when deciding whether in personam
jurisdiction exists with regard to a defendant in a
civil case.
Explain what is necessary in order for a federal
court to have subject-matter jurisdiction over a
civil case.
BUSINESS LAW COURSES examine many substantive
legal rules that tell us how to behave in business and in
society. Examples include the principles of contract, tort,
and agency law, as well as those of many other legal areas
addressed later in this text. Most of these principles are applied by courts as they decide civil cases involving private
parties. This chapter lays a foundation for the text’s discussion of substantive legal rules by examining the court
systems of the United States and by outlining how civil
cases proceed from beginning to end. The chapter also
2-5
2-6
2-7
Identify the major steps in a civil lawsuit’s
progression from beginning to end.
Describe the different forms of discovery
available to parties in civil cases.
Explain the differences among the major forms
of alternative dispute resolution.
these courts, procedures may be informal, and parties
often argue their own cases without representation by attorneys. Courts of limited jurisdiction often are not courts
of record—meaning that they may not keep a transcript
of the proceedings conducted. Appeals from their decisions therefore require a new trial (a trial de novo) in a
trial court.
Trial Courts Courts of limited jurisdiction find the
relevant facts, identify the appropriate rule(s) of law, and
LEARNING OBJECTIVES
Active Learning Objectives open each chapter and
are tied to AACSB standards. LOs inform you of
specific outcomes you should have after finishing the
chapter. Icons reference each LO’s reference within
the chapter.
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50
Part One Foundations of American Law
CYBERLAW IN ACTION
xi
CYBERLAW IN ACTION
BOXES
objection is valid in light of the particular facts and circumstances.
For instance, if requested e-mails appear only on backup tapes and
searching those tapes would require the expenditures of significant
time, money, and effort, are the requested e-mails “not reasonably
accessible because of undue burden or costs”? Perhaps, but perhaps
not. The court will rule, based on the relevant situation. The court may
deny the discovery request, uphold it, or condition the upholding of
it on the requesting party’s covering part or all of the costs incurred
by the other party in retrieving the ESI and making it available. When
a party fails or refuses to comply with a legitimate discovery request
and the party seeking discovery of ESI has to secure a court order
compelling the release of it, the court may order the noncompliant
party to pay the attorney’s fees incurred by the requesting party in
seeking the court order. If a recalcitrant party disregards a court
order compelling discovery, the court may assess attorney’s fees
against that party and/or impose evidentiary or procedural sanctions
such as barring that party from using certain evidence or from raising
certain claims or defenses at trial.
The discussion suggests that discovery requests regarding ESI
may be extensive and broad-ranging, with logistical issues often
attending those requests. In recognition of these realities, the
Federal Rules seek to head off disputes by requiring the parties to
civil litigation to meet, at least through their attorneys, soon after
the case is filed. The meeting’s goal is development of a discovery
plan that outlines the parties’ intentions regarding ESI discovery and
sets forth an agreement on such matters as the form in which the
requested ESI will be provided. If the parties cannot agree on certain
ESI discovery issues, the court will become involved to resolve the
disputes.
The discoverability of ESI makes it incumbent upon businesses to
retain and preserve such material not only when litigation to which
the material may be related has already been instituted, but also
when potential litigation might reasonably be anticipated.
52 Failure to
Part One Foundations of American Law
preserve the electronic communications could give rise to allegations
of evidence destruction and, potentially, sanctions imposed by a
court. (For further discussion of related legal and ethical issues, see
this chapter’s Ethics in Action box.)
Finally, given the now-standard requests of plaintiffs and
defendants that the opposing party provide access to relevant The broad scope of discovery rights in a civil case authority to impose appropriate sanctions on the documente-mails, one should not forget this important piece of advice: Do will often entitle a party to seek and obtain copies destroying party. These sanctions may include such remedies
of e-mails, records, memos, and other documents as court orders prohibiting the document-destroyer from raisnot say anything in an e-mail that you would not say in a formal
and electronically stored information from the opposing par- ing certain claims or defenses in the lawsuit, instructions to
written memo or in a conversation with someone. There is a tooty’s files. In many cases, some of the most favorable evidence the jury regarding the wrongful destruction of the documents,
frequent tendency to think that because e-mails often tend to be
for the plaintiff will have come from the defendant’s files, and and court orders that the document-destroyer pay certain atinformal in nature, one is somehow free to say things in an e-mail
vice versa. If your firm is, or is likely to be, a party to civil torney’s fees to the opposing party.
that he or she would not say in another setting. Many individuals
What about the temptation to refuse to cooperate relitigation and you know that the firm’s files contain materials
and companies have learned the hard way that comments made
that may be damaging to the firm in the litigation, you may garding an opposing party’s lawful request for discovery
in their e-mails or those of their employees proved to be damning
be faced with the temptation to alter or destroy the potentially regarding material in one’s possession? Although a refusal
evidence against them in litigation and thus helped the opposing
damaging items. This temptation poses serious ethical dilem- to cooperate seems less blameworthy than destruction or
parties win the cases.
mas. Is it morally defensible to change the content of records alteration of documents, extreme instances of recalcitrance
118
Part One Foundations of American Law
or documents on an after-the-fact basis, in order to lessen the during the discovery process may cause a party to experience
adverse effect on your firm in pending or probable litigation? adverse consequences similar to those imposed on parties
around health care policy in the United States, a key questheory. First, it is difficult to achieve agreement
about destruction or e-mail deletion ethically justifiable who destroy or alter documents. Litigation involving Ronald
Is document
Perelman and the Morgan Stanley firm provides an illustrayou seek to protect your firm’s interests in a lawsuit?
tion is whether or not every citizen has a right to health care.
which rights are protected. Rights fundamental when
to modern
If the ethical
concerns are not sufficient by themselves to tion. Perelman had sued Morgan Stanley on the theory that
countries like the United States (such as many women’s
or
makearound
you leery of involvement in document alteration or de- the investment bank participated with Sunbeam Corp. in a
Strengths of Rights Theory The major strength of rights
GLBT rights) are more limited in other countries
struction, consider the potential legal consequences for your- fraudulent scheme that supposedly induced him to sell Suntheory is that it recognizes the moral worth of each inthe world. Even within one country, citizens disagree
on
self and your firm. The much-publicized collapse of the Enron beam his stake in another firm in return for Sunbeam shares
dividual and the importance of protecting fundamental
the existence and ranking of rights. For example,
as noted
Corporation in 2001 led to considerable scrutiny of the actions whose value plummeted when Sunbeam collapsed. During
rights. This means that members of modern democratic
earlier, some Americans argue that the right to health
care
of the Arthur Andersen firm, which had provided auditing and the discovery phase of the case, Perelman had sought cersocieties have extensive liberties and rights around which
is an important need that should be met by government
consulting services to Enron. An Andersen partner, David Dun- tain potentially relevant e-mails from Morgan Stanley’s files.
a consensus has formed and citizens need not fear the
or a person’s employer. Other Americans believe
can,funding
pleaded guilty to a criminal obstruction of justice charge Morgan Stanley repeatedly failed and refused to provide this
removal of these rights by their government or other
universal health care would interfere with the that
libertarian
accused him of having destroyed, or having instructed An- discoverable material and, in the process, ignored court oremployees to destroy, certain Enron-related records in ders to provide the e-mails.
members of society. In the U.S. context, one need look
right to limited government intervention in our dersen
lives. BalEventually, a fed-up trial judge decided to impose sancorder to thwart a Securities and Exchange Commission (SEC)
no further than the Declaration of Independence and its
ancing rights in conflict can be difficult.
emphasis on “life, liberty, and the pursuit of happiness”
In addition, rights theory does not concern investigation
itself with of Andersen. The U.S. Justice Department also tions for Morgan Stanley’s wrongful conduct during the
launched an obstruction of justice prosecution against Ander- discovery process. The judge ordered that Perelman’s contenas those “unalienable rights” that lie beyond the reach of
the costs or benefits of requiring respect for another’s right.
sen on the theory that the firm altered or destroyed records per- tions would be presumed to be correct and that the burden
government interference. In the global context, the UniFor example, rights theory probably justifies thetaining
protection
to Enron in order to impede the SEC investigation. A of proof would be shifted to Morgan Stanley so that Morversal Declaration of Human Rights was adopted by the
of a neo-Nazi’s right to spout hateful speech, even
jury though
found Andersen guilty of obstruction of justice. Although gan Stanley would have to disprove Perelman’s allegations.
United Nations in 1948 as an expression of fundamental
the costs of such speech, including damage totherelations
Andersen conviction was later overturned by the U.S. Su- In addition, the trial judge prohibited Morgan Stanley from
rights to which many people believe all are entitled.
between ethnic groups, may far outweigh any benefits
the because the trial judge’s instructions to the jury contesting certain allegations made by Perelman. The jury
preme Court
on relevant principles of law had been impermissibly vague later returned a verdict in favor of Perelman and against Morspeaker, listeners, and society receive from the speech.
regarding
the critical issue of criminal intent, a devastating ef- gan Stanley for $604 million in compensatory damages and
Criticisms of Rights Theory Most of the criticisms
Moreover, in the context of discussions around
pub$850 million in punitive damages. The court orders sanctionthe firm had already taken place.
of rights theory deal with the near absolute yet relative
lic policy and political economy, some argue fect
thatonrights
Of course,
value of the rights protected, sometimes making it diffitheory can be perverted to create a sense of entitlement
re- not all instances of document alteration or ing Morgan Stanley for its discovery misconduct undoubtedly
destruction will lead to criminal prosecution for obstruction played a key role in Perelman’s victory, effectively turning
cult to articulate and administer a comprehensive rights
ducing innovation, entrepreneurship, and production. For
of justice. Other consequences of a noncriminal but clearly a case that was not a sure-fire winner for Perelman into just
severe nature may result, however, from document destruc- that. The case illustrates that a party to litigation may be playtion that interferes with legitimate discovery requests in a ing with fire if he, she, or it insists on refusing to comply with
civil case. In such instances, courts have broad discretionary legitimate discovery requests.
In recent years, the widespread uses of e-mail and
information presented and stored in electronic
form have raised questions about whether, in civil
litigation, an opposing party’s e-mails and electronic
information are discoverable to the same extent as
conventional written or printed documents. With
the Federal Rules of Civil Procedure and comparable discovery
rules applicable in state courts having been devised prior to the
explosion in e-mail use and online activities, the rules’ references
to “documents” contemplated traditional on-paper items. Courts,
however, frequently interpreted “documents” broadly, so as to
include e-mails and certain electronic communications within the
scope of discoverable items.
Even so, greater clarity regarding discoverability seemed
warranted—especially as to electronic material that might be less
readily classifiable than e-mails as “documents.” Various states
responded by updating their discovery rules to include electronic
communications within the list of discoverable items. So did the
Federal Judicial Conference. In Federal Rules of Civil Procedure
amendments proposed by the Judicial Conference and ratified
by Congress in 2006, “electronically stored information” became
a separate category of discoverable material. The electronically
stored information (ESI) category is broad enough to include e-mails
and similar communications as well as electronic business records,
web pages, dynamic databases, and a host of other material
existing in electronic form. So-called e-discovery has become a
standard feature of civil litigation because of the obvious value of
having access to the opposing party’s e-mails and other electronic
communications.
Discovery regarding ESI occurs in largely the same manner as
discovery regarding conventional documents. The party seeking
discovery of ESI serves a specific request for production on the other.
The served party must provide the requested ESI if it is relevant, is
not protected by a legal privilege (e.g., the attorney–client privilege),
and is reasonably accessible. Court involvement becomes necessary
only if the party from whom discovery is sought fails to comply or
objects on lack of relevance, privilege, or burdensomeness grounds.
The Federal Rules allow the party seeking discovery of ESI to specify
the form in which the requested copies should appear (e.g., hard
copies, electronic files, searchable CD, direct access to database,
etc.). The party from whom discovery is sought may object to the
specified form, in which event the court may have to resolve the
dispute. If the requesting party does not specify a form, the other
party must provide the requested electronic material in a form that
is reasonably usable.
The Federal Rules provide that if the requested electronic material
is “not reasonably accessible because of undue burden or cost,” the
party from whom discovery is sought need not provide it. When an
objection along those lines is filed, the court decides whether the
In keeping with today’s technological world, these
boxes describe and discuss actual instances of how
e-commerce and the Internet are affecting business
law today.
ETHICS IN ACTION BOXES
Ethics in Action
These boxes appear throughout the chapters and
offer critical thinking questions and situations that
relate to ethical/public policy concerns.
The Global Business Environment
The Golden Rule in the World’s Religions
and Cultures
Immanuel Kant’s categorical imperative, which
is one formulation of rights theory, has its foundations in the
Golden Rule. Note that the Golden Rule exists in all cultures
and in all countries of the world. Here is a sampling.
BUDDHISM: Hurt not others in ways that you would find
hurtful.
CHRISTIANITY: Do to others as you would have others
do to you.
CONFUCIANISM: Do not to others what you would not
like yourself.
GRECIAN: Do not that to a neighbor which you shall take
ill from him.
ISLAM: No one of you is a believer until he desires for his
brother that which he desires for himself.
THE GLOBAL BUSINESS
ENVIRONMENT BOXES
of witnesses
JAINISM: In happiness and suffering, in joy and
grief, we or to certain evidence that has been offered for
admission.
The trial judge utilizes the legal rules of evidence
should regard all creatures as we regard our own
self.
life is the foundation.
PERSIAN: Do as you would be done by.
ROMAN: Treat your inferiors as you would be treated by
your superiors.
SHINTOISM: The heart of the person before you is a mirror. See there your own form.
SIKHISM: As you deem yourself, so deem others.
HINDUISM: This is the sum of duty: do nothing to others
which if done to you would cause you pain.
TAOISM: Regard your neighbor’s gain as your own gain,
and your neighbor’s loss as your own loss.
HUMANISM: Individual and social problems can only be
resolved by means of human reason, intelligent effort, and
critical thinking joined with compassion and a spirit of empathy for all living beings.
YORUBAN: One going to take a pointed stick to pinch a
baby bird should first try it on himself to feel how it hurts.
ZOROASTRIANISM: That nature alone is good which refrains from doing to another whatsoever is not good for itself.
overrule it (meaning that the question may be answered or
Because global issues
affect
people
inallowed).
many
that the
offered evidence
will be
The witnesses that plaintiffs and defendants call to tesdifferent aspects of business,
thisthose
material
appears
tify at trial may include
who can testify
as to relevant
facts of which they have personal knowledge (often called
throughout the text instead of in a separate chapter
on international issues. This feature brings to life
global issues that are affecting business law.
to determine whether to sustain the objection (meaning that
JUDAISM: Whatever is hateful to you, do not to another.
the objected-to question cannot be answered by the witness
NATIVE AMERICAN SPIRITUALITY: Respect
or thatfor
thealloffered evidence will be disallowed) or, instead,
xii
A Guided Tour
LOG ON BOXES
versy in recent years: the emergence of the so-called patent trolls—parties that acquire patents from others, not
for the purpose of producing the patented items themselves, but solely to exercise licensing leverage against
users of the invention. However, recent Supreme Court
decisions appear to contemplate greater ability on the part
of courts to assess attorney’s fees against an apparent troll
that loses an arguably frivolous patent infringement case.
These appear throughout the chapters and direct students,
LOG ON
where appropriate, to relevant websites that will give them
508
Part Three
Contracts websites contain a wealth of information on
U.S. government
more information about each featured topic. Many of these
patent, copyright, and trademark law and procedures. For
People assign rights for a variety of reasons. A person
The transfer of a right under a contract is called an
are key legal sites that may be used repeatedly by business
information
on patents and trademarks, visit the site of the
might assign a right to a third party to satisfy a debt that
assignment. The appointment of another person to perU.S. Patent and Trademark
Office,
at www.uspto.gov.
Information
he
owes.
For
example,
Jordan, the assignor
in the above
form
a
duty
under
a
contract
is
called
a
delegation.
law students and business professionals alike.
on copyrights may
be found
at www.loc.gov/copyright,
the site
of the
example,
owes
money to Kane, so he assigns
to Kane
right
to receive the $500 that Samson owes him. A person
Nature of Assignment of RightstheAU.S.
person
Copyright
Office.
might also sell or pledge the rights owed to him to obtain
who owes a duty to perform under a contract is called an
financing. In the case of a business, the money owed to the
obligor. The person to whom he owes the duty is called the
business by customers and clients is called accounts receivobligee. For example, Samson borrows $500 from Jordan,
able.
A business’s law
accounts
receivable
are anexclusive
asset to the
promising to repay Jordan in six months. Samson, who
Copyright
gives
certain
business that can be used to raise money in several ways.
owes the duty to pay the money, is the obligor, and Jordan,
rights
to An
creators
of original
worksmay
of pledge
authorship.
It receivpreFor example,
the business
its accounts
who has the right to receive the money, is the
obligee.
ableusing
as collateral
a loan.
Suppose
Acean
Tree
Trimming
assignment occurs when the obligee transfers
his others
right to from
vents
theirfor
work,
gives
them
incentive
Co. thereby
wants to borrow
moneysociety.
from First Bank
gives First
receive the obligor’s performance to a thirdto
person.
When and
innovate,
benefits
Yet and
copyright
Bank a security interest (an interest in the debtor’s property
there has been an assignment, the person making the assigntries tothat
balance
purposes
against
equallyin
secures these
the debtor’s
performance
of anthe
obligation)
ment—the original obligee—is then calledlaw
the also
assignor.
compelling
interest
in the1 Iffree
ideas,to
its accounts
receivable.
The person to whom the right has been transferred
is called public
Acemovement
defaults in its of
payments
Contracts
the assignee. Figure 1 summarizes these key terms.
First Bank, First Bank will acquire Ace’s rights to collect
Suppose that Jordan, the obligee in the example above,
the accounts receivable. A person might also make an asConCept
eview
assignsRhis
right to receive Samson’s payment to Kane.
signment of a contract right as a gift. For example, Lansing
boxes
represent
important
concepts
Here, Jordan is the assignor and Kane isThese
the assignee.
The visually
owes $2,000
to Father. Father
assigns the
right to receive
relationship between the three parties is represented in
Lansing’s performance to Son as a graduation gift.
presented
in
the
text
to
help
summarize
key
ideas at
Figure 2. Notice that the assignment is a separate transacFraud
tion: It occurs after the formation of the original contract.
Evolution of the Law Regarding Assignments Contract
a glance
and simplify
conceptualization
of
Rescission and/or tort action forThe
damages
effect of the assignment is to extinguish
the assignrights havestudents’
not always been
transferable. Early common
1. Untrue assertion of fact (or equivalent)
or’s right
to receive
transfer that right
law refused to permit assignment or delegation because
2. Assertion made with knowledge
of falsity
(scienter)performance and tocomplicated
issues.
to the assignee. In the above example, Kane now owns the
debts were considered to be too personal to transfer. A
and intent to deceive
3. Justifiable reliance
right to collect payment from Samson. If Samson fails to
debtor who failed to pay an honest debt was subject to
4. Economic loss (in a tort action for damages)
pay, Kane, as an assignee, now has the right to file suit
severe penalties, including imprisonment, because such
against Samson to collect the debt.
a failure to pay was viewed as the equivalent of theft.
Copyrights
432
Part Three
Misrepresentation and Fraud
Innocent Misrepresentation
Remedy
Elements
Rescission
1. Untrue assertion of fact (or equivalent)
2. Assertion relates to material fact
3. Actual reliance
4. Justifiable reliance
LOG ON
A number of useful sites provide information about the
nature of Internet fraud and how to reduce the chances
of being victimized. Some even provide a method
of reporting Internet fraud. An example is the National Fraud
Information Center, www.fraud.org/. For a good resource on
identity theft and identity fraud, see the U.S. Department of
Justice’s web page on the topic at www.usdoj.gov/criminal
/fraud/websites/idtheft.html.
FIGURES
CONCEPT REVIEWS
by the mistake can avoid the contract under the doctrine
Figure
Assignment:
Key Terms
of mistake. The purpose of the
doctrine1 of mistake
is to
prevent unexpected and unbargained for losses that result
when the parties are mistakenObligor
about a fact central to Obligee
their
contract.
Person who
Person who has the
What Is a Mistake? In ordinary
may to receive obliowes conversation,
the duty to we right
use the term mistake to meanperform
an error in judgment or
an performance
gor’s
unfortunate act. In contract law, however, a mistake is a
belief about a fact that is not in accord with the truth.4
The mistake must relate to facts as they exist at the time
the contract is created. An erroneous
prediction
Figurebelief
2 or
Assignment
about facts that might occur in the future would not qualify as a mistake.
Before assignment
As in misrepresentation cases, the complaining party
Owes
in a mistake case enters into a contract because
ofduty
a belief
to perform
that is at variance with the actual facts. Mistake is unlike
misrepresentation, however, in that the erroneous belief is
not the result of the other party’s untrue
statements.
Obligor
Obligee
Mistake
The
figures appear occasionally in certain
Nature of Mistake
chapters. These features typically furnish
Explain the elements of mistake and determine when
LO13-4
further
on special
issues introduced
mistakedetail
makes a contract
voidable.
more
generally
elsewhere
inthethe
Anyone who enters into a contract does so on
basis text.
of
Chapter One The Nature of Law
5
her understanding of the facts that are relevant to the conMistakes of Law A number of the older mistake cases
This text’s torts, contracts, and agency chapters often
Because the judge-made rules of common law apply
tract. Her decision
about what she is willing to exchange
state
that mistake about a principle of law will not justify
refer to the Restatement—or Restatement (Second) or
only when there is no applicable statute or other type of
with the other
party
is
based
on
this
understanding.
If
the
rescission.
rationale
viewlegal
wasrules
that everyone
(Third)—rule on a particular subject. The Restatements
law, commonThe
law fills
in gapsfor
leftthis
by other
parties are wrong
aboutofancommon
important
fact,
the exchange
are collections
law (and
occasionally
statutory)
if sound
social and
reasons
callmodern
for thosecases, howwas
presumed
to public
know policy
the law.
More
rulesiscovering
the law. Because
gaps tohave
be filled.
Judges
thus even
serve as
policythe
makers
in is an erthat they make
likely various
to be areas
quiteofdifferent
from they
whatare ever,
granted
relief
when
mistake
promulgated by the American Law Institute rather than by
formulating the content of the common law. In Price v.
they contemplated
when they entered into the contract.
roneous
belief about some aspect of law.
courts, the Restatements are not law and do not bind courts.
High Pointe Oil Company, Inc., which follows shortly, the
This difference
is
due
to
simple
error
rather
than
to
any
However, state courts often find Restatement rules perCourt surveys the relevant legal landscape and concludes
Negligence
and
the Right
Avoid
forinMistake
Alexternal events
such
an them
increase
in market
price.
suasive
andas
adopt
as common
law rules
withinFor
their
that a longstanding
common
law ruleto
should
remain
efThe Restatement
rules
usually
are the rules stone,
followed
fect. A later
section sometimes
in the chapter will
focus
on the
process
though
courts
state
that
relief
will not be
example, Foxstates.
contracts
to sell to
Ward
a half-carat
by a majority of the states. Occasionally, however, the Reof case lawwhen
reasoning,
in which courts
engagewas
whencaused
they
granted
a person’s
mistake
by his
which both believe to be a tourmaline, at a price of $65. If
statements stimulate changes in the common law by sugmake and apply common law rules. That process is exemown
they
often
have granted rescission
they are wrong
andnew
therules
stone
a decide
diamond
worth
gesting
thatis
theactually
courts later
to follow.
plified negligence,
by the first half of
the Price
opinion.
even when the mistaken party was somewhat negligent.
at least $2,500, Fox will have suffered an unexpected loss
Section 157 of the Restatement (Second) of Contracts
and Ward will have reaped an unexpected gain. The conv. High
Pointe
Oil ifCompany,
828degree
N.W.2dof
660
(Mich. 2013)
focuses on the
a party’s
negligence in making
tract would not havePrice
been made
at a price
of $65
the par- Inc.
ties’ belief about the nature of the stone had been in accord
In 2006, Beckie Price replaced the oil furnace in her house with a4 propane furnace. The oil furnace was removed, but the pipe
with the facts. In
such cases, the person adversely affected
Restatement (Second) of Contracts § 151.
that had been used to fill the furnace with oil remained in place.
At the time the furnace was replaced, Price canceled her contract for oil refills with the predecessor of High Pointe Oil
Company, the defendant. Somehow, though, in November 2007, High Pointe mistakenly placed Price’s address back on its
“keep full list.” Subsequently, a High Pointe truck driver pumped around 400 gallons of fuel oil into Price’s basement through
the oil-fill pipe before realizing the mistake. Price’s house and her belongings were destroyed. The house was eventually torn
down, the site was remediated, and a new house was built on a different part of Price’s property. Price’s personal property was
all cleaned or replaced. All of her costs related to her temporary homelessness were reimbursed to her, as well. Thus, she was
fully compensated for all of her economic losses resulting from High Pointe’s error.
Nevertheless, Price sued High Pointe alleging a number of claims. The only of her claims to survive to trial was one focused
on her noneconomic losses—for example, pain and suffering, humiliation, embarrassment, and emotional distress. A jury found
in Price’s favor and awarded her $100,000 in damages.
High Pointe filed an appeal to the intermediate appellate court, to no avail. High Pointe then appealed to the Michigan
Supreme Court, excerpts of whose opinion is below.
Markman, J.
III. Analysis
The question in this case is whether noneconomic damages are
recoverable for the negligent destruction of real property. Absent
any relevant statute, the answer to that question is a matter of
common law.
A. Common Law
As this Court explained in [a prior case], the common law “is
but the accumulated expressions of the various judicial tribunals in their efforts to ascertain what is right and just between
individuals in respect to private disputes[.]” The common
law, however, is not static. By its nature, it adapts to changing
circumstances. . . . The common law is always a work in progress
and typically develops incrementally, i.e., gradually evolving as
individual disputes are decided and existing common-law rules
are considered and sometimes adapted to current needs in light
of changing times and circumstances.
The common-law rule with respect to the damages recoverable in an action alleging the negligent destruction of property
was set forth in [a 1933 case]:
If injury to property caused by negligence is permanent or irreparable, the measure of damages is the difference in its market
value before and after said injury, but if the injury is reparable,
and the expense of making repairs is less than the value of the
property, the measure of damages is the cost of making repairs.
Michigan common law has continually followed [that] rule. . . .
Accordingly, the long-held common-law rule in Michigan is that the
measure of damages for the negligent destruction of property is the
cost of replacement or repair. Because replacement and repair costs
reflect economic damages, the logical implication of this rule is that
the measure of damages excludes noneconomic damages.
Lending additional support to this conclusion is the simple
fact that, before the Court of Appeals’ opinion below, no case
ever in the history of the Michigan common law has approvingly discussed the recovery of noneconomic damages for the
Assignment
Assignor
Assignee
Transfer of the right
to receive obligor’s
performance
Obligee who transfers
the right to receive obligor’s performance
Person to whom the right
to receive obligor’s performance is transferred
Assignment
Transfers right
to receive obligor’s
performance
Obligee
(Assignor)
Assignee
Result of assignment
Owes duty
to perform
Obligor
Assignee
Security interests in accounts and other property are discussed in
Chapter 29.
1
CASES
The cases in each chapter help to provide concrete
examples of the rules stated in the text. A list of
cases appears at the front of the text.
phrasing of a descriptiv
of a play would be exp
the novel or play, but th
lying the work would n
sion in nonfiction work
protected by the copyr
facts present in them w
Computer program
lems. It is fairly well
a program’s object c
machine-readable but
source code (instructio
less agreement, howev
program’s nonliteral e
structure, and its prese
Most courts that have
literal elements may s
law, but courts differ a
Copyright protecti
objects, which the Co
ticles.” However, wor
useful articles may so
In the Star Athletica
Court addresses such
cheerleading uniforms
A Guided Tour
PROBLEMS AND
PROBLEM CASES
Problem cases appear at the end of
each chapter for student review and
discussion.
KEY TERMS
Key terms are bolded throughout the text and
terminology.
xiii
Chapter Two
The Resolution of Private Disputes
63
residents Anne and Jim Cornelsen. When Anne Cornelson telephoned the Bomblisses and said she was
1. Victoria Wilson, a resident of Illinois, wishes to
ready to sell two litters of Tibetan mastiff puppies,
bring an invasion of privacy lawsuit against XYZ
Ron Bombliss expressed interest in purchasing two
Co. because XYZ used a photograph of her, without
females of breeding quality. The Cornelsens had a
her consent, in an advertisement for one of the comwebsite that allowed communications regarding dogs
pany’s products. Wilson will seek money damages
available for purchase but did not permit actual sales
of $150,000 from XYZ, whose principal offices are
via the website. The Bomblisses traveled to Oklahoma
located in New Jersey. A New Jersey newspaper was
to see the Cornelsens’ puppies and ended up purchasthe only print media outlet in which the advertisement
ing two of them. The Cornelsens provided a guarantee
was published. However, XYZ also placed the adverthat the puppies were suitable for breeding purposes.
tisement on the firm’s website. This website may be
Following the sale, the Cornelsens mailed, to the
viewed by anyone with Internet access, regardless of
Bomblisses’ home in Illinois, American Kennel Club
the viewer’s geographic location. Where, in a georegistration papers for the puppies. Around this same
graphic sense, may Wilson properly file and pursue
time, Anne Cornelsen posted comments in an Internet
her lawsuit against XYZ? Must Wilson pursue her
chat room frequented by persons interested in Tibetan
case in a state court, or does she have the option of
mastiffs. These comments suggested that the mother
litigating in federal court? Assuming that Wilson files
of certain Tibetan mastiff puppies (including one the
her case in state court, what strategic option may XYZ
Bomblisses had purchased) may have had a genetic
exercise if it acts promptly?
disorder. The comments were made in the context
of an apparent dispute between the Cornelsens and
2. Alex Ferrer, a former judge who appeared as “Judge
Richard Eichhorn, who owned the mother mastiff and
Alex” on a television program, entered into a conhad made it available to the Cornelsens for breeding
tract with Arnold Preston, a California attorney who
purposes. The Bomblisses believed that the comments
rendered services to persons in the entertainment inwould have been seen by other persons in Illinois and
dustry. Seeking fees allegedly due under the contract,
elsewhere and would have impaired the Bomblisses’
Preston invoked the clause setting forth the parties’
ability to sell their puppies even though, when tested,
agreement to arbitrate “any dispute . . . relating to the
their puppies were healthy. The Bomblisses therefore
terms of [the contract] or the breach, validity, or lesued the Cornelsens in an Illinois court on various
gality thereof . . . in accordance with the rules [of the
legal theories. The Cornelsens asked the Illinois court
American Arbitration Association].” Ferrer countered
to dismiss the case on the ground that the court lacked
Preston’s demand for arbitration by filing, with the
in personam jurisdiction over them. Did the Illinois
California Labor Commissioner, a petition in which he
court lack in personam jurisdiction?
contended that the contract was unenforceable under
the California Talent Agencies Act (CTAA) because
4. Hall Street Associates was the landlord and Mattel Inc.
Preston supposedly acted as a talent agent without
was the tenant under various leases for property that
the license required by the CTAA. In addition, Ferrer
Mattel used as a manufacturing site for many years.
sued Preston in a California court, seeking a declaraThe leases provided that the tenant would indemnify
tion that the dispute between the parties regarding the
the landlord for any costs resulting from the tenant’s
contract and its validity was not subject to arbitration.
failure to follow environmental laws while using the
Ferrer also sought an injunction restraining Preston
premises. Tests of the property’s well water in 1998
from proceeding before the arbitrator unless and until
showed high levels of trichloroethylene (TCE), the apthe Labor Commissioner concluded that she did not
parent residue of manufacturing discharges connected
have authority to rule on the parties’ dispute. Preston
with Mattel’s operations on the site between 1951 and
responded by moving to compel arbitration, in reli1980. After the Oregon Department of Environmenon the
Federal Arbitration
Theof
California
defined ance
in the
Glossary
at theAct.
end
the text fortalbetter
comprehension
of important
Quality (DEQ)
discovered even more
pollutants,
court denied Preston’s motion to compel arbitration
Mattel signed a consent order with the DEQ providand issued the injunction sought by Ferrer. Was the
ing for cleanup of the site. After Mattel gave notice
court correct in doing so?
of intent to terminate the lease in 2001, Hall Street
sued, contesting Mattel’s right to vacate on the date
3. Dog-breeders Ron and Catherine Bombliss lived in Ilit gave and claiming that the leases obliged Mattel to
linois. They bred Tibetan mastiffs, as did Oklahoma
Problems and Problem Cases
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xiv
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Brief Contents
Brief Contents
Preface v
Part 1
1
2
3
4
The Nature of Law 3
The Resolution of Private Disputes 35
Business and the Constitution 67
Business Ethics, Corporate Social Responsibility,
Corporate Governance, and Critical Thinking 113
Part 2
5
6
7
8
Sales
Formation and Terms of Sales Contracts 559
Product Liability 579
Performance of Sales Contracts 631
Remedies for Breach of Sales Contracts 651
Part 5
23
24
25
26
27
Contracts
Introduction to Contracts 343
The Agreement: Offer 363
The Agreement: Acceptance 383
Consideration 405
Reality of Consent 425
Capacity to Contract 445
Illegality 459
Writing 483
Rights of Third Parties 507
Performance and Remedies 527
Part 4
19
20
21
22
Crimes and Torts
Criminal Law and Procedure 149
Intentional Torts 199
Negligence and Strict Liability 245
Intellectual Property and Unfair Competition 287
Part 3
9
10
11
12
13
14
15
16
17
18
Foundations of American Law
Property
Personal Property and Bailments 673
Real Property 695
Landlord and Tenant 731
Estates and Trusts 751
Insurance Law 775
Part 6
Credit
28 Introduction to Credit and Secured Transactions 809
29 Security Interests in Personal Property 831
30 Bankruptcy 857
Part 7
Commercial Paper
31 Negotiable Instruments 893
xviii
32 Negotiation and Holder in Due Course 911
33 Liability of Parties 939
34 Checks and Electronic Transfers 963
Part 8
Agency Law
35 The Agency Relationship 991
36 Third-Party Relations of the Principal and the
Agent 1011
Part 9
Partnerships
37 Introduction to Forms of Business and Formation of
Partnerships 1031
38 Operation of Partnerships and Related Forms 1053
39 Partners’ Dissociation and Partnerships’ Dissolution
and Winding Up 1071
40 Limited Liability Companies, Limited Partnerships,
and Limited Liability Limited Partnerships 1091
Part 10
Corporations
41 History and Nature of Corporations 1115
42 Organization and Financial Structure of
Corporations 1135
43 Management of Corporations 1159
44 Shareholders’ Rights and Liabilities 1195
45 Securities Regulation 1227
46 Legal and Professional Responsibilities of Auditors,
Consultants, and Securities Professionals 1279
Part 11
Regulation of Business
47 Administrative Law 1315
48 The Federal Trade Commission Act and Consumer
Protection Laws 1349
49 Antitrust: The Sherman Act 1383
50 The Clayton Act, the Robinson–Patman Act, and
Antitrust Exemptions and Immunities 1423
51 Employment Law 1455
52 Environmental Regulation 1497
Appendix A
The Constitution of the United States of America A-1
Appendix B
Uniform Commercial Code B-1
Glossary G-1
Index I-1
Contents
Contents
1
Alternative Dispute Resolution 58
Common Forms of ADR 58
Other ADR Devices 62
Preface v
Part 1 Foundations of American Law
1
The Nature of Law 3
3
An Overview of the U.S. Constitution 68
The Evolution of the Constitution and the Role
of the Supreme Court 69
The Coverage and Structure of
This Chapter 69
State and Federal Power to Regulate 70
State Regulatory Power 70
Federal Regulatory Power 70
Independent Checks on the Federal Government
and the States 79
Incorporation 79
Government Action 79
Means-Ends Tests 80
Business and the First Amendment 81
Due Process 94
Equal Protection 95
Independent Checks Applying Only to the
States 104
The Contract Clause 104
Burden on, or Discrimination against, Interstate
Commerce 105
Federal Preemption 106
The Takings Clause 106
Types and Classifications of Law 4
The Types of Law 4
Priority Rules 8
Classifications of Law 10
Jurisprudence 10
Legal Positivism 11
Natural Law 11
American Legal Realism 11
Sociological Jurisprudence 12
Other Schools of Jurisprudence 12
The Functions of Law 13
Legal Reasoning 13
Case Law Reasoning 14
Statutory Interpretation 18
Limits on the Power of Courts 28
APPENDIX Reading and Briefing Cases 29
2
The Resolution of Private Disputes 35
State Courts and Their Jurisdiction 36
Courts of Limited Jurisdiction 36
Trial Courts 36
Appellate Courts 37
Jurisdiction and Venue 37
Federal Courts and Their Jurisdiction 43
Federal District Courts 43
Specialized Federal Courts 46
Federal Courts of Appeals 46
The U.S. Supreme Court 46
Civil Procedure 47
Service of the Summons 47
The Pleadings 48
Motion to Dismiss 48
Discovery 49
Summary Judgment 51
The Pretrial Conference 51
The Trial 51
Appeal 54
Enforcing a Judgment 54
Class Actions 54
Business and the Constitution 67
4
Business Ethics, Corporate Social
Responsibility, Corporate Governance,
and Critical Thinking 113
Why Study Business Ethics? 114
The Corporate Social Responsibility Debate 115
Ethical Theories 115
Rights Theory 117
Justice Theory 119
Utilitarianism 119
Shareholder Theory 120
Virtue Theory 123
Improving Corporate Governance and Corporate
Social Responsibility 124
Independent Boards of Directors 126
The Law 128
Guidelines for Ethical Decision Making 129
xix
xx
Contents
What Facts Impact My Decision? 129
What Are the Alternatives? 130
Who Are the Stakeholders? 130
How Do the Alternatives Impact Society as a
Whole? 130
How Do the Alternatives Impact My Business
Firm? 131
How Do the Alternatives Impact Me, the Decision
Maker? 131
What Are the Ethics of Each Alternative? 132
What Are the Practical Constraints of Each
Alternative? 133
What Course of Action Should Be Taken and How Do
We Implement It? 133
Knowing When to Use the Guidelines 134
Thinking Critically 134
Non Sequiturs 135
Appeals to Pity 135
False Analogies 135
Begging the Question 135
Argumentum ad Populum 136
Bandwagon Fallacy 136
Argumentum ad Baculum 136
Argumentum ad Hominem 136
Argument from Authority 137
False Cause 137
The Gambler’s Fallacy 137
Reductio ad Absurdum 138
Appeals to Tradition 138
The Lure of the New 138
Sunk Cost Fallacy 138
Common Characteristics of Poor Decision
Making 139
Failing to Remember Goals 139
Overconfidence 139
Complexity of the Issues 140
Resisting Requests to Act Unethically 140
Recognizing Unethical Requests and Bosses 140
Buying Time 141
Find a Mentor and a Peer Support Group 141
Find Win–Win Solutions 141
Work within the Firm to Stop the
Unethical Act 142
Prepare to Lose Your Job 143
Leading Ethically 143
Be Ethical 143
Communicate the Firm’s Core Ethical Values 143
Connect Ethical Behavior with the Firm’s and Workers’
Best Interests 144
Reinforce Ethical Behavior 144
2
Part 2 Crimes and Torts
5
Criminal Law and Procedure 149
Role of the Criminal Law 151
Nature of Crimes 151
Purpose of the Criminal Sanction 152
Essentials of Crime 154
Constitutional Limitations on Power to Criminalize
Behavior 156
Criminal Procedure 161
Criminal Prosecutions: An Overview 161
Role of Constitutional Safeguards 162
The Fourth Amendment 162
Key Fourth Amendment Questions 162
Warrantless Searches and the Fourth Amendment 168
The Fifth Amendment 172
The Sixth Amendment 178
White-Collar Crimes and the Dilemmas of
Corporate Control 178
Introduction 178
Evolution of Corporate Criminal Liability 178
Corporate Criminal Liability Today 179
Individual Liability for Corporate Crime 180
New Directions 181
Important White-Collar Crimes 182
Regulatory Offenses 182
Fraudulent Acts 182
The Sarbanes–Oxley Act 185
Bribery and Giving of Illegal Gratuities 185
RICO 186
Computer Crime 191
6
Intentional Torts 199
Interference with Personal Rights 203
Battery 203
Assault 206
Intentional Infliction of Emotional Distress 206
False Imprisonment 209
Defamation 211
Invasion of Privacy 226
Misuse of Legal Proceedings 232
Deceit (Fraud) 233
Contents
Interference with Property Rights 233
Trespass to Land 233
Private Nuisance 233
Conversion 236
Other Examples of Intentional Tort Liability 236
7
Negligence and Strict Liability 245
Negligence 246
Duty and Breach of Duty 247
Causation of Injury 261
Res Ipsa Loquitur 272
Negligence Defenses 273
Strict Liability 274
Abnormally Dangerous Activities 274
Statutory Strict Liability 278
Tort Reform 278
8
Intellectual Property and Unfair
Competition 287
Protection of Intellectual Property 288
Patents 288
Copyrights 298
Trademarks 312
Trade Secrets 323
Definition of a Trade Secret 324
Ownership and Transfer of Trade Secrets 325
Misappropriation of Trade Secrets 325
Commercial Torts 327
Injurious Falsehood 327
Interference with Contractual Relations 328
Interference with Prospective Advantage 329
Lanham Act § 43(a) 332
3
Part 3 Contracts
9
Introduction to Contracts 343
The Nature of Contracts 343
The Functions of Contracts 344
The Evolution of Contract Law 344
The Methods of Contracting 344
Basic Elements of a Contract 345
Basic Contract Concepts and Types 348
Bilateral and Unilateral Contracts 348
Valid, Unenforceable, Voidable, and Void Contracts 348
Express and Implied Contracts 348
Executed and Executory Contracts 348
xxi
Sources of Law Governing Contracts 349
The Uniform Commercial Code: Origin and
Purposes 349
Application of Article 2 349
Application of the Common Law of Contracts 349
Law Governing “Hybrid” Contracts 349
Relationship of the UCC and the Common Law of
Contracts 352
Basic Differences in the Nature of Article 2 and the
Common Law of Contracts 352
Influence of Restatement (Second) of Contracts 353
“Noncontract” Obligations 354
Quasi-Contract 354
Promissory Estoppel 356
10 The Agreement: Offer 363
Requirements for an Offer 364
Intent to Contract 364
Definiteness of Terms 364
Communication to Offeree 369
Special Offer Problem Areas 369
Advertisements 369
Rewards 370
Auctions 372
Bids 373
Which Terms Are Included in the Offer? 373
Termination of Offers 375
Terms of the Offer 375
Lapse of Time 375
Revocation 375
Rejection 377
Death or Insanity of Either Party 380
Destruction of Subject Matter 380
Intervening Illegality 380
11 The Agreement: Acceptance 383
What Is an Acceptance? 383
Intention to Accept 384
Intent and Acceptance on the Offeror’s Terms 387
Communication of Acceptance 391
When Is Acceptance Communicated? 391
Acceptances by Instantaneous Forms of
Communication 391
Acceptances by Noninstantaneous Forms of
Communication 391
Stipulated Means of Communication 395
Special Acceptance Problem Areas 395
xxii
Contents
Acceptance in Unilateral Contracts 395
Acceptance in Bilateral Contracts 395
Silence as Acceptance 396
Acceptance When a Writing
Is Anticipated 398
Acceptance of Ambiguous Offers 400
Who Can Accept an Offer? 401
12 Consideration 405
Elements of Consideration 406
Legal Value 406
Bargained-For Exchange 408
Exchanges That Fail to Meet Consideration
Requirements 410
Illusory Promises 410
Preexisting Duties 412
Past Consideration 416
Exceptions to the Consideration
Requirement 418
Promissory Estoppel 418
Promises to Pay Debts Barred by Statutes of
Limitations 421
Promises to Pay Debts Barred by Bankruptcy
Discharge 421
Charitable Subscriptions 421
13 Reality of Consent 425
Effect of Doctrines Discussed in This
Chapter 425
Necessity for Prompt and
Unequivocal Rescission 426
Misrepresentation and Fraud 426
Relationship between Misrepresentation and
Fraud 426
Requirements for Rescission on the
Ground of Misrepresentation 426
Mistake 432
Nature of Mistake 432
Requirements for Mutual Mistake 433
Requirements for Unilateral Mistake 435
Duress 437
Nature of Duress 437
Requirements for Duress 438
Economic Duress 441
Undue Influence 441
Nature of Undue Influence 441
Determining Undue Influence 441
14 Capacity to Contract 445
What Is Capacity? 445
Effect of Lack of Capacity 446
Capacity of Minors 446
Minors’ Right to Disaffirm 446
Period of Minority 449
Emancipation 449
Time of Disaffirmance 449
Ratification 449
Duties upon Disaffirmance 450
Effect of Misrepresentation of Age 452
Capacity of Mentally Impaired Persons 452
Theory of Incapacity 452
Test for Mental Incapacity 453
The Effect of Incapacity Caused by Mental
Impairment 453
Contracts of Intoxicated Persons 455
Intoxication and Capacity 455
15 Illegality 459
Meaning of Illegality 459
Determining Whether an Agreement
Is Illegal 460
Agreements in Violation of Statute 462
Agreements Declared Illegal by Statute 462
Agreements That Violate the Public Policy of a
Statute 462
Agreements That May Be in Violation of Public
Policy Articulated by Courts 463
Agreements in Restraint of Competition 463
Exculpatory Clauses 467
Family Relationships and Public Policy 470
Unfairness in Agreements: Contracts of
Adhesion and Unconscionable Contracts 471
Unconscionability 471
Contracts of Adhesion 474
Effect of Illegality 475
General Rule: No Remedy for Breach of
Illegal Agreements 475
Exceptions 475
16 Writing 483
The Significance of Writing in
Contract Law 483
Purposes of Writing 483
Writing and Contract Enforcement 484
Overview of the Statute of Frauds 484
Contents
History and Purposes 484
Effect of Violating the Statute of Frauds 484
Contracts Covered by the Statute of Frauds 484
Collateral Contracts 485
Interest in Land 485
Contracts That Cannot Be Performed within
One Year 488
Promise of Executor or Administrator to Pay a
Decedent’s Debt Personally 491
Contract in Which Marriage Is
the Consideration 492
Meeting the Requirements of the Statute of
Frauds 493
Nature of the Writing Required 493
UCC: Alternative Means of Satisfying the Statute of
Frauds in Sale of Goods Contracts 494
Promissory Estoppel and the Statute of Frauds 497
The Parol Evidence Rule 498
Explanation of the Rule 498
Scope of the Parol Evidence Rule 498
Admissible Parol Evidence 499
Interpretation of Contracts 501
17 Rights of Third Parties 507
Assignment of Contracts 507
Nature of Assignment of Rights 508
Creating an Assignment 509
Assignability of Rights 509
Nature of Assignee’s Rights 512
Subsequent Assignments 513
Successive Assignments 513
Assignor’s Warranty Liability to Assignee 513
Delegation of Duties 514
Nature of Delegation 514
Delegable Duties 514
Language Creating a Delegation 516
Assumption of Duties by Delegatee 517
Discharge of Delegator by Novation 517
Third-Party Beneficiaries 519
Intended Beneficiaries versus Incidental
Beneficiaries 519
Vesting of Beneficiary’s Rights 523
18 Performance and Remedies 527
Conditions 528
Nature of Conditions 528
Types of Conditions 528
xxiii
Creation of Express Conditions 531
Excuse of Conditions 531
Performance of Contracts 534
Level of Performance Expected of
the Promisor 534
Good-Faith Performance 535
Breach of Contract 536
Effect of Material Breach 536
Determining the Materiality of the Breach 536
Anticipatory Repudiation 539
Recovery by a Party Who Has Committed
Material Breach 540
Excuses for Nonperformance 540
Impossibility 540
Commercial Impracticability 543
Other Grounds for Discharge 543
Discharge by Mutual Agreement 543
Discharge by Accord and Satisfaction 543
Discharge by Waiver 544
Discharge by Alteration 544
Discharge by Statute of Limitations 544
Discharge by Decree of Bankruptcy 544
Remedies for Breach of Contract 544
Types of Contract Remedies 544
Interests Protected by Contract
Remedies 545
Legal Remedies (Damages) 545
Equitable Remedies 550
Restitution 552
4
Part 4 Sales
19 Formation and Terms of Sales Contracts 559
Sale of Goods 560
Leases 562
Higher Standards for Merchants 562
Code Requirements 562
Terms of Sales Contracts 562
Gap Fillers 562
Price Terms 563
Quantity Terms 564
Output and Needs Contracts 564
Exclusive Dealing Contracts 564
Time for Performance 566
Delivery Terms 567
Title 567
xxiv
Contents
Code Changes 567
General Title Rule 567
Title and Third Parties 569
Obtaining Good Title 569
Transfers of Voidable Title 569
Buyers in the Ordinary Course of Business 570
Entrusting of Goods 570
Risk of Loss 572
Terms of the Agreement 572
Shipment Contracts 573
Destination Contracts 573
Goods in the Possession of Third Parties 573
Risk Generally 573
Effect of Breach on Risk of Loss 575
Insurable Interest 575
Sales on Trial 575
Sale or Return 575
Sale on Approval 575
20 Product Liability 579
The Evolution of Product Liability Law 580
The 19th Century 580
The 20th and 21st Centuries 581
The Current Debate over Product
Liability Law 581
Theories of Product Liability Recovery 581
Express Warranty 582
Implied Warranty of Merchantability 584
Implied Warranty of Fitness 587
Negligence 590
Strict Liability 593
The Restatement (Third) 595
Other Theories of Recovery 600
Time Limitations 602
Damages in Product Liability Cases 602
The No-Privity Defense 606
Tort Cases 606
Warranty Cases 606
Disclaimers and Remedy Limitations 607
Implied Warranty Disclaimers 607
Express Warranty Disclaimers 612
Disclaimers of Tort Liability 612
Limitation of Remedies 612
Defenses 615
The Traditional Defenses 616
Comparative Principles 616
Preemption and Regulatory Compliance 618
21 Performance of Sales Contracts 631
General Rules 632
Good Faith 632
Course of Dealing 632
Usage of Trade 632
Modification 634
Waiver 634
Assignment 635
Delivery 635
Basic Obligation 635
Place of Delivery 635
Seller’s Duty of Delivery 635
Inspection and Payment 636
Buyer’s Right of Inspection 636
Payment 636
Acceptance, Revocation, and Rejection 636
Acceptance 636
Effect of Acceptance 639
Revocation of Acceptance 639
Buyer’s Rights on Improper Delivery 642
Rejection 642
Right to Cure 644
Buyer’s Duties after Rejection 644
Assurance, Repudiation, and Excuse 645
Assurance 645
Anticipatory Repudiation 645
Excuse 645
22 Remedies for Breach of Sales Contracts 651
Agreements as to Remedies 652
Statute of Limitations 654
Seller’s Remedies 655
Remedies Available to an Injured Seller 655
Cancellation and Withholding of Delivery 655
Resale of Goods 655
Recovery of the Purchase Price 656
Damages for Rejection or Repudiation 656
Seller’s Remedies where Buyer
Is Insolvent 658
Seller’s Right to Stop Delivery 659
Liquidated Damages 659
Buyer’s Remedies 660
Buyer’s Remedies in General 660
Buyer’s Right to Damages 660
Buyer’s Right to Cover 661
Incidental Damages 661
Consequential Damages 662
Contents
Damages for Nondelivery 662
Damages for Defective Goods 664
Buyer’s Right to Specific Performance 667
Buyer and Seller Agreements as to Remedies 667
5
Part 5 Property
23 Personal Property and Bailments 673
Nature of Property 674
Classifications of Property 674
Personal Property versus Real Property 674
Tangible versus Intangible Personal Property 674
Public and Private Property 674
Acquiring Ownership of Personal Property 675
Production or Purchase 675
Possession of Unowned Property 675
Rights of Finders of Lost, Mislaid, and Abandoned
Property 675
Legal Responsibilities of Finders 678
Leasing 678
Gifts 679
Conditional Gifts 679
Uniform Transfers to Minors Act 679
Will or Inheritance 681
Confusion 681
Accession 681
Bailments 682
Nature of Bailments 682
Elements of a Bailment 682
Creation of a Bailment 682
Types of Bailments 682
Special Bailments 683
Duties of the Bailee 683
Duty of Bailee to Take Care of Property 683
Bailee’s Duty to Return the Property 684
Bailee’s Liability for Misdelivery 684
Limits on Liability 684
Right to Compensation 686
Bailor’s Liability for Defects in the Bailed
Property 686
Special Bailments 687
Common Carriers 687
Hotelkeepers 687
Safe-Deposit Boxes 687
Involuntary Bailments 688
Documents of Title 688
xxv
Warehouse Receipts 688
Bills of Lading 689
Duty of Care 690
Negotiation of Document of Title 691
Rights Acquired by Negotiation 691
Warranties of Transferor of Document of Title 691
24 Real Property 695
Scope of Real Property 696
Fixtures 696
Rights and Interests in Real Property 699
Estates in Land 699
Co-ownership of Real Property 700
Interests in Real Property Owned
by Others 703
Easements 703
Creation of Easements 704
Profits 706
Licenses 706
Restrictive Covenants 706
Acquisition of Real Property 712
Acquisition by Purchase 712
Acquisition by Gift 712
Acquisition by Will or Inheritance 712
Acquisition by Tax Sale 712
Acquisition by Adverse Possession 712
Transfer by Sale 714
Steps in a Sale 714
Contracting with a Real Estate Broker 715
Contract of Sale 715
Fair Housing Act 715
Deeds 716
Form and Execution of Deed 717
Recording Deeds 717
Methods of Assuring Title 718
Seller’s Responsibilities regarding the Quality of
Residential Property 718
Implied Warranty of Habitability 719
Duty to Disclose Hidden Defects 719
Other Property Condition–Related
Obligations of Real Property Owners
and Possessors 719
Expansion of Premises Liability 720
Americans with Disabilities Act 720
Land Use Control 721
Nuisance Law 721
Eminent Domain 722
xxvi
Contents
Zoning and Subdivision Laws 725
Land Use Regulation and Taking 726
25 Landlord and Tenant 731
Leases and Tenancies 732
Nature of Leases 732
Types of Tenancies 732
Execution of a Lease 733
Rights, Duties, and Liabilities of the
Landlord 734
Landlord’s Rights 734
Landlord’s Duties 734
Landlord’s Responsibility for Condition of
Leased Property 735
Landlord’s Tort Liability 739
Rights, Duties, and Liabilities of
the Tenant 745
Rights of the Tenant 745
Duty to Pay Rent 745
Duty Not to Commit Waste 745
Assignment and Subleasing 745
Tenant’s Liability for Injuries to
Third Persons 746
Termination of the Leasehold 746
Eviction 746
Agreement to Surrender 746
Abandonment 746
26 Estates and Trusts 751
The Law of Estates and Trusts 752
Estate Planning 752
Wills 752
Right of Disposition by Will 752
Nature of a Will 752
Common Will Terminology 752
Testamentary Capacity 753
Execution of a Will 756
Incorporation by Reference 758
Informal Wills 758
Joint and Mutual Wills 758
Construction of Wills 758
Limitations on Disposition by Will 758
Revocation of Wills 759
Codicils 760
Advance Directives: Planning for Disability 760
Living Wills 760
Durable Power of Attorney 760
Durable Power of Attorney for
Health Care 760
Federal Law and Advance Directives 761
Intestacy 761
Characteristics of Intestacy Statutes 762
Special Rules 762
Simultaneous Death 765
Administration of Estates 766
The Probate Estate 766
Determining the Existence of a Will 766
Selecting a Personal Representative 766
Responsibilities of the Personal
Representative 766
Trusts 767
Nature of a Trust 767
Trust Terminology 767
Why People Create Trusts 768
Creation of Express Trusts 768
Charitable Trusts 768
Totten Trusts 770
Powers and Duties of the Trustee 770
Liability of Trustee 771
Spendthrift Trusts 771
Termination and Modification of a Trust 771
Implied and Constructive Trusts 771
27 Insurance Law 775
Nature and Benefits of Insurance
Relationships 776
Insurance Policies as Contracts 777
Interested Parties 777
Offer, Acceptance, and Consideration 777
Effect of Insured’s Misrepresentation 780
Legality 780
Form and Content of Insurance
Contracts 780
Performance and Breach by Insurer 782
Property Insurance 782
The Insurable Interest Requirement 783
Covered and Excluded Perils 783
Nature and Extent of Insurer’s Payment
Obligation 787
Right of Subrogation 789
Duration and Cancellation of Policy 789
Liability Insurance 791
Types of Liability Insurance Policies 791
Liabilities Insured Against 791
Contents
Insurer’s Obligations 795
Is There a Liability Insurance Crisis? 799
Bad-Faith Breach of Insurance Contract 799
6
Part 6 Credit
28 Introduction to Credit and Secured
Transactions 809
Credit 810
Unsecured Credit 810
Secured Credit 810
Development of Security 811
Security Interests in Personal Property 811
Security Interests in Real Property 811
Suretyship and Guaranty 812
Sureties and Guarantors 812
Creation of Principal and Surety Relation 814
Defenses of a Surety 814
Creditor’s Duties to Surety 815
Subrogation, Reimbursement, and Contribution 815
Liens on Personal Property 816
Security Interests in Personal Property and Fixtures
under the Uniform Commercial Code 816
Common Law Liens 816
Statutory Liens 816
Characteristics of Liens 816
Foreclosure of Lien 819
Security Interests in Real Property 819
Historical Developments of Mortgages 819
Form, Execution, and Recording 819
Rights and Liabilities 819
Foreclosure 820
Right of Redemption 820
Recent Development Concerning Foreclosures 821
Deed of Trust 822
Land Contracts 823
Mechanic’s and Materialman’s Liens 824
Rights of Subcontractors and Materialmen 824
Basis for Mechanic’s or Materialman’s Lien 824
Requirements for Obtaining a Lien 825
Priorities and Foreclosure 825
Waiver of Lien 825
29 Security Interests in Personal Property 831
Article 9 832
Security Interests under the Code 832
xxvii
Security Interests 832
Types of Collateral 832
Obtaining a Security Interest 833
Attachment of the Security Interest 833
Attachment 833
The Security Agreement 833
Purchase Money Security Interests 834
Future Advances 835
After-Acquired Property 835
Proceeds 835
Perfecting the Security Interest 836
Perfection 836
Perfection by Public Filing 836
Possession by Secured Party as Public Notice 839
Control 839
Perfection by Attachment/Automatic
Perfection 839
Motor Vehicles 841
Fixtures 842
Priority Rules 842
Importance of Determining Priority 842
General Priority Rules 842
Purchase Money Security Interest in
Inventory 842
Purchase Money Security Interest in Noninventory
Collateral 844
Rationale for Protecting Purchase Money Security
Interests 845
Buyers in the Ordinary Course of Business 845
Artisan’s and Mechanic’s Liens 845
Liens on Consumer Goods Perfected by Attachment/
Automatic Perfection 848
Fixtures 848
Default and Foreclosure 850
Default 850
Right to Possession 850
Sale of the Collateral 850
Consumer Goods 850
Distribution of Proceeds 850
Liability of Creditor 851
30 Bankruptcy 857
The Bankruptcy Code 858
Bankruptcy Proceedings 858
Liquidations 858
Reorganizations 859
Family Farms 859
xxviii
Contents
Consumer Debt Adjustments 859
The Bankruptcy Courts 859
Chapter 7: Liquidation Proceedings 859
Petitions 859
Involuntary Petitions 859
Automatic Stay Provisions 860
Order of Relief 861
Meeting of Creditors and Election of Trustee 861
Duties of the Trustee 861
The Bankruptcy Estate 862
Exemptions 862
Avoidance of Liens 865
Redemptions 865
Preferential Payments 865
Preferential Liens 866
Transactions in the Ordinary Course of Business 866
Fraudulent Transfers 866
Claims 869
Allowable Claims 869
Secured Claims 869
Priority Claims 869
Distribution of the Debtor’s Estate 870
Discharge in Bankruptcy 870
Discharge 870
Objections to Discharge 870
Acts That Bar Discharge 872
Nondischargeable Debts 872
Reaffirmation Agreements 874
Dismissal for Substantial Abuse 874
Chapter 11: Reorganizations 878
Reorganization Proceeding 878
Use of Chapter 11 881
Chapter 12: Family Farmers and Fishermen 883
Relief for Family Farmers and Fishermen 883
Chapter 13: Consumer Debt Adjustments 884
Relief for Individuals 884
Procedure 884
Discharge 888
Advantages of Chapter 13 888
7
Part 7 Commercial Paper
31 Negotiable Instruments 893
Nature of Negotiable Instruments 894
Uniform Commercial Code 894
Negotiable Instruments 894
Negotiability 895
Kinds of Negotiable Instruments 895
Promissory Notes 895
Certificates of Deposit 896
Drafts 897
Checks 897
Benefits of Negotiable Instruments 898
Rights of an Assignee of a Contract 898
Rights of a Holder of a Negotiable Instrument 899
Formal Requirements for Negotiability 899
Basic Requirements 899
Importance of Form 900
In Writing 900
Signed 900
Unconditional Promise or Order 900
Requirement of a Promise or Order 900
Promise or Order Must Be Unconditional 900
Fixed Amount of Money 902
Fixed Amount 902
Payable in Money 903
Payable on Demand or at a Definite Time 903
Payable on Demand 903
Payable at a Definite Time 903
Payable to Order or Bearer 904
Special Terms 906
Additional Terms 906
Ambiguous Terms 908
32 Negotiation and Holder in Due Course 911
Negotiation 912
Nature of Negotiation 912
Formal Requirements for Negotiation 912
Nature of Indorsement 912
Wrong or Misspelled Name 913
Checks Deposited without Indorsement 913
Transfer of Order Instrument 913
Indorsements 915
Effects of an Indorsement 915
Kinds of Indorsements 915
Rescission of Indorsement 917
Holder in Due Course 918
General Requirements 919
Holder 919
Value 921
Good Faith 921
Overdue or Dishonored 922
Notice of Unauthorized Signature or Alteration 923
Contents
Notice of Claims 923
Irregular and Incomplete Instruments 924
Shelter Rule 925
Rights of a Holder in Due Course 927
Claims and Defenses Generally 927
Importance of Being a Holder in Due Course 927
Real Defenses 927
Personal Defenses 929
Claims to the Instrument 931
Claims in Recoupment 931
Changes in the Holder in Due Course Rule for
Consumer Credit Transactions 931
Consumer Disadvantages 931
State Consumer Protection Legislation 932
Federal Trade Commission Regulation 933
33 Liability of Parties 939
Liability in General 940
Contractual Liability 940
Primary and Secondary Liability 940
Obligation of a Maker 940
Obligation of a Drawee or an Acceptor 941
Obligation of a Drawer 941
Obligation of an Indorser 941
Obligation of an Accommodation Party 942
Signing an Instrument 944
Signature by an Authorized Agent 944
Unauthorized Signature 945
Contractual Liability in Operation 946
Presentment of a Note 946
Presentment of a Check or a Draft 946
Time of Presentment 948
Warranty Liability 948
Transfer Warranties 948
Presentment Warranties 950
Payment or Acceptance by Mistake 951
Operation of Warranties 951
Other Liability Rules 953
Negligence 953
Impostor Rule 953
Fictitious Payee Rule 953
Comparative Negligence Rule Concerning Impostors
and Fictitious Payees 954
Fraudulent Indorsements by Employees 954
Conversion 957
Discharge of Negotiable Instruments 958
Discharge of Liability 958
xxix
Discharge by Payment 959
Discharge by Cancellation 959
Altered Instruments; Discharge by
Alteration 959
Discharge of Indorsers and Accommodation
Parties 960
34 Checks and Electronic Transfers 963
The Drawer–Drawee Relationship 964
Bank’s Duty to Pay 964
Bank’s Right to Charge to Customer’s Account 964
Stop-Payment Order 967
Bank’s Liability for Payment after Stop-Payment
Order 970
Certified Check 971
Cashier’s Check 971
Death or Incompetence of Customer 972
Forged and Altered Checks 972
Bank’s Right to Charge Account 972
Customer’s Duty to Report Forgeries and
Alterations 974
Check Collection and Funds Availability 977
Check Collection 977
Funds Availability 980
Check 21 981
Electronic Transfers 982
Electronic Fund Transfer Act 983
Wire Transfers 985
8
Part 8 Agency Law
35 The Agency Relationship 991
Creation of an Agency 992
Formation 992
Capacity 992
Nondelegable Obligations 993
Agency Concepts, Definitions, and Types 993
Authority 993
General and Special Agents 994
Gratuitous Agents 994
Subagents 994
Employees and Nonemployee Agents 994
Duties of Agent to Principal 997
Agent’s Duty of Loyalty 997
Agent’s Duty to Obey Instructions 999
Agent’s Duty to Act with Care and Skill 999
xxx
Contents
Agent’s Duty to Provide Information 999
Agent’s Duties of Segregation, Record-Keeping, and
Accounting 1000
Duty Not to Receive a Material Benefit 1000
Duty of Good Conduct 1000
Duties of Principal to Agent 1002
Duty to Compensate Agent 1002
Duties of Reimbursement and Indemnity 1002
Termination of an Agency 1003
Termination by Act of the Parties 1003
Termination by Operation of Law 1004
Termination of Agency Powers Given as Security 1004
Effect of Termination on Agent’s Authority 1005
36 Third-Party Relations of the Principal and
the Agent 1011
Contract Liability of the Principal 1012
Actual Authority 1012
Apparent Authority 1013
Agent’s Notification and Knowledge 1014
Ratification 1014
Estoppel 1015
Contracts Made by Subagents 1016
Contract Liability of the Agent 1017
The Nature of the Principal 1017
Liability of Agent by Agreement 1019
Implied Warranty of Authority 1019
Tort Liability of the Principal 1020
Respondeat Superior Liability 1020
Direct Liability 1022
Liability for Torts of Nonemployee Agents 1023
Liability for Agent’s Misrepresentations 1023
Tort Liability of the Agent 1024
Tort Suits against Principal and Agent 1025
9
Part 9 Partnerships
37 Introduction to Forms of Business and
Formation of Partnerships 1031
Choosing a Form of Business 1032
Sole Proprietorship 1032
Partnership 1032
Limited Liability Partnership 1033
Limited Partnership 1033
Limited Liability Limited Partnership 1034
Corporation 1034
Professional Corporation 1034
Limited Liability Company 1035
Partnerships 1037
Creation of Partnership 1037
RUPA Definition of Partnership 1038
Creation of Joint Ventures 1040
Creation of Mining Partnerships 1041
Creation of Limited Liability
Partnerships 1041
Purported Partners 1042
Purporting to Be a Partner 1042
Reliance Resulting in a Transaction with the
Partnership 1042
Effect of Purported Partnership 1042
Partnership Capital 1044
Partnership Property 1045
Examples 1045
Partner’s Partnership Interest 1047
Partner’s Transferable Interest 1047
Effect of Partnership Agreement 1048
38 Operation of Partnerships and Related
Forms 1053
Duties of Partners to the Partnership and Each
Other 1054
Having Interest Adverse to Partnership 1054
Competing against the Partnership 1054
Duty to Serve 1056
Duty of Care 1056
Duty to Act within Actual Authority 1056
Duty to Account 1056
Other Duties 1056
Joint Ventures and Mining Partnerships 1057
Compensation of Partners 1057
Profits and Losses 1057
Management Powers of Partners 1060
Individual Authority of Partners 1060
Special Transactions 1061
Disagreement among Partners: Ordinary Course of
Business 1062
When Unanimous Partners’ is Agreement Required 1063
Joint Ventures and Mining Partnerships 1063
Effect of Partnership Agreement 1063
Liability for Torts and Crimes 1065
Torts 1065
Tort Liability and Limited Liability Partnerships 1066
Crimes 1066
Contents
Lawsuits by and against Partnerships and
Partners 1066
Limited Liability Partnerships 1066
39 Partners’ Dissociation and Partnerships’
Dissolution and Winding Up 1071
Dissociation 1072
Nonwrongful Dissociation 1072
Wrongful Dissociation 1073
Acts Not Causing Dissociation 1073
Effect of Partnership Agreement 1073
Dissolution and Winding Up the Partnership
Business 1075
Events Causing Dissolution and
Winding Up 1075
Joint Ventures and Mining Partnerships 1077
Performing Winding Up 1078
Partner’s Authority during Winding Up 1078
Distribution of Dissolved Partnership’s
Assets 1080
Asset Distributions in a Limited Liability
Partnership 1080
Termination 1081
When the Business Is Continued 1081
Successor’s Liability for Predecessor’s
Obligations 1081
Dissociated Partner’s Liability for Obligations
Incurred while a Partner 1081
Dissociated Partner’s Liability for Obligations
Incurred after Leaving the Partnership 1081
Effect of LLP Status 1082
Buyout of Dissociated Partners 1082
Partners Joining an Existing
Partnership 1085
Liability of New Partners 1085
40 Limited Liability Companies, Limited
Partnerships, and Limited Liability
Limited Partnerships 1091
Limited Liability Companies 1092
Tax Treatment of LLCs 1092
Formation of LLCs 1092
Members’ Rights and Liabilities 1093
Members’ Dissociations and
LLC Dissolution 1096
Limited Partnerships and Limited Liability
Limited Partnerships 1099
xxxi
The Uniform Limited Partnership Acts 1099
Use of Limited Partnerships
and LLLPs 1099
Creation of Limited Partnerships and
LLLPs 1100
Creation of LLLPs 1101
Defective Compliance with Limited
Partnership Statute 1101
Rights and Liabilities of Partners in Limited
Partnerships or LLLPs 1102
Rights and Liabilities Shared by General
and Limited Partners 1102
Other Rights of General Partners 1103
Other Liabilities of General Partners 1104
Other Rights of Limited Partners 1104
Other Liabilities of Limited Partners 1104
Partner Who Is Both a General Partner
and a Limited Partner 1104
Partners’ Dissociations and Limited Partnership
Dissolution 1105
Partners’ Dissociations 1105
Limited Partnership Dissolutions 1106
Mergers and Conversions 1107
10
Part 10 Corporations
41 History and Nature of Corporations 1115
History of Corporations 1116
American Corporation Law 1116
Classifications of Corporations 1116
Regulation of For-Profit Corporations 1118
State Incorporation Statutes 1118
State Common Law of Corporations 1118
Regulation of Nonprofit Corporations 1118
Regulation of Foreign and Alien
Corporations 1119
Due Process Clause 1119
Commerce Clause 1119
Subjecting Foreign Corporations to Suit 1119
Taxation 1120
Qualifying to Do Business 1122
Regulation of a Corporation’s Internal Affairs 1124
Regulation of Foreign Nonprofit
Corporations 1124
Piercing the Corporate Veil 1125
Nonprofit Corporations 1126
xxxii
Contents
42 Organization and Financial Structure of
Corporations 1135
Promoters and Preincorporation
Transactions 1135
Corporation’s Liability on Preincorporation
Contracts 1136
Promoter’s Liability on Preincorporation
Contracts 1136
Obtaining a Binding Preincorporation Contract 1136
Preincorporation Share Subscriptions 1137
Relation of Promoter and Prospective
Corporation 1138
Liability of Corporation to Promoter 1138
Incorporation 1138
Steps in Incorporation 1138
Close Corporation Elections 1141
Defective Attempts to Incorporate 1141
De Jure Corporation 1141
De Facto Corporation 1142
Corporation by Estoppel 1142
Liability for Defective Incorporation 1142
Modern Approaches to the Defective
Incorporation Problem 1142
Incorporation of Nonprofit Corporations 1144
Liability for Preincorporation
Transactions 1145
Financing For-Profit Corporations 1145
Equity Securities 1145
Authorized, Issued, and Outstanding Shares 1146
Options, Warrants, and Rights 1146
Debt Securities 1147
Consideration for Shares 1147
Quality of Consideration for Shares 1147
Quantity of Consideration for Shares 1147
Share Subscriptions 1150
Issuance of Shares 1150
Transfer of Shares 1151
Restrictions on Transferability of Shares 1151
Financing Nonprofit Corporations 1154
43 Management of Corporations 1159
Corporate Objectives 1160
Corporate Powers 1161
Purpose Clauses in Articles of Incorporation 1161
Powers of Nonprofit Corporations 1161
The Board of Directors 1161
Board Authority under Corporation Statutes 1162
Committees of the Board 1162
Who Is an Independent Director? 1163
Powers, Rights, and Liabilities of Directors as
Individuals 1163
Election of Directors 1163
Directors’ Meetings 1166
Officers of the Corporation 1167
Managing Close Corporations 1167
Managing Nonprofit Corporations 1168
Directors’ and Officers’ Duties to the
Corporation 1169
Acting within Authority 1169
Duty of Care 1169
Board Opposition to Acquisition of Control of a
Corporation 1176
Duties of Loyalty 1180
Conflicting Interest Transactions 1180
Usurpation of a Corporate Opportunity 1181
Oppression of Minority Shareholders 1183
Trading on Inside Information 1185
Director’s Right to Dissent 1185
Duties of Directors and Officers of Nonprofit
Corporations 1185
Corporate and Management Liability for Torts
and Crimes 1186
Liability of the Corporation 1186
Directors’ and Officers’ Liability for Torts and
Crimes 1187
Insurance and Indemnification 1190
Mandatory Indemnification of Directors 1190
Permissible Indemnification of Directors 1190
Insurance 1191
Nonprofit Corporations 1191
44 Shareholders’ Rights and Liabilities 1195
Shareholders’ Meetings 1196
Notice of Meetings 1196
Conduct of Meetings 1196
Shareholder Action without a Meeting 1196
Shareholders’ Election of Directors 1196
Straight Voting 1196
Cumulative Voting 1197
Classes of Shares 1197
Shareholder Control Devices 1197
Fundamental Corporate Changes 1200
Procedures Required 1201
Dissenters’ Rights 1201
Contents
Shareholders’ Inspection and Information
Rights 1207
Preemptive Right 1209
Distributions to Shareholders 1209
Dividends 1209
Share Repurchases 1212
Ensuring a Shareholder’s Return on
Investment 1212
Shareholders’ Lawsuits 1212
Shareholders’ Individual Lawsuits 1212
Shareholder Class Action Suits 1213
Shareholders’ Derivative Actions 1213
Defense of Corporation by Shareholder 1216
Shareholder Liability 1216
Shareholder Liability for Illegal Distributions 1216
Shareholder Liability for Corporate Debts 1216
Sale of a Control Block of Shares 1216
Shareholders as Fiduciaries 1217
Members’ Rights and Duties in Nonprofit
Corporations 1219
Members’ Meeting and Voting Rights 1219
Member Inspection and Information Rights 1220
Distributions of Assets 1220
Resignation and Expulsion of Members 1220
Derivative Suits 1221
Dissolution and Termination of
Corporations 1221
Winding Up and Termination 1222
Dissolution of Nonprofit Corporations 1223
45 Securities Regulation 1227
Purposes of Securities Regulation 1228
Securities and Exchange Commission 1229
SEC Actions 1229
What Is a Security? 1229
Securities Act of 1933 1232
Registration of Securities under the 1933 Act 1232
Mechanics of a Registered Offering 1232
Registration Statement and Prospectus 1233
Section 5: Timing, Manner, and Content of
Offers and Sales 1233
Exemptions from the Registration Requirements
of the 1933 Act 1237
Securities Exemptions 1237
Transaction Exemptions 1238
Intrastate Offering Exemption 1238
Private Offering Exemption 1238
xxxiii
Small Offering Exemptions 1240
Securities Offerings on the Internet 1241
Transaction Exemptions for Nonissuers 1241
Sale of Restricted Securities 1241
Consequence of Obtaining a Securities or Transaction
Exemption 1243
Liability Provisions of the 1933 Act 1246
Liability for Defective Registration Statements 1246
Other Liability Provisions 1251
Criminal Liability 1252
Securities Exchange Act of 1934 1252
Registration of Securities under the 1934 Act 1252
Holdings and Trading by Insiders 1253
Proxy Solicitation Regulation 1254
Liability Provisions of the 1934 Act 1256
Liability for False Statements in Filed
Documents 1256
Section 10(b) and Rule 10b–5 1256
Elements of a Rule 10b–5 Violation 1257
Regulation FD 1269
Criminal Liability 1270
Tender Offer Regulation 1270
Private Acquisitions of Shares 1272
State Regulation of Tender Offers 1272
State Securities Law 1272
Registration of Securities 1272
46 Legal and Professional Responsibilities
of Auditors, Consultants, and Securities
Professionals 1279
General Standard of Performance 1281
Professionals’ Liability to Clients 1281
Contractual Liability 1281
Tort Liability 1282
In Pari Delicto 1285
Breach of Trust 1286
Securities Law 1286
Professionals’ Liability to Third Persons:
Common Law 1287
Negligence and Negligent Misrepresentation 1287
Fraud 1292
Professional’s Liability to Third Parties:
Securities Law 1292
Securities Act of 1933 1293
Securities Exchange Act of 1934 1294
State Securities Law 1297
Securities Analysts’ Conflicts of Interest 1297
xxxiv
Contents
Dodd–Frank Act and Broker-Dealers 1299
Limiting Professionals’ Liability: Professional
Corporations and Limited Liability
Partnerships 1299
Qualified Opinions, Disclaimers of
Opinion, Adverse Opinions, and Unaudited
Statements 1300
Criminal, Injunctive, and Administrative
Proceedings 1301
Criminal Liability under the
Securities Laws 1302
Other Criminal Law Violations 1303
Injunctions 1304
Administrative Proceedings 1304
Securities Exchange Act Audit
Requirements 1305
SOX Section 404 1305
Cooperation with PCAOB Investigations 1305
Ownership of Working Papers 1306
Professional–Client Privilege 1306
11
Part 11 Regulation of Business
47 Administrative Law 1315
Origins of Administrative Agencies 1317
Agency Creation 1318
Enabling Legislation 1318
Administrative Agencies and the
Constitution 1319
Agency Types and Organization 1323
Agency Types 1323
Agency Organization 1324
Agency Powers and Procedures 1324
Nature, Types, and Source of Powers 1324
Investigative Power 1324
Rulemaking Power 1326
Adjudicatory Power 1328
Controlling Administrative Agencies 1329
Presidential Controls 1329
Congressional Controls 1329
Judicial Review 1330
Information Controls 1339
Freedom of Information Act 1339
Privacy Act of 1974 1343
Government in the Sunshine Act 1343
Issues in Regulation 1343
“Old” Regulation versus “New”
Regulation 1343
“Captive” Agencies and Agencies’
“Shadows” 1343
Is the Agency Doing Its Job? 1344
Deregulation versus Reregulation 1344
48 The Federal Trade Commission Act
and Consumer Protection Laws 1349
The Federal Trade Commission 1350
The FTC’s Powers 1350
FTC Enforcement Procedures 1350
Actions in Court 1351
Anticompetitive Behavior 1354
Deception and Unfairness 1354
Deception 1354
Unfairness 1363
Remedies 1363
Consumer Protection Laws 1363
Telemarketing and Consumer Fraud and
Abuse Prevention Act 1363
Do-Not-Call Registry 1364
Do Not Track 1365
Magnuson–Moss Warranty Act 1365
Truth in Lending Act 1366
Fair Credit Reporting Act 1367
FACT Act and the Identity
Theft Problem 1371
Equal Credit Opportunity Act 1372
Fair Credit Billing Act 1372
The Dodd–Frank Act 1372
Fair Debt Collection
Practices Act 1373
Product Safety Regulation 1378
49 Antitrust: The Sherman Act 1383
The Antitrust Policy Debate 1384
Chicago School Theories 1385
Traditional Antitrust Theories 1385
Effect of Chicago School
Notions 1385
Jurisdiction, Types of Cases,
and Standing 1385
Jurisdiction 1385
Types of Cases and the Role of Pretrial
Settlements 1386
Criminal Prosecutions 1386
Contents
Civil Litigation 1386
Standing 1387
Section 1—Restraints of Trade 1387
Concerted Action 1387
Per Se Analysis 1391
“Rule of Reason” Analysis 1391
Horizontal Price-Fixing 1391
Vertical Price-Fixing 1395
Horizontal Divisions of Markets 1399
Vertical Restraints on
Distribution 1399
Group Boycotts and Concerted
Refusals to Deal 1400
Tying Agreements 1400
Reciprocal Dealing Agreements 1407
Exclusive Dealing Agreements 1407
Joint Ventures by Competitors 1407
Section 2—Monopolization 1408
Monopolization 1408
Attempted Monopolization 1416
Conspiracy to Monopolize 1417
50 The Clayton Act, the Robinson–Patman
Act, and Antitrust Exemptions and
Immunities 1423
Clayton Act Section 3 1424
Tying Agreements 1425
Exclusive Dealing Agreements 1425
Clayton Act Section 7 1425
Introduction 1425
Relevant Market Determination 1426
Horizontal Mergers 1427
Vertical Mergers 1435
Conglomerate Mergers 1436
Clayton Act Section 8 1437
The Robinson–Patman Act 1438
Jurisdiction 1438
Section 2(a) 1439
Defenses to Section 2(a) Liability 1444
Indirect Price Discrimination 1445
Buyer Inducement of Discrimination 1446
Antitrust Exceptions and Exemptions 1446
Statutory Exemptions 1446
State Action Exemption 1447
The Noerr–Pennington Doctrine 1447
Patent Licensing 1451
Foreign Commerce 1451
xxxv
51 Employment Law 1455
Legislation Protecting Employee Health,
Safety, and Well-Being 1456
Workers’ Compensation 1456
The Occupational Safety and Health Act 1460
The Family and Medical Leave Act 1460
Legislation Protecting Wages, Pensions,
and Benefits 1461
Social Security 1461
Unemployment Compensation 1461
ERISA 1461
The Fair Labor Standards Act 1462
Collective Bargaining and
Union Activity 1462
Equal Opportunity Legislation 1463
The Equal Pay Act 1463
Title VII 1464
Section 1981 1477
The Age Discrimination in Employment Act 1477
The Americans with Disabilities Act 1478
Genetic Information Nondiscrimination Act 1483
Immigration Reform and Control Act 1483
Uniformed Services Employment and Reemployment
Rights Act 1484
Executive Order 11246 1484
State Antidiscrimination Laws 1484
Retaliation 1484
Employee Privacy 1484
Polygraph Testing 1485
Drug and Alcohol Testing 1486
Employer Searches 1486
Records and References 1486
Employer Monitoring 1487
Job Security 1487
The Doctrine of Employment at Will 1487
The Common Law Exceptions 1489
52 Environmental Regulation 1497
Historical Perspective 1498
The Environmental Protection Agency 1498
The National Environmental Policy Act 1499
Air Pollution 1499
Background 1499
Clean Air Act 1499
Ambient Air Control Standards 1499
Acid Rain Controls 1500
Control of Hazardous Air Pollutants 1500
xxxvi
Contents
New Source Controls 1500
Permits 1503
Enforcement 1503
Automobile Pollution 1504
International Air Problems 1505
Water Pollution 1508
Background 1508
Early Federal Legislation 1508
Clean Water Act 1508
Discharge Permits 1508
Water Quality Standards 1509
Enforcement 1509
Wetlands 1512
Waters of the United States 1512
Ocean Dumping 1512
Liability for Oil Spills 1513
Drinking Water 1515
Waste Disposal 1515
Background 1515
The Resource Conservation and Recovery Act 1516
Underground Storage Tanks 1516
State Responsibilities 1516
Enforcement 1516
Solid Waste 1519
Superfund 1519
Community Right to Know and Emergency
Cleanup 1522
Regulation of Chemicals 1522
Background 1522
Regulation of Agricultural Chemicals 1522
Toxic Substances Control Act 1523
International Developments Concerning
Regulation of Toxic Substances 1523
Biotechnology 1525
Appendix A The Constitution of the
United States of America A-1
Appendix B Uniform Commercial
Code B-1
Glossary G-1
Index I-1
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Abdouch v. Lopez. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Coleman v. Retina Consultants, P.C.. . . . . . . . . . . . . . . . . . . 326
Advance Dental Care, Inc. v. SunTrust Bank. . . . . . . . . . . . . . . 9
Columbia Realty Ventures v. Dang . . . . . . . . . . . . . . . . . . . . 812
Aliaga Medical Center v. Harris Bank. . . . . . . . . . . . . . . . . . 968
Coma Corporation v. Kansas Department of Labor. . . . . . . . 460
Alice Corporation Ltd. v. CLS Bank International. . . . . . . . . 290
Coomer v. Kansas City Royals Baseball Corp. . . . . . . . . . . . . 15
Allstate Lien & Recovery Corporation v. Stansbury . . . . . . . 817
Cordas v. Uber Technologies, Inc.. . . . . . . . . . . . . . . . . . . . . 374
American Needle, Inc. v. National Football League . . . . . . 1388
Coyle v. Schwartz. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1153
Anderson v. Branch Banking and Trust Company. . . . . . . . . 975
Currie v. Chevron U.S.A., Inc.. . . . . . . . . . . . . . . . . . . . . . . . 252
Arthur Andersen LLP v. United States. . . . . . . . . . . . . . . . . 1307
D’Agostino v. Federal Insurance Company. . . . . . . . . . . . . . 378
AT&T Mobility LLC v. Concepcion . . . . . . . . . . . . . . . . . . . . 59
Darco Transportation v. Dulen. . . . . . . . . . . . . . . . . . . . . . . 1459
Audio Visual Artistry v. Tanzer. . . . . . . . . . . . . . . . . . . . . . . 350
Day v. Fortune Hi-Tech Marketing, Inc. . . . . . . . . . . . . . . . . 410
Ballard v. Dornic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 701
DePetris & Backrach, LLP v. Srour. . . . . . . . . . . . . . . . . . . 1019
Bank of America, N.A. v. Inda. . . . . . . . . . . . . . . . . . . . . . . . 920
Dixon v. Crawford, McGilliard, Peterson & Yelish. . . . . . . 1083
Banks v. Lockart. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
Dodge v. Ford Motor Co.. . . . . . . . . . . . . . . . . . . . . . . . . . . 1210
Bauer v. Qwest Communications Company, LLC. . . . . . . . . 396
Doe v. Roman Catholic Archdiocese of Indianapolis. . . . . . . 416
Beer v. Bennett. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660
Domingo v. Mitchell. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365
Berghuis v. Thompkins. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
Drake Manufacturing Company, Inc. v. Polyflow, Inc.. . . . 1123
Berry v. Great American Dream Inc.. . . . . . . . . . . . . . . . . . 1469
Durham v. McDonald’s Restaurants of Oklahoma, Inc.. . . . . 207
Bertrand v. Mullin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218
Duro Textiles, LLC v. Sunbelt Corporation. . . . . . . . . . . . . . 390
Bissinger v. New Country Buffet. . . . . . . . . . . . . . . . . . . . . . 585
Dynegy, Inc. v. Yates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486
Black v. William Insulation Co.. . . . . . . . . . . . . . . . . . . . . . . 267
E & G Food Corp. v. Cumberland Farms. . . . . . . . . . . . . . . . 928
Bouchat v. Baltimore Ravens Limited Partnership. . . . . . . . . 308
EEOC v. Kohl’s Dept. Stores, Inc. . . . . . . . . . . . . . . . . . . . 1480
Branham v. Ford Motor Co.. . . . . . . . . . . . . . . . . . . . . . . . . . 596
Escott v. BarChris Construction Corp.. . . . . . . . . . . . . . . . . 1248
Brehm v. Eisner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1171
Evory v. RJM Acquisitions Funding, L.L.C. . . . . . . . . . . . . 1374
Brooke Group Ltd. v. Brown & Williamson
Tobacco Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1440
Exxon Shipping Co. v. Baker. . . . . . . . . . . . . . . . . . . . . . . . 1513
Brooks v. Lewin Realty III, Inc.. . . . . . . . . . . . . . . . . . . . . . . 736
Federal Trade Commission v. Ross . . . . . . . . . . . . . . . . . . . 1352
Browning v. Poirier. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489
Federal Trade Commission v. Staples, Inc. . . . . . . . . . . . . . 1432
Cabot Oil & Gas Corporation v. Daugherty
Petroleum, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398
Ferris, Baker Watts, Inc. v. Ernst & Young, LLP. . . . . . . . . 1295
Cahaba Disaster Recovery v. Rogers. . . . . . . . . . . . . . . . . . . 664
Finch v. Raymer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1046
Capshaw v. Hickman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 574
CBS Corp. v. FCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 995
Cincinnati Insurance Company v. Wachovia Bank
National Association. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 972
Citizens National Bank of Paris v. Kids Hope United,
Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 769
Citizens United v. Federal Election Commission. . . . . . . . . . . 82
City of Dearborn Heights Act 345 Police & Fire
Ret. Sys. v. Waters Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . . 1302
Clark’s Sales and Service, Inc. v. Smith. . . . . . . . . . . . . . . . . 465
Coggins v. New England Patriots Football Club, Inc.. . . . . 1184
Farrell v. Macy’s Retail Holdings, Inc. . . . . . . . . . . . . . . . . . 210
Filer, Inc. v. Staples, Inc.,. . . . . . . . . . . . . . . . . . . . . . . . . . . . 511
Fish v. Tex. Legislative Serv., P’ship. . . . . . . . . . . . . . . . . . 1058
Fitl v. Strek. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 643
Fitzgerald v. Racing Association of Central Iowa . . . . . . . . . . 95
Forcht Bank v. Gribbins. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 966
Franchise Holding II, LLC v. Huntington Restaurants
Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407
Francini v. Goodspeed Airport, LLC. . . . . . . . . . . . . . . . . . . 705
Frontier Leasing Corp. v. Links Engineering, LLC. . . . . . . 1015
Gamboa v. Alvarado. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 476
Garden Ridge, L.P. v. Advance International, Inc.. . . . . . . . . 548
Gaskell v. University of Kentucky. . . . . . . . . . . . . . . . . . . . 1466
xxxvii
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xxxviii
List of Cases
General Credit Corp. v. New York Linen Co. . . . . . . . . . . . . 930
George v. AL Hoyt & Sons, Inc. . . . . . . . . . . . . . . . . . . . . . . 546
Jewish Federation of Greater Des Moines v. Cedar
Forrest Products Co.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 657
Giddings & Lewis, Inc. v. Industrial Risk Insurers . . . . . . . . 603
Johnson v. Bank of America, N.A.. . . . . . . . . . . . . . . . . . . . . 515
Giles v. First Virginia Credit Services, Inc.. . . . . . . . . . . . . . 851
Johnson v. Fluor Corporation. . . . . . . . . . . . . . . . . . . . . . . . 1476
Gniadek v. Camp Sunshine at Sebago Lake, Inc.. . . . . . . . . 1006
Johnson v. J. Walter Thompson U.S.A., LLC . . . . . . . . . . . 1473
Gold v. Deloitte & Touche, LLP (In re NM
Holdings Co., LLC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1283
Jones v. Wells Fargo Bank, N.A.. . . . . . . . . . . . . . . . . . . . . . 957
Gonzales v. Raich. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
J.T. ex rel. Thode v. Monster Mountain, LLC . . . . . . . . . . . . 446
Grace Label, Inc. v. Kliff . . . . . . . . . . . . . . . . . . . . . . . . . . . . 633
Kelo v. City of New London. . . . . . . . . . . . . . . . . . . . . . . . . . 723
Grande v. Jennings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 677
Kesner v. Superior Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247
Green Garden Packaging Co., v. Schoenmann
Produce Co.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496
Kibler v. Hall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318
Green v. Cosby. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1022
Kirtsaeng v. John Wiley & Sons, Inc.. . . . . . . . . . . . . . . . . . . 303
Green v. Ford Motor Co.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616
Kolodziej v. Mason. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370
Green Wood Industrial Company v. Forceman
International Development Group . . . . . . . . . . . . . . . . . . . . . 662
Kraft, Inc. v. Federal Trade Commission. . . . . . . . . . . . . . . 1355
Guth v. Loft, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1181
Krupinski v. Deyesso . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1143
Gyamfoah v. EG&G Dynatrend (now EG&G
Technical Services). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 690
Harrison v. Family Home Builders, LLC. . . . . . . . . . . . . . . . 537
Hecht v. Andover Assoc. Mgmt. Co.. . . . . . . . . . . . . . . . . . 1094
Helena Chemical Co. v. Williamson. . . . . . . . . . . . . . . . . . . . 652
Heritage Bank v. Bruha. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 902
Hertz Corp. v. Friend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Hicks v. Sparks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434
Hill v. Nakai (In re Estate of Hannifin) . . . . . . . . . . . . . . . . . 763
Holiday Motor Corp. v. Walters. . . . . . . . . . . . . . . . . . . . . . . 591
Houseman v. Dare. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 551
Huntington National Bank v. Guishard, Wilburn & Shorts. . 949
Hutchison v. Kaforey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 753
Impression Products, Inc. v. Lexmark International, Inc.. . . . 293
In re Bernard L. Madoff Investment Securities . . . . . . . . . . . 867
In re Borden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 845
In re Burt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 885
In re Foreclosure Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 821
In re Lance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840
In re Made In Detroit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880
Jordan v. Jewel Food Stores, Inc.. . . . . . . . . . . . . . . . . . . . . . 228
Killian v. Ricchetti . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 529
Krieger v. Educational Credit Management Corporation. . . . 872
Kruser v. Bank of America NT & SA. . . . . . . . . . . . . . . . . . . 984
Lach v. Man O’War, LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . 1107
Leegin Creative Leather Products v. PSKS, Inc. . . . . . . . . . 1395
Lehigh Presbytery v. Merchants Bancorp. . . . . . . . . . . . . . . . 916
Lewis-Gale Medical Center, LLC v. Alldredge. . . . . . . . . . . 329
Lincoln Composites, Inc. v. Firetrace USA, LLC . . . . . . . . . 613
Lindh v. Surman. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 680
Long v. Provide Commerce, Inc. . . . . . . . . . . . . . . . . . . . . . . 384
Lord v. D & J Enterprises, Inc.. . . . . . . . . . . . . . . . . . . . . . . . 256
Marion T v. Northwest Metals Processors. . . . . . . . . . . . . . . 944
Mark v. FSC Securities Corp.. . . . . . . . . . . . . . . . . . . . . . . . 1239
Massachusetts v. Environmental Protection Agency. . . . . . 1506
Matal v. Tam. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Mathias v. Accor Economy Lodging, Inc.. . . . . . . . . . . . . . . 201
Mayo Foundation for Medical Education v. United
States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1335
McDonough v. McDonough. . . . . . . . . . . . . . . . . . . . . . . . . 1097
McLellan v. Charly. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418
McMillian v. McMillian. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1054
In re Rogers (Wallace v. Rogers). . . . . . . . . . . . . . . . . . . . . . 863
MDM Group Associates, Inc. v. CX Reinsurance
Company Ltd.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 992
In re Sia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 907
Medmarc Casualty Insurance Co. v. Avent America, Inc.. . . 795
In re Siegenberg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 875
Meyer v. Christie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1074
James v. City of Costa Mesa. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Michigan Battery Equipment, Inc. v. Emcasco
Insurance Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 785
Janke v. Brooks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561
J.D. Fields & Company, Inc. v. United States Steel
International, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367
Miller v. Burnett. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747
Milner v. Department of the Navy. . . . . . . . . . . . . . . . . . . . 1340
List of Cases
xxxix
Mitchell Partners, L.P. v. Irex Corp. . . . . . . . . . . . . . . . . . . 1218
Riegel v. Medtronic, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 620
Mogilevsky v. Rubicon Technology, Inc.. . . . . . . . . . . . . . . . 698
RJR Nabisco, Inc. v. European Community. . . . . . . . . . . . . . 187
Montgomery Cellular Holding Co., Inc. v. Dobler. . . . . . . . 1202
Rochester Gas and Electric Corporation. v. Delta Star. . . . . . 646
Mortgage Grader, Inc. v. Ward & Olivo, L.L.P. . . . . . . . . . 1067
Rogers v. Household Life Insurance Co. . . . . . . . . . . . . . . . . 453
Moser v. Moser. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1101
Royal Indemnity Co. v. Tyco Fire Products, LP. . . . . . . . . . 583
Moss v. Batesville Casket Co. . . . . . . . . . . . . . . . . . . . . . . . . 588
RR Maloan Investment v. New HGE. . . . . . . . . . . . . . . . . . . 921
MP Nexlevel of Cal., Inc. v. CVIN. . . . . . . . . . . . . . . . . . . . 1043
Safeco Insurance Co. of America v. Burr. . . . . . . . . . . . . . . 1368
Music Acceptance Corp. v. Lofing. . . . . . . . . . . . . . . . . . . . . 933
Sanders v. Madison Square Garden L.P. . . . . . . . . . . . . . . . 1001
Mutual Savings Association v. Res/Com Properties . . . . . . . 825
Sekhar v. United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
National College Loan Trust 2004-1 v. Irizarry. . . . . . . . . . . 942
Shaw v. United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
National Federation of Independent Business v. Sebelius. . . . 75
Singh v. Uber Technologies Inc.. . . . . . . . . . . . . . . . . . . . . . . 472
NBN Broadcasting, Inc. v. Sheridan Broadcasting
Networks, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1064
SmithStearn Yachts, Inc. v. Gyrographic
Communications, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1137
Nelson v. James H. Knight DDS, P.C.. . . . . . . . . . . . . . . . . 1488
Sogeti USA LLC v. Scariano. . . . . . . . . . . . . . . . . . . . . . . . . 509
Neumann v. Liles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212
SRM Global Fund L.P. v. Countrywide Financial Corp.. . . 1258
New Randolph Halstead Currency Exchange v. Regent
Title Insurance Agency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 924
Stahlecker v. Ford Motor Co.. . . . . . . . . . . . . . . . . . . . . . . . . 269
Noble Roman’s v. Pizza Boxes. . . . . . . . . . . . . . . . . . . . . . . . 565
Star Athletica, LLC v. Varsity Brands, Inc.. . . . . . . . . . . . . . 299
North Atlantic Instruments, Inc. v. Haber. . . . . . . . . . . . . . . . 998
State of Connecticut v. Cardwell . . . . . . . . . . . . . . . . . . . . . . 568
North Carolina State Board of Dental Examiners v.
Federal Trade Commission. . . . . . . . . . . . . . . . . . . . . . . . . . 1448
Steinberg v. U.S.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408
Nye Capital Appreciation Partners, L.L.C. v. Nemchik. . . . 1230
Obergefell v. Hodges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Stoneridge Investment Partners, LLC v.
Scientific-Atlanta, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1265
Obsidian Finance Group, LLC v. Cox . . . . . . . . . . . . . . . . . . 223
Stratford v. Long. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 713
O’Connor v. Oakhurst Dairy. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Stuart v. Pittman. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 777
Olmsted v. Saint Paul Public Schools. . . . . . . . . . . . . . . . . . . 439
Supply Chain Assocs., LLC v. ACT Elecs., Inc. . . . . . . . . . 1126
Omnicare, Inc. v. NCS Healthcare, Inc.. . . . . . . . . . . . . . . . 1165
Paciaroni v. Crane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1079
Suture Express, Inc. v. Owens & Minor
Distribution, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1401
Palmatier v. Wells Fargo Financial National Bank . . . . . . . . 834
Symons v. Heaton. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355
Paramount Communications, Inc. v. Time, Inc.. . . . . . . . . . 1178
Tan v. Arnel Management Company. . . . . . . . . . . . . . . . . . . 743
Patterson v. CitiMortgage, Inc.. . . . . . . . . . . . . . . . . . . . . . . . 436
Tedeton v. Tedeton. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1148
Pearson v. Shalala. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1319
The Industrial Development Board of the City of
Montgomery v. Russell. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517
Pelican National Bank v. Provident Bank of Maryland . . . . . 904
Pena v. Fox. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387
Peterson v. AT&T Mobility Services, LLC. . . . . . . . . . . . . 1491
Philibert v. Kluser. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262
Pittman v. Henry Moncure Motors. . . . . . . . . . . . . . . . . . . . . 640
POM Wonderful LLC v. Coca-Cola Co. . . . . . . . . . . . . . . . . 332
POM Wonderful, LLC v. Federal Trade Commission. . . . . 1357
Stanton v. Greenstar Recycled Holdings, LLC. . . . . . . . . . . . 532
Stephen A. Wheat Trust v. Sparks . . . . . . . . . . . . . . . . . . . . . 428
The United States Life Insurance Company in the
City of New York v. Wilson. . . . . . . . . . . . . . . . . . . . . . . . . . 392
Thomas v. Archer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357
Timothy v. Keetch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
Toms v. Calvary Assembly of God, Inc. . . . . . . . . . . . . . . . . 275
Town of Freeport v. Ring. . . . . . . . . . . . . . . . . . . . . . . . . . . . 913
Price v. High Pointe Oil Company, Inc. . . . . . . . . . . . . . . . . . . 5
Toyo Tire North America Manufacturing, Inc. v. Davis . . . . 233
ProMedica Health System, Inc. v. Federal Trade
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1428
Trapani Construction Co. v. Elliot Group, Inc.. . . . . . . . . . . . 346
Treadwell v. J.D. Construction Co.. . . . . . . . . . . . . . . . . . . . 1017
Rasmussen v. Jackson. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1040
Tricontinental Industries, Ltd. v. PricewaterhouseCoopers,
LLP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1289
Reynolds Health Care Services, Inc. v. HMNH, Inc.. . . . . . 1198
xl
List of Cases
Tyson Foods, Inc. v. Bouaphakeo. . . . . . . . . . . . . . . . . . . . . . . 55
Wallis v. Brainerd Baptist Church . . . . . . . . . . . . . . . . . . . . . 520
United States v. Anderson. . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
Walters v. YMCA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468
United States v. Domenic Lombardi Realty. . . . . . . . . . . . . 1520
Weil v. Murray. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 638
United States v. Hopkins. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1509
Weissman v. City of New York. . . . . . . . . . . . . . . . . . . . . . . 685
United States v. Hsiung. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1392
Welsh v. Lithia Vaudm, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . 413
United States v. Jensen. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1187
Wendzel v. Feldstein. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 740
United States v. Jones. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
Whitman v. American Trucking Associations. . . . . . . . . . . 1322
United States v. Microsoft Corp. . . . . . . . . . . . . . . . . . . . . . 1410
Wilke v. Woodhouse Ford, Inc. . . . . . . . . . . . . . . . . . . . . . . . 608
United States v. Newman. . . . . . . . . . . . . . . . . . . . . . . . . . . 1263
Winger v. CM Holdings, L.L.C.. . . . . . . . . . . . . . . . . . . . . . . 259
United States v. Ohio Edison Company. . . . . . . . . . . . . . . . 1501
United States v. SDI Future Health, Inc. . . . . . . . . . . . . . . . . 166
World Harvest Church v. Grange Mutual
Casualty Co.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792
United States v. Southern Union Co. . . . . . . . . . . . . . . . . . . 1516
World of Boxing LLC v. King. . . . . . . . . . . . . . . . . . . . . . . . 541
United Techs. Corp. v. Treppel. . . . . . . . . . . . . . . . . . . . . . . 1208
Woven Treasures, Inc. v. Hudson Capital, L.L.C.. . . . . . . . . 843
Urbain v. Beierling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1076
Wykeham Rise, LLC v. Federer. . . . . . . . . . . . . . . . . . . . . . . 707
Utility Air Regulatory Group v. Environmental
Protection Agency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1331
Yung-Kai Lu v. Univ. of Utah . . . . . . . . . . . . . . . . . . . . . . . . 500
Valley Bank of Ronan v. Hughes. . . . . . . . . . . . . . . . . . . . . . 978
Zaretsky v. William Goldberg Diamond Corp. . . . . . . . . . . . 570
Victory Clothing Co. v. Wachovia Bank, N.A. . . . . . . . . . . . 954
Zelnick v. Adams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451
Volvo Trucks North America, Inc. v. Reeder-Simco
GMC, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1442
Zimmerman v. Allen. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 756
Zapata Corp. v. Maldonado . . . . . . . . . . . . . . . . . . . . . . . . . 1214
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Part One
chapter 1
The Nature of Law
chapter 2
The Resolution of Private Disputes
chapter 3
Business and the Constitution
chapter 4
Business Ethics, Corporate Social
Responsibility, Corporate Governance,
and Critical Thinking
Foundations of
American Law
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CHAPTER 1
THE NATURE OF LAW
A
ssume that you have taken on a management position at MKT Corp. If MKT is to make sound business
decisions, you and your management colleagues must be aware of a broad array of legal considerations.
These may range, to use a nonexhaustive list, from issues in contract, agency, and employment law to
considerations suggested by tort, intellectual property, securities, and constitutional law. Sometimes, legal principles may constrain MKT’s business decisions; at other times, the law may prove a valuable ally of MKT in the
successful operation of the firm’s business.
Of course, you and other members of the MKT management group will rely on the advice of in-house counsel
(an attorney who is an MKT employee) or of outside attorneys who are in private practice. The approach of simply
“leaving the law to the lawyers,” however, is likely to be counterproductive. It will often be up to nonlawyers such
as you to identify a potential legal issue or pitfall about which MKT needs professional guidance. If you fail to spot
the issue in a timely manner and legal problems are allowed to develop and fester, even the most skilled attorneys
may have difficulty rescuing you and the firm from the resulting predicament. If, on the other hand, your failure to
identify a legal consideration means that you do not seek advice in time to obtain an advantage that applicable law
would have provided MKT, the corporation may lose out on a beneficial opportunity. Either way—that is, whether
the relevant legal issue operates as a constraint or offers a potential advantage—you and the firm cannot afford to
be unfamiliar with the legal environment in which MKT operates.
This may sound intimidating, but it need not be. The process of acquiring a working understanding of the legal
environment of business begins simply enough with these basic questions:
∙∙ What major types of law apply to the business activities and help shape the business decisions of firms such as
MKT?
∙∙ What ways of examining and evaluating law may serve as useful perspectives from which to view the legal
environment in which MKT and other businesses operate?
∙∙ What role do courts play in making or interpreting law that applies to businesses such as MKT and to employees of those firms, and what methods of legal reasoning do courts utilize?
∙∙ What is the relationship between legal standards of behavior and notions of ethical conduct?
LEARNING OBJECTIVES
LO
After studying this chapter, you should be able to:
1-1
1-2
Identify the respective makers of the different
types of law (constitutions, statutes, common law,
and administrative regulations and decisions).
Identify the type of law that takes precedence
when two types of law conflict.
1-3
1-4
Explain the basic differences between the
criminal law and civil law classifications.
Describe key ways in which the major schools
of jurisprudence differ from each other.
4
Part One Foundations of American Law
1-5
Describe the respective roles of adhering to
precedent (stare decisis) and distinguishing
precedent in case law reasoning.
Types and Classifications of Law
The Types of Law
Identify the respective makers of the different types of law
LO1-1 (constitutions, statutes, common law, and administrative
regulations and decisions).
Constitutions Constitutions, which exist at the state and
federal levels, have two general functions.1 First, they set up
the structure of government for the political unit they control
(a state or the federal government). This involves creating the
branches and subdivisions of the government and stating the
powers given and denied to each. Through its separation
of powers, the U.S. Constitution establishes the Congress
and gives it power to make law in certain areas, provides for
a chief executive (the president) whose function is to execute
or enforce the laws, and helps create a federal judiciary to
interpret the laws. The U.S. Constitution also structures the
relationship between the federal government and the states.
In the process, it respects the principle of federalism by recognizing the states’ power to make law in certain areas.
The second function of constitutions is to prevent the
government from taking certain actions or passing certain
laws, sometimes even if those actions or laws would otherwise appear to fall within the authority granted to the government under the first function. Constitutions do so mainly
by prohibiting government action that restricts certain individual rights. The Bill of Rights to the U.S. Constitution is
an example. You could see the interaction of those two functions, for instance, where Congress is empowered to regulate
interstate commerce but cannot do so in a way that would
abridge the First Amendment’s free speech guarantee.
Statutes Statutes are laws created by elected representatives in Congress or a state legislature. They are stated in
an authoritative form in statute books or codes. As you
will see, however, their interpretation and application are
often difficult.
Chapter 3 discusses constitutional law as it applies to government
regulation of business.
1
1-6
Identify what courts focus on when applying the
major statutory interpretation techniques (plain
meaning, legislative purpose, legislative history,
and general public purpose).
Throughout this text, you will encounter state statutes
that were originally drafted as uniform acts. Uniform
acts are model statutes drafted by private bodies of lawyers and scholars. They do not become law until a legislature enacts them. Their aim is to produce state-by-state
uniformity on the subjects they address. Examples include the Uniform Commercial Code (which deals with
a wide range of commercial law subjects), the Revised
Uniform Partnership Act, and the Revised Model Business Corporation Act.
Common Law The common law (also called judgemade law or case law) is law made and applied by judges
as they decide cases not governed by statutes or other
types of law. Although, as a general matter, common law
exists only at the state level, both state courts and federal
courts become involved in applying it. The common law
originated in medieval England and developed from the
decisions of judges in settling disputes. Over time, judges
began to follow the decisions of other judges in similar
cases, called precedents. This practice became formalized
in the doctrine of stare decisis (let the decision stand). As
you will see later in the chapter, stare decisis is not completely rigid in its requirement of adherence to precedent.
It is flexible enough to allow the common law to evolve to
meet changing social conditions. The common law rules
in force today, therefore, often differ considerably from
the common law rules of earlier times.
The common law came to America with the first English settlers, was applied by courts during the colonial
period, and continued to be applied after the Revolution and the adoption of the Constitution. It still governs
many cases today. For example, the rules of tort, contract, and agency discussed in this text are mainly common law rules. In some instances, states have codified
(enacted into statute) some parts of the common law.
States and the federal government have also passed statutes superseding the common law in certain situations.
As discussed in Chapter 9, for example, the states have
established special rules for contract cases involving
the sale of goods by enacting Article 2 of the Uniform
Commercial Code.
Chapter One
This text’s torts, contracts, and agency chapters often
refer to the Restatement—or Restatement (Second) or
(Third)—rule on a particular subject. The Restatements
are collections of common law (and occasionally statutory)
rules covering various areas of the law. Because they are
promulgated by the American Law Institute rather than by
courts, the Restatements are not law and do not bind courts.
However, state courts often find Restatement rules persuasive and adopt them as common law rules within their
states. The Restatement rules usually are the rules followed
by a majority of the states. Occasionally, however, the Restatements stimulate changes in the common law by suggesting new rules that the courts later decide to follow.
The Nature of Law
5
Because the judge-made rules of common law apply
only when there is no applicable statute or other type of
law, common law fills in gaps left by other legal rules
if sound social and public policy reasons call for those
gaps to be filled. Judges thus serve as policy makers in
formulating the content of the common law. In Price v.
High Pointe Oil Company, Inc., which follows shortly, the
Court surveys the relevant legal landscape and concludes
that a longstanding common law rule should remain in effect. A later section in the chapter will focus on the process
of case law reasoning, in which courts engage when they
make and apply common law rules. That process is exemplified by the first half of the Price opinion.
Price v. High Pointe Oil Company, Inc. 828 N.W.2d 660 (Mich. 2013)
In 2006, Beckie Price replaced the oil furnace in her house with a propane furnace. The oil furnace was removed, but the pipe
that had been used to fill the furnace with oil remained in place.
At the time the furnace was replaced, Price canceled her contract for oil refills with the predecessor of High Pointe Oil
Company, the defendant. Somehow, though, in November 2007, High Pointe mistakenly placed Price’s address back on its
“keep full list.” Subsequently, a High Pointe truck driver pumped around 400 gallons of fuel oil into Price’s basement through
the oil-fill pipe before realizing the mistake. Price’s house and her belongings were destroyed. The house was eventually torn
down, the site was remediated, and a new house was built on a different part of Price’s property. Price’s personal property was
all cleaned or replaced. All of her costs related to her temporary homelessness were reimbursed to her, as well. Thus, she was
fully compensated for all of her economic losses resulting from High Pointe’s error.
Nevertheless, Price sued High Pointe alleging a number of claims. The only of her claims to survive to trial was one focused
on her noneconomic losses—for example, pain and suffering, humiliation, embarrassment, and emotional distress. A jury found
in Price’s favor and awarded her $100,000 in damages.
High Pointe filed an appeal to the intermediate appellate court, to no avail. High Pointe then appealed to the Michigan
Supreme Court, excerpts of whose opinion is below.
Markman, J.
III. Analysis
The question in this case is whether noneconomic damages are
recoverable for the negligent destruction of real property. Absent
any relevant statute, the answer to that question is a matter of
common law.
A. Common Law
As this Court explained in [a prior case], the common law “is
but the accumulated expressions of the various judicial tribunals in their efforts to ascertain what is right and just between
individuals in respect to private disputes[.]” The common
law, however, is not static. By its nature, it adapts to changing
circumstances. . . . The common law is always a work in progress
and typically develops incrementally, i.e., gradually evolving as
individual disputes are decided and existing common-law rules
are considered and sometimes adapted to current needs in light
of changing times and circumstances.
The common-law rule with respect to the damages recoverable in an action alleging the negligent destruction of property
was set forth in [a 1933 case]:
If injury to property caused by negligence is permanent or irreparable, the measure of damages is the difference in its market
value before and after said injury, but if the injury is reparable,
and the expense of making repairs is less than the value of the
property, the measure of damages is the cost of making repairs.
Michigan common law has continually followed [that] rule. . . .
Accordingly, the long-held common-law rule in Michigan is that the
measure of damages for the negligent destruction of property is the
cost of replacement or repair. Because replacement and repair costs
reflect economic damages, the logical implication of this rule is that
the measure of damages excludes noneconomic damages.
Lending additional support to this conclusion is the simple
fact that, before the Court of Appeals’ opinion below, no case
ever in the history of the Michigan common law has approvingly discussed the recovery of noneconomic damages for the
6
Part One Foundations of American Law
negligent destruction of property. Indeed, no case has even
broached this issue except through the negative implication arising from limiting damages for the negligent destruction or damage of property to replacement and repair costs. . . .
Moreover, the Court of Appeals has decided two relatively recent cases concerning injury to personal property in which noneconomic damages were disallowed. In Koester v. VCA Animal
Hospital, the plaintiff dog owner sought noneconomic damages
in a tort action against his veterinarian following the death of his
dog resulting from the veterinarian’s negligence. The trial court
granted the defendant’s motion for summary disposition, holding
that “emotional damages for the loss of a dog do not exist.” On appeal, the Court of Appeals affirmed, noting that pets are personal
property under Michigan law and explaining that there “is no Michigan precedent that permits the recovery of damages for emotional
injuries allegedly suffered as a consequence of property damage.”
Later, in Bernhardt v. Ingham Regional Medical Center, the
plaintiff [accidentally left] her grandmother’s 1897 wedding
ring (which was also her wedding ring) and a watch purchased
in 1980 around the time of her brother’s murder . . . in the [hospital’s] washbasin and left the hospital. Upon realizing her mistake, the plaintiff contacted the defendant and was advised that
she could retrieve the jewelry from hospital security. However,
when she tried to retrieve the jewelry, it could not be located. The
plaintiff sued, and the defendant moved for summary disposition,
arguing that the plaintiff’s damages did not exceed the $25,000
jurisdictional limit of the trial court. The plaintiff countered that
her damages exceeded that limit because the jewelry possessed
great sentimental value. The trial court granted the defendant’s
motion. On appeal, the Court of Appeals affirmed, citing Koester for the proposition that there “is no Michigan precedent that
permits the recovery of damages for emotional injuries allegedly
suffered as a consequence of property damage”. . . . In support
of its conclusion, Bernhardt quoted the following language from
the Restatement Second of Torts:
If the subject matter cannot be replaced, however, as in the
case of a destroyed or lost family portrait, the owner will be
compensated for its special value to him, as evidenced by
the original cost, and the quality and condition at the time
of the loss. . . . In these cases, however, damages cannot be
based on sentimental value. Compensatory damages are not
given for emotional distress caused merely by the loss of the
things, except that in unusual circumstances damages may be
awarded for humiliation caused by deprivation, as when one
is deprived of essential elements of clothing.
While Koester and Bernhardt both involved negligent injury to
personal property, they speak of property generally. Although
the Court of Appeals in the instant case seeks to draw distinctions
between personal and real property, neither that Court nor plaintiff has explained how any of those distinctions, even if they had
some pertinent foundation in the law, are relevant with regard to
the propriety of awarding noneconomic damages. In short, while
it is doubtlessly true that many people are highly emotionally attached to their houses, many people are also highly emotionally
attached to their pets, their heirlooms, their collections, and any
number of other things. But there is no legally relevant basis that
would logically justify prohibiting the recovery of noneconomic
damages for the negligent killing of a pet or the negligent loss
of a family heirloom but allow such a recovery for the negligent
destruction of a house. Accordingly, Koester and Bernhardt underscore [the long-standing] exclusion of noneconomic damages
for negligent injury to real and personal property.
Finally, we would be remiss if we did not address Sutter v.
Biggs, which the Court of Appeals cited as providing the “general
rule” for the recovery of damages in tort actions. Sutter stated:
The general rule, expressed in terms of damages, and long
followed in this State, is that in a tort action, the [party that
committed the tort] is liable for all injuries resulting directly
from his wrongful act, whether foreseeable or not, provided
the damages are the legal and natural consequences of the
wrongful act, and are such as, according to common experience and the usual course of events, might reasonably have
been anticipated. Remote contingent, or speculative damages
are not considered in conformity to the general rule.
Although Sutter articulates a “general rule,” it is a “general rule”
that has never been applied to allow the recovery of noneconomic damages in a case involving only property damage, and it
is a “general rule” that must be read in light of the more narrow
and specific “general rule” [that Michigan has always followed
with regard to the noneconomic damages exclusion in cases involving property damage].
The development of the common law frequently yields “general rules” from which branch more specific “general rules” that
apply in limited circumstances. Where tension exists between
those rules, the more specific rule controls. . . . With respect to
this case, although Sutter articulated a general rule, [the rule excluding noneconomic damages for property damages is] a more
specific “general rule”. . . . Accordingly, because this case involves only property damage, the [latter] rule . . . controls.
B. Altering the Common Law
Because the Court of Appeals determined that the “general rule”
is that “in a tort action, the [party who committed the tort] is liable for all injuries,” the Court of Appeals contended that it was
not altering the common law but, rather, “declin[ing] to extend”
to real property the personal property “exception” set forth in
Koester and Bernhardt. However, as previously mentioned, the
Court of Appeals’ opinion constitutes the first and only Michigan case to support the recovery of noneconomic damages for
the negligent destruction of property. Accordingly, contrary to
Chapter One
The Nature of Law
7
the Court of Appeals’ own characterization and for the reasons
discussed [above], the Court of Appeals’ holding represents an
alteration of the common law. With that understanding, we address whether the common law should be altered.
“This Court is the principal steward of Michigan’s common
law,” . . . and it is “axiomatic that our courts have the constitutional authority to change the common law in the proper case. . . .”
However, this Court has also explained that alteration of the common law should be approached cautiously with the fullest consideration of public policy and should not occur through sudden
departure from longstanding legal rules. . . . Among them has
been our attempt to “avoid capricious departures from bedrock
legal rules as such tectonic shifts might produce unforeseen and
undesirable consequences.” . . . As this emphasis on incrementalism suggests, when it comes to alteration of the common law,
the traditional rule must prevail absent compelling reasons for
change. This approach ensures continuity and stability in the law.
With the foregoing principles in mind, we respectfully decline
to alter the common-law rule that the appropriate measure of damages for negligently damaged property is the cost of replacement or
repair. We are not oblivious to the reality that destruction of property or property damage will often engender considerable mental
distress, and we are quite prepared to believe that the particular
circumstances of the instant case were sufficient to have caused
exactly such distress. However, we are persuaded that the present rule is a rational one and justifiable as a matter of reasonable
public policy. We recognize that might also be true of alternative
rules that could be constructed by this Court. In the final analysis,
however, the venerability of the present rule and the lack of any
compelling argument that would suggest its objectionableness in
light of changing social and economic circumstances weigh, in our
judgment, in favor of its retention. Because we believe the rule to
be sound, if change is going to come, it must come by legislative
alteration. A number of factors persuade us that the longstanding
character of the present rule is not simply a function of serendipity
or of judicial inertia, but is reflective of the fact that the rule serves
legitimate purposes and values within our legal system.
First, one of the most fundamental principles of our economic
system is that the market sets the price of property. This is so even
though every individual values property differently as a function
of his or her own particular preferences. . . . Second, economic
damages, unlike noneconomic damages, are easily verifiable, quantifiable, and measurable. Thus, when measured only in terms of
economic damages, the value of property is easily ascertainable. . . .
Third, limiting damages to the economic value of the damaged or
destroyed property limits disparities in damage awards from case to
case. Disparities in recovery are inherent in legal matters in which
the value of what is in dispute is neither tangible nor objectively
determined, but rather intangible and subjectively determined. . . .
Fourth, the present rule affords some reasonable level of certainty
to businesses regarding the potential scope of their liability for accidents caused to property resulting from their negligent conduct.
[U]nder the Court of Appeals’ rule, those businesses that come
into regular contact with real property—contractors, repairmen,
and fuel suppliers, for example—would be exposed to the uncertainty of not knowing whether their exposure to tort liability will
be defined by a plaintiff who has an unusual emotional attachment
to the property or by a jury that has an unusually sympathetic opinion toward those emotional attachments.
Once again, it is not our view that the common-law rule in
Michigan cannot be improved, or that it represents the best of all
possible rules, only that the rule is a reasonable one and has survived for as long as it has because there is some reasonable basis
for the rule and that no compelling reasons for replacing it have
been set forth by either the Court of Appeals or plaintiff. We
therefore leave it to the Legislature, if it chooses to do so at some
future time, to more carefully balance the benefits of the current
rule with what that body might come to view as its shortcomings.
Equity The body of law called equity historically concerned
itself with accomplishing “rough justice” when common law
rules would produce unfair results. In medieval England,
common law rules were technical and rigid and the remedies
available in common law courts were too few. This meant
that some deserving parties could not obtain adequate relief.
As a result, separate equity courts began hearing cases that
the common law courts could not resolve fairly. In these equity courts, procedures were flexible, and rigid rules of law
were deemphasized in favor of general moral maxims.
Equity courts also provided several remedies not available in the common law courts (which generally awarded
IV. Conclusion
The issue in this case is whether noneconomic damages are
recoverable for the negligent destruction of real property. No
Michigan case has ever allowed a plaintiff to recover noneconomic damages resulting solely from the negligent destruction of
property, either real or personal. Rather, the common law of this
state has long provided that the appropriate measure of damages
in cases involving the negligent destruction of property is simply
the cost of replacement or repair of the negligently destroyed
property. We continue today to adhere to this rule and decline
to alter it. Accordingly, we reverse the judgment of the Court of
Appeals and remand this case to the trial court for entry of summary disposition in defendant’s favor.
8
Part One Foundations of American Law
only money damages or the recovery of property). The most
important of these equitable remedies was—and continues
to be—the injunction, a court order forbidding a party
to do some act or commanding him to perform some
act. Others include the contract remedies of specific
performance (whereby a party is ordered to perform according to the terms of her contract), reformation (in which
the court rewrites the contract’s terms to reflect the parties’
real intentions), and rescission (a cancellation of a contract
and a return of the parties to their precontractual position).
As was the common law, equity principles were
brought to the American colonies and continued to be
used after the Revolution and the adoption of the Constitution. Over time, however, the once-sharp line between
law and equity has become blurred. Nearly all states have
abolished separate equity courts and have enabled courts
to grant whatever relief is appropriate, whether it be the
legal remedy of money damages or one of the equitable
remedies discussed earlier. Equitable principles have been
blended together with common law rules, and some traditional equity doctrines have been restated as common law
or statutory rules. An example is the doctrine of unconscionability discussed in Chapter 15.
Administrative Regulations and Decisions As Chapter 47 reveals, the administrative agencies established by
Congress and the state legislatures have acquired considerable power, importance, and influence over business. A
major reason for the rise of administrative agencies was
the collection of social and economic problems created by
the industrialization of the United States that began late in
the 19th century. Because legislatures generally lacked the
time and expertise to deal with these problems on a continuing basis, the creation of specialized, expert agencies
was almost inevitable.
Administrative agencies obtain the ability to make law
through a delegation (or grant) of power from the legislature. Agencies normally are created by a statute that specifies the areas in which the agency can make law and the
scope of its power in each area. Often, these statutory delegations are worded so broadly that the legislature has, in
effect, merely pointed to a problem and given the agency
wide-ranging powers to deal with it.
The two types of law made by administrative agencies are administrative regulations and agency decisions. As do statutes, administrative regulations appear
in a precise form in one authoritative source. They
differ from statutes, however, because the body enacting regulations is not an elected body. Many agencies
have an internal courtlike structure that enables them
to hear cases arising under the statutes and regulations
they enforce. The resulting agency decisions are legally binding, though appeals to the judicial system are
sometimes allowed.
Treaties According to the U.S. Constitution, treaties
made by the president with foreign governments and
approved by two-thirds of the U.S. Senate become “the
supreme Law of the Land.” As will be seen, treaties invalidate inconsistent state (and sometimes federal) laws.
Ordinances State governments have subordinate units
that exercise certain functions. Some of these units, such
as school districts, have limited powers. Others, such as
counties, municipalities, and townships, exercise various
governmental functions. The enactments of counties and
municipalities are called ordinances; zoning ordinances
are an example. Ordinances resemble statutes, and the
techniques of statutory interpretation described later in
this chapter typically are used to interpret ambiguous language in ordinances.
Executive Orders In theory, the president or a state’s
governor is a chief executive who enforces the laws but
has no law-making powers. However, these officials
sometimes have limited power to issue laws called executive orders. This power normally results from a legislative delegation.
Priority Rules
LO1-2
Identify the type of law that takes precedence when two
types of law conflict.
Because the different types of law may, from time to time,
conflict, rules for determining which type takes priority
are necessary. Here, we briefly describe the most important such rules.
1. According to the principle of federal supremacy, the
U.S. Constitution, federal laws enacted pursuant to
it, and treaties are the supreme law of the land. This
means that federal law defeats conflicting state law.
2. Constitutions defeat other types of law within their domain. Thus, a state constitution defeats all other state
laws inconsistent with it. The U.S. Constitution, however, defeats inconsistent laws of whatever type.
3. When a treaty conflicts with a federal statute over a
purely domestic matter, the measure that is later in time
usually prevails.
4. Within either the state or the federal domain, statutes
defeat conflicting laws that depend on a legislative
Chapter One
delegation for their validity. For example, a state statute
defeats an inconsistent state administrative regulation.
5. Statutes and any laws derived from them by delegation
defeat inconsistent common law rules. Accordingly, either a statute or an administrative regulation defeats a
conflicting common law rule.
Courts are careful to avoid finding a conflict between
the different types of law unless the conflict is clear. In
fact, one maxim of statutory interpretation (described
later in this chapter) instructs courts to choose an interpretation that avoids unnecessary conflicts with other
types of law, particularly constitutions that would preempt the statute. Statutes will sometimes explicitly state
The Nature of Law
9
the enacting legislature’s intent to displace a common
law rule. In the absence of that, though, courts will look
for significant overlap and inconsistency between a statute and a common law rule to determine that there is
a conflict for which the statute must take priority. The
following Advance Dental Care, Inc. v. SunTrust Bank
case illustrates this. Notice how the court first looks to
the statutory language for explicit instruction regarding
displacement of the common law rule. Then it considers
whether the statute and common law rule overlap, particularly whether the statute offers a sufficient remedy
to replace the common law rule. Finally, the court notes
an important inconsistency between the statute and the
common law rule.
Advance Dental Care, Inc. v. SunTrust Bank 816 F. Supp. 2d 268 (D. Md. 2011)
Michelle Rampersad was an employee of Advance Dental at its dental office in Prince George’s County, Maryland. During a
period of more than three years ending in fall 2007, Rampersad took approximately 185 insurance reimbursement checks that
were written to Advance Dental and endorsed them to herself. She then took the checks to SunTrust Bank and deposited them
into her personal accounts. The checks totaled $400,954.04.
Advance Dental filed a lawsuit against SunTrust after it discovered Rampersad’s unauthorized endorsement and deposit of the
checks. The lawsuit claimed SunTrust violated two provisions of the Maryland version of the Uniform Commercial Code (UCC)
dealing with negligence and conversion. It also stated a claim of negligence pursuant to the common law of Maryland. The court
had previously dismissed the UCC negligence claim for reasons not relevant here. In the opinion that follows, the court considers
whether Advance Dental’s common-law negligence claim has been displaced by the statutory UCC conversion claim.
Alexander Williams, Jr., U.S. District Court Judge
B. Indistinct Causes of Action with Conflicting Defenses
In this case of first impression, the Court must determine whether
section 3-420 of the Maryland U.C.C. [(the U.C.C. conversion
provision)] displaces common-law negligence when a payee
seeks to recover from a depositary bank that accepted unauthorized and fraudulently endorsed checks.
Statutory authority also emphasizes the necessity of displacing
common-law negligence in this case. Section 1-103(b) of the
Maryland U.C.C. establishes the U.C.C.’s position regarding
the survival of common-law actions alongside the U.C.C.: “[u]
nless displaced by the particular provisions of Titles 1-10 of this
article, the principles of law and equity . . . shall supplement
its provisions. . . .” Since the U.C.C. has no express “displacement” provision, the Court must determine whether [the U.C.C.
conversion provision] is a “particular provision” that displaces
the common law.
The Court finds significant overlap between [the U.C.C. conversion provision] and common-law negligence. [The U.C.C.
conversion provision] defines conversion as “payment with respect to [an] instrument for a person not entitled to enforce the
instrument or receive payment.” Here, Advance Dental alleges
that SunTrust is liable in negligence for allowing Rampersad to
fraudulently endorse and deposit checks made payable to Advance Dental into her personal account. Therefore, . . . both negligence and conversion require a consideration of whether there
was payment over a wrongful endorsement.
A. Availability of an Adequate U.C.C. Remedy
Maryland case law concerning a drawer’s claims against a depositary bank [is] instructive. . . . Although [prior courts] allowed
a common-law action to proceed, the drawer’s lack of adequate
remedy under the U.C.C. was fundamental to each ruling. . . .
Additionally, other courts have held that common-law negligence claims can proceed only in the absence of an adequate
U.C.C. remedy.
In the present case, it is indisputable that Advance Dental has
an adequate U.C.C. remedy—conversion—for which Advance
Dental has already filed a claim. Therefore, in light of the overwhelming case law, . . . [the U.C.C. conversion provision] displaces common-law negligence because Advance Dental has an
adequate U.C.C. remedy.
10
Part One Foundations of American Law
The duplicative nature of these two theories suggests the
U.C.C.’s intention to create a comprehensive regulation of payment
over unauthorized or fraudulent endorsements. . . . In the presence
of such intent, courts have preempted common-law claims. To do
otherwise would destroy the U.C.C.’s attempt to establish reliability, uniformity, and certainty in commercial transactions.
Here, Advance Dental’s common-law negligence action has
no independent significance apart from [the U.C.C. conversion
provision]. In fact, when discussing common-law negligence,
Advance Dental simply refers to the same conduct alleged in
Count I (conversion) to argue that SunTrust has breached its duty
of reasonable and ordinary care. . . . In other words, [the U.C.C.
conversion provision] has effectively subsumed common-law
negligence claims.
Not only is common-law negligence insufficiently distinct from
[the U.C.C. conversion provision], but the conflicting defenses
available for each cause of action are also problematic. The U.C.C.
is based on the principle of comparative negligence. In contrast,
contributory negligence remains a defense for common-law negligence.2 Displacement is thus required since Maryland courts “hesitate to adopt or perpetuate a common law rule that would be plainly
inconsistent with the legislature’s intent. . . .”
Classifications of Law
Substantive Law and Procedural Law Substantive
law sets the rights and duties of people as they act in society. Procedural law controls the behavior of government
bodies (mainly courts) as they establish and enforce rules
of substantive law. A statute making murder a crime, for
example, is a rule of substantive law. The rules describing
the proper conduct of a trial, however, are procedural. This
text focuses on substantive law, although Chapters 2 and 5,
examine some of the procedural rules governing civil and
criminal cases.
Three common classifications of law cut across the different types of law. These
classifications involve distinctions between (1) criminal
law and civil law; (2) substantive law and procedural law;
and (3) public law and private law. One type of law might
be classified in each of these ways. For example, a burglary statute would be criminal, substantive, and public;
a rule of contract law would be civil, substantive, and
private.
LO1-3
Explain the basic differences between the criminal law
and civil law classifications.
Criminal and Civil Law Criminal law is the law under
which the government prosecutes someone for committing a crime. It creates duties that are owed to the public as
a whole. Civil law mainly concerns obligations that private parties owe to each other. It is the law applied when
one private party sues another. The government, however,
may also be a party to a civil case. For example, a city
may sue, or be sued by, a construction contractor. Criminal penalties (e.g., imprisonment or fines) differ from civil
remedies (e.g., money damages or equitable relief). Although most of the legal rules in this text are civil law
rules, Chapter 5 deals specifically with the criminal law.
Even though the civil law and the criminal law are distinct bodies of law, the same behavior will sometimes violate both. For instance, if A commits an intentional act of
physical violence on B, A may face both a criminal prosecution by the state and B’s civil suit for damages.
IV. Conclusion
For the foregoing reasons [and reasons not included in this edited version of the opinion], the Court GRANTS Defendant’s
Renewed Motion to Dismiss Count III of Plaintiff’s Complaint.
The comparative and contributory negligence defenses are discussed
in detail in Chapter 7. They address in different manners whether and
to what extent a plaintiff’s own negligence in the actions upon which
a claim is based ought to excuse the defendant from liability. Here the
defenses would be relevant in that SunTrust might argue that Advance
Dental was at fault for failing to discover and to prevent Rampersad’s
fraudulent activities on its own.
2
Public and Private Law Public law concerns the powers
of government and the relations between government and
private parties. Examples include constitutional law, administrative law, and criminal law. Private law establishes
a framework of legal rules that enables parties to set the
rights and duties they owe each other. Examples include
the rules of contract, property, and agency.
Jurisprudence
LO1-4
Describe key ways in which the major schools
of jurisprudence differ from each other.
The various types of law sometimes are called positive
law. Positive law comprises the rules that have been laid
down by a recognized political authority. Knowing the
types of positive law is essential to an understanding of the
American legal system and the topics discussed in this text.
Chapter One
Yet defining law by listing these different kinds of positive
law is no more complete or accurate than defining “automobile” by describing all the vehicles going by that name.
To define law properly, some say, we need a general description that captures its essence.
The field known as jurisprudence seeks to provide
such a description. Over time, different schools of jurisprudence have emerged, each with its own distinctive view
of law.
Legal Positivism One feature common to all types
of law is their enactment by a governmental authority
such as a legislature or an administrative agency. This feature underlies the definition of law that characterizes the
school of jurisprudence known as legal positivism. Legal
positivists define law as the command of a recognized
political authority. As the British political philosopher
Thomas Hobbes observed, “Law properly, is the word of
him, that by right hath command over others.”
The commands of recognized political authorities
may be good, bad, or indifferent in moral terms. To legal
positivists, such commands are valid law regardless of
their “good” or “bad” content. In other words, positivists
see legal validity and moral validity as entirely separate
questions. Some (but not all) positivists say that every
properly enacted positive law should be enforced and
obeyed, whether just or unjust. Similarly, a judge who
views the law through a positivist lens would typically
try to enforce the law as written, excluding her own
moral views from the process. Note, however, that this
does not mean that a positivist is bound to accept the law
as static or unchangeable. Rather, a positivist who was
unhappy with the law as written would point to established political processes as the appropriate mechanism
for the law to evolve (e.g., by lobbying a legislature to
amend or repeal a statute).
Natural Law At first glance, legal positivism’s “law
is law, just or not” approach may seem to be perfect common sense. It presents a problem, however, for it could
mean that any positive law—no matter how unjust—is
valid law and should be enforced and obeyed so long as
some recognized political authority enacted it. The school
of jurisprudence known as natural law rejects the positivist separation of law and morality.
Natural law adherents usually contend that some higher
law or set of universal moral rules binds all human beings in all times and places. The Roman statesman Marcus Cicero described natural law as “the highest reason,
implanted in nature, which commands what ought to be
done and forbids the opposite.” Because this higher law
The Nature of Law
11
determines what is ultimately good and ultimately bad, it
serves as a criterion for evaluating positive law. To Saint
Thomas Aquinas, for example, “every human law has just
so much of the nature of law, as it is derived from the law
of nature.” To be genuine law, in other words, positive law
must resemble the law of nature by being “good”—or at
least by not being “bad.”
Unjust positive laws, then, are not valid law under
the natural law view. As Cicero put it: “What of the
many deadly, the many pestilential statutes which are
imposed on peoples? These no more deserve to be
called laws than the rules a band of robbers might pass
in their assembly.”
An “unjust” law’s supposed invalidity does not translate into a natural law defense that is recognized in court,
however. Nonetheless, judges may sometimes take natural
law–oriented views into account when interpreting the
law. As compared with positivist judges, judges influenced by natural law ideas may be more likely to read
constitutional provisions broadly in order to strike down
positive laws they regard as unjust. They also may be more
likely to let morality influence their interpretation of the
law. Of course, neither judges nor natural law thinkers always agree about what is moral and immoral—a major
difficulty for the natural law position. This difficulty allows legal positivists to claim that only by keeping legal
and moral questions separate can we obtain stability and
predictability in the law.
American Legal Realism To some, the debate
between natural law and legal positivism may seem disconnected from reality. Not only is natural law unworkable, such people might say, but sometimes positive law
does not mean much either. For example, juries sometimes
pay little attention to the legal rules that are supposed to
guide their decisions, and prosecutors have discretion
concerning whether to enforce criminal statutes. In some
legal proceedings, moreover, the background, biases, and
values of the judge—and not the positive law—drive the
result. An old joke reminds us that justice sometimes is
what the judge ate for breakfast.
Remarks such as these typify the school of jurisprudence known as American legal realism. Legal realists
regard the law in the books as less important than the law
in action—the conduct of those who enforce and interpret
the positive law. American legal realism defines law as the
behavior of public officials (mainly judges) as they deal
with matters before the legal system. Because the actions
of such decision makers—and not the rules in the books—
really affect people’s lives, the realists say, this behavior is
what deserves to be called law.
12
Part One Foundations of American Law
It is doubtful whether the legal realists have ever developed a common position on the relation between law
and morality or on the duty to obey positive law. They
have been quick, however, to tell judges how to behave.
Many realists feel that the modern judge should be a social engineer who weighs all relevant values and considers social science findings when deciding a case. Such a
judge would make the positive law only one factor in her
decision. Because judges inevitably base their decisions
on personal considerations, the realists assert, they should
at least do this honestly and intelligently. To promote this
kind of decision making, the realists have sometimes favored fuzzy, discretionary standards that allow judges to
decide each case according to its unique facts.
Sociological Jurisprudence
Sociological
jurisprudence is a general label uniting several different
approaches that examine law within its social context. The
following quotation from Justice Oliver Wendell Holmes
is consistent with such approaches:
The life of the law has not been logic: it has been experience.
The felt necessities of the time, the prevalent moral and political theories, intuitions of public policy, avowed or unconscious,
even the prejudices which judges share with their fellow-men,
have had a good deal more to do than the syllogism in determining the rules by which men should be governed. The law
embodies the story of a nation’s development through many
centuries, and it cannot be dealt with as if it contained only the
axioms and corollaries of a book of mathematics.3
Despite these approaches’ common outlook, there is no
distinctive sociological definition of law. If one were attempted, it might go as follows: Law is a process of social
ordering reflecting society’s dominant interests and values.
Different Sociological Approaches By examining examples of sociological legal thinking, we can add substance
to the definition just offered. The “dominant interests”
portion of the definition is exemplified by the writings of
Roscoe Pound, an influential 20th-century American legal
philosopher. Pound developed a detailed and changing catalog of the social interests that press on government and the
legal system and thus shape positive law. An example of
the definition’s “dominant values” component is the historical school of jurisprudence identified with the 19th-century
German legal philosopher Friedrich Karl von Savigny.
Savigny saw law as an unplanned, almost unconscious, reflection of the collective spirit of a particular society. In his
3
Holmes. The Common Law (1881).
view, legal change could only be explained historically, as a
slow response to social change.
By emphasizing the influence of dominant social interests and values, Pound and Savigny undermine the legal
positivist view that law is nothing more than the command
of some political authority. The early 20th-century Austrian legal philosopher Eugen Ehrlich went even further
in rejecting positivism. He did so by identifying two different “processes of social ordering” contained within our
definition of sociological jurisprudence. The first of these
is positive law. The second is the “living law,” informal
social controls such as customs, family ties, and business
practices. By regarding both as law, Ehrlich sought to
demonstrate that positive law is only one element within a
spectrum of social controls.
The Implications of Sociological Jurisprudence Because its definition of law includes social values, sociological jurisprudence seems to resemble natural law. Most
sociological thinkers, however, are concerned only with
the fact that moral values influence the law, and not with
the goodness or badness of those values. Thus, it might
seem that sociological jurisprudence gives no practical
advice to those who must enforce and obey positive law.
Sociological jurisprudence has at least one practical
implication, however: a tendency to urge that the law must
change to meet changing social conditions and values. In
other words, the law should keep up with the times. Some
might stick to this view even when society’s values are
changing for the worse. To Holmes, for example, “[t]he
first requirement of a sound body of law is, that it should
correspond with the actual feelings and demands of the
community, whether right or wrong.”
Other Schools of Jurisprudence
During the
past half century, legal scholars have fashioned additional ways of viewing law, explaining why legal rules
are as they are and exploring supposed needs for changes
in legal doctrines. For example, the law and economics
movement examines legal rules through the lens provided
by economic theory and analysis. This movement’s influence has extended beyond academic literature, with law
and economics-oriented considerations, factors, and tests
sometimes appearing in judicial opinions dealing with
such matters as contract, tort, or antitrust law.
The critical legal studies (CLS) movement regards law as
inevitably the product of political calculation (mostly of the
right-wing variety) and longstanding class biases on the part
of lawmakers, including judges. Articles published by CLS
adherents provide controversial assessments and critiques of
legal rules. Given the thrust of CLS and the view it takes
Chapter One
of lawmakers, however, one would be hard-pressed to find
CLS adherents in the legislature or the judiciary.
Other schools of jurisprudence that have acquired notoriety in recent years examine law and the legal system
from the vantage points of particular groups of persons or
sets of ideas. Examples include feminist and queer legal
theory and critical disability theory.
As you read the excerpts of judicial opinions throughout this text, consider whether one or more of these jurisprudential approaches appears to have influenced the
judges’ thinking when interpreting or applying the law.
Certainly judges seldom, if ever, explicitly reference those
influences, but you may find them lurking significantly
between the lines of some of the opinions.
The Functions of Law
In societies of the past, people often viewed law as unchanging rules that deserved obedience because they
were part of the natural order of things. Most lawmakers
today, however, treat law as a flexible tool or instrument
for the accomplishment of chosen purposes. For example, the law of negotiable instruments discussed later in
this text is designed to stimulate commercial activity by
promoting the free movement of money substitutes such
as promissory notes, checks, and drafts. Throughout the
text, moreover, you see courts manipulating existing legal
rules to achieve desired results. One strength of this instrumentalist attitude is its willingness to adapt the law
to further the social good. A weakness, however, is the
legal instability and uncertainty those adaptations often
produce.
Just as individual legal rules advance specific purposes, law as a whole serves many general social functions. Among the most important of those functions are:
1. Peacekeeping. The criminal law rules discussed in
Chapter 5 further this basic function of any legal system. Also, as Chapter 2 suggests, the resolution of private disputes serves as a major function of the civil law.
2. Checking government power and promoting personal
freedom. Obvious examples are the constitutional restrictions examined in Chapter 3.
3. Facilitating planning and the realization of reasonable
expectations. The rules of contract law discussed in
Chapters 9, 10, 11, 12, 13, 14, 15, 16, 17, and 18 help
fulfill this function of law.
4. Promoting economic growth through free competition.
The antitrust laws discussed in Chapters 48, 49, and 50
are among the many legal rules that help perform this
function.
The Nature of Law
13
5. Promoting social justice. Throughout this century,
government has intervened in private social and economic affairs to correct perceived injustices and give
all citizens equal access to life’s basic goods. Examples
include some of the employment laws addressed in
Chapter 51.
6. Protecting the environment. The most important federal environmental statutes are discussed in Chapter 52.
Obviously, the law’s various functions can conflict.
The familiar clash between economic growth and environmental protection is an example. Chapter 5’s cases
dealing with the constitutional aspects of criminal cases
illustrate the equally familiar conflict between effective law enforcement and the preservation of personal
rights. Only rarely does the law achieve one end without
sacrificing others. In law, as in life, there generally is no
such thing as a free lunch. Where the law’s objectives
conflict, lawmakers may try to strike the best possible
balance among those goals. This suggests limits on the
law’s usefulness as a device for promoting particular
social goals.
Legal Reasoning
This text seeks to describe important legal rules affecting business. As texts generally do, it states those rules
in what lawyers call “black letter” form, using sentences
saying that certain legal consequences will occur if certain events happen. Although it provides a clear statement
of the law’s commands, this black letter approach can be
misleading. It suggests definiteness, certainty, permanence, and predictability—attributes the law frequently
lacks. To illustrate, and to give you some idea how lawyers
and judges think, we now discuss the two most important
kinds of legal reasoning: case law reasoning and statutory interpretation.4 However, we first must examine legal
reasoning in general.
Legal reasoning is basically deductive, or syllogistic.
The legal rule is the major premise, the facts are the minor
premise, and the result is the product of combining the
two. Suppose a state statute says that a driver operating an
automobile between 55 and 70 miles per hour must pay a
$50 fine (the rule or major premise) and that Jim Smith
drives his car at 65 miles per hour (the facts or minor
premise). If Jim is arrested, and if the necessary facts can
be proved, he will be required to pay the $50 fine. As you
4
The reasoning courts employ in constitutional cases resembles that used
in common law cases, but often is somewhat looser. See Chapter 3.
14
Part One Foundations of American Law
Ethics in Action
Some schools of jurisprudence discussed in this
chapter—most notably natural law and the various
approaches lumped under the sociological jurisprudence heading—concern themselves with the relationship between law and notions of morality. These schools of
jurisprudence involve considerations related to key aspects of
ethical theories that will be explored in Chapter 4, which addresses ethical issues arising in business contexts.
Natural law’s focus on rights thought to be independent
of positive law has parallels in ethical theories that are classified under the rights theory heading. In its concern over
will now see, however, legal reasoning often is more difficult than this example would suggest.
Case Law Reasoning
Describe the respective roles of adhering to precedent
LO1-5 (stare decisis) and distinguishing precedent in case law
reasoning.
In cases governed by the common law, courts find the appropriate legal rules in prior cases called precedents. The
standard for choosing and applying prior cases to decide
present cases is the doctrine of stare decisis, which states
that like cases should be decided alike. That is, the present
case should be decided in the same way as past cases presenting the same facts and the same legal issues. If no applicable precedent exists, the court is free to develop a new
common law rule to govern the case, assuming the court
believes that sound public policy reasons call for the development of a new rule. When an earlier case may seem
similar enough to the present case to constitute a precedent but the court deciding the present case nevertheless
identifies a meaningful difference between the cases, the
court distinguishes the earlier decision.
Because every present case differs from the precedents in
some respect, it is always possible to spot a factual distinction. For example, one could attempt to distinguish a prior
case dealing with a defense to a claim of breach of contract
because both parties in that case had black hair, whereas one
party in the present case dealing with that same defense has
brown hair. Of course, such a distinction would be ridiculous
because the difference it identifies is insignificant in moral,
social policy, or legal terms. A valid distinction involves
a widely accepted ethical or policy reason for treating the
present case differently from its predecessor. Because people
unjust laws, natural law finds common ground with the ethical
theory known as justice theory. When subscribers to sociological jurisprudence focus on the many influences that shape
law and the trade-offs involved in a dynamic legal system,
they may explore considerations that relate not only to rights
theory or justice theory but also to the theory of utilitarianism and considerations central to shareholder theory. As you
study Chapter 4 and later chapters, keep the schools of jurisprudence in mind. Think of them as you consider the extent to
which a behavior’s probable legal treatment and the possible
ethical assessments of it may correspond or, instead, diverge.
disagree about moral ideas, public policies, and the degree
to which they are accepted, and because all these factors
change over time, judges may differ on the wisdom of distinguishing a prior case. This is a source of uncertainty in the
common law, but it gives the common law the flexibility to
adapt to changing social conditions.5
When a precedent has been properly distinguished, the
common law rule it stated does not control the present case.
The court deciding the present case may then fashion a
new common law rule to govern the case. Consider, for instance, an example involving the employment-at-will rule,
the prevailing common law rule regarding employees in the
United States. Under this rule, an employee may be fired at
any time—and without any reason, let alone a good one—
unless a contract between the employer and the employee
guaranteed a certain duration of employment or established
that the employee could be fired only for certain recognized
legal causes. Most employees are not parties to a contract
containing such provisions. Therefore, they are employeesat-will. Assume that in a precedent case, an employee who
had been doing good work challenged his firing and that
the court hearing the case ruled against him on the basis
of the employment-at-will rule. Also assume that in a later
case, a fired employee has challenged her dismissal. Although the fired employee would appear to be subject to the
employment-at-will rule applied in the seemingly similar
precedent case, the court deciding the later case nevertheless identifies an important difference: that in the later case,
the employee was fired in retaliation for having reported to
law enforcement authorities that her employer was engaging in seriously unlawful business-related conduct. A firing
under such circumstances appears to offend public policy,
Also, though they exercise the power infrequently, courts sometimes
completely overrule their own prior decisions.
5
Chapter One
notwithstanding the general acceptance of the employmentat-will rule. Having properly distinguished the precedent,
the court deciding the later case would not be bound by
the employment-at-will rule set forth in the precedent and
would be free to develop a public policy–based exception
under which the retaliatory firing would be deemed wrongful.
(Chapter 51 will reveal that courts in a number of states have
adopted such an exception to the employment-at-will rule.)
The Coomer case, which follows, provides a further illustration of the process of case law reasoning. In
Coomer, the Missouri Supreme Court scrutinizes various
precedents as it attempts to determine whether Missouri’s
courts should extend the so-called baseball rule, under
The Nature of Law
15
which injuries suffered as a result of certain risks that are
inherent to an activity—like being struck by a foul ball at
a baseball game. (Negligence law, upon which Coomer’s
claim is based, is discussed in depth in Chapter 7.) Ultimately, the court decides not to expand the baseball rule to
the facts of Coomer’s case, finding his injury did not result
from a risk inherent to attending the baseball game.6
Though mastery of the nuances of the rules of baseball is not necessary
to understand the court’s reasoning in the Coomer case, readers who are
unfamiliar with baseball may find an explanation of the basics of
the game helpful. One such explanation can be found at http://www
.howbaseballworks.com/FieldofPlay.htm.
6
Coomer v. Kansas City Royals Baseball Corp. 437 S.W.3d 184 (Mo. 2014)
On September 8, 2009, John Coomer and his father attended a Major League Baseball game between the Kansas City Royals the
Detroit Tigers. The game, which took place in Kansas City at Kauffman Stadium, was less well attended than normal, because
it rained most of the day leading up to the first pitch. Early in the game, Coomer and his father moved from their assigned seats
to better, empty seats six rows behind the visitor’s dugout.
Shortly after Coomer moved to the better seats, Sluggerrr, the mascot for the Royals, mounted the dugout to begin the “Hotdog Launch,” which had been a feature of every Royals home game since 2000. The Launch happened between innings, when
Sluggerrr used an air gun to shoot hotdogs from the roof of the visitor’s dugout to fans seated beyond hand-tossing range. When
his assistants were reloading the air gun, Sluggerrr tossed hotdogs by hand to the fans seated nearby. Sluggerrr usually tossed
the hotdogs underhand while facing the fans, but sometimes he threw them overhand, behind his back, or side-armed.
At the game in question, Sluggerrr began to toss hotdogs by hand to fans seated near Coomer, while Sluggerrr’s assistants
were reloading the hotdog-shaped air gun. Coomer testified that he saw Sluggerrr turn away from the crowd as if to prepare for
a behind-the-back throw, but because Coomer chose that moment to turn and look at the scoreboard, he admits he never saw
Sluggerrr throw the hotdog that he claims injured him. Coomer testified only that a “split second later . . . something hit me in
the face,” and he described the blow as “pretty forceful.”
A couple of days later, Coomer reported that he was “seeing differently” and something “wasn’t right” with his left eye. The
problem progressed until, approximately eight days after the incident. Coomer saw a doctor and was diagnosed with a detached
retina. Coomer underwent surgeries to repair the retina and to remove a “traumatic cataract” in the same eye.
Coomer sued the Kansas City Royals Corp. for, among other things, negligence (i.e., that Sluggerrr’s careless acts, which were the
responsibility of the Royals to oversee an control, caused his injury). The Royals did not deny responsibility for Sluggerrr’s acts but
instead argued that Sluggerrr did not act negligently and, in any event, that Coomer had accepted the risk posed by Sluggerrr’s hotdog
toss by buying a ticket and attending the game. The latter is a theory known as implied primary assumption of risk.7
Among the instructions the trial judge gave to the jury was one asking the jury to decide whether the risk of being injured by
Sluggerrr’s hotdog toss is one of the inherent risks of watching a Royals home game, which Coomer assumed merely by attending the game.
The jury found in favor of the Royals, and Coomer appealed.
Paul C. Wilson, Judge
In the past, this Court has held that spectators cannot sue a baseball team for injuries caused when a ball or bat enters the stands.
Such risks are an unavoidable—even desirable—part of the
joy that comes with being close enough to the Great American
Chapter 7 includes a detailed discussion of the negligence defense of
assumption of risk.
7
Pastime to smell the new-mown grass, to hear the crack of
42 inches of solid ash meeting a 95–mph fastball, or to watch a
diving third baseman turn a heart-rending triple into a soul-soaring double-play. The risk of being injured by Sluggerrr’s hotdog
toss, on the other hand, is not an unavoidable part of watching the
Royals play baseball. That risk is no more inherent in watching
a game of baseball than it is inherent in watching a rock concert,
a monster truck rally, or any other assemblage where free food
16
Part One Foundations of American Law
or T-shirts are tossed into the crowd to increase excitement and
boost attendance.
***
II. Implied Primary Assumption of the Risk and the
“Baseball Rule”
One of the most interesting—and certainly the most relevant—
applications of implied primary assumption of the risk involves
certain risks assumed by spectators at sporting events. Long before the Kansas City Athletics moved to Oakland and the fledging Royals joined the Junior Circuit, an overwhelming majority
of courts recognized that spectators at sporting events are exposed to certain risks that are inherent merely in watching the
contest. Accordingly, under [the] implied primary assumption of
the risk, these courts held that the home team was not liable to a
spectator injured as a result of such risks.
The archetypal example of this application of implied primary assumption of the risk is when a baseball park owner fails
to protect each and every spectator from the risk of being injured
by a ball or bat flying into the stands. Just as Missouri teams have
led (and continue to lead) professional baseball on the field, Missouri courts helped lead the nation in defining this area of the law
off the field. More than 50 years ago, this Court was one of the
first to articulate the so-called “Baseball Rule”:
[W]here a baseball game is being conducted under the customary and usual conditions prevailing in baseball parks, it
is not negligence to fail to protect all seats in the park by
wire netting, and that the special circumstances and specific
negligence pleaded did not aid plaintiff or impose upon the
defendant a duty to warn him against hazards which are necessarily incident to baseball and are perfectly obvious to a
person in possession of his faculties.
Anderson v. Kansas City Baseball Club, 231 S.W.2d 170, 172
(Mo. 1950) (emphasis added).
Anderson was based on this Court’s earlier decision in
Hudson v. Kansas City Baseball Club, 164 S.W.2d 318, 320
(Mo. 1942), which used the “no duty” language of implied primary assumption of the risk to explain its holding:
The basis of the proprietor’s liability is his superior knowledge and if his invitee knows of the condition or hazard there
is no duty on the part of the proprietor to warn him and there
is no liability for resulting injury because the invitee has as
much knowledge as the proprietor does and then by voluntarily acting, in view of his knowledge, assumes the risks and
dangers incident to the known condition.
Hudson, 164 S.W.2d at 323 (emphasis added) (applying Restatement (Second) of Torts, § 343). Hudson involved
a spectator with personal knowledge of the inherent risk of
being injured by a foul ball while watching a baseball game.
But, when the Court returned to this same issue eight years
later in Anderson, it continued to rely on section 343 of the
Restatement (Second) of Torts (i.e., the “open and obvious
dangers” doctrine under the rules of premises liability) to extend Missouri’s no-duty rule to cases involving baseball spectators with no prior knowledge of baseball or the risks inherent
in watching it.
All of the cases cited here and many others which are cited
in Hudson v. Kansas City Baseball Club . . . emphasize that
when due care has been exercised to provide a reasonable
number of screened seats, there remains a hazard that spectators in unscreened seats may be struck and injured by balls
which are fouled or otherwise driven into the stands. This
risk is a necessary and inherent part of the game and remains after ordinary care has been exercised to provide the
spectators with seats which are reasonably safe. It is a risk
which is assumed by the spectators because it remains after
due care has been exercised and is not the result of negligence on the part of the baseball club. It is clearly not an
unreasonable risk to spectators which imposes a duty to
warn [or protect].
Anderson, 231 S.W.2d at 173 (emphasis added).
Anderson and Hudson are just two of the many dozens of
cases around the country holding that, as long as some seats directly behind home plate are protected, the team owes “no duty” to
spectators outside that area who are injured by a ball or bat while
watching a baseball game. Despite being decided by such different
courts across so many decades, all of these cases reflect certain
shared principles. First, it is not possible for baseball players to
play the game without occasionally sending balls or bats (or parts
of bats) into the stands, sometimes at unsafe speeds. Second, it is
not possible for the home team to protect each and every spectator
from such risks without fundamentally altering the game or the
spectators’ experience of watching it through such means as: (a)
substituting foam rubber balls and bats that will not injure anyone
(or be very fun to watch); (b) erecting a screen or other barrier
around the entire field protecting all spectators while obstructing
their view and making them feel more removed from the action; or
(c) moving all spectators at least 600 feet away from home plate in
all directions. Third, ordinary negligence principles do not produce
reliably acceptable results in these circumstances because the risk
of injury (and the extent of the harm) to spectators is substantial,
yet the justification for not protecting spectators from that risk can
be expressed only in terms of the amusement or entertainment
value of watching the sport that brought the spectators to the stadium in the first place.
Against this background, Anderson and Hudson (and dozens of Baseball Rule cases around the country) represent a conscious decision to favor the collective interests of all spectators
by rejecting as a matter of law the individual claims of injured
Chapter One
spectators. [T]he rationale [is] now identified as implied primary
assumption of the risk, [and] these decisions protect the home
team from liability for risks that are inherent in watching a baseball game based on the team’s failure to take steps that could
defeat the reason spectators are there at all, i.e., to get as close
as they can to the action without interfering with the game they
came to watch.
But the rationale for this rule—and, therefore, the rule itself—
extends only to those risks that the home team is powerless to
alleviate without fundamentally altering the game or spectator’s
enjoyment of it. As a result, the solid wall of authority in support
of the Baseball Rule is badly cracked in cases where a spectator
is injured by a ball when the game is not underway or where fans
ordinarily do expect to have to keep a careful lookout for balls or
bats leaving the field. This Court has not had to address such a
question and does not do so now.
Moreover, even though the “no duty” rationale of the Baseball Rule applies to risks inherent in watching a baseball game,
the home team still owes a duty of reasonable care not to alter
or increase such inherent risks. One example, useful both for
its facts and its analysis, is Lowe v. California League of Prof.
Baseball, 56 Cal.App.4th 112 (1997). There, the court began by
explaining this “no duty” rationale:
In the first instance, foul balls hit into the spectators’ area
clearly create a risk of injury. If such foul balls were to be
eliminated, it would be impossible to play the game. Thus,
foul balls represent an inherent risk to spectators attending
baseball games. Under [the rule announced in a prior case],
such risk is assumed.
In Lowe, however, even though the plaintiff was struck by a
foul ball, he claimed that his injuries were not caused by that inherent risk. Instead, the plaintiff claimed he was prevented from
watching for foul balls because he was repeatedly jostled and
distracted by the team’s dinosaur mascot. The court agreed that
the Baseball Rule did not bar such a claim:
[T]he key inquiry here is whether the risk which led to
plaintiff’s injury involved some feature or aspect of the
game which is inevitable or unavoidable in the actual playing of the game. . . . Can [this] be said about the antics of the
mascot? We think not. Actually, the . . . person who dressed
up as Tremor, recounted that there were occasional games
played when he was not there. In view of this testimony, as a
matter of law, we hold that the antics of the mascot are not an
essential or integral part of the playing of a baseball game. In
short, the game can be played in the absence of such antics.
Id. (emphasis added).
Accordingly, even though implied primary assumption of the
risk precludes recovery for injuries caused by the inherent risk
of being hit by a foul ball while watching a baseball game, Lowe
The Nature of Law
17
holds that the jury can hold the team liable for such injuries if
the negligence of its mascot altered or increased that otherwise
inherent risk and this negligence causes the plaintiff’s injuries.
Accordingly, the proper application of implied primary assumption of the risk in this case . . . is this: if Coomer was injured
by a risk that is an inherent part of watching the Royals play
baseball, the team had no duty to protect him and cannot be liable for his injuries. But, if Coomer’s injury resulted from a risk
that is not an inherent part of watching baseball in person—or
if the negligence of the Royals altered or increased one of these
inherent risks and caused Coomer’s injury—the jury is entitled
to hold the Royals liable for such negligence. . . .
***
IV. Being Injured by Sluggerrr’s Hotdog Toss Is Not a Risk
Inherent in Watching Royals Baseball
The Royals admit that, “[s]trictly speaking, this is not a baseball rule case” because Coomer does not claim he was injured
by a foul ball or loose bat. But, because it claims the Hotdog
Launch is a “common sense” activity, the Royals contend that
the same implied primary assumption of the risk rationale
should apply and bar all recovery by Coomer. According to
the Royals, the risk to a spectator of being injured by Sluggerrr’s hotdog toss shares the same essential characteristics as
the other risks that this Court (and many others) determined
long ago were inherent in watching a baseball game in person,
i.e., risks that a spectator will be injured by a flying ball or bat.
The Court disagrees.
The rationale for barring recovery for injuries from risks that
are inherent in watching a particular sport under implied primary
assumption of the risk is that the defendant team owner cannot
remove such risks without materially altering either the sport
that the spectators come to see or the spectator’s enjoyment of it.
No such argument applies to Sluggerrr’s hotdog toss. Millions of
fans have watched the Royals (and its forebears in professional
baseball) play the National Pastime for the better part of a century before Sluggerrr began tossing hotdogs, and millions more
people watch professional baseball every year in stadiums all
across this country without the benefit of such antics.
Some fans may find Sluggerrr’s hotdog toss fun to watch between innings, and some fans may even have come to expect it,
but this does not make the risk of injury from Sluggerrr’s hotdog
toss an “inherent risk” of watching a Royals game. “[I]nherent”
means “structural or involved in the constitution or essential
character of something: belonging by nature or settled habit,”
Webster’s Third New International Dictionary (1966), at 1163
(emphasis added). There is nothing about the risk of injury from
Sluggerrr’s hotdog toss that is “structural” or involves the “constitution or essential character” of watching a Royals game at
Kauffman Stadium.
18
Part One Foundations of American Law
The Royals concede that Sluggerrr’s hotdog toss has nothing
to do with watching the game of baseball but contend that the
Hotdog Launch is a well-established (even customary) part of the
overall stadium “experience.” In support, the Royals cite cases
that have applied the Baseball Rule to risks that were not created
directly from the game. These cases do not support the Royals’
argument.
In Loughran v. The Phillies, 888 A.2d 872, 876–77 (Pa.Super.
2005), because a plaintiff was injured when a fielder tossed the ball
into the stands after catching the last out of the inning, the court
held that implied primary assumption of the risk barred the plaintiff’s claims. In rejecting the plaintiff’s claim that the Baseball Rule
should not apply because the throw was not part of the game itself,
Loughran holds that—even though the “‘no duty’ rule applies only
to ‘common, expected, and frequent’ risks of the game”—the link
between the game and the risk of being hit with a ball tossed into the
stands by a player is undeniable. Id. at 876. Baseball is the reason
centerfielder Marlon Byrd was there, just as it was the reason the
fans were in the stands (including the many who were yelling for
Byrd to toss the ball to them). Here, on the other hand, there is no
link between the game and the risk of being hit by Sluggerrr’s hotdog toss. The Hotdog Launch is not an inherent part of the game;
it is what the Royals do to entertain baseball fans when there is no
game for them to watch. Sluggerrr may make breaks in the game
more fun, but Coomer and his 12,000 rain-soaked fellow spectators
were not there to watch Sluggerrr toss hotdogs; they were there to
watch the Royals play baseball.
Somewhat closer to the mark—but still inapposite—is the
Royals’ reliance on Cohen v. Sterling Mets, L.P., 840 N.Y.S.2d
527 (N.Y.Sup.Ct.2007), aff’d 58 A.D.3d (N.Y.App.Div.2009). A
vendor sued the team for injuries caused by a fan who hit the
vendor while diving for a souvenir T-shirt that had been tossed
into the crowd. The court dismissed these claims, stating: “When
a ball is tossed into the stands by a player many spectators rush
toward the ball in hopes of getting a souvenir, just as what allegedly occurred here during the t-shirt launch.” Id.
The Royals’ reliance on Cohen highlights one of the basic flaws
in its effort to use implied primary assumption to bar Coomer’s
claims, and it shows the importance of correctly identifying the
risks and activity in each case. [W]hat makes a risk “inherent” for
purposes of this doctrine . . . is that the risks are so intertwined (i.e.,
so “structural” or involved in the “constitution or essential character”) with the underlying activity that the team cannot control or
limit the risk without abandoning the activity. In Cohen, because
the Mets could not control how fans reacted to the T-shirt launch,
that reaction was an inherent risk—not of watching a baseball
game but—of taking part in the T-shirt launch (which the plaintiff’s work required him to do). Here, on the other hand, not only
is being injured by Sluggerrr’s hotdog toss not an inherent risk of
watching a Royals game, it is not an inherent risk of the Hotdog
Launch. . . .
Accordingly, the Court holds as a matter of law that the risk
of injury from Sluggerrr’s hotdog toss is not one of the risks
inherent in watching the Royals play baseball that Coomer assumed merely by attending a game at Kauffman Stadium. This
risk can be increased, decreased or eliminated altogether with
no impact on the game or the spectators’ enjoyment of it. As a
result, Sluggerrr (and, therefore, the Royals) owe the fans a duty
to use reasonable care in conducting the Hotdog Launch and can
be held liable for damages caused by a breach of that duty.
Statutory Interpretation
for deliberate ambiguity include the need for legislative
compromise and legislators’ desire to avoid taking controversial positions.
Ambiguity in statutory language can also arise from
the vagaries of grammar, either as a result of sloppiness
or because rules of grammar are contested. The following
O’Connor case, for instance, illustrates just how much can
ride on a “missing” comma, namely millions of dollars
in unpaid overtime wages. As you read the case, consider
what strategies the judges use to resolve the ambiguity. Those strategies correspond to the techniques of statutory interpretation that are described in the text following
the case.
Because statutes are
written in one authoritative form, their interpretation
might seem easier than case law reasoning. However,
this is not so. The natural ambiguity of language serves
as one reason courts face difficulties when interpreting
statutes. The problems become especially difficult when
statutory words are applied to situations the legislature
did not foresee. In some instances, legislators may deliberately use ambiguous language when they are unwilling
or unable to deal specifically with each situation the statute was enacted to regulate. When this happens, the legislature expects courts and/or administrative agencies to
fill in the details on a case-by-case basis. Other reasons
Conclusion
For the reasons set forth above, this Court vacates the judgment
and remands the case.
Chapter One
The Nature of Law
O’Connor v. Oakhurst Dairy 19
851 F. 3d 69 (1st Cir. 2017)
A group of delivery drivers for Oakhurst Dairy sued the dairy and its parent company for unpaid overtime wages. Oakhurst
Dairy processes, bottles, stores, markets, and distributes milk and other dairy products from facilities in Portland, Waterville,
Bangor, and Presque Isle, Maine.
Oakhurst designated the plaintiff drivers “route salesmen” on their official job descriptions. The drivers, however, claimed
they solely engaged in deliveries of Oakhurst’s products.
State and federal wage and hour laws generally require employers to pay their employees a premium wage for any hours the
employees work in excess of 40 hours in a given week, unless the employees are exempted from overtime rules by the relevant
statutory language.
The drivers argued that they were not exempted from the overtime wage requirement in the Maine wage and hour statute,
while Oakhurst argued that they were exempt under a provision focused on workers who deal with perishable food products.
The district court considered the question and agreed with Oakhurst, granting partial summary judgment to the defendants
and otherwise dismissing various of the plaintiffs’ claims.
The drivers appealed.
BARRON, Circuit Judge
For want of a comma, we have this case. It arises from a dispute
between a Maine dairy company and its delivery drivers, and it
concerns the scope of an exemption from Maine’s overtime law.
Specifically, if that exemption used a serial comma to mark off
the last of the activities that it lists, then the exemption would
clearly encompass an activity that the drivers perform. And, in
that event, the drivers would plainly fall within the exemption
and thus outside the overtime law’s protection. But, as it happens, there is no serial comma to be found in the exemption’s list
of activities, thus leading to this dispute over whether the drivers
fall within the exemption from the overtime law or not.
The District Court concluded that, despite the absent comma,
the Maine legislature unambiguously intended for the last term in
the exemption’s list of activities to identify an exempt activity in its
own right. The District Court thus granted summary judgment to
the dairy company, as there is no dispute that the drivers do perform
that activity. But, we conclude that the exemption’s scope is actually
not so clear in this regard. And because, under Maine law, ambiguities in the state’s wage and hour laws must be construed liberally in
order to accomplish their remedial purpose, we adopt the drivers’
narrower reading of the exemption. We therefore reverse the grant of
summary judgment and remand for further proceedings.
I.
The Maine overtime law is part of the state’s wage and hour law.
The overtime law provides that “[a]n employer may not require an employee to work more than 40 hours in any one week
unless 1 1/2 times the regular hourly rate is paid for all hours
actually worked in excess of 40 hours in that week.”
[S]ome workers who fall within the statutory definition
of “employee” nonetheless fall outside the protection of the
overtime law due to a series of express exemptions from that
law. The exemption to the overtime law that is in dispute here is
Exemption F.
Exemption F covers employees whose work involves the
handling—in one way or another—of certain, expressly enumerated food products. Specifically, Exemption F states that the
protection of the overtime law does not apply to: “The canning,
processing, preserving, freezing, drying, marketing, storing,
packing for shipment or distribution of: (1) Agricultural produce; (2) Meat and fish products; and (3) Perishable foods.” The
parties’ dispute concerns the meaning of the words “packing for
shipment or distribution.”
The delivery drivers contend that, in combination, these
words refer to the single activity of “packing,” whether the “packing” is for “shipment” or for “distribution.” The drivers further
contend that, although they do handle perishable foods, they do
not engage in “packing” them. As a result, the drivers argue that,
as employees who fall outside Exemption F, the Maine overtime
law protects them.
Oakhurst responds that the disputed words actually refer to
two distinct exempt activities, with the first being “packing for
shipment” and the second being “distribution.” And because the
delivery drivers do—quite obviously—engage in the “distribution” of dairy products, which are “perishable foods,” Oakhurst
contends that the drivers fall within Exemption F and thus outside the overtime law’s protection.
***
III.
Each party recognizes that, by its bare terms, Exemption F raises
questions as to its scope, largely due to the fact that no comma
precedes the words “or distribution.” But each side also contends
20
Part One Foundations of American Law
that the exemption’s text has a latent clarity, at least after one
applies various interpretive aids. Each side then goes on to argue
that the overtime law’s evident purpose and legislative history
confirms its preferred reading.
We conclude, however, that Exemption F is ambiguous, even
after we take account of the relevant interpretive aids and the
law’s purpose and legislative history. For that reason, we conclude that, under Maine law, we must construe the exemption in
the narrow manner that the drivers favor, as doing so furthers the
overtime law’s remedial purposes. See Dir. of Bureau of Labor
Standards v. Cormier, 527 A.2d 1297 (Me. 1987). Before explaining our reasons for reaching this conclusion, though, we
first need to work our way through the parties’ arguments as to
why, despite the absent comma, Exemption F is clearer than it
looks.
A.
First, the text. In considering it, we do not simply look at the
particular word “distribution” in isolation from the exemption
as a whole. We instead must take account of certain linguistic
conventions—canons, as they are often called—that can help us
make sense of a word in the context in which it appears. Oakhurst
argues that, when we account for these canons here, it is clear
that the exemption identifies “distribution” as a stand-alone, exempt activity rather than as an activity that merely modifies the
stand-alone, exempt activity of “packing.”
Oakhurst relies for its reading in significant part on the rule
against surplusage, which instructs that we must give independent meaning to each word in a statute and treat none as unnecessary. To make this case, Oakhurst explains that “shipment”
and “distribution” are synonyms. For that reason, Oakhurst contends, “distribution” cannot describe a type of “packing,” as the
word “distribution” would then redundantly perform the role
that “shipment”—as its synonym—already performs, which is
to describe the type of “packing” that is exempt. By contrast,
Oakhurst explains, under its reading, the words “shipment” and
“distribution” are not redundant. The first word, “shipment,” describes the exempt activity of “packing,” while the second, “distribution,” describes an exempt activity in its own right.
Oakhurst also relies on another established linguistic convention in pressing its case—the convention of using a conjunction
to mark off the last item on a list. Oakhurst notes, rightly, that
there is no conjunction before “packing,” but that there is one
after “shipment” and thus before “distribution.” Oakhurst also
observes that Maine overtime law contains two other lists in addition to the one at issue here and that each places a conjunction
before the last item.
Oakhurst acknowledges that its reading would be beyond dispute
if a comma preceded the word “distribution” and that no comma
is there. But, Oakhurst contends, that comma is missing for good
reason. Oakhurst points out that the Maine Legislative Drafting
Manual expressly instructs that: “when drafting Maine law or rules,
don’t use a comma between the penultimate and the last item of a
series.” In fact, Oakhurst notes, Maine statutes invariably omit the
serial comma from lists. And this practice reflects a drafting convention that is at least as old as the Maine wage and hour law, even
if the drafting manual itself is of more recent vintage.
B.
If no more could be gleaned from the text, we might be inclined
to read Exemption F as Oakhurst does. But, the delivery drivers
point out, there is more to consider. And while these other features of the text do not compel the drivers’ reading, they do make
the exemption’s scope unclear, at least as a matter of text alone.
The drivers contend, first, that the inclusion of both “shipment” and “distribution” to describe “packing” results in no redundancy. Those activities, the drivers argue, are each distinct.
They contend that “shipment” refers to the outsourcing of the
delivery of goods to a third-party carrier for transportation,
while “distribution” refers to a seller’s in-house transportation
of products directly to recipients. And the drivers note that this
distinction is, in one form or another, adhered to in [the New
Oxford English American Dictionary and Webster’s Third New
International Dictionary] definitions.
Consistent with the drivers’ contention, Exemption F does use
two different words (“shipment” and “distribution”) when it is hard
to see why, on Oakhurst’s reading, the legislature did not simply
use just one of them twice. After all, if “distribution” and “shipment” really do mean the same thing, as Oakhurst contends, then
it is odd that the legislature chose to use one of them (“shipment”)
to describe the activity for which “packing” is done but the other
(“distribution”) to describe the activity itself.
The drivers’ argument that the legislature did not view the
words to be interchangeable draws additional support from another Maine statute. That statute clearly lists both “distribution”
and “shipment” as if each represents a separate activity in its
own right. And because Maine law elsewhere treats “shipment”
and “distribution” as if they are separate activities in a list, we do
not see why we must assume that the Maine legislature did not
treat them that way here as well. After all, the use of these two
words to describe “packing” need not be understood to be wasteful. Such usage could simply reflect the legislature’s intention
to make clear that “packing” is exempt whether done for “shipment” or for “distribution” and not simply when done for just one
of those activities.[1]
[1]
We also note that there is some reason to think that the distinction
between “shipment” and “distribution” is not merely one that only a
lawyer could love. Oakhurst’s own internal organization chart seems to
treat the two as if they are separate activities.
Chapter One
Next, the drivers point to the exemption’s grammar. The drivers note that each of the terms in Exemption F that indisputably
names an exempt activity—“canning, processing, preserving,”
and so forth on through “packing”—is a gerund. By, contrast,
“distribution” is not. And neither is “shipment.” In fact, those are
the only non-gerund nouns in the exemption, other than the ones
that name various foods.
Thus, the drivers argue, in accord with what is known as
the parallel usage convention, that “distribution” and “shipment” must be playing the same grammatical role—and one
distinct from the role that the gerunds play. In accord with that
convention, the drivers read “shipment” and “distribution”
each to be objects of the preposition “for” that describes the
exempt activity of “packing.” And the drivers read the gerunds each to be referring to stand-alone, exempt activities—
“canning, preserving. . . .”
By contrast, in violation of the convention, Oakhurst’s reading treats one of the two non-gerunds (“distribution”) as if it
is performing a distinct grammatical function from the other
(“shipment”), as the latter functions as an object of a preposition
while the former does not. And Oakhurst’s reading also contravenes the parallel usage convention in another way: it treats a
non-gerund (again, “distribution”) as if it is performing a role in
the list—naming an exempt activity in its own right—that gerunds otherwise exclusively perform.
Finally, the delivery drivers circle back to that missing comma.
They acknowledge that the drafting manual advises drafters not
to use serial commas to set off the final item in a list—despite
the clarity that the inclusion of serial commas would often seem
to bring. But the drivers point out that the drafting manual is not
dogmatic on that point. The manual also contains a proviso—“Be
careful if an item in the series is modified”—and then sets out
several examples of how lists with modified or otherwise complex
terms should be written to avoid the ambiguity that a missing serial comma would otherwise create.
Thus, the drafting manual’s seeming—and, from a judge’s
point of view, entirely welcome—distaste for ambiguous lists
does suggest a reason to doubt Oakhurst’s insistence that the
missing comma casts no doubt on its preferred reading. For, as
the drivers explain, the drafting manual cannot be read to instruct
that the comma should have been omitted here if “distribution”
was intended to be the last item in the list. In that event, the serial
comma’s omission would give rise to just the sort of ambiguity
that the manual warns drafters not to create.
Still, the drivers’ textual points do not account for what seems
to us to be Oakhurst’s strongest textual rejoinder: no conjunction precedes “packing.” Rather, the only conjunction in the
exemption—“or”—appears before “distribution.” And so, on the
drivers’ reading, the list is strangely stingy when it comes to conjunctions, as it fails to use one to mark off the last listed activity.
The Nature of Law
21
To address this anomaly, the drivers cite to Antonin Scalia & Bryan Garner, Reading Law: The Interpretation of Legal
Texts (2012), in which the authors observe that “[s]ometimes
drafters will omit conjunctions altogether between the enumerated items [in a list],” in a technique called “asyndeton,”
id. at 119. But those same authors point out that most legislative drafters avoid asyndeton. And, the delivery drivers do not
provide any examples of Maine statutes that use this unusual
grammatical device. Thus, the drivers’ reading of the text is
hardly fully satisfying.[2]
IV.
The text has, to be candid, not gotten us very far. We are reluctant to
conclude from the text alone that the legislature clearly chose to deploy the nonstandard grammatical device of asyndeton. But we are
also reluctant to overlook the seemingly anomalous violation of the
parallel usage canon that Oakhurst’s reading of the text produces.
And so—there being no comma in place to break the tie—the text
turns out to be no clearer on close inspection than it first appeared.
As a result, we turn to the parties’ arguments about the exemption’s
purpose and the legislative history.
A.
Oakhurst contends that the evident purpose of the exemption
strongly favors its reading. The whole point of the exemption,
Oakhurst asserts (albeit without reference to any directly supportive text or legislative history), is to protect against the distorting
effects that the overtime law otherwise might have on employer
decisions about how best to ensure perishable foods will not spoil.
And, Oakhurst argues, the risk of spoilage posed by the distribution of perishable food is no less serious than is the risk of spoilage
posed by the other activities regarding the handling of such foods
to which the exemption clearly does apply.
B.
We are not so sure. Any analysis of Exemption F that depends
upon an assertion about its clear purpose is necessarily somewhat
[2]
The drivers do also contend that their reading draws support from the
noscitur a sociis canon, which “dictates that words grouped in a list
should be given related meaning.” Dole v. United Steelworkers of Am.,
494 U.S. 26, 36 (1990) (citation omitted). In particular, the drivers contend that distribution is a different sort of activity than the others, nearly
all of which entail transforming perishable products to less perishable
forms—“canning,” “processing,” “preserving,” “freezing,” “drying,”
and “storing.” However, the list of activities also includes “marketing,” which Oakhurst argues undercuts the drivers’ noscitur a sociis
argument. And even if “marketing” does not mean promoting goods or
services, as in the case of advertising, and means only “to deal in a market,” . . . it is a word that would have at least some potential commonalities with the disputed word, “distribution.” For that reason, this canon
adds little insight beyond that offered by the parallel usage convention.
22
Part One Foundations of American Law
speculative. Nothing in the overtime law’s text or legislative history purports to define a clear purpose for the exemption.
Moreover, even if we were to share in Oakhurst’s speculation
that the legislature included the exemption solely to protect against
the possible spoilage of perishable foods rather than for some distinct reason related, perhaps, to the particular dynamics of certain
labor markets, we still could not say that it would be arbitrary for
the legislature to exempt “packing” but not “distributing” perishable goods. The reason to include “packing” in the exemption is
easy enough to conjure. If perishable goods are not packed in a
timely fashion, it stands to reason that they may well spoil. Thus,
one can imagine the reason to ensure that the overtime law creates
no incentives for employers to delay the packing of such goods.
The same logic, however, does not so easily apply to explain the
need to exempt the activity of distributing those same goods. Drivers delivering perishable food must often inevitably spend long
periods of time on the road to get the goods to their destination.
It is thus not at all clear that a legal requirement for employers to
pay overtime would affect whether drivers would get the goods to
their destination before they spoiled. No matter what delivery drivers are paid for the journey, the trip cannot be made to be shorter
than it is.
Of course, this speculation about the effect that a legal requirement to pay overtime may or may not have on increasing the
risk of food spoilage is just that. But such speculation does make
us cautious about relying on what is only a presumed legislative
purpose to generate a firm conclusion about what the legislature
must have intended in drafting the exemption.
***
C.
To be clear, none of this evidence is decisive either way. It
does highlight, however, the hazards of simply assuming—on
the basis of no more than supposition about what would make
sense—that the legislature could not have intended to craft Exemption F as the drivers contend that the legislature crafted it.
Thus, we do not find either the purpose or the legislative history
fully clarifying. And so we are back to where we began.
V.
We are not, however, without a means of moving forward. The default rule of construction under Maine law for ambiguous provisions
in the state’s wage and hour laws is that they “should be liberally
construed to further the beneficent purposes for which they are enacted.” Dir. of Bureau of Labor Standards v. Cormier, 527 A.2d
1297, 1300 (Me. 1987). The opening of the subchapter of Maine
law containing the overtime statute and exemption at issue here declares a clear legislative purpose: “It is the declared public policy of
the State of Maine that workers employed in any occupation should
receive wages sufficient to provide adequate maintenance and to
protect their health, and to be fairly commensurate with the value
of the services rendered.” Thus, in accord with Cormier, we must
interpret the ambiguity in Exemption F in light of the remedial purpose of Maine’s overtime statute. And, when we do, the ambiguity
clearly favors the drivers’ narrower reading of the exemption.
***
VI.
Accordingly, the District Court’s grant of partial summary judgment to Oakhurst is reversed.
CYBERLAW IN ACTION
Section 230 of the Communications Decency Act (CDA),
a federal statute, provides that “[n]o provider or user of
an interactive computer service shall be treated as the
publisher or speaker of any information provided by
another information content provider.” Although § 230
appears in a statute otherwise designed to protect
minors against online exposure to indecent material, the broad
language of § 230 has caused courts to apply it in contexts having
nothing to do with indecent expression.
For instance, various courts have held that § 230 protects providers
of an interactive computer service (ICS) against liability for defamation
when a user of the service creates and posts false, reputation-harming
statements about someone else. (ICS is defined in the statute as “any
information service, system, or access software provider that provides
or enables computer access by multiple users to a computer server.”)
With courts so holding, § 230 has the effect of superseding a common
law rule of defamation that anyone treated as a publisher or speaker of
defamatory material is liable to the same extent as the original speaker
or writer of that material. Absent § 230, ICS providers could sometimes
face defamation liability under the theory that they are publishers
of statements made by someone else. (You will learn more about
defamation in Chapter 6.) This application of § 230 illustrates two
concepts noted earlier in the chapter: first, that federal law overrides
state law when the two conflict, and second, that an applicable statute
supersedes a common law rule.
Cases in other contexts have required courts to utilize statutory
interpretation techniques discussed in this chapter as they determine
whether § 230’s shield against liability applies. For example, two cases
presented the question whether § 230 protects website operators
against liability for alleged Fair Housing Act (FHA) violations based on
Chapter One
material that appears on their sites. The FHA states that it is unlawful to
“make, print or publish” or to “cause” the making, printing, or publishing
of, notices, statements, or advertisements that “with respect to the sale
or rental of a dwelling[,] . . . indicate[s] any preference, limitation, or
discrimination based on race, color, religion, sex, handicap, familial
status, or national origin, or an intention to make any such preference,
limitation, or discrimination.” A civil rights organization sued Craigslist
Inc., which operates a well-known electronic forum for those who wish
to buy, sell, or rent housing and miscellaneous goods and services. The
plaintiff alleged that Craigslist users posted housing-related statements
such as “No minorities” and “No children” and that those statements
constituted FHA violations on the part of Craigslist.
In Chicago Lawyers Committee for Civil Rights Under Law, Inc.
v. Craigslist, Inc., 519 F.3d 666 (7th Cir. 2008), the U.S. Court of
Appeals for the Seventh Circuit affirmed the district court’s dismissal
of the plaintiff’s complaint. The Seventh Circuit held that a “natural
reading” of § 230 of the CDA protected Craigslist against liability. The
statements that allegedly violated the FHA were those of users of the
electronic forum—meaning that Craigslist would be liable only if it
Identify what courts focus on when applying the major
LO1-6 statutory interpretation techniques (plain meaning, legislative
purpose, legislative history, and general public purpose).
To deal with the problems of ambiguity that arise from
drafting errors, unclear language, or the application of
clear language to unanticipated circumstances, courts use
various techniques of statutory interpretation. As you saw
in the O’Connor case, different techniques may dictate
different results in a particular case. Sometimes judges
employ the techniques in an instrumentalist or resultoriented fashion, emphasizing the technique that will produce the result they want and downplaying the others. It
is, therefore, unclear which technique should control when
different techniques yield different results. Judges have
considerable latitude in this regard.
A conceptually helpful metaphor here might be to think
of a judge approaching a question of statutory interpretation
as a repairperson. The various techniques of statutory interpretation described here are the tools he or she might use for
a repair job. Sometimes a particular tool is more suited to a
particular job, but a repairperson uses his or her judgment
in determining which tools to use to accomplish the goal of
making the repair. Likewise, a judge retains the freedom to
reach in the “statutory interpretation toolbox” for any of the
tools described here, but professional norms and experience
often guide a judge’s choice, just as it would a repairperson’s.
Plain Meaning Courts routinely begin their interpretation
of a statute with its actual language. If the statute’s words
The Nature of Law
23
were treated as a publisher or speaker of the users’ statements. The
plain language of § 230, however, prohibited classifying Craigslist
as a publisher or speaker of the content posted by the users. Neither
did Craigslist “cause” users to make statements of the sort prohibited
by the FHA. Using a commonsense interpretation of the word “cause,”
the court concluded that merely furnishing the electronic forum was
not enough to implicate Craigslist in having “cause[d]” the users’
statements. There were no facts indicating that Craigslist suggested
or encouraged statements potentially running afoul of the FHA.
Very shortly after the Craigslist decision, a different federal court
of appeals decided Fair Housing Council v. Roommates.com, LLC.
That case presented the question whether § 230 of the CDA protected
Roommates.com against FHA liability for allegedly discriminatory
housing-related statements posted by users of Roommates.com’s
electronic forum. The case’s basic facts appear in problem case 10 at
the end of this chapter. Review those facts and compare them to the
facts of the Craigslist case. Then determine whether § 230 protected
Roommates.com against liability (as it protected Craigslist) or whether
the facts of the Roommates.com case warranted a different outcome.
have a clear, common, accepted meaning, courts often employ the plain meaning rule. This approach calls for the
court to apply the statute according to the usual meaning
of its words, without concerning itself with anything else.
At times, this approach is clear and settles the matter. Often,
though, judges find the application of plain meaning unhelpful. It may lead to absurd or patently unjust results, or
it might simply fail to resolve the ambiguity at issue. In
James v. City of Costa Mesa, which follows the description
of these statutory interpretation techniques, both the majority and the dissenting judges agree that the plain meaning
of the statutory text at issue is ambiguous, even as they disagree as to what that meaning is.
Legislative History and Legislative Purpose Courts
sometimes refuse to follow a statute’s plain meaning when
its legislative history suggests a different result. Almost
all courts resort to legislative history when the statute’s
language is ambiguous. A statute’s legislative history
includes the following sources: reports of investigative
committees or law revision commissions that led to the
legislation, transcripts or summaries of hearings of legislative committees that originally considered the legislation,
reports issued by such committees, records of legislative
debates, reports of conference committees reconciling the
chambers’ conflicting versions of the law in a bicameral
legislature, amendments or defeated amendments to the
legislation, other bills not passed by the legislature but
proposing similar legislation, and discrepancies between a
bill passed by one chamber of a bicameral legislature and
the final version of the statute.
24
Part One Foundations of American Law
Sometimes a statute’s legislative history provides no information or conflicting information about its meaning, scope,
or purposes. Some sources prove to be more authoritative
than others. The worth of debates, for instance, may depend
on which legislator (e.g., the sponsor of the bill or an uninformed blowhard) is quoted. Some sources are useful only in
particular situations; prior unpassed bills and amendments or
defeated amendments are examples. Consider, for instance,
whether mopeds are covered by an air pollution statute applying to “automobiles, trucks, buses, and other motorized
passenger or cargo vehicles.” If the statute’s original version
included mopeds but this reference was removed by amendment, it is unlikely that the legislature wanted mopeds to be
covered. The same might be true if six similar unpassed bills
had included mopeds but the bill that was eventually passed
did not, or if one house had passed a bill including mopeds but
mopeds did not appear in the final version of the legislation.
Courts use legislative history in two overlapping but distinguishable ways. They may use it to determine what the legislature thought about the specific meaning of statutory language.
They may also use it to determine the overall aim, end, or goal
of the legislation. In this second case, they then ask whether
a particular interpretation of the statute is consistent with this
legislative purpose. To illustrate the difference between these
two uses of legislative history, suppose that a court is considering whether our pollution statute’s “other motorized passenger
or cargo vehicles” language includes battery-powered vehicles. The court might scan the legislative history for specific
references to battery-powered vehicles or other indications of
what the legislature thought about their inclusion. The court
might also use the same history to determine the overall aims
of the statute and then ask whether including battery-powered
vehicles is consistent with those aims. Because the history
probably would reveal that the statute’s purpose was to reduce air pollution from internal combustion engines, the court
might well conclude that covering battery-powered vehicles
would be inconsistent with the legislative purpose and, therefore, decline to include them within the coverage of the statute.
General Public Purpose Occasionally, courts construe
statutory language in the light of various general public
purposes. These purposes are not the purposes underlying
the statute in question; rather, they are widely accepted
general notions of public policy. For example, the Supreme Court once used the general public policy against
racial discrimination in education as an argument for denying tax-exempt status to a private university that discriminated on the basis of race.
Prior Interpretations Courts sometimes follow prior
cases and administrative decisions interpreting a statute,
regardless of the statute’s plain meaning or legislative
history. The main argument for following these prior interpretations is to promote stability and certainty by preventing each successive court that considers a statute from
adopting its own interpretation. The courts’ willingness to
follow a prior interpretation depends on such factors as
the number of past courts adopting the interpretation, the
authoritativeness of those courts, and the number of years
that the interpretation has been followed.8
Maxims Maxims are general rules of thumb employed
in statutory interpretation. There are many maxims,
which courts tend to use or ignore at their discretion. The
O’Connor court used several maxims to interpret the Maine
overtime law exemption in the case at the beginning of this
section. The court there referred to the maxims as “canons”
of statutory interpretation. For our purposes, maxim and
canon are synonyms. The judge in O’Connor explained
the maxim of noscitur a sociis in the second footnote of
the opinion. Another example of a maxim is the ejusdem
generis rule, which says that when general words follow
words of a specific, limited meaning, the general language
should be limited to things of the same class as those specifically stated. Suppose that the pollution statute quoted
earlier listed 12 types of gas-powered vehicles and ended
with the words “and other motorized passenger or cargo vehicles.” In that instance, ejusdem generis probably would
dictate that battery-powered vehicles not be included.
The following James v. City of Costa Mesa case reports the
decision of a three-judge panel of the U.S. Court of Appeals
for the Ninth Circuit. Two of the three judges agreed with one
interpretation of the statutory language at issue; the third disagreed with that interpretation. The decision of the two judges
who agreed is presented as the majority opinion of the court,
while the disagreeing judge’s argument is in the dissenting
opinion. Notice how each opinion uses plain meaning and legislative history and purpose (with a maxim or two peppered in
for good measure) to interpret the language to different conclusions. This illustrates how, regardless of these consistent
techniques described here, there is still substantial room for
contested judgment in statutory interpretation. Likewise, you
should compare and contrast the James court’s application of
those techniques with the earlier O’Connor opinion.
Note here that this technique is related to, but distinct from, a court’s
obligation to follow binding precedent. If a prior interpretation of a
statute was handed down by a higher court whose rulings are binding
on a lower court, then the lower court must follow that interpretation.
As such, the application of binding precedent is not truly considered
statutory interpretation. The technique of statutory interpretation that
follows prior interpretations of a statute arises when courts look to nonprecedential decisions of other courts for guidance.
8
Chapter One
The Nature of Law
James v. City of Costa Mesa 25
700 F.3d 394 (9th Cir. 2012)
Marla James, Wayne Washington, James Armantrout, and Charles Daniel Dejong (collectively referred to here either as “the
plaintiffs” or “James,” the name of the lead plaintiff) suffer from serious medical conditions. To alleviate pain associated with
their impairments, they each use marijuana, as recommended and monitored by their medical doctors. In California, where the
plaintiffs live, the medical use of marijuana is permissible according to state law. Marijuana, however, remains a controlled
substance under the federal Controlled Substances Act (CSA). As a result, it is generally a federal crime to possess and distribute
marijuana, even for medical purposes.
The plaintiffs filed a lawsuit against the cities of Costa Mesa and Lake Forest, California, for taking steps to close down
or otherwise prohibit the operation of marijuana-dispensing facilities within their boundaries. The plaintiffs claimed that the
cities’ actions violated Title II of the Americans with Disabilities Act (ADA), which prohibits discrimination on the basis of disability in the provision of public services. The lawsuit asked the court to enjoin the cities’ actions (i.e., issue a decision ordering
the cities to stop their efforts to close the marijuana-dispensing facilities).
A judge in the United States District Court for the Central District of California declined to issue an injunction on the ground
that the ADA does not protect against discrimination on the basis of plaintiffs’ marijuana use, even medical marijuana use
supervised by a doctor in accordance with state law. The judge based his decision on a determination that the plaintiffs are not
entitled to the protection of the ADA in this instance because only a “qualified individual with a disability” is protected from
being denied the benefit of public services. The ADA states that “the term ‘individual with a disability’ does not include an
individual who is currently engaging in the illegal use of drugs, when the covered entity acts on the basis of such use.”
The plaintiffs appealed the District Court’s ruling to the U.S. Court of Appeals for the Ninth Circuit.
Raymond C. Fisher, Circuit Judge
This case turns on whether the plaintiffs’ medical marijuana use
constitutes “illegal use of drugs[.]”
[The ADA] defines “illegal use of drugs” as
the use of drugs, the possession or distribution of which is unlawful under the Controlled Substances Act. Such term does not
include the use of a drug taken under supervision by a licensed
health care professional, or other uses authorized by the Controlled Substances Act or other provisions of Federal law.
The parties agree that the possession and distribution of marijuana, even for medical purposes, is generally unlawful under
the CSA, and thus that medical marijuana use falls within the
exclusion set forth in [the above definition’s] first sentence. They
dispute, however, whether medical marijuana use is covered by
one of the exceptions in the second sentence. The plaintiffs contend their medical marijuana use falls within the exception for
drug use supervised by a licensed health care professional.
There are two reasonable interpretations of the [ADA]’s language excepting from the illegal drug exclusion “use of a drug
taken under supervision by a licensed health care professional,
or other uses authorized by the Controlled Substances Act or
other provisions of Federal law.” The first interpretation—urged
by the plaintiffs—is that this language creates two exceptions
to the illegal drug exclusion: (1) an exception for professionally
supervised drug use carried out under any legal authority, and
(2) an independent exception for drug use authorized by the CSA
or other provisions of federal law. The second interpretation—
offered by the cities and adopted by the district court—is that
the provision contains a single exception covering all uses authorized by the CSA or other provisions of federal law, including
both CSA-authorized uses that involve professional supervision
(such as use of controlled substances by prescription . . . and
uses of controlled substances in connection with research and experimentation), and other CSA-authorized uses. Under the plaintiffs’ interpretation, their state-sanctioned, doctor-recommended
marijuana use is covered under the supervised use exception.
Under the cities’ interpretation, the plaintiffs’ state-authorized
medical marijuana use is not covered by any exception because it
is not authorized by the CSA or another provision of federal law.
Although [the definition of “illegal use of drugs”] lacks a plain
meaning and its legislative history is not conclusive, we hold, in
light of the text and legislative history of the ADA, as well as
the relationship between the ADA and the CSA, that the cities’
interpretation is correct.
The meaning of [the definition of “illegal use of drugs”]
cannot be discerned from the text alone. Both interpretations
of the provision are somewhat problematic. The cities’ reading of the statute renders the first clause in [the definition]’s
second sentence superfluous; if Congress had intended that the
exception cover only uses authorized by the CSA and other provisions of federal law, it could have omitted the “taken under
supervision” language altogether. But the plaintiffs’ interpretation also fails to give effect to each word of [the statute] . . . ,
for if Congress had really intended that the language excepting “other uses authorized by the Controlled Substances Act
or other provisions of Federal law” be entirely independent of
the preceding supervised use language, it could have omitted
26
Part One Foundations of American Law
the word “other,” thus excepting “use of a drug taken under
supervision by a licensed health care professional, or uses authorized by the Controlled Substances Act.” Moreover, unless
the word “other” is omitted, the plaintiffs’ interpretation renders the statutory language outright awkward. One would not
naturally describe “the use of a drug taken under supervision
by a licensed health care professional, or other uses authorized
by the Controlled Substances Act or other provisions of Federal law” unless the supervised uses were a subset of the uses
authorized by the CSA and other provisions of federal law. The
plaintiffs’ reading thus results not only in surplusage, but also
in semantic dissonance.
The cities’ interpretation also makes the most sense of the
contested language when it is viewed in context. . . . Here,
the context reveals Congress’ intent to define “illegal use of
drugs” by reference to federal, rather than state, law. [The
definition] mentions the CSA by name twice, and [a subsequent provision of the ADA] provides that “[t]he term ‘drug’
means a controlled substance, as defined in . . . the Controlled
Substances Act.”
We therefore conclude that the cities’ interpretation of the
statutory text is the more persuasive, though we agree with the
dissent that the text is ultimately inconclusive. We therefore look
to legislative history, including related congressional activity.
The legislative history of this provision, like its text, is indeterminate. It is true, as the plaintiffs point out, that Congress
rejected an early draft of the “taken under supervision” exception in favor of a broader version. [The early version excepted
drugs taken pursuant to a valid prescription, rather than the
use of a drug taken under supervision by a licensed health care
professional.] We are not persuaded, however, that this history
compels the plaintiffs’ interpretation. Although the expansion of
the supervised use exception suggests Congress wanted to cover
more than just CSA-authorized prescription-based use, it does
not demonstrate that the exception was meant to extend beyond
the set of uses authorized by the CSA and other provisions of
federal law. The CSA does authorize some professionally supervised drug use that is not prescription-based, and Congress could
have intended simply to expand the supervised use exception to
encompass all such uses.
One House Committee Report does include a brief passage
that arguably supports the notion that [the] supervised use language and [the] authorized use language are independent, stating “The term ‘illegal use of drugs’ does not include the use
of controlled substances, including experimental drugs, taken
under the supervision of a licensed health care professional. It
also does not include uses authorized by the Controlled Substances Act or other provisions of federal law.” This discussion
is of limited persuasive value, however, because it may rest
on the unstated assumption—quite plausible at the time—that
professionally supervised use of illegal drugs would always be
consistent with the CSA. There is no reason to think that the
1990 Congress that passed the ADA would have anticipated
later changes in state law facilitating professional supervision
of drug use that federal law does not permit. The first such
change came six years later, when California voters passed
Proposition 215, now codified as the Compassionate Use
Act of 1996.
[D]uring and after adoption of the ADA there has been a
strong and longstanding federal policy against medical marijuana use outside the limits established by federal law itself. . . .
Under the plaintiffs’ view, the ADA worked a substantial departure from this accepted federal policy by extending federal protections to federally prohibited, but state-authorized, medical use
of marijuana. That would have been an extraordinary departure
from policy, and one that we would have expected Congress to
take explicitly. It is unlikely that Congress would have wished
to legitimize state-authorized, federally proscribed medical
marijuana use without debate, in an ambiguously worded ADA
provision.
***
AFFIRMED.
DISSENT BY: Marsha S. Berzon, Circuit Judge
The statutory interpretation issue at the core of this case is
an unusually tough one, as the majority opinion recognizes.
Looking at the language of [the definition of “illegal use of
drugs”] alone, I would come out where the majority does—
concluding that the statute is ambiguous. But unlike the majority, I would not declare a near-draw. Instead, looking at the
words alone, I would conclude that the plaintiffs have much
the better reading, but not by enough to be comfortable that
their interpretation is surely correct. Turning then to the legislative history, I would again declare the plaintiffs the winner, this time sufficiently, when combined with the language
considerations, to adopt their interpretation, absent some very
good reason otherwise.
1. Statutory Text
James and the other plaintiffs argue that the first clause of the
second sentence [of the definition] carves out their marijuana
use, which is under the supervision of a doctor and in compliance with California law. The Cities, on the other hand, read the
statute as creating a single exception—for drug use authorized
by the CSA—and argue that the first clause should be read as
excepting drug use under supervision of a doctor only when that
use complies with the CSA.
Chapter One
Although [the definition] is not entirely clear, James has very
much the better reading of the statutory language. In James’s
view, the phrases “use of a drug taken under supervision by a
licensed health care professional” and “other uses authorized by
the [CSA]” create two different exceptions, so that the ADA protects use of drugs under supervision of a doctor even when that
use is not authorized by the CSA. If Congress intended to carve
out only drug use authorized by the CSA, after all, the entire
first clause—“the use of a drug under supervision by a licensed
health care professional”—would have been unnecessary.
a. The use of “other”
The Cities argue, and the district court held, that James’s reading renders the word “other” redundant, since Congress could
have more clearly and concisely conveyed the meaning of two
distinct exceptions by leaving it out. Under this view, “other”
indicates that the exception contained in the first clause, for uses
supervised by a doctor, is meant to be a subset of the exception
in the second clause, and is included only for clarification and
emphasis. This interpretation would, oddly, prefer a minor
redundancy—the word “other”—over a major one—the entire first
phrase of the second sentence.
Moreover, the word “other” is not necessarily redundant at all.
It could be read to indicate that use under supervision of a doctor is
meant to be a category of uses entirely subsumed by the larger category of uses authorized by the CSA, but this is not the only possible
interpretation. Put another way, omitting the word “other” entirely
would certainly have compelled the reading James advances, but its
presence does not invalidate her interpretation. There is, after all, a
middle ground between these two readings. . . . [T]he two clauses
could . . . be seen as partially overlapping, with the group of uses
supervised by a doctor partially included within the set of uses authorized by the CSA but also partially independent, encompassing
in addition a set of uses not authorized by the CSA. This reading
strikes me as the most sensible.
Under this interpretation, “other” is not redundant. Instead,
it accurately reflects the overlap. Were the “other” not there, the
exception would have divided the relevant universe into two nonoverlapping sets. Yet, in fact the CSA authorizes some (but not
all) uses of “drugs taken under supervision of a licensed health
care professional.” The “other” serves to signal that there is no
strict dichotomy between the two phrases, as the bulk of the
CSA-authorized uses are within the broader set covered by the
first phrase.
***
2. Legislative History
James’ reading of the statute also accords much better with
the overall thrust of the legislative history. That history, while
The Nature of Law
27
not entirely without ambiguity, strongly supports James’s
interpretation.
a. Evolution of the exception
As the majority observes, Congress replaced a draft of the exception that required that use of drugs be “pursuant to a valid
prescription,” . . . with the broader language eventually enacted.
Critically, the House Committee Report restates the exception,
once amended, in precisely the cumulative manner. I have suggested most accords with the statutory language: “The term
‘illegal use of drugs’ does not include the use of controlled
substances, including experimental drugs, taken under the supervision of a licensed health care professional. It also does not
include uses authorized by the [CSA] or other provisions of Federal law.” This summary is in no way ambiguous, and indicates
at least that members of the House familiar with the statutory
language understood it in the manner that, for reasons I have explained, most accords with ordinary principles of grammar and
syntax.
b. Congressional awareness of medical marijuana
The majority discounts any significance in the way the current
language is described in the relevant Committee report, observing that California voters did not pass Prop. 215 until 1996 and
that there were no state laws in 1990 allowing for professionally
supervised use of drugs in a manner inconsistent with the CSA.
Congress would not have carefully drafted the exception to include non-CSA authorized medically supervised uses, the majority posits, as no such uses were legal under state law at the time.
That explanation for dismissing the best reading of the
statute and the only coherent reading of the Committee’s explanation of the statute won’t wash, for several reasons. First,
while California in 1996 became the first of the sixteen states
that currently legalize medical marijuana, the history of medical marijuana goes back much further, so that use for medical
purposes was not unthinkable in 1990. At one time, “almost all
States . . . had exceptions making lawful, under specified conditions, possession of marihuana by . . . persons for whom the
drug had been prescribed or to whom it had been given by an
authorized medical person.” What’s more, the Federal government itself conducted an experimental medical marijuana program from 1978 to 1992, and it continues to provide marijuana
to the surviving participants. The existence of these programs
indicates that medical marijuana was not a concept utterly foreign to Congress before 1996.
***
The upshot is that the statutory language and history, taken together, fit much better with James’s version of what Congress
meant than the Cities’.
28
Part One Foundations of American Law
Limits on the Power of Courts
By now, you
may think that anything goes when courts decide common
law cases or interpret statutes. Many factors, however, discourage courts from adopting a freewheeling approach.
Their legal training and mental makeup cause judges to
be likely to respect established precedents and the will of
the legislature. Many courts issue written opinions, which
expose judges to academic and professional criticism if
the opinions are poorly reasoned. Lower court judges may
be discouraged from innovation by the fear of being overruled by a higher court. Finally, political factors inhibit
judges. For example, some judges are elected, and even
judges with lifetime tenure can sometimes be removed.
An even more fundamental limit on the power of courts
is that they cannot make or interpret law until parties present them with a case to decide. In addition, any such case
must be a real dispute. That is, courts generally limit
themselves to genuine, existing “cases or controversies”
between real parties with tangible opposing interests in
the lawsuit. Courts generally do not issue advisory opinions on abstract legal questions unrelated to a genuine dispute, and do not decide feigned controversies that parties
concoct to seek answers to such questions. Courts may
also refuse to decide cases that are insufficiently ripe to
have matured into a genuine controversy, or that are moot
because there no longer is a real dispute between the parties. Reflecting similar policies is the doctrine of standing
to sue, which normally requires that the plaintiff have
some direct, tangible, and substantial stake in the outcome
of the litigation.
State and federal declaratory judgment statutes,
however, allow parties to determine their rights and duties even though their controversy has not advanced to
the point where harm has occurred and legal relief may
be necessary. This enables them to determine their legal
position without taking action that could expose them to
liability. For example, if Darlene believes that something
she plans to do would not violate Earl’s copyright on a
work of authorship but she recognizes that he may take a
contrary view, she may seek a declaratory judgment on the
question rather than risk Earl’s lawsuit by proceeding to
do what she had planned. Usually, a declaratory judgment
is awarded only when the parties’ dispute is sufficiently
advanced to constitute a real case or controversy.
The Global Business Environment
Just as statutes may require judicial interpretation when a dispute arises, so may treaties. The
techniques that courts use in interpreting treaties
correspond closely to the statutory interpretation techniques
discussed in this chapter. Olympic Airways v. Husain, 540 U.S.
644 (U.S. Sup. Ct. 2004), furnishes a useful example.
In Olympic Airways, the U.S. Supreme Court was faced
with an interpretation question regarding a treaty, the Warsaw
Convention, which deals with airlines’ liability for passenger
deaths or injuries on international flights. Numerous nations
(including the United States) subscribe to the Warsaw Convention, a key provision of which provides that in regard to international flights, the airline “shall be liable for damages sustained
in the event of the death or wounding of a passenger or any
other bodily injury suffered by a passenger, if the accident
which caused the damage so sustained took place on board the
aircraft or in the course of any of the operations of embarking or disembarking.” A separate provision imposes limits on
the amount of money damages to which a liable airline may be
subjected.
The Olympic Airways case centered around the death of
Dr. Abid Hanson, a severe asthmatic, on an international
flight operated by Olympic. Smoking was permitted on the
flight. Hanson was given a seat in the nonsmoking section,
but his seat was only three rows in front of the smoking section. Because Hanson was extremely sensitive to secondhand
smoke, he and his wife, Rubina Husain, requested various
times that he be allowed, for health reasons, to move to a
seat farther away from the smoking section. Each time, the
request was denied by an Olympic flight attendant. When
smoke from the smoking section began to give Hanson difficulty, he used a new inhaler and walked toward the front of
the plane to get some fresher air. Hanson went into respiratory distress, whereupon his wife and a doctor who was on
board gave him shots of epinephrine from an emergency kit
that Hanson carried. Although the doctor administered CPR
and oxygen when Hanson collapsed, Hanson died. Husain,
acting as personal representative of her late husband’s estate,
sued Olympic in federal court on the theory that the Warsaw
Convention made Olympic liable for Hanson’s death. The
federal district court and the court of appeals ruled in favor
of Husain.
In considering Olympic’s appeal, the U.S. Supreme
Court noted that the key issue was one of treaty interpretation: whether the flight attendant’s refusals to reseat Hanson
constituted an “accident which caused” the death of Hanson.
Noting that the Warsaw Convention itself did not define “accident” and that different dictionary definitions of “accident”
Chapter One
exist, the Court looked to a precedent case, Air France v.
Saks, 470 U.S. 392 (U.S. Sup. Ct. 1985), for guidance. In
the Air France case, the Court held that the term “accident”
in the Warsaw Convention means “an unexpected or unusual
event or happening that is external to the passenger.” Applying that definition to the facts at hand, the Court concluded
in Olympic Airways that the repeated refusals to reseat Hanson despite his health concerns amounted to unexpected and
unusual behavior for a flight attendant. Although the refusals
APPENDIX
Reading and Briefing Cases
Throughout
this text, you will encounter cases—the judicial opinions accompanying court decisions. These cases are
highly edited versions of their much longer originals.
What follows are explanations and pointers to assist you
in studying cases.
1. Each case has a case name that includes at least some
of the parties to the case. Because the order of the parties may change when a case is appealed, do not assume that the first party listed is the plaintiff (the party
suing) and the second the defendant (the party being
sued). Also, because some cases have many plaintiffs
and/or many defendants, the parties discussed in the
court’s opinion sometimes differ from those found in
the case name.
2. Each case also has a citation, which includes the
volume and page number of the legal reporter in
which the full case appears, plus the year the case
was decided. James v. City of Costa Mesa, for instance, begins on page 394 of volume 700 of the
third edition of the Federal Reporter (the official
reporter that compiles the published opinions of
the U.S. Circuit Courts of Appeal) and was decided
in 2012. (Each of the many different legal reporters has its own abbreviation. The list is too long
to include here.) In parentheses accompanying the
date, we also give you some information about the
court that decided the case. For example, “U.S. Sup.
Ct.” is the United States Supreme Court, “1st Cir.”
is the U.S. Court of Appeals for the First Circuit,
“D. Md.” is the U.S. District Court for the District of
Maryland, “Mich.” is the Supreme Court of Michigan,
and “Minn. Ct. App.” is the Minnesota Court of Appeals (a Minnesota intermediate appellate court).
Chapter 2 describes the various kinds of courts.
The Nature of Law
29
were not the sole reason why Hanson died (the smoke itself
being a key factor), the refusals were nonetheless a significant link in the causation chain that led to Hanson’s death.
Given the definition of “accident” in the Court’s earlier precedent, the phrasing, the Warsaw Convention, and the underlying public policies supporting it, the Court concluded that the
refusals to reseat Hanson constituted an “accident” covered
by the Warsaw Convention. Therefore, the Court affirmed the
decision of the lower courts.
3. At the beginning of each case, there is a statement of
facts containing the most important facts that gave rise
to the case.
4. As part of the statement of facts, we give you the case’s
procedural history. This history tells you what courts
previously handled the case you are reading, and how
they dealt with it.
5. Next comes your major concern: the body of the
court’s opinion. Here, the court determines the applicable law and applies it to the facts to reach a conclusion. The court’s discussion of the relevant law
may be elaborate; it may include prior cases, legislative history, applicable public policies, and more.
The court’s application of the law to the facts usually occurs after it has arrived at the applicable legal
rule(s), but also may be intertwined with its legal
discussion.
6. At the very end of the case, we complete the procedural history by stating the court’s decision. For example, “Judgment reversed in favor of Smith” says that
a lower court judgment against Smith was reversed on
appeal. This means that Smith’s appeal was successful
and Smith wins.
7. The cases’ main function is to provide concrete examples of rules stated in the text. (Frequently, the
text tells you what point the case illustrates.) In
studying law, it is easy to conclude that your task
is finished once you have memorized a black letter
rule. Real-life legal problems, however, seldom present themselves as abstract questions of law; instead,
they are hidden in particular situations one encounters or particular actions one takes. Without some
sense of a legal rule’s real-life application, your
knowledge of that rule is incomplete. The cases help
provide this sense.
8. You may find it helpful to brief the cases. There is no
one correct way to brief a case, but most good briefs
30
Part One Foundations of American Law
contain the following elements: (1) a short statement
of the relevant facts, (2) the case’s prior history,
(3) the question(s) or issue(s) the court had to decide,
(4) the answer(s) to those question(s), (5) the reasoning
the court used to justify its decision, and (6) the final
result. A brief of Price v. High Pointe Oil Company,
Inc. (a case included earlier) might look this way:
Price v. High Pointe Oil Company, Inc.
Facts Beckie Price’s house and all of her personal belongings were destroyed when High Pointe erroneously
filled her basement with 400 gallons of oil through an oil
fill pipe that formerly led to an oil furnace in the basement. Price had replaced the oil furnace with a propane
furnace a year earlier and canceled her fill order with High
Pointe. Somehow, though, her address was mistakenly included on a “keep full list.” Despite the fact that Price’s
house was eventually rebuilt, her land was remediated, her
personal belongings cleaned or replaced, and her expenses
while she was displaced from her home covered, she sued
High Pointe for negligence, including claims for noneconomic damages.
History A Michigan jury found for Price on the claim
they heard and awarded her $100,000. The Michigan appellate court affirmed. High Pointe appealed to the Michigan Supreme Court.
Issues Should the Michigan common law include the
recognition of noneconomic damages for the negligent destruction of real property?
Holdings Michigan common law has never allowed
the recovery of noneconomic damages for the negligent
Problems and Problem Cases
1. Law enforcement officers arrived at a Minnesota residence in order to execute arrest warrants for Andrew
Hyatt. During the officers’ attempt to make the arrest, Hyatt yelled something such as “Go ahead, just
shoot me, shoot me,” and struck one of the officers.
Another officer then called for assistance from City
of Anoka, Minnesota, police officer Mark Yates, who
was elsewhere in the residence with his leashed police
dog, Chips. Yates entered the room where Hyatt was,
saw the injured officer’s bloodied face, and observed
Hyatt standing behind his wife (Lena Hyatt). One of
the officers acquired the impression that Lena may
have been serving as a shield for her husband. When
Andrew again yelled “Shoot me, shoot me” and ran
toward the back of the room, Yates released Chips
destruction of real or personal property and the court will
not adopt a new common law rule doing so in this case.
Reasoning The longstanding rule in Michigan is that
the remedy for the negligent destruction of property is the
market value of the property if it is destroyed or the repair
cost of the property if it is only damaged. No cases have
ever held differently. Two recent cases applied the exclusion of noneconomic damages to claims regarding personal property, and the Court found that the current case
was not distinguishable from those cases.
Consistent with the proper caution courts should exercise when considering changing the common law, the
Court further declined to modify that longstanding rule
for a number of reasons. The rule is rational and can be
justified by important considerations of public policy,
including:
1. A reliance on the market for valuation of property;
2. Easy verifiability, quantifiability, and measurability of
economic damages (and concomitant difficulty of those
in noneconomic damages);
3. Avoidance of disparity among the valuation of the
same property in different cases; and
4. Certainty for businesses that have frequent contact with
property and might damage it through negligence.
The Legislature is the appropriate entity to change the
rule if it sees fit.
Result The Supreme Court of Michigan reversed the
judgment of the Court of Appeals and remanded the case
to the trial court to enter judgment in favor of High Pointe.
from the leash. Instead of pursuing Andrew, Chips
apprehended Lena, taking her to the ground and performing a “bite and hold” on her leg and arm. Yates
then pursued Andrew, who had fled through a window. When Yates later reentered the room, he released
Chips from Lena and instructed another officer to arrest her on suspicion of obstruction of legal process.
Lena was taken by ambulance to a hospital and treated
for lacerations on her elbow and knee. She later sued
the City of Anoka, seeking compensation for medical expenses and pain and suffering. Her complaint
alleged liability on the basis of Minnesota’s dog bite
statute, which read as follows:
If a dog, without provocation, attacks or injures any
person who is acting peaceably in any place where
the person may lawfully be, the owner of the dog
Chapter One
is liable in damages to the person so attacked or
injured to the full amount of the injury sustained.
The term “owner” includes any person harboring
or keeping a dog but the owner shall be primarily
liable. The term “dog” includes both male and female of the canine species.
In defense, the city argued that the dog bite statute
does not apply to police dogs and municipalities that
own them. Was the city correct?
2. As part of its collective bargaining agreement with the
United Steelworkers of America, the Kaiser Aluminum and Chemical Company established an on-thejob craft training program at its Gramercy, Louisiana,
plant. The selection of trainees for the program was
generally based on seniority, but the selection guidelines included an affirmative action feature under
which at least 50 percent of the new trainees had to be
black until the percentage of black skilled craft workers in the plant approximated the percentage of blacks
in the local labor force. The purposes of the affirmative action feature were to break down old patterns
of racial segregation and hierarchy, and to open up
employment opportunities for blacks in occupations
that had traditionally been closed to them. Kaiser employee Brian Weber, who was white, applied for the
program but was rejected. He would have qualified for
the program had the affirmative action feature not existed. Weber sued Kaiser and the union in federal district court, arguing that the racial preference violated
Title VII of the Civil Rights Act of 1964. Section
703(a) of the act states: “It shall be an unlawful employment practice for an employer . . . to discriminate
against any individual with respect to his compensation, terms, conditions, or privileges of employment,
because of such individual’s race, color, religion, sex,
or national origin.” Section 703(d) includes a similar
provision specifically forbidding racial discrimination in admission to apprenticeship or other training
programs. Weber won his case in the federal district
court and in the federal court of appeals. Kaiser and
the union appealed to the U.S. Supreme Court. Did
the affirmative action feature of the training program
violate Title VII’s prohibition of employment discrimination on the basis of race?
3. The Freedom of Access to Clinic Entrances Act (FACE),
a federal statute, provides for penalties against anyone
who “by force or threat of force or by physical obstruction . . . intentionally injures, intimidates, or interferes . . .
with any person . . . in order to intimidate such person . . . from
obtaining or providing reproductive health services.”
The Nature of Law
31
Two persons, Lynch and Moscinski, blocked access to
a clinic that offered such services. The federal government sought an injunction barring Lynch and Moscinski from impeding access to, or coming within 15 feet
of, the clinic. In defense, the defendants argued that
FACE protects the taking of innocent human life, that
FACE is therefore contrary to natural law, and that, accordingly, FACE should be declared null and void. A
federal district court issued the injunction after finding that Lynch and Moscinski had violated FACE by
making entrance to the clinic unreasonably difficult.
On appeal, the defendants maintained that the district
court erred in not recognizing their natural law argument as a defense. Were the defendants correct?
4. In August 2002, Dayle Trentadue, as the daughter
and representative of the estate of Margarette Eby,
sued various parties for their part in Eby’s 1986 murder at the home she rented in Flint, Michigan. The
murder had been unsolved from 1986 until 2002,
when DNA evidence established that Jeffrey Gorton
had committed the crime. Gorton worked for his
parents’ corporation, which serviced the sprinkler
system on the grounds surrounding the rental home
where Eby lived.
In addition to Gorton, Trentadue sued Gorton’s
parents, their corporation, the estate of the rentalhome owner, the property management company that
managed the rental home, and two employees of the
rental-home owner. The claims against the parties
other than Gorton were negligence-based wrongful
death theories. Those parties asked the court to dismiss Trentadue’s lawsuit against them, claiming the
action was barred by Michigan’s three-year statute of
limitations for wrongful death actions.
Statutes of limitations require that a plaintiff who
wishes to make a legal claim must file her lawsuit within
a designated length of time after her claim accrues. Normally a claim accrues at the time the legal wrong was
committed. If the plaintiff does not file her lawsuit within
the time specified by the applicable statute of limitations,
her claim cannot lawfully be pursued.
The defendants other than Gorton argued that
Trentadue’s case should be dismissed because her
claim accrued when Eby was killed in 1986—meaning that the 2002 filing of the lawsuit occurred long
after the three-year period had expired. Trentadue
responded that a common law rule known as the
“discovery rule” should be applied so as to suspend the running of the limitations period until
2002, when she learned the identity of Eby’s killer.
Under the discovery rule, the 2002 filing of the
32
Part One Foundations of American Law
lawsuit would have been timely because the limitations period would have been tolled, or suspended,
until the 2002 discovery that Gorton was the murderer. The Michigan Compiled Laws (MCL)—the
statute that includes the relevant three-year statute
of limitations for wrongful death claims—does
not include a tolling provision similar to the common law discovery rule for wrongful death claims,
even though it does in other areas. Nonetheless, the
statute likewise does not explicitly reject the discovery rule.
How should the court determine whether the common law discovery rule applies to Trentadue’s claims
or whether it has been displaced by the MCL’s statute
of limitations?
5. The federal Age Discrimination in Employment Act
(ADEA) makes it unlawful for employers “to fail
or refuse to hire or to discharge any individual or
otherwise discriminate against any individual with
respect to his compensation, terms, conditions, or
privileges of employment, because of such individual’s age.” The ADEA also provides that the statute’s protection against discrimination applies only
when the affected individual is at least 40 years of
age. A pre-1997 collective bargaining agreement
between the United Auto Workers (UAW) and General Dynamics Land Systems, Inc. (GDLS) called
for GDLS to furnish health benefits to retired employees who had worked for the company for a qualifying number of years. In 1997, however, the UAW
and GDLS entered into a new collective bargaining
agreement that eliminated the obligation of GDLS
to provide health benefits to employees who retired
after the effective date of the new agreement, except
for then-current workers who were at least 50 years
old at the time of the agreement. Employees in that
50-and-over category would still receive health benefits when they retired.
Dennis Cline and certain other GDLS employees
objected to the new collective bargaining agreement because they were under 50 years of age
when the agreement was adopted, and thus would
not receive health benefits when they retired. Cline
and the other objecting employees were all at least
40 years of age. In a proceeding before the Equal
Employment Opportunity Commission (EEOC),
Cline and the similarly situated employees asserted that the 1997 agreement violated the ADEA
because they were within the ADEA’s protected
class of persons (those at least 40 years of age) and
because the agreement discriminated against them
“with respect to . . . compensation, terms, conditions, or privileges of employment, because of
[their] age” (quoting the ADEA). They contended
that age discrimination occurred when their under50 age served as the basis for denying them the
more favorable treatment to be received by persons
50 years of age or older. After no settlement occurred despite the EEOC’s encouragement, Cline
and the similarly situated employees sued GDLS
for a supposed violation of the ADEA. In asserting
that they had been discriminated against in favor
of older workers, did Cline and the other plaintiffs
state a valid claim under the ADEA?
6. A federal statute known as the Freedom of Information Act (FOIA) establishes a general rule that federal
agencies must make records and documents publicly
available upon submission of a proper request. However, if those records or documents fall within certain
exemptions set forth in FOIA, they can be withheld
from public disclosure.
After the Federal Communications Commission
(FCC) conducted an investigation of AT&T regarding
AT&T’s possible overbilling of the government under
an FCC-administered program, the FCC and AT&T
entered into an agreement to settle any allegations of
wrongdoing. The agreement included a payment from
AT&T to the government of $500,000, though AT&T
admitted no wrongdoing.
Subsequently, a trade association and some of
AT&T’s competitors submitted a FOIA request to
the FCC for records related to the investigation. The
FCC withheld certain documents that contained
AT&T trade secrets, pursuant to a specific FOIA
exemption. But the FCC determined that other documents not containing trade secrets had to be disclosed despite AT&T’s contention that they should
not be disclosed under Exemption 7(C), which exempts “records or information compiled for law
enforcement purposes” if the records “could reasonably be expected to constitute unwarranted invasion of personal privacy.” The FCC determined that
Exemption 7(C) did not apply, because corporations
like AT&T, unlike humans, do not possess “personal
privacy” interests.
This dispute ultimately ended up in court, requiring judges to determine the meaning of “personal
privacy” in Exemption 7(C). How might a judge go
about determining whether Exemption 7(C) applies to
AT&T’s interests?
Chapter One
7. Many states and localities used to have so-called
Sunday Closing laws—statutes or ordinances forbidding certain business from being conducted on
Sunday. A few may still have such laws. Often,
these laws have not been obeyed or enforced. What
would an extreme legal positivist tend to think
about the duty to enforce and obey such laws? What
would a natural law exponent who strongly believes
in economic freedom tend to think about this question? What about a natural law adherent who is a
Christian religious traditionalist? What observation would almost any legal realist make about
Sunday Closing laws? With these laws looked at
from a sociological perspective, finally, what social factors help explain their original passage, their
relative lack of enforcement today, and their continued presence on the books despite their lack of
enforcement?
8. Linda Hagan and her sister Barbara Parker drank
from a bottle of Coke that they both agreed tasted
flat. Hagan then held the bottle up to a light and observed what she and Parker thought was a used condom with “oozy stringy stuff coming out of the top.”
Both women were distressed that they had consumed
some foreign material, and Hagan immediately became nauseated. The bottle was later delivered to
Coca-Cola for testing. Concerned about what they had
drunk, the women went to a health care facility the
next day and were given shots. The medical personnel
at the clinic told them that they should be tested for
HIV. Hagan and Parker were then tested and informed
that the results were negative. Six months later, both
women were again tested for HIV, and the results were
again negative.
Hagan and Parker brought a negligence action
against Coca-Cola. Coca-Cola’s beverage analyst testified at trial that he had initially thought, as Hagan
and Parker had, that the object in the bottle was a
condom; however, upon closer examination, he concluded that the object was a mold and that, to a “scientific certainty,” the item floating in the Coke bottle
was not a condom.
There is case law that lays out the so-called impact
rule in negligence claims. The rule requires that before a plaintiff may recover damages for emotional
distress, she must demonstrate that the emotional
stress suffered flowed from injuries sustained in an
impact. Nonetheless, there are a number of exceptions to the impact rule, in which a lack of physical
impact would not preclude an otherwise viable claim
The Nature of Law
33
for emotional distress. Those exceptions include bystander cases, wrongful birth cases, negligent stillbirth cases, and bad-faith claims against insurance
carriers. Other courts had found that ingestion of a
contaminated product could serve in the place of the
traditionally required impact.
Given that Hagan and Parker’s claim is in common law, how should the court go about determining
whether the impact rule applies to their case?
9. Which of the following types of law will have priority in the event that they present an unresolvable and
unavoidable conflict?
∙
A federal administrative regulation and a state
statute.
∙ A federal statute and the U.S. Constitution.
∙
A federal statute and a federal administrative
regulation.
∙
A state constitution and a treaty that has been ratified by Congress.
10. Roommates.com, LLC (“Roommates”) operated a
widely used website designed to match people renting out spare rooms with people looking for a place
to live. Before subscribers to Roommates could
search listings or post housing opportunities on the
website, they had to create profiles by answering a
series of questions. Besides requesting basic information such as name, location, and e-mail address,
Roommates required each subscriber to disclose his
or her sex and sexual orientation and whether he
or she would bring children to a household. Each
subscriber was further required to describe his or
her roommate preferences with respect to the same
three criteria (sex, sexual orientation, and whether
children would be brought to the household).
Roommates also encouraged subscribers to provide
“Additional Comments” describing themselves and
their desired roommate in an open-ended essay.
After a new subscriber completed the application,
Roommates would assemble his or her answers into
a profile page. Subscribers to Roommates were entitled to view their own profile pages and those of
others, send personal e-mail messages through the
site, and receive notices from Roommates regarding available housing opportunities matching their
preferences.
The Fair Housing Councils of the San Fernando
Valley and San Diego (“Councils”) sued Roommates, alleging that its activities violated the federal Fair Housing Act (“FHA”). The FHA prohibits
34
Part One Foundations of American Law
discrimination in the sale or rental of housing on the
basis of “race, color, religion, sex, familial status, or
national origin.” The FHA also bars
mak[ing], print[ing], or publish[ing], or caus[ing] to
be made, printed, or published, any notice, statement,
or advertisement, with respect to the sale or rental
of a dwelling that indicates any preference, limitation, or discrimination based on race, color, religion,
sex, handicap, familial status, or national origin, or an
intention to make any such preference, limitation, or
discrimination.
Roommates argued, however, that it was immune
from liability under § 230 of the federal Communications Decency Act, which provides that
“[n]o provider . . . of an interactive computer service
shall be treated as the publisher or speaker of any information provided by another information content provider.” Did § 230 protect Roommates against liability?
CHAPTER 2
THE RESOLUTION OF
PRIVATE DISPUTES
A
llnews Publishing Inc., a firm whose principal offices are located in Orlando, Florida, owns and publishes
33 newspapers. These newspapers are published in 21 different states of the United States. Among the
Allnews newspapers is the Snakebite Rattler, the lone newspaper in the city of Snakebite, New Mexico.
The Rattler is sold in print form only in New Mexico. However, many of the articles in the newspaper can be viewed
by anyone with Internet access, regardless of his or her geographic location, by going to the Allnews website.
In a recent Rattler edition, an article appeared beneath this headline: “Local Business Executive Sued for Sexual
Harassment.” The accompanying article, written by a Rattler reporter (an Allnews employee), stated that a person
named Phil Anderson was the defendant in the sexual harassment case. Besides being married, Anderson was a
well-known businessperson in the Snakebite area. He was active in his church and in community affairs in both
Snakebite (his city of primary home) and Petoskey, Michigan (where he and his wife have a summer home). A
stock photo of Anderson, which had been used in connection with previous Rattler stories mentioning him, appeared alongside the story about the sexual harassment case. Anderson, however, was not the defendant in that
case. He was named in the Rattler story because of an error by the Rattler reporter. The actual defendant in the
sexual harassment case was a local business executive with a similar name: Phil Anderer.
Anderson plans to file a defamation lawsuit against Allnews because of the above-described falsehood in the
Rattler story. He expects to seek $500,000 in damages for harm to his reputation and for other related harms. In
Chapter 6, you will learn about the substantive legal issues that will arise in Anderson’s defamation case. For now,
however, the focus is on important legal matters of a procedural nature.
Consider the following questions regarding Anderson’s case as you read this chapter:
∙∙ Where, in a geographic sense, may Anderson properly file and pursue his lawsuit against Allnews?
∙∙ Must Anderson pursue his case in a state court, or does he have the option of litigating it in federal court?
∙∙ Assuming that Anderson files his case in a state court, what strategic option may Allnews exercise if it acts
promptly?
∙∙ In the run-up to a possible trial in the case, what legal mechanisms may Anderson utilize in order to find out,
on a pretrial basis, what the Rattler reporter and other Allnews employees would say in possible testimony at
trial? Is Allnews entitled to do the same with regard to Anderson?
∙∙ If Anderson’s case goes to trial, what types of trials are possible?
∙∙ Through what legal mechanisms might a court decide the case without a trial?
∙∙ Today, many legal disputes are decided through arbitration rather than through proceedings in court. Given the
prevalence of arbitration these days, why isn’t Anderson’s case a candidate for arbitration?
36
Part One Foundations of American Law
LEARNING OBJECTIVES
LO
After studying this chapter, you should be able to:
2-1
2-2
2-3
2-4
Describe the basic structures of state court
systems and the federal court system.
Explain the difference between subject-matter
jurisdiction and in personam jurisdiction.
Identify the major legal issues courts must
resolve when deciding whether in personam
jurisdiction exists with regard to a defendant in a
civil case.
Explain what is necessary in order for a federal
court to have subject-matter jurisdiction over a
civil case.
BUSINESS LAW COURSES examine many substantive
legal rules that tell us how to behave in business and in
society. Examples include the principles of contract, tort,
and agency law, as well as those of many other legal areas
addressed later in this text. Most of these principles are applied by courts as they decide civil cases involving private
parties. This chapter lays a foundation for the text’s discussion of substantive legal rules by examining the court
systems of the United States and by outlining how civil
cases proceed from beginning to end. The chapter also
explores related subjects, including alternative dispute
resolution, a collection of processes for resolving private
disputes outside the court systems.
State Courts and Their
Jurisdiction
LO2-1
Describe the basic structures of state court systems and
the federal court system.
The United States has 52 court systems—a federal system
plus a system for each state and the District of Columbia.
This section describes the various types of state courts. It
also considers the important subject of jurisdiction, something a court must have if its decision in a case is to be
binding on the parties.
Courts of Limited Jurisdiction Minor criminal cases and civil disputes involving small amounts of
money or specialized matters frequently are decided
in courts of limited jurisdiction. Examples include traffic courts, probate courts, and small claims courts. Such
courts often handle a large number of cases. In some of
2-5
2-6
2-7
Identify the major steps in a civil lawsuit’s
progression from beginning to end.
Describe the different forms of discovery
available to parties in civil cases.
Explain the differences among the major forms
of alternative dispute resolution.
these courts, procedures may be informal, and parties
often argue their own cases without representation by attorneys. Courts of limited jurisdiction often are not courts
of record—meaning that they may not keep a transcript
of the proceedings conducted. Appeals from their decisions therefore require a new trial (a trial de novo) in a
trial court.
Trial Courts Courts of limited jurisdiction find the
relevant facts, identify the appropriate rule(s) of law, and
combine the facts and the law to reach a decision. State
trial courts do the same, but differ from inferior courts in
two key ways. First, they are not governed by the subjectmatter restrictions or the limits on civil damages or criminal penalties that govern courts of limited jurisdiction.
Cases involving significant dollar amounts or major criminal penalties usually begin, therefore, at the trial court
level. Second, trial courts are courts of record that keep
detailed records of hearings, trials, and other proceedings.
These records become important if a trial court decision
is appealed. The trial court’s fact-finding function may be
handled by the judge or by a jury. Determination of the applicable law, however, is always the judge’s responsibility.
In cases pending in trial courts, the parties nearly always
are represented by attorneys.
States usually have at least one trial court for each
county. It may be called a circuit, superior, district, county,
or common pleas court. Most state trial courts can hear a
wide range of civil and criminal cases, with little or no
subject-matter restriction. They may, however, have civil
and criminal divisions. If no court of limited jurisdiction
deals with these matters, state trial courts may also contain other divisions such as domestic relations courts or
probate courts.
Chapter Two
The Resolution of Private Disputes
Appellate Courts
State appeals (or appellate)
courts generally decide only legal questions. Instead of
receiving new evidence or otherwise retrying the case, appellate courts review the record of the trial court proceedings. Although appellate courts correct legal errors made
by the trial judge, they usually accept the trial court’s
findings of fact. Appellate courts may also hear appeals
from state administrative agency decisions. Some states
have only one appeals court (usually called the Supreme
Court), but most also have an intermediate appellate court.
The U.S. Supreme Court sometimes hears appeals from
decisions of the state’s highest court.
Jurisdiction and Venue
LO2-2
Explain the difference between subject-matter
jurisdiction and in personam jurisdiction.
The party who sues in a civil case (the plaintiff) cannot sue the defendant (the party being sued) in whatever
court the plaintiff happens to prefer. Instead, the chosen
court—whether a state court or a federal court—must
have jurisdiction over the case. Jurisdiction is a court’s
power to hear a case and to issue a decision binding on
the parties. In order to render a binding decision in a
civil case, a court must have not only subject-matter
jurisdiction but also in personam jurisdiction or in rem
jurisdiction. Even if a court has jurisdiction, applicable
venue requirements must also be satisfied in order for
the case to proceed in that court.
Subject-Matter Jurisdiction Subject-matter jurisdiction
is a court’s power to decide the type of dispute involved in
the case. Criminal courts, for example, cannot hear civil
matters. Similarly, a $500,000 claim for breach of contract
cannot be pursued in a small claims court.
In Personam Jurisdiction
Identify the major legal issues courts must resolve when
LO2-3 deciding whether in personam jurisdiction exists with
regard to a defendant in a civil case.
Even a court with subject-matter jurisdiction cannot decide a civil case unless it also has either in personam
jurisdiction or in rem jurisdiction. In personam jurisdiction is based on the residence, location, or activities of the
defendant. A state court has in personam jurisdiction over
defendants who are citizens or residents of the state (even
if situated out-of-state), who are within the state’s borders
37
when process is served on them (even if nonresidents),1
or who consent to the court’s authority (for instance, by
entering the state to defend against the plaintiff’s claim).2
The same principle governs federal courts’ in personam
jurisdiction over defendants.
In addition, most states have enacted “long-arm” statutes that are designed to give their courts in personam
jurisdiction over out-of-state defendants in certain instances. Under these statutes, nonresident individuals
and businesses may become subject to the jurisdiction
of the state’s courts by, for example, doing business within
the state, contracting to supply goods or services
within the state, committing a tort (a civil wrong) within
the state, or committing a tort outside the state if it produces harm within the state. (Some long-arm statutes are
phrased with even broader application in mind, so that
in personam jurisdiction may extend as far as the U.S.
Constitution’s Due Process clauses permit.) Federal law,
moreover, permits federal courts to rely on state long-arm
statutes as a basis for obtaining in personam jurisdiction
over nonresident defendants.
Even if a long-arm statute applies, however, a state or
federal court’s assertion of in personam jurisdiction over
a nonresident defendant must also meet due process standards. In International Shoe Co. v. Washington (1945),
the U.S. Supreme Court held that in order for due process
requirements to be satisfied when a state or federal court
asserts in personam jurisdiction over a nonresident defendant, the defendant must be shown to have had the requisite “minimum contacts” with the forum state or federal
district. These contacts must be significant enough that
it would not offend “traditional notions of fair play and
substantial justice” to require the nonresident defendant to
defend the case in the forum state or federal district.
After International Shoe, in personam jurisdiction
cases involving nonresident defendants became divided
into two categories: general jurisdiction; and specific jurisdiction. In Abdouch v. Lopez, which follows, the Supreme Court of Nebraska explains each of these types of
in personam jurisdiction and goes on to address the specific jurisdiction arguments made in the case. In Daimler
AG v. Bauman, which serves as a basis of the Global
Business Environment box that appears later in the chapter,
the U.S. Supreme Court decides whether general jurisdiction exists regarding a German firm sued in the United
States over actions that occurred outside the United States.
Service of process is discussed later in the chapter.
In many states, however, out-of-state defendants may make a special
appearance to challenge the court’s jurisdiction without consenting to
the court’s authority.
1
2
38
Part One Foundations of American Law
Abdouch v. Lopez 829 N.W.2d 662 (Neb. Sup. Ct. 2013)
Helen Abdouch, an Omaha, Nebraska resident, served as executive secretary of the Nebraska presidential campaign of John F.
Kennedy in 1960. Ken Lopez, a Massachusetts resident, and his Massachusetts-based company, Ken Lopez Bookseller (KLB),
are engaged in the rare book business. In 1963, Abdouch received a copy of a book titled Revolutionary Road. Its author,
Richard Yates, inscribed the copy with a note to Abdouch. The inscribed copy was later stolen from Abdouch. In 2009, Lopez
and KLB bought the inscribed copy from a seller in Georgia. They sold it that same year to a customer from a state other than
Nebraska. In 2011, Abdouch learned that Lopez had used the inscription and references to her in an advertisement on KLB’s
website. The advertisement, which appeared on the website for more than three years after Lopez and KLB sold the inscribed
copy, contained a picture of the inscription, the word “SOLD,” and this statement:
This copy is inscribed by Yates: ‘For Helen Abdouch—with admiration and best wishes. Dick Yates. 8/19/63.’ Yates had
worked as a speech writer for Robert Kennedy when Kennedy served as Attorney General; Abdouch was the executive
secretary of the Nebraska (John F.) Kennedy organization when Robert Kennedy was campaign manager. . . . A scarce
book, and it is extremely uncommon to find this advance issue of it signed. Given the date of the inscription—that is, during
JFK’s Presidency—and the connection between writer and recipient, it’s reasonable to suppose this was an author’s copy,
presented to Abdouch by Yates.
Because Lopez and KLB did not obtain her permission before mentioning her and using the inscription in the advertisement,
Abdouch filed an invasion-of-privacy lawsuit against Lopez and KLB in a Nebraska state district court. Contending that the Nebraska court lacked in personam jurisdiction, Lopez and KLB filed a motion to dismiss the case. The state district court granted
the motion. Abdouch then appealed to the Supreme Court of Nebraska. (Further facts bearing upon the in personam jurisdiction
issue appear in the following edited version of the Supreme Court’s opinion.)
McCormack, Judge
Abdouch argues that the district court erred in finding that the
State lacked in personam jurisdiction [, often referred to here
as personal jurisdiction,] over Lopez and KLB. Abdouch argues
that [the defendants’] active website deliberately targeted her
with tortious conduct. She alleges these contacts are sufficient to
create the necessary minimum contacts for specific jurisdiction.
Personal jurisdiction is the power of a tribunal to subject and
bind a particular entity to its decisions. Before a court can exercise personal jurisdiction over a nonresident defendant, the court
must determine whether the long-arm statute is satisfied and,
if the long-arm statute is satisfied, whether minimum contacts
exist between the defendant and the forum state [for due process
purposes]. Nebraska’s long-arm statute provides: “A court may
exercise personal jurisdiction over a person . . . [w]ho has any
other contact with or maintains any other relation to this state
to afford a basis for the exercise of personal jurisdiction consistent with the Constitution of the United States.” Nebraska’s
long-arm statute, therefore, extends Nebraska’s jurisdiction over
nonresidents having any contact with or maintaining any relation
to this state as far as the U.S. Constitution permits. [T]he issue is
whether Lopez and KLB had sufficient contacts with Nebraska
so that the exercise of personal jurisdiction would not offend federal principles of due process.
To subject an out-of-state defendant to personal jurisdiction
in a forum court, due process requires that the defendant have
minimum contacts with the forum state so as not to offend traditional notions of fair play and substantial justice. [See International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945).] The
benchmark . . . is whether the defendant’s minimum contacts
with the forum state are such that the defendant should reasonably anticipate being haled into court there. Whether a forum
state court has personal jurisdiction over a nonresident defendant
depends on whether the defendant’s actions created substantial
connections with the forum state, resulting in the defendant’s purposeful availment of the forum state’s benefits and protections.
In analyzing personal jurisdiction, we consider the quality
and type of the defendant’s activities in deciding whether the
defendant has the necessary minimum contacts with the forum
state. A court exercises two types of personal jurisdiction depending upon the facts and circumstances of the case: general
personal jurisdiction or specific personal jurisdiction. In the exercise of general personal jurisdiction, the plaintiff’s claim does
not have to arise directly out of the defendant’s contacts with the
forum state if the defendant has engaged in continuous and systematic general business contacts with the forum state. But if the
defendant’s contacts are neither substantial nor continuous and
systematic, as Abdouch concedes is the case here, and instead
the cause of action arises out of or is related to the defendant’s
contacts with the forum, a court may assert specific jurisdiction
over the defendant, depending upon the nature and quality of
such contact.
Chapter Two
The Resolution of Private Disputes
The Internet and its interaction with personal jurisdiction over a nonresident is an issue of first impression for this
court. [However,] we take note that technological advances do
not render impotent our longstanding principles. With this in
mind, [most federal courts of appeal have] adopted the analytical framework set forth in Zippo Manufacturing Co. v. Zippo
Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997), for Internet jurisdiction cases. In that case, Zippo Manufacturing filed a
complaint in Pennsylvania against nonresident Zippo Dot Com,
Inc., alleging causes of action under the federal Trademark Act
of 1946. Zippo Dot Com’s contact with Pennsylvania consisted
of over 3,000 Pennsylvania residents subscribing to its website.
The court in Zippo Manufacturing famously created a “sliding
scale” test that considers a website’s interactivity and the nature
of the commercial activities conducted over the Internet to determine whether the courts have personal jurisdiction over nonresident defendants. The court explained the sliding scale as follows:
At one end of the spectrum are situations where a defendant
clearly does business over the Internet. If the defendant enters into contracts with residents of a foreign jurisdiction that
involve the knowing and repeated transmission of computer
files over the Internet, personal jurisdiction is proper. . . . At
the opposite end are situations where a defendant has simply
posted information on an Internet website which is accessible
to users in foreign jurisdictions. A passive 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. . . . The middle ground is occupied by interactive websites where a user can exchange information with the
host computer. In these cases, the exercise of jurisdiction is
determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on
the website.
The court in Zippo Manufacturing held that Pennsylvania
had personal jurisdiction over Zippo Dot Com. In doing so, the
court . . . found that the Zippo Dot Com website was a highly interactive commercial site [and] that the trademark infringement
causes of action were related to the business contacts with customers in Pennsylvania.
[Although Zippo Manufacturing’s test] is widely recognized
and accepted, most circuits use it only as a starting point. As
the Second Circuit noted, “it does not amount to a separate
framework for analyzing Internet-based jurisdiction”; instead,
“traditional statutory and constitutional principles remain the
touchstone of the inquiry.” [Case citation omitted.]
The Seventh Circuit has noted that “[c]ourts should be careful in resolving questions about personal jurisdiction involving
online contacts to ensure that a defendant is not haled into court
simply because the defendant owns or operates a website that
is accessible in the forum state, even if that site is interactive.”
39
[Citation omitted.] Many courts have held that even if the defendant operates a highly interactive website which is accessible
from, but does not target, the forum state, then the defendant
may not be haled into court in that state without offending the
Constitution.
Our precedent states that for there to be specific personal jurisdiction, the cause of action must arise out of or be related to
the defendant’s contacts with the forum state. This is consistent
with the U.S. Supreme Court’s precedent which has stated “mere
purchases, even if occurring at regular intervals, are not enough
to warrant a State’s assertion of in personam jurisdiction over a
nonresident corporation in a cause of action not related to those
purchase transactions.” Helicopteros Nacionales de Colombia v.
Hall, 466 U.S. 408 (1984).
In the case at hand, it is evident that the KLB website is interactive under the Zippo Manufacturing test. In his affidavit, Lopez
admits that customers can browse and purchase books from the
online inventory. Lopez admits that he has two customers in Nebraska who are on the mailing list for KLB’s catalogs. He admits that from 2009 through 2011, . . . $614.87 in sales from
the website was made to Nebraska residents out of an estimated
$3.9 million in total sales. But, beyond the minimal website sales
to Nebraska residents and mailing catalogs to two Nebraska residents [who requested them], Lopez’s and KLB’s contacts with
Nebraska are nonexistent. Lopez and KLB do not own, lease,
or rent land in Nebraska. They have never advertised directly in
Nebraska, participated in bookfairs in Nebraska [despite having
participated in many bookfairs in other states], or attended meetings in Nebraska, and neither has paid sales tax in Nebraska.
Furthermore, the Seventh Circuit has recently stated that when
“the plaintiff’s claims are for intentional torts, the inquiry focuses
on whether the conduct underlying the claims was purposely
directed at the forum state.” [Citation omitted.] The reason for
requiring purposeful direction is to “ensure that an out-of-state
defendant is not bound to appear to account for merely ‘random,
fortuitous, or attenuated contacts’ with the forum state.” Burger
King Corp. v. Rudzewicz, 471 U.S. 462 (1985). Here, Abdouch’s
cause of action is an intentional tort based on Nebraska’s privacy statute. There is no evidence that Lopez and KLB purposefully directed the advertisement at Nebraska. Further, there is
no evidence that Lopez and KLB intended to invade Abdouch’s
privacy in Nebraska. Rather, the limited Internet sales appear to
be random, fortuitous, and attenuated contacts with Nebraska.
Therefore, although KLB’s website is highly interactive, all of
the contacts created by the site with Nebraska are unrelated to
Abdouch’s cause of action.
Abdouch argues that the effects test formulated by the U.S.
Supreme Court in Calder v. Jones, 465 U.S. 783 (1984), creates
personal jurisdiction over Lopez and KLB. In Calder, two Florida
residents participated in the publication of [a National Enquirer]
40
Part One Foundations of American Law
article about a California resident who brought a libel action in
California against the Florida residents. Both defendants asserted
that as Florida residents, they were not subject to the jurisdiction
of the California court. The Supreme Court rejected the defendants’ argument and noted that the defendants [committed]
intentional, and allegedly tortious, actions [that] were expressly aimed at California. [They] wrote and . . . edited an
article that they knew would have a potentially devastating
impact upon [the plaintiff]. And they knew that the brunt of
that injury would be felt by [her] in the State in which she
lives and works and in which the National Enquirer has its
largest circulation. Under the circumstances, [the defendants]
must reasonably anticipate being haled into court there to answer for the truth of the statements made in their article.
Calder, 465 U.S. at 789–90.
In coming to its holding, the U.S. Supreme Court created a
test, now known as the Calder effects test, which has been explained by the Eighth Circuit: “[A] defendant’s tortious acts can
serve as a source of personal jurisdiction only where the plaintiff
makes a prima facie showing that the defendant’s acts (1) were intentional, (2) were uniquely or expressly aimed at the forum state,
and (3) caused harm, the brunt of which was suffered—and which
the defendant knew was likely to be suffered—[in the forum
state].” Johnson v. Arden, 614 F.3d 785 (8th Cir. 2010). In the
context of Internet intentional tort cases, the federal circuit courts
have rejected the argument that [merely] posting defamatory or
invasive material to the World Wide Web [is enough to satisfy
the Calder effects test and give rise to in personam jurisdiction].
[Here,] Lopez’s and KLB’s placement of the advertisement online was directed at the entire world, without expressly
aiming the posting at Nebraska. Abdouch pleaded in her complaint that the advertisement was “broadcast or sent out over
the World Wide Web,” but Abdouch failed to plead facts that
demonstrate that Nebraska residents were targeted with the
advertisement. Although the advertisement does mention that
“Abdouch was the executive secretary of the Nebraska (John F.)
Kennedy organization,” the advertisement does not expressly
direct its offer of sale to Nebraska. The mention of Nebraska
here is incidental and was not included for the purposes of having the consequences felt in Nebraska. Lopez did not know that
Abdouch was a resident of Nebraska [until he learned that fact
in 2011]. He [initially] assumed that she had passed away and
thus had no way of knowing that the brunt of harm would be
suffered in Nebraska.
We conclude that Abdouch’s complaint fails to plead
facts to demonstrate that Lopez and KLB have sufficient
minimum contacts with Nebraska. Although the website
used to post the advertisement is interactive, the contacts
created by the website are unrelated to Abdouch’s cause of
action. Furthermore, . . . the pleadings fail to establish that
Lopez and KLB expressly aimed their tortious conduct at
Nebraska. For these reasons, Lopez and KLB could not have
anticipated being haled into a Nebraska court for their online
advertisement.
Dismissal for lack of in personam jurisdiction affirmed.
The Global Business Environment
Daimler AG v. Bauman 134 S. Ct. 746 (U.S. Sup. Ct. 2014)
In 2004, 22 residents of Argentina filed suit in the
U.S. District Court for the Northern District of
California against (Daimler), a German company that manufactures Mercedes-Benz vehicles in Germany. The plaintiffs
contended that during Argentina’s 1976–1983 “Dirty War,”
Daimler’s subsidiary, Mercedes-Benz Argentina (MB Argentina), collaborated with state security forces to kidnap, detain,
torture, and kill certain MB Argentina workers. These workers
included the plaintiffs and deceased persons closely related to
the plaintiffs. No part of MB Argentina’s alleged collaboration
with Argentinian authorities took place in California or anywhere else in the United States.
The plaintiffs maintained that Daimler should be held vicariously liable for MB Argentina’s actions. They brought
claims under U.S. law as well as claims for wrongful death and
intentional infliction of emotional distress under the laws of
California and Argentina. Relying on a California long-arm
statute that applies to the full extent of what constitutional notions of due process will permit, the plaintiffs contended that in
personam jurisdiction over Daimler should be predicated on the
California contacts of Mercedes-Benz USA, LLC (MBUSA),
another Daimler subsidiary. MBUSA, which is incorporated in
Delaware and has its principal place of business in New Jersey, distributes Daimler-manufactured vehicles to dealerships
in California and throughout the United States. MBUSA has
multiple California-based facilities and is the largest supplier
of luxury vehicles to the California market.
Daimler sought dismissal of the case on the ground that the
court lacked in personam jurisdiction over it. A federal district
court granted Daimler’s request. The U.S. Court of Appeals for
Chapter Two
The Resolution of Private Disputes
the Ninth Circuit reversed, concluding that in personam jurisdiction (personal jurisdiction) existed. The U.S. Supreme Court
granted Daimler’s petition for a writ of certiorari.
Writing for the Supreme Court in Daimler AG v. Bauman,
Justice Ginsburg noted the landmark decision in International
Shoe Co. v. Washington, 326 U.S. 310 (1945). That decision’s
“minimum contacts” doctrine and “fair play and substantial
justice” test continue to guide the due process inquiry when in
personam jurisdiction over a nonresident defendant is at issue.
(See the discussion of International Shoe earlier in the chapter.) Justice Ginsburg’s Daimler majority opinion also outlined
the differences between general jurisdiction and specific jurisdiction. (For an explanation of these two types of in personam
jurisdiction, see Abdouch v. Lopez, a case included earlier in
the chapter.) The following excerpts from Daimler focus on the
question of whether general jurisdiction existed.
Ginsburg, Justice This case concerns the authority of a court
in the United States to entertain a claim brought by foreign
plaintiffs against a foreign defendant based on events occurring entirely outside the United States. The question presented
is whether the Due Process Clause of the Fourteenth Amendment precludes the district court from exercising jurisdiction
over Daimler, given the absence of any California connection to the atrocities, perpetrators, or victims described in the
complaint.
Plaintiffs invoked the court’s general or all-purpose jurisdiction. California, they urge, is a place where Daimler may
be sued on any and all claims against it, wherever in the world
the claims may arise. For example, as plaintiffs’ counsel affirmed, under the proffered jurisdictional theory, if a Daimlermanufactured vehicle overturned in Poland, injuring a Polish
driver and passenger, the injured parties could maintain a design defect suit in California. [We must decide whether such]
exercises of personal jurisdiction . . . are [permitted or, instead,]
barred by due process constraints on the assertion of adjudicatory authority.
In Goodyear Dunlop Tires Operations, S. A. v. Brown, 131
S. Ct. 2846 (2011), we addressed the distinction between general or all-purpose jurisdiction, and specific or conduct-linked
jurisdiction. As to the former, we held that a court may assert
jurisdiction over a foreign corporation “to hear any and all
claims against [it]” only when the corporation’s affiliations
with the State in which suit is brought are so constant and pervasive “as to render [it] essentially at home in the forum State.”
Id. at 2851.
Since [the 1945 decision in] International Shoe, “specific
jurisdiction has become the centerpiece of modern jurisdiction
theory, while general jurisdiction [has played] a reduced role.”
Goodyear, 131 S. Ct. at 2854. Our post-International Shoe
opinions on general jurisdiction . . . are few. [In] Perkins v.
Benguet Consolidated Mining Co., 342 U.S. 437 (1952), an
Ohio resident sued Benguet [in an Ohio court] on a claim that
neither arose in Ohio nor related to the corporation’s activities
in that State. [Benguet] was a company incorporated under
the laws of the Philippines, where it operated gold and silver
mines. [However,] Benguet ceased its mining operations during
the Japanese occupation of the Philippines in World War II; its
president moved to Ohio, where he kept an office, maintained
the company’s files, and oversaw the company’s activities. We
held that [because Ohio was the corporation’s principal, if temporary, place of business,] the Ohio courts could exercise general jurisdiction over Benguet without offending due process.
Id. at 448.
The next case on point, Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408 (1984), arose from a helicopter crash in Peru. Four U.S. citizens perished in that accident;
their survivors and representatives brought suit in Texas state
court against the helicopter’s owner and operator, a Colombian
corporation. That company’s contacts with Texas were confined to “sending its chief executive officer to Houston for a
contract-negotiation session; accepting into its New York bank
account checks drawn on a Houston bank; purchasing helicopters, equipment, and training services from a Texas-based helicopter company for substantial sums; and sending personnel
to Texas for training.” Id. at 416. Notably, those contacts bore
no apparent relationship to the accident that gave rise to the
suit. We held that the company’s Texas connections did not resemble the “continuous and systematic general business contacts . . . found to exist in Perkins.” Id. “[M]ere purchases, even
if occurring at regular intervals,” we clarified, “are not enough
to warrant a State’s assertion of in personam jurisdiction over a
nonresident corporation in a cause of action not related to those
purchase transactions.” Id. at 418.
Most recently, in Goodyear, we answered this question:
“Are foreign subsidiaries of a United States parent corporation
amenable to suit in state court on claims unrelated to any activity of the subsidiaries in the forum State?” 131 S. Ct. at 2850.
That case arose from a bus accident outside Paris that killed
two boys from North Carolina. The boys’ parents brought a
wrongful-death suit in North Carolina state court alleging that
the bus’s tire was defectively manufactured. The complaint
named as defendants not only Goodyear, an Ohio corporation,
but also Goodyear’s Turkish, French, and Luxembourgian subsidiaries. Those foreign subsidiaries, which manufactured tires
for sale in Europe and Asia, lacked any affiliation with North
Carolina. A small percentage of tires manufactured by the foreign subsidiaries were distributed in North Carolina, however,
and on that ground, the North Carolina Court of Appeals held
the subsidiaries amenable to the general jurisdiction of North
Carolina courts.
We reversed, observing that the North Carolina court’s
analysis “elided the essential difference between case-specific
and all-purpose (general) jurisdiction.” Id. at 2846. Although
the placement of a product into the stream of commerce “may
bolster an affiliation germane to specific jurisdiction,” we explained, such contacts “do not warrant a determination that,
41
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Part One Foundations of American Law
based on those ties, the forum has general jurisdiction over
a defendant.” Id. As International Shoe itself teaches, a corporation’s “continuous activity of some sorts within a state
is not enough to support the demand that the corporation be
amenable to suits unrelated to that activity.” 326 U.S. at 318.
Because Goodyear’s foreign subsidiaries were “in no sense at
home in North Carolina,” we held, those subsidiaries could not
be required to submit to the general jurisdiction of that State’s
courts. 131 S.Ct. at 2854.
With this background, we turn directly to the question
whether Daimler’s affiliations with California are sufficient
to subject it to the general (all-purpose) personal jurisdiction
of that State’s courts. In sustaining the exercise of general jurisdiction over Daimler, the Ninth Circuit relied on an agency
theory, determining that MBUSA acted as Daimler’s agent for
jurisdictional purposes and then attributing MBUSA’s California contacts to Daimler. This Court has not yet addressed
whether a foreign corporation may be subjected to a court’s
general jurisdiction based on the contacts of its in-state subsidiary. But we need not pass judgment on invocation of an agency
theory in the context of general jurisdiction, for in no event can
the appeals court’s analysis be sustained.
The Ninth Circuit’s agency finding rested primarily on its
observation that MBUSA’s services were important to Daimler,
as gauged by Daimler’s hypothetical readiness to perform those
services itself if MBUSA did not exist. Formulated this way,
the inquiry into importance stacks the deck, for it will always
yield a pro-jurisdiction answer: “Anything a corporation does
through an independent contractor, subsidiary, or distributor is
presumably something that the corporation would do by other
means if the independent contractor, subsidiary, or distributor
did not exist.” [Citation omitted.] The Ninth Circuit’s agency
theory thus appears to subject foreign corporations to general
jurisdiction whenever they have an in-state subsidiary or affiliate, an outcome that would sweep beyond even the sprawling
view of general jurisdiction we rejected in Goodyear.
Goodyear made clear that only a limited set of affiliations with a forum will render a defendant amenable to allpurpose jurisdiction there. With respect to a corporation, the
place of incorporation and principal place of business are
paradigm bases for general jurisdiction. Those affiliations
have the virtue of being unique—that is, each ordinarily
indicates only one place—as well as easily ascertainable.
Cf. Hertz Corp. v. Friend, 559 U.S. 77 (2010). These bases
afford plaintiffs recourse to at least one clear and certain
forum in which a corporate defendant may be sued on any
and all claims.
Goodyear did not hold that a corporation may be subject to
general jurisdiction only in a forum where it is incorporated or
has its principal place of business; it simply typed those places
paradigm all-purpose forums. Plaintiffs would have us look beyond the exemplar bases Goodyear identified, and approve the
exercise of general jurisdiction in every State in which a corporation “engages in a substantial, continuous, and systematic
course of business” [quoting the plaintiffs’ brief]. That formulation, we hold, is unacceptably grasping.
[The relevant] inquiry under [International Shoe and]
Goodyear is not whether a foreign corporation’s in-forum contacts can be said to be in some sense “continuous and systematic,” it is whether that corporation’s “affiliations with the State
are so continuous and systematic as to render [it] essentially at
home in the forum State.” Goodyear, 131 S. Ct. at 2851. Here,
neither Daimler nor MBUSA is incorporated in California, nor
does either entity have its principal place of business there. If
Daimler’s California activities sufficed to allow adjudication of
this Argentina-rooted case in California, the same global reach
would presumably be available in every other State in which
MBUSA’s sales are sizable. Such exorbitant exercises of allpurpose jurisdiction would scarcely permit out-of-state defendants “to structure their primary conduct with some minimum
assurance as to where that conduct will and will not render
them liable to suit.” [Citation omitted.]
It was therefore error for the Ninth Circuit to conclude that
Daimler, even with MBUSA’s contacts attributed to it, was at
home in California, and hence subject to suit there on claims
by foreign plaintiffs having nothing to do with anything that
occurred or had its principal impact in California.
Ninth Circuit decision reversed; Daimler held not subject to
court’s in personam jurisdiction.
In Rem Jurisdiction In rem jurisdiction is based on the
presence of property within the state. It empowers state
courts to determine rights in that property even if the persons
whose rights are affected are outside the state’s in personam
jurisdiction. For example, a state court’s decision regarding
title to land within the state is said to bind the world.3
Venue Even if a court has jurisdiction, it may be unable
to decide the case because venue requirements have not
been met. Venue questions arise only after jurisdiction
is established or assumed. In general, a court has venue
if it is a territorially fair and convenient forum in which
to hear the case. Venue requirements applicable to state
Another form of jurisdiction, quasi in rem jurisdiction or attachment
jurisdiction, also is based on the presence of property within the state. Unlike cases based on in rem jurisdiction, cases based on quasi in rem jurisdiction do not necessarily determine rights in the property itself. Instead,
the property is regarded as an extension of the out-of-state defendant—an
extension that sometimes enables the court to decide claims unrelated to
the property. For example, a plaintiff might attach the defendant’s bank
account in the state where the bank is located, sue the defendant on a tort
or contract claim unrelated to the bank account, and recover the amount of
the judgment from the account if the suit is successful.
3
Chapter Two
The Resolution of Private Disputes
courts typically are set by state statutes, which normally
determine the county in which a case must be brought.
For instance, the statute might say that a case concerning
land must be filed in the county where the land is located,
and that other suits must be brought in the county where
the defendant resides or is doing business. If justice so requires, the defendant may be able to obtain a change of
venue. This can occur when, for example, a fair trial would
be impossible within a particular county.
Role of Forum Selection Clauses Contracts sometimes contain a clause reciting that disputes between the
parties regarding matters connected with the contract
must be litigated in the courts of a particular state. Such
a provision is known as a forum selection clause. Depending on its wording, a forum selection clause may
have the effect of addressing both jurisdiction and venue
issues. Although forum selection clauses may appear in
agreements whose terms have been hammered out by
the parties after extensive negotiation, they fairly often
are found in form agreements whose terms were not the
product of actual discussion or give-and-take. For example, an Internet access provider (IAP) may include a
forum selection clause in a so-called “clickwrap” document that sets forth the terms of its Internet-related services—terms to which the IAP’s subscribers are deemed
to have agreed by virtue of utilizing the IAP’s services.
Forum selection clauses, whether expressly bargained
for or included in a clickwrap agreement, are generally
enforced by courts unless they are shown to be unreasonable in a given set of circumstances. Assume, for instance, that the IAP’s terms of services document calls
for the courts of Virginia to have “exclusive jurisdiction”
over its subscribers’ disputes with the company, but that
a subscriber sues the IAP in a Pennsylvania court. Unless
the subscriber performs the difficult task of demonstrating that application of the clickwrap agreement’s forum
selection clause would be unreasonable, the Pennsylvania court will be likely to dismiss the case and to hold
that if the subscriber wishes to litigate the claim, he or
she must sue in an appropriate Virginia court.
Federal Courts and Their
Jurisdiction
Federal District Courts
LO2-1
Describe the basic structures of state court systems and
the federal court system.
43
In the federal system, lawsuits usually begin in the federal
district courts. As do state trial courts, the federal district
courts determine both the facts and the law. The fact-finding function may be entrusted to either the judge or a jury,
but determining the applicable law is the judge’s responsibility. Each state is designated as a separate district for
purposes of the federal court system. Each district has at
least one district court, and each district court has at least
one judge.
District Court Jurisdiction
LO2-4
Explain what is necessary in order for a federal court to
have subject-matter jurisdiction over a civil case.
There are various bases of federal district court civil
jurisdiction. The two most important are diversity
jurisdiction and federal question jurisdiction. One traditional justification for diversity jurisdiction is that it
may help protect out-of-state defendants from potentially biased state courts. Diversity jurisdiction exists
when (1) the case is between citizens of different states
and (2) the amount in controversy exceeds $75,000. Diversity jurisdiction also exists in certain cases between
citizens of a state and citizens or governments of foreign
nations, if the amount in controversy exceeds $75,000.
Under diversity jurisdiction, a corporation is a citizen
of both the state where it has been incorporated and the
state where it has its principal place of business. For an
example of diversity jurisdiction and an explanation of
how a corporation’s principal place of business is to be
determined for diversity jurisdiction purposes, see the
U.S. Supreme Court’s Hertz decision, which follows
shortly.
Federal question jurisdiction exists when the case
arises under the Constitution, laws, or treaties of the
United States. The “arises under” requirement normally
is met when a right created by federal law is a basic part
of the plaintiff’s case. There is no amount-in-controversy
requirement for federal question jurisdiction.
Diversity jurisdiction and federal question jurisdiction
are forms of subject-matter jurisdiction. Even if one of the
two forms exists, a federal district court must also have in
personam jurisdiction in order to render a decision that is
binding on the parties. As indicated earlier in the chapter, the analysis of in personam jurisdiction issues in the
federal court system is essentially the same as in the state
court systems. Further limiting the plaintiff’s choice of federal district courts are the federal system’s complex venue
requirements, which are beyond the scope of this text.
44
Part One Foundations of American Law
Concurrent Jurisdiction and Removal The federal district courts have exclusive jurisdiction over some matters.
Patent cases, for example, must be litigated in the federal
system. Often, however, federal district courts have concurrent jurisdiction with state courts—meaning that both
state and federal courts have jurisdiction over the case.
For example, a plaintiff might assert state court in personam jurisdiction over an out-of-state defendant or might
sue in a federal district court under that court’s diversity
Hertz Corp. v. Friend jurisdiction. A state court, moreover, may sometimes decide cases involving federal questions. Where concurrent
jurisdiction exists and the plaintiff opts for a state court,
the defendant has the option to remove the case to an appropriate federal district court, assuming the defendant
acts promptly. The Hertz decision, which follows, provides an example of a defendant’s ability to have a case
removed from state court to federal court in an instance of
concurrent jurisdiction.
559 U.S. 77 (U.S. Sup. Ct. 2010)
Alleging violations of California’s wage and hour laws, California citizens Melinda Friend and John Nhieu sued Hertz Corporation
in a California state court. Hertz filed a notice seeking removal of the case to a federal court on the basis of diversity-of-citizenship
jurisdiction. The relevant federal statute provides that a federal court possesses diversity jurisdiction if the plaintiff and defendant
are citizens of different states and the amount in controversy exceeds $75,000. The statute further provides that “a corporation shall
be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business.”
In seeking removal, Hertz argued that diversity jurisdiction was appropriate because the plaintiffs and the defendant were
citizens of different states and more than $75,000 was in controversy. The plaintiffs contended, however, that Hertz was a California citizen (just as they were) and that the case should therefore remain in state court. Hertz submitted a declaration meant to
demonstrate that its “principal place of business” was in New Jersey rather than in California. Besides stressing that Hertz was
a national operation with car rental locations in 44 states, the declaration recited a series of statistics indicating that California
accounted for approximately 20 percent of Hertz’s rental locations, full-time employees, annual revenue, and annual car rental
transactions. The declaration also listed Park Ridge, New Jersey, as the location of Hertz’s corporate headquarters and stated
that Hertz’s core executive and administrative functions are conducted there.
In deciding whether Hertz was a California citizen for purposes of the diversity jurisdiction statute, the U.S. District Court
for the Northern District of California applied Ninth Circuit Court of Appeals precedent instructing courts to identify a corporation’s principal place of business by first determining the amount of a corporation’s business activity state by state. Then,
if the amount of activity was significantly larger or substantially predominated in one state, that state would be considered the
corporation’s principal place of business. Applying the Ninth Circuit’s test to the relevant facts, the federal district court reasoned that the extent of Hertz’s business activities in California, as compared with its activities in other states, made California
Hertz’s principal place of business. Because it concluded that Hertz was a California citizen and that diversity jurisdiction did
not exist, the district ordered that the case be remanded to state court. Hertz appealed this order to the Ninth Circuit Court of
Appeals, which affirmed. The U.S. Supreme Court agreed to decide the case at Hertz’s request.
Breyer, Justice
The federal diversity jurisdiction statute provides that “a corporation shall be deemed to be a citizen of any State by which it
has been incorporated and of the State where it has its principal
place of business.” We seek here to resolve different interpretations that the [federal courts of appeal] have given this phrase.
In doing so, we place primary weight upon the need for judicial
administration of a jurisdictional statute to remain as simple as
possible.
The phrase “principal place of business” has proved . . . difficult to apply. [C]ourts were . . . uncertain as to where to look
to determine a corporation’s “principal place of business” for diversity purposes. If a corporation’s headquarters and executive
offices were in the same state in which it did most of its business, the test seemed straightforward. The “principal place of
business” was located in that state. But suppose those corporate
headquarters, including executive offices, are in one state, while
the corporation’s plants or other centers of business activity are
located in other states? In 1959 a distinguished federal district
judge, Edward Weinfeld, answer[ed] this question in part:
Where a corporation is engaged in far-flung and varied activities which are carried on in different states, its principal
place of business is the nerve center from which it radiates
out to its constituent parts and from which its officers direct,
control and coordinate all activities without regard to locale,
in the furtherance of the corporate objective. The test . . . is
Chapter Two
The Resolution of Private Disputes
that place where the corporation has an office from which its
business was directed and controlled—the place where all of
its business was under the supreme direction and control of
its officers.
Scot Typewriter Co. v. Underwood Corp., 170 F. Supp. 862, 865
(S.D.N.Y. 1959).
Numerous [circuit courts of appeal] have since followed this
rule, applying the “nerve center” test for corporations with “farflung” business activities. Scot’s analysis, however, did not go
far enough. For it did not answer what courts should do when the
operations of the corporation are not “far-flung” but rather limited to only a few states. When faced with this question, various
courts have focused more heavily on where a corporation’s actual
business activities are located.
Perhaps because corporations come in many different forms,
involve many different kinds of business activities, and locate
offices and plants for different reasons in different ways in different regions, a general “business activities” approach has proved
unusually difficult to apply. Courts must decide which factors are
more important than others: for example, plant location, sales or
servicing centers, transactions, payrolls, or revenue generation.
The number of factors grew as courts explicitly combined aspects of the “nerve center” and “business activity” tests to look
to a corporation’s “total activities,” sometimes to try to determine what treatises have described as the corporation’s “center
of gravity.” Not surprisingly, different circuit courts of appeal
(and sometimes different courts within a single circuit) have
applied these highly general multifactor tests in different ways.
This complexity . . . is at war with administrative simplicity. And
it has failed to achieve a nationally uniform interpretation of federal law, an unfortunate consequence in a federal legal system.
In an effort to find a single, more uniform interpretation of the
statutory phrase, we have reviewed the courts of appeals’ divergent and increasingly complex interpretations. [W]e now return
to, and expand, Judge Weinfeld’s approach [in Scot]. We conclude that “principal place of business” is best read as referring
to the place where a corporation’s officers direct, control, and
coordinate the corporation’s activities. It is the place that courts
of appeals have called the corporation’s “nerve center.” And in
practice it should normally be the place where the corporation
maintains its headquarters—provided that the headquarters is
the actual center of direction, control, and coordination, i.e., the
“nerve center,” and not simply an office where the corporation
holds its board meetings (for example, attended by directors and
officers who have traveled there for the occasion).
[Important considerations] convince us that this approach,
while imperfect, is superior to other possibilities. First, the statute’s language supports the approach. The statute’s text deems a
corporation a citizen of the “State where it has its principal place
of business.” The word “place” is in the singular, not the plural.
45
The word “principal” requires us to pick out the “main, prominent” or “leading” place. And the fact that the word “place” follows the words “State where” means that the “place” is a place
within a state. It is not the state itself.
A corporation’s “nerve center,” usually its main headquarters,
is a single place. The public often (though not always) considers
it the corporation’s main place of business. By contrast, the application of a more general business activities test has led some
courts, as in the present case, to look, not at a particular place
within a state, but incorrectly at the state itself, measuring the
total amount of business activities that the corporation conducts
there and determining whether they are significantly larger than
in the next-ranking state. This approach invites greater litigation
and can lead to strange results, as the Ninth Circuit has since
recognized. Namely, if a “corporation may be deemed a citizen
of California on th[e] basis” of “activities [that] roughly reflect
California’s larger population . . . nearly every national retailer—
no matter how far flung its operations—will be deemed a citizen
of California for diversity purposes.” [Case citation omitted.]
But why award or decline diversity jurisdiction on the basis of
a state’s population, whether measured directly, indirectly (say
proportionately), or with modifications?
Second, administrative simplicity is a major virtue in a jurisdictional statute. Complex jurisdictional tests complicate
a case, eating up time and money as the parties litigate, not
the merits of their claims, but which court is the right court to
decide those claims. [Moreover,] courts benefit from straightforward rules under which they can readily assure themselves
of their power to hear a case. Simple jurisdictional rules also
promote greater predictability. Predictability is valuable to corporations making business and investment decisions. Predictability also benefits plaintiffs deciding whether to file suit in a
state or federal court.
A “nerve center” approach, which ordinarily equates that
“center” with a corporation’s headquarters, is simple to apply
comparatively speaking. The metaphor of a corporate “brain,”
while not precise, suggests a single location. By contrast, a corporation’s general business activities more often lack a single
principal place where they take place. That is to say, the corporation may have several plants, many sales locations, and employees located in many different places. If so, it will not be as
easy to determine which of these different business locales is the
“principal” or most important “place.”
We recognize that there may be no perfect test that satisfies
all administrative and purposive criteria. We recognize as well
that, under the “nerve center” test we adopt today, there will be
hard cases. For example, in this era of telecommuting, some corporations may divide their command and coordinating functions
among officers who work at several different locations, perhaps
communicating over the Internet. That said, our test nonetheless
46
Part One Foundations of American Law
points courts in a single direction, towards the center of overall
direction, control, and coordination. Courts do not have to try to
weigh corporate functions, assets, or revenues different in kind,
one from the other.
We also recognize that the use of a “nerve center” test may
in some cases produce results that seem to cut against the basic
rationale for [diversity jurisdiction]. For example, if the bulk of
a company’s business activities visible to the public take place
in New Jersey, while its top officers direct those activities just
across the river in New York, the “principal place of business” is
New York. One could argue that members of the public in New
Jersey would be less likely to be prejudiced against the corporation than persons in New York—yet the corporation will still be
entitled to remove a New Jersey state case to federal court. And
note too that the same corporation would be unable to remove a
New York state case to federal court, despite the New York public’s presumed prejudice against the corporation.
We understand that such seeming anomalies will arise. However, in view of the necessity of having a clearer rule, we must
accept them. Accepting occasionally counterintuitive results is
the price the legal system must pay to avoid overly complex jurisdictional administration while producing the benefits that accompany a more uniform legal system.
[In this case, Hertz’s] unchallenged declaration suggests that
Hertz’s center of direction, control, and coordination, its “nerve
center,” and its corporate headquarters are one and the same, and
they are located in New Jersey, not in California.
Specialized Federal Courts
The U.S. Supreme Court
The federal court
system also includes certain specialized federal courts, including the Court of Federal Claims (which hears claims
against the United States), the Court of International Trade
(which is concerned with tariff, customs, import, and
other trade matters), the Bankruptcy Courts (which operate as adjuncts of the district courts), and the Tax Court
(which reviews certain IRS determinations). Usually, the
decisions of these courts can be appealed to a federal court
of appeals.
Federal Courts of Appeals
The U.S. courts of
appeals do not engage in fact-finding. Instead, they review
only the legal conclusions reached by lower federal courts.
As Figure 1 shows, there are 13 circuit courts of appeals:
11 numbered circuits covering several states each; a District of Columbia circuit; and a separate federal circuit.
Except for the Court of Appeals for the Federal Circuit,
the most important function of the U.S. courts of appeals
is to hear appeals from decisions of the federal district
courts. Appeals from a district court ordinarily proceed
to the court of appeals for that district court’s region. Appeals from the District Court for the Southern District of
New York, for example, go to the Second Circuit Court of
Appeals. The courts of appeals also hear appeals from the
Tax Court, from many administrative agency decisions,
and from some Bankruptcy Court decisions. The Court
of Appeals for the Federal Circuit hears a wide variety of
specialized appeals, including some patent and trademark
matters, Court of Federal Claims decisions, and decisions
by the Court of International Trade.
Ninth Circuit’s decision vacated, and case remanded for further proceedings in federal district court.
The United States
Supreme Court, the highest court in the land, is mainly
an appellate court. It therefore considers only questions of law when it decides appeals from the federal
courts of appeals and the highest state courts.4 Today,
most appealable decisions from these courts fall within
the Supreme Court’s certiorari jurisdiction, under
which the Court has discretion whether to hear the appeal. The Court hears only a small percentage of the
many appeals it is asked to decide under its certiorari
jurisdiction.
Nearly all appeals from the federal courts of appeals
are within the Court’s certiorari jurisdiction. Appeals
from the highest state courts are within the certiorari
jurisdiction when (1) the validity of any treaty or federal statute has been questioned; (2) any state statute is
challenged as repugnant to federal law; or (3) any title,
right, privilege, or immunity is claimed under federal
law. The Supreme Court usually defers to the states’
highest courts on questions of state law and does not
hear appeals from those courts if the case involves only
such questions.
In certain rare situations, the U.S. Supreme Court has
original jurisdiction, which means that it acts as a trial
court. The Supreme Court has original and exclusive jurisdiction over all controversies between two or more states.
It has original, but not exclusive, jurisdiction over cases
involving foreign ambassadors, ministers, and like parties;
In special situations that do not often arise, the Supreme Court will
hear appeals directly from the federal district courts.
4
Chapter Two
The Resolution of Private Disputes
47
Figure 1 The Thirteen Federal Judicial Circuits
First Circuit (Boston,
Mass.) Maine,
Massachusetts, New
Hampshire, Puerto Rico,
Rhode Island
Second Circuit (New
York, N.Y.) Connecticut,
New York, Vermont
Third Circuit (Philadelphia,
Pa.) Delaware, New
Jersey, Pennsylvania,
Virgin Islands
Fourth Circuit (Richmond,
Va.) Maryland, North
Carolina, South Carolina,
Virginia, West Virginia
Fifth Circuit (New
Orleans, La.) Louisiana,
Mississippi, Texas
Sixth Circuit (Cincinnati,
Ohio) Kentucky,
Michigan, Ohio, Tennessee
Seventh Circuit (Chicago,
Ill.) Illinois, Indiana,
Wisconsin
Eighth Circuit (St. Louis,
Mo.) Arkansas, Iowa,
Minnesota, Missouri,
Nebraska, North Dakota,
South Dakota
Ninth Circuit (San Francisco,
Calif.) Alaska, Arizona,
California, Guam, Hawaii,
Idaho, Montana, Nevada,
Northern Mariana Islands,
Oregon, Washington
Tenth Circuit (Denver,
Colo.) Colorado, Kansas,
New Mexico, Oklahoma,
Utah, Wyoming
Eleventh Circuit (Atlanta,
Ga.) Alabama, Florida,
Georgia
District of Columbia
Circuit (Washington,
D.C.)
Federal Circuit
(Washington, D.C.)
controversies between the United States and a state; and
cases in which a state proceeds against citizens of another
state or against aliens.
Civil Procedure
LO2-5
Identify the major steps in a civil lawsuit’s progression
from beginning to end.
Civil procedure is the set of legal rules establishing how
a civil lawsuit proceeds from beginning to end.5 Because
civil procedure sometimes varies with the jurisdiction in
question,6 the following presentation summarizes the most
widely accepted rules governing civil cases in state and
federal courts. Knowledge of these basic procedural matters will be useful if you become involved in a civil lawsuit
and will help you understand the cases in this text.
In any civil case, the adversary system is at work.
Through their attorneys, the litigants take contrary
Criminal procedure is discussed in Chapter 5.
In the following discussion, the term jurisdiction refers to one of the
50 states, the District of Columbia, or the federal government.
5
6
positions before a judge and possibly a jury. To win a civil
case, the plaintiff must prove each element of his, her, or
its claim by a preponderance of the evidence.7 This standard of proof requires the plaintiff to show that the greater
weight of the evidence—by credibility, not quantity—
supports the existence of each element. In other words, the
plaintiff must convince the fact-finder that the existence
of each element is more probable than its nonexistence.
The attorney for each party presents his or her client’s
version of the facts, tries to convince the judge or jury
that this version is true, and attempts to rebut conflicting
factual allegations by the other party. Each attorney also
seeks to persuade the court that his or her reading of the
law is correct.
Service of the Summons A summons notifies the defendant that he, she, or it is being sued. The
summons typically names the plaintiff and states the time
within which the defendant must enter an appearance in
court (usually through an attorney). In most jurisdictions,
In a criminal case, however, the government must prove the elements
of the alleged crime beyond a reasonable doubt. This standard of proof
is discussed in Chapter 5.
7
48
Part One Foundations of American Law
it is accompanied by a copy of the plaintiff’s complaint
(which is described later).
The summons is usually served on the defendant by
an appropriate public official after the plaintiff has filed
her case. To ensure that the defendant is properly notified,
statutes, court rules, and constitutional due process guarantees set standards for proper service of the summons.
For example, personal delivery to the defendant almost
always meets these standards. Many jurisdictions also
permit the summons to be left at the defendant’s home or
place of business. Service to corporations often may be
accomplished by delivery of the summons to the firm’s
managing agent. Many state long-arm statutes permit
out-of-state defendants to be served by registered mail.
Although inadequate service of process may sometimes
defeat the plaintiff’s claim, the defendant who participates
in the case without making a prompt objection to the manner of service will be deemed to have waived the objection.
The Pleadings The pleadings are the documents
the parties file with the court when they first state their
respective claims and defenses. They include the complaint, the answer, and, in some jurisdictions, the reply.
Traditionally, the pleadings’ main function was to define
and limit the issues to be decided by the court. Only those
issues raised in the pleadings were considered part of the
case, amendments to the pleadings were seldom permitted, and litigants were firmly bound by allegations or
admissions contained in the pleadings. Although many
jurisdictions retain some of these rules, most have relaxed
them significantly. The main reason is the modern view
of the purpose of pleading rules: that their aim is less to
define the issues for trial than to give the parties general
notice of each other’s claims and defenses.
The Complaint The complaint states the plaintiff’s claim
in separate, numbered paragraphs. It must allege sufficient
facts to show that the plaintiff would be entitled to legal
relief and to give the defendant reasonable notice of the
nature of the plaintiff’s claim. The complaint also must
state the remedy requested.
The Answer Unless the defendant makes a successful
motion to dismiss (described later), he must file an answer
to the plaintiff’s complaint within a designated time after
service of the complaint. The amount of time is set by applicable law, with 30 to 45 days being typical. The answer
responds to the complaint paragraph by paragraph, with an
admission or denial of each of the plaintiff’s allegations.
An answer may also include an affirmative defense
to the claim asserted in the complaint. A successful
affirmative defense enables the defendant to win the case
even if all the allegations in the complaint are true and, by
themselves, would have entitled the plaintiff to recover.
For example, suppose that the plaintiff bases her lawsuit
on a contract that she alleges the defendant has breached.
The defendant’s answer may admit or deny the existence
of the contract or the assertion that the defendant breached
it. In addition, the answer may make assertions that, if
proven, would provide the defendant an affirmative defense on the basis of fraud committed by the plaintiff during the contract negotiation phase.
Furthermore, the answer may contain a counterclaim.8
A counterclaim is a new claim by the defendant arising
from the matters stated in the complaint. Unlike an affirmative defense, it is not merely an attack on the plaintiffs
claim, but is the defendant’s attempt to obtain legal relief.
In addition to using fraud as an affirmative defense to a
plaintiff’s contract claim, for example, a defendant might
counterclaim for damages caused by that fraud.
The Reply In some jurisdictions, the plaintiff is allowed
or required to respond to an affirmative defense or a counterclaim by making a reply. The reply is the plaintiff’s
point-by-point response to the allegations in the answer or
counterclaim. In jurisdictions that do not allow a reply to
an answer, the defendant’s new allegations are automatically denied. Usually, however, a plaintiff who wishes to
contest a counterclaim must file a reply to it.
Motion to Dismiss
Sometimes it is evident from
the complaint or the pleadings that the plaintiff does not
have a valid claim. In such a situation, it would be wasteful
for the litigation to proceed further. The procedural device
for ending the case at this early stage is commonly called
the motion to dismiss. This motion often is made after
the plaintiff has filed her complaint. A similar motion allowed by some jurisdictions, the motion for judgment on
the pleadings, normally occurs after the pleadings have
been completed. A successful motion to dismiss means
that the defendant wins the case. If the motion fails, the
case proceeds.
The motion to dismiss may be made on various
grounds—for example, inadequate service of process or
lack of jurisdiction. The most important type of motion to
dismiss, however, is the motion to dismiss for failure to
state a claim upon which relief can be granted, sometimes
In appropriate instances, a defendant also may file a cross claim
against another defendant in the plaintiff’s suit, or a third-party complaint against a party who was not named as a defendant in the plaintiff’s complaint.
8
Chapter Two
The Resolution of Private Disputes
called the demurrer. This motion basically says “So
what?” to the factual allegations in the complaint. It asserts
that the plaintiff cannot recover even if all of his allegations
are true because no rule of law entitles him to win on those
facts. Suppose that Potter sues Davis on the theory that Davis’s bad breath is a form of “olfactory pollution” entitling
Potter to recover damages. Potter’s complaint describes
Davis’s breath and the distress it causes Potter in great
detail. Even if all of Potter’s factual allegations are true,
Davis’s motion to dismiss almost certainly will succeed.
There is no rule of law allowing the “victim” of another
person’s bad breath to recover damages from that person.
Discovery
LO2-6
Describe the different forms of discovery available to
parties in civil cases.
When a civil case begins, litigants do not always possess all
of the facts they need to prove their claims or establish their
defenses. To help litigants obtain the facts and to narrow and
clarify the issues for trial, the state and federal court systems permit each party to a civil case to exercise discovery
rights. The discovery phase of a lawsuit normally begins
when the pleadings have been completed. Each party is entitled to request information from the other party by utilizing
the forms of discovery described in this section. Moreover,
for civil cases pending in federal court, the Federal Rules
of Civil Procedure require each party to provide the other
party certain relevant information at an early point in the
case without a formal discovery request by the other party.
Discovery is available for information that is not subject to a recognized legal privilege and is relevant to the
case or likely to lead to other information that may be relevant. Information may be subject to discovery even if it
would not ultimately be admissible at trial under the legal
rules of evidence. The scope of permissible discovery is
thus extremely broad. The broad scope of discovery stems
from a policy decision to minimize the surprise element
in litigation and to give each party the opportunity to become fully informed regarding facts known by the opposing party. Each party may then formulate trial strategies on
the basis of that knowledge.
The deposition is one of the most frequently employed
forms of discovery. In a deposition, one party’s attorney conducts an oral examination of the other party or
of a likely witness (usually one identified with the other
party). The questions asked by the examining attorney
and the answers given by the deponent—the person
being examined—are taken down by a court reporter.
49
The deponent is under oath, just as he or she would be if
testifying at trial, even though the deposition occurs on a
pretrial basis and is likely to take place at an attorney’s
office or at some location other than a courtroom. Some
depositions are recorded in audio-visual form.
Interrogatories and requests for admissions are among
the other commonly utilized forms of discovery. Interrogatories are written questions directed by the plaintiff to
the defendant, or vice versa. The litigant on whom interrogatories are served must provide written answers, under
oath, within a time period prescribed by applicable law
(30 days being typical). Requests for admissions are one
party’s written demand that the other party admit or deny,
in writing, certain statements of supposed fact or of the
application of law to fact, within a time period prescribed
by law (30 days again being typical). The other party’s
failure to respond with an admission or denial during the
legal time period is deemed an admission of the statements’ truth or accuracy.
Requests for production of documents or other physical
items (e.g., videos, photographs, and the like) are a discovery form employed by the parties in many civil cases.
What about e-mail and other electronically stored information? For a discussion of the discoverability of such
items, see the Cyberlaw in Action box that appears later
in the chapter.
When the issues in a case make the opposing litigant’s
physical or mental condition relevant, a party may seek
discovery in yet another way by filing a motion for a court
order requiring that the opponent undergo a physical or
mental examination. With the exception of the discovery
form mentioned in the previous sentence, discovery generally takes place without a need for court orders or other
judicial supervision. Courts become involved, however, if
a party objects to a discovery request on the basis of privilege or other recognized legal ground, desires an order
compelling a noncomplying litigant to respond to a discovery request, or seeks sanctions on a party who refused
to comply with a legitimate discovery request or abusively
invoked the discovery process.
Documents and similar items obtained through the
discovery process may be used at trial if they fall within
the legal rules governing admissible evidence. The same
is true of discovery material such as answers to interrogatories and responses to requests for admissions. If a party
or other witness who testifies at trial offers testimony that
differs from her statements during a deposition, the deposition may be used to impeach her—that is, to cast doubt
on her trial testimony. A litigant may offer as evidence the
deposition of a witness who died prior to trial or meets
the legal standard of unavailability to testify in person.
50
Part One Foundations of American Law
CYBERLAW IN ACTION
In recent years, the widespread uses of e-mail and
information presented and stored in electronic
form have raised questions about whether, in civil
litigation, an opposing party’s e-mails and electronic
information are discoverable to the same extent as
conventional written or printed documents. With
the Federal Rules of Civil Procedure and comparable discovery
rules applicable in state courts having been devised prior to the
explosion in e-mail use and online activities, the rules’ references
to “documents” contemplated traditional on-paper items. Courts,
however, frequently interpreted “documents” broadly, so as to
include e-mails and certain electronic communications within the
scope of discoverable items.
Even so, greater clarity regarding discoverability seemed
warranted—especially as to electronic material that might be less
readily classifiable than e-mails as “documents.” Various states
responded by updating their discovery rules to include electronic
communications within the list of discoverable items. So did the
Federal Judicial Conference. In Federal Rules of Civil Procedure
amendments proposed by the Judicial Conference and ratified
by Congress in 2006, “electronically stored information” became
a separate category of discoverable material. The electronically
stored information (ESI) category is broad enough to include e-mails
and similar communications as well as electronic business records,
web pages, dynamic databases, and a host of other material
existing in electronic form. So-called e-discovery has become a
standard feature of civil litigation because of the obvious value of
having access to the opposing party’s e-mails and other electronic
communications.
Discovery regarding ESI occurs in largely the same manner as
discovery regarding conventional documents. The party seeking
discovery of ESI serves a specific request for production on the other.
The served party must provide the requested ESI if it is relevant, is
not protected by a legal privilege (e.g., the attorney–client privilege),
and is reasonably accessible. Court involvement becomes necessary
only if the party from whom discovery is sought fails to comply or
objects on lack of relevance, privilege, or burdensomeness grounds.
The Federal Rules allow the party seeking discovery of ESI to specify
the form in which the requested copies should appear (e.g., hard
copies, electronic files, searchable CD, direct access to database,
etc.). The party from whom discovery is sought may object to the
specified form, in which event the court may have to resolve the
dispute. If the requesting party does not specify a form, the other
party must provide the requested electronic material in a form that
is reasonably usable.
The Federal Rules provide that if the requested electronic material
is “not reasonably accessible because of undue burden or cost,” the
party from whom discovery is sought need not provide it. When an
objection along those lines is filed, the court decides whether the
objection is valid in light of the particular facts and circumstances.
For instance, if requested e-mails appear only on backup tapes and
searching those tapes would require the expenditures of significant
time, money, and effort, are the requested e-mails “not reasonably
accessible because of undue burden or costs”? Perhaps, but perhaps
not. The court will rule, based on the relevant situation. The court may
deny the discovery request, uphold it, or condition the upholding of
it on the requesting party’s covering part or all of the costs incurred
by the other party in retrieving the ESI and making it available. When
a party fails or refuses to comply with a legitimate discovery request
and the party seeking discovery of ESI has to secure a court order
compelling the release of it, the court may order the noncompliant
party to pay the attorney’s fees incurred by the requesting party in
seeking the court order. If a recalcitrant party disregards a court
order compelling discovery, the court may assess attorney’s fees
against that party and/or impose evidentiary or procedural sanctions
such as barring that party from using certain evidence or from raising
certain claims or defenses at trial.
The discussion suggests that discovery requests regarding ESI
may be extensive and broad-ranging, with logistical issues often
attending those requests. In recognition of these realities, the
Federal Rules seek to head off disputes by requiring the parties to
civil litigation to meet, at least through their attorneys, soon after
the case is filed. The meeting’s goal is development of a discovery
plan that outlines the parties’ intentions regarding ESI discovery and
sets forth an agreement on such matters as the form in which the
requested ESI will be provided. If the parties cannot agree on certain
ESI discovery issues, the court will become involved to resolve the
disputes.
The discoverability of ESI makes it incumbent upon businesses to
retain and preserve such material not only when litigation to which
the material may be related has already been instituted, but also
when potential litigation might reasonably be anticipated. Failure to
preserve the electronic communications could give rise to allegations
of evidence destruction and, potentially, sanctions imposed by a
court. (For further discussion of related legal and ethical issues, see
this chapter’s Ethics in Action box.)
Finally, given the now-standard requests of plaintiffs and
defendants that the opposing party provide access to relevant
e-mails, one should not forget this important piece of advice: Do
not say anything in an e-mail that you would not say in a formal
written memo or in a conversation with someone. There is a toofrequent tendency to think that because e-mails often tend to be
informal in nature, one is somehow free to say things in an e-mail
that he or she would not say in another setting. Many individuals
and companies have learned the hard way that comments made
in their e-mails or those of their employees proved to be damning
evidence against them in litigation and thus helped the opposing
parties win the cases.
Chapter Two
The Resolution of Private Disputes
In addition, selected parts or all of the deposition of the
opposing party or of certain persons affiliated with the opposing party may be used as evidence at trial, regardless of
whether such a deponent is available to testify “live.”
Participation in the discovery process may require significant expenditures of time and effort, not only by the attorneys but also by the parties and their employees. Parties
who see themselves as too busy to comply with discovery
requests may need to think seriously about whether they
should remain a party to pending litigation. The discovery
process may also trigger significant ethical issues, such as
those associated with uses of discovery requests simply
to harass or cause expense to the other party, or the issues
faced by one who does not wish to hand over legitimately
sought material that may prove to be damaging to him or
to his employer.
Summary Judgment Summary judgment is a
device for disposing of relatively clear cases without a trial.
It differs from a demurrer because it involves factual determinations. To prevail, the party moving for a summary
judgment must show that (1) there is no genuine issue of
material (legally significant) fact and (2) she is entitled to
judgment as a matter of law. A moving party satisfies the
first element of the test by using the pleadings, relevant
discovery information, and affidavits (signed and sworn
statements regarding matters of fact) to show that there is
no real question about any significant fact. She satisfies
the second element by showing that, given the established
facts, the applicable law clearly mandates that she win.
Either or both parties may move for a summary judgment. If the court rules in favor of either party, that party
wins the case. (The losing party may appeal, however.) If
the parties’ summary judgment motions are denied, the
case proceeds to trial. The judge may also grant a partial
summary judgment, which settles some issues in the case
but leaves others to be decided at trial.
The Pretrial Conference
Depending on the jurisdiction, a pretrial conference is either mandatory or
held at the discretion of the trial judge. At this conference, the judge meets informally with the attorneys for
both litigants. He or she may try to get the attorneys to
stipulate, or agree to, the resolution of certain issues in
order to simplify the trial. The judge may also urge them
to convince their clients to settle the case by coming to
an agreement that eliminates the need for a trial. If the
case is not settled, the judge enters a pretrial order that
includes the attorneys’ stipulations and any other agreements. Ordinarily, this order binds the parties for the remainder of the case.
51
The Trial
Once the case has been through discovery
and has survived any pretrial motions, it is set for trial.
The trial may be before a judge alone (i.e., a bench trial),
in which case the judge makes findings of fact and reaches
conclusions of law before issuing the court’s judgment. If
the right to a jury trial exists and either party demands
one, the jury finds the facts. The judge, however, continues to determine legal questions.9 During a pretrial jury
screening process known as voir dire, biased potential jurors may be removed for cause. In addition, the attorney
for each party is allowed a limited number of peremptory
challenges, which allow him to remove potential jurors
without having to show bias or other cause.
Trial Procedure At either a bench trial or a jury trial,
the attorneys for each party make opening statements that
outline what they expect to prove. The plaintiff’s attorney then presents her client’s case-in-chief by calling witnesses and introducing documentary evidence (relevant
documents and written records, e-mails, videos, and other
evidence having a physical form). The plaintiff’s attorney
asks questions of her client’s witnesses in a process known
as direct examination. If the plaintiff is an individual person rather than a corporation, he is very likely to testify.
The plaintiff’s attorney may choose to call the defendant
to testify. In this respect, civil cases differ from criminal
cases, in which the Fifth Amendment’s privilege against
self-incrimination bars the government from compelling
the defendant to testify. After the plaintiff’s attorney completes direct examination of a witness, the defendant’s
lawyer cross-examines the witness. This may be followed
by redirect examination by the plaintiff’s attorney and recross examination by the defendant’s lawyer.
Once the plaintiff’s attorney has completed the presentation of her client’s case, defense counsel presents his client’s
case-in-chief by offering documentary evidence and the
testimony of witnesses. The same process of direct, cross-,
redirect, and recross-examination is followed, except that
the examination roles of the respective lawyers are reversed.
After the plaintiff and defendant have presented their casesin-chief, each party is allowed to present evidence rebutting the showing made by the other party. Throughout each
side’s presentations of evidence, the opposing attorney may
object, on specified legal grounds, to certain questions asked
The rules governing availability of a jury trial are largely beyond the
scope of this text. The U.S. Constitution guarantees a jury trial in federal court cases “at common law” whose amount exceeds $20. Most
states have similar constitutional provisions, often with a higher dollar
amount. Also, Congress and the state legislatures have chosen to allow
jury trials in various other cases.
9
52
Part One Foundations of American Law
Ethics in Action
The broad scope of discovery rights in a civil case
will often entitle a party to seek and obtain copies
of e-mails, records, memos, and other documents
and electronically stored information from the opposing party’s files. In many cases, some of the most favorable evidence
for the plaintiff will have come from the defendant’s files, and
vice versa. If your firm is, or is likely to be, a party to civil
litigation and you know that the firm’s files contain materials
that may be damaging to the firm in the litigation, you may
be faced with the temptation to alter or destroy the potentially
damaging items. This temptation poses serious ethical dilemmas. Is it morally defensible to change the content of records
or documents on an after-the-fact basis, in order to lessen the
adverse effect on your firm in pending or probable litigation?
Is document destruction or e-mail deletion ethically justifiable
when you seek to protect your firm’s interests in a lawsuit?
If the ethical concerns are not sufficient by themselves to
make you leery of involvement in document alteration or destruction, consider the potential legal consequences for yourself and your firm. The much-publicized collapse of the Enron
Corporation in 2001 led to considerable scrutiny of the actions
of the Arthur Andersen firm, which had provided auditing and
consulting services to Enron. An Andersen partner, David Duncan, pleaded guilty to a criminal obstruction of justice charge
that accused him of having destroyed, or having instructed Andersen employees to destroy, certain Enron-related records in
order to thwart a Securities and Exchange Commission (SEC)
investigation of Andersen. The U.S. Justice Department also
launched an obstruction of justice prosecution against Andersen on the theory that the firm altered or destroyed records pertaining to Enron in order to impede the SEC investigation. A
jury found Andersen guilty of obstruction of justice. Although
the Andersen conviction was later overturned by the U.S. Supreme Court because the trial judge’s instructions to the jury
on relevant principles of law had been impermissibly vague
regarding the critical issue of criminal intent, a devastating effect on the firm had already taken place.
Of course, not all instances of document alteration or
destruction will lead to criminal prosecution for obstruction
of justice. Other consequences of a noncriminal but clearly
severe nature may result, however, from document destruction that interferes with legitimate discovery requests in a
civil case. In such instances, courts have broad discretionary
of witnesses or to certain evidence that has been offered for
admission. The trial judge utilizes the legal rules of evidence
to determine whether to sustain the objection (meaning that
the objected-to question cannot be answered by the witness
or that the offered evidence will be disallowed) or, instead,
authority to impose appropriate sanctions on the documentdestroying party. These sanctions may include such remedies
as court orders prohibiting the document-destroyer from raising certain claims or defenses in the lawsuit, instructions to
the jury regarding the wrongful destruction of the documents,
and court orders that the document-destroyer pay certain attorney’s fees to the opposing party.
What about the temptation to refuse to cooperate regarding an opposing party’s lawful request for discovery
regarding material in one’s possession? Although a refusal
to cooperate seems less blameworthy than destruction or
alteration of documents, extreme instances of recalcitrance
during the discovery process may cause a party to experience
adverse consequences similar to those imposed on parties
who destroy or alter documents. Litigation involving Ronald
Perelman and the Morgan Stanley firm provides an illustration. Perelman had sued Morgan Stanley on the theory that
the investment bank participated with Sunbeam Corp. in a
fraudulent scheme that supposedly induced him to sell Sunbeam his stake in another firm in return for Sunbeam shares
whose value plummeted when Sunbeam collapsed. During
the discovery phase of the case, Perelman had sought certain potentially relevant e-mails from Morgan Stanley’s files.
Morgan Stanley repeatedly failed and refused to provide this
discoverable material and, in the process, ignored court orders to provide the e-mails.
Eventually, a fed-up trial judge decided to impose sanctions for Morgan Stanley’s wrongful conduct during the
discovery process. The judge ordered that Perelman’s contentions would be presumed to be correct and that the burden
of proof would be shifted to Morgan Stanley so that Morgan Stanley would have to disprove Perelman’s allegations.
In addition, the trial judge prohibited Morgan Stanley from
contesting certain allegations made by Perelman. The jury
later returned a verdict in favor of Perelman and against Morgan Stanley for $604 million in compensatory damages and
$850 million in punitive damages. The court orders sanctioning Morgan Stanley for its discovery misconduct undoubtedly
played a key role in Perelman’s victory, effectively turning
a case that was not a sure-fire winner for Perelman into just
that. The case illustrates that a party to litigation may be playing with fire if he, she, or it insists on refusing to comply with
legitimate discovery requests.
overrule it (meaning that the question may be answered or
that the offered evidence will be allowed).
The witnesses that plaintiffs and defendants call to testify at trial may include those who can testify as to relevant
facts of which they have personal knowledge (often called
Chapter Two
The Resolution of Private Disputes
lay witnesses) and, sometimes, so-called expert witnesses.
If the court agrees that someone a plaintiff or defendant
wishes to use as an expert witness possesses relevant scientific, technical, or other specialized knowledge, skill,
experience, or educational background and could provide
testimony potentially useful to the judge or jury, the court
may permit the expert witness to provide opinion testimony or other insights regarding matters of importance in
the case. (Lay witnesses, on the other hand, normally are
not permitted to offer opinions in their testimony.)
Before allowing such opinion testimony, however, the
court must be satisfied not only that the witness qualifies
as an expert by virtue of knowledge, skill, experience, or
background, but also that his or her opinion testimony
would be based on sufficient facts and would result from
reasoned application of principles and methods considered reliable in the relevant field. In a significant number
of cases, there may be “dueling experts” on a given
matter—one expert witness called by the plaintiff and
another by the defendant.
After all of the evidence has been presented by the
parties, each party’s attorney makes a closing argument
summarizing his or her client’s position. In bench trials,
the judge then usually takes the case under advisement
rather than issuing a decision immediately. The judge later
makes findings of fact and reaches conclusions of law,
renders judgment, and, if the plaintiff is the winning party,
states the relief to which the plaintiff is entitled.
Jury Trials At the close of a jury trial, the judge ordinarily submits the case to the jury after issuing instructions
that set forth the legal rules applicable to the case. The
jury then deliberates, makes the necessary determinations
of the facts, applies the applicable legal rules to the facts,
and arrives at a verdict on which the court’s judgment will
be based.
The verdict form used the majority of the time is the
general verdict, which requires only that the jury declare
which party wins and, if the plaintiff wins, the money
damages awarded. The jury neither states its findings of
fact nor explains its application of the law to the facts. Although the nature of the general verdict may permit a jury,
if it is so inclined, to render a decision that is based on
bias, sympathy, or some basis other than the probable facts
and the law, one’s belief regarding the extent to which juries engage in so-called jury nullification of the facts and
law is likely to be heavily influenced by one’s attitude toward the jury system. Most proponents of the jury system
may be inclined to believe that “renegade” juries, though
regrettable, are an aberration, and that the vast majority
of juries make a good-faith effort to decide cases on the
53
basis of the facts and controlling legal principles. Some
jury system proponents, however, take a different view, asserting that juries should engage in jury nullification when
they believe it is necessary to accomplish “rough justice.”
Those who take a dim view of the jury system perceive it
as fundamentally flawed and as offering juries too much
opportunity to make decisions that stray from a reasonable view of the evidence and the law. Critics of the jury
system have little hope of abolishing it, however. Doing so
would require amendments to the U.S. Constitution and
many state constitutions, as well as the repeal of numerous
federal and state statutes.
Another verdict form known as the special verdict may
serve to minimize concerns that some observers have
about jury decisions. When a special verdict is employed,
the jury makes specific, written findings of fact in response to questions posed by the trial judge. The judge
then applies the law to those findings. Whether a special
verdict is utilized is a matter largely within the discretion
of the trial judge. The special verdict is not as frequently
employed, however, as the general verdict.
Directed Verdict Although the general verdict gives
the jury considerable power, the American legal system
also has devices for limiting that power. One device, the
directed verdict, takes the case away from the jury and
provides a judgment to one party before the jury gets a
chance to decide the case. The motion for a directed verdict may be made by either party; it usually occurs after
the other (nonmoving) party has presented her evidence.
The moving party asserts that the evidence, even when
viewed favorably to the other party, leads to only one result and need not be considered by the jury. Courts differ on the test governing a motion for a directed verdict.
Some deny the motion if there is any evidence favoring
the nonmoving party, whereas others deny the motion
only if there is substantial evidence favoring the nonmoving party. More often than not, trial judges deny motions
for a directed verdict.
Judgment Notwithstanding the Verdict On occasion,
one party wins a judgment even after the jury has reached
a verdict against that party. The device for doing so is the
judgment notwithstanding the verdict (also known as
the judgment non obstante veredicto or judgment n.o.v.).
Some jurisdictions provide that a motion for judgment
n.o.v. cannot be made unless the moving party previously
moved for a directed verdict. In any event, the standard
used to decide the motion for judgment n.o.v. usually is
the same standard used to decide the motion for a directed
verdict.
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Part One Foundations of American Law
Motion for a New Trial In a wide range of situations that
vary among jurisdictions, the losing party can successfully move for a new trial. Acceptable reasons for granting a new trial include legal errors by the judge during
the trial, jury or attorney misconduct, the discovery of
new evidence, or an award of excessive damages to the
plaintiff. Most motions for a new trial are unsuccessful,
however.
Appeal A final judgment generally prevents the parties from relitigating the same claim. One or more parties
still may appeal the trial court’s decision, however. Normally, appellate courts consider only alleged errors of law
made by the trial court. The matters ordinarily considered
“legal” and thus appealable include the trial judge’s decisions on motions to dismiss, for summary judgment, for
directed verdict or judgment notwithstanding the verdict,
and for a new trial. Other matters typically considered appealable include trial court rulings on service of process
and admission of evidence at trial, as well as the court’s
legal conclusions in a nonjury trial, instructions to the jury
in a jury case, and decision regarding damages or other relief. Appellate courts may affirm the trial court’s decision,
reverse it, or affirm parts of the decision and reverse other
parts. One of three things ordinarily results from an appellate court’s disposition of an appeal: (1) the plaintiff wins
the case, (2) the defendant wins the case, or (3) the case is
remanded (returned) to the trial court for further proceedings if the trial court’s decision is reversed in whole or in
part. For example, if the plaintiff appeals a trial court decision granting the defendant’s motion to dismiss and the appellate courts affirm that decision, the plaintiff loses. On
the other hand, if an appellate court reverses a trial court
judgment in the plaintiff’s favor, the defendant could win
outright, or the case might be returned to the trial court for
further proceedings consistent with the appellate decision.
Enforcing a Judgment In this text, you may occasionally see cases in which someone was not sued even
though he probably would have been liable to the plaintiff,
who sued another party instead. One explanation is that
the first party was “judgment-proof”—so lacking in assets
as to make a civil lawsuit for damages a waste of time and
money. The defendant’s financial condition also affects a
winning plaintiff’s ability to collect whatever damages she
has been awarded.
When the defendant fails to pay as required after losing a civil case, the winning plaintiff must enforce the
judgment. Ordinarily, the plaintiff will obtain a writ
of execution enabling the sheriff or federal marshal to
seize designated property of the defendant and sell it at
a judicial sale to help satisfy the judgment. A judgment
winner may also use a procedure known as garnishment
to seize property, money, and wages that belong to the defendant but are in the hands of a third party such as a bank
or employer. Legal limits exist, however, concerning the
portion of wages that may be garnished. If the property
needed to satisfy the judgment is located in another state,
the plaintiff must use that state’s execution or garnishment
procedures. Under the U.S. Constitution, the second state
must give “full faith and credit” to the judgment of the
state in which the plaintiff originally sued. Finally, when
the court has awarded an equitable remedy such as an injunction, the defendant may be found in contempt of court
and subjected to a fine or a jail term if he fails to obey the
court’s order.
Class Actions
So far, our civil procedure discussion
has proceeded as if the plaintiff and the defendant were
single parties. Various plaintiffs and defendants, however,
may be parties to one lawsuit. In addition, each jurisdiction has procedural rules stating when other parties can be
joined to a suit that begins without them.
One special type of multiparty case, the class action,
allows one or more persons to sue on behalf of themselves
and all others who have suffered similar harm from substantially the same wrong. Class action suits by consumers,
environmentalists, and other groups now are reasonably
common events. The usual justifications for the class action are that (1) it allows legal wrongs causing losses to a
large number of widely dispersed parties to be fully compensated, and (2) it promotes economy of judicial effort by
combining many similar claims into one suit.
The requirements for a class action vary among jurisdictions. The issues addressed by state and federal class
action rules include the following: whether there are questions of law and fact common to all members of the alleged class; whether those common questions predominate
over other questions; whether the class is small enough to
allow all of its members to join the case as parties, rather
than use a class action; and whether the plaintiff(s) and
their attorney(s) can adequately represent the class without conflicts of interest or other forms of unfairness. To
protect the individual class members’ right to be heard,
some jurisdictions have required that unnamed or absent
class members be given notice of the case if this is reasonably possible. The damages awarded in a successful class
action usually are apportioned among the entire class. Establishing the total recovery and distributing it to the class,
however, pose problems when the class is large, the class
members’ injuries are indefinite, or some members cannot
be identified.
Chapter Two
The Resolution of Private Disputes
In 2005, Congress moved to restrict the filing of class
actions in state courts by enacting a statute giving the federal district courts original jurisdiction over class actions
in which the amount in controversy exceeds $5 million
and any member of the plaintiff class resides in a state different from the state of any defendant. Proponents of the
measure describe it as being designed to curtail “forum
shopping” by multistate plaintiffs for “friendly” state
courts that might be especially likely to favor the claims of
the plaintiffs. Critics assert that the 2005 enactment is too
protective of corporate defendants and likely to curtail the
bringing of legitimate civil rights, consumer-protection,
and environmental-harm claims. Those criticisms have
been countered by assertions from other quarters that the
2005 law did not go far enough in restricting class actions. These critics contend that some proposed classes
are simply “too big”—meaning that a corporate defendant
could face ruinous financial consequences if the court allowed the case to proceed as a class action and liability
was established. In such instances, the argument goes, the
court should refuse to certify the case as a class action and
thereby force individual plaintiffs to sue on a case-by-case
basis.
During recent years, the Supreme Court has issued
important decisions dealing with class action certification issues. In Wal-Mart Stores, Inc. v. Dukes, 564 U.S.
338 (2011), the Court rejected class status for a group of
1.5 million females employed, or formerly employed, by
Walmart. All 1.5 million claimed to have been the victims
of sex discrimination during their Walmart employment
as a result of a company practice that allowed local store
managers very broad discretion in making salary and promotion decisions regarding store employees. The plaintiffs
who sought class recognition alleged that in exercising
this discretion, store managers made salary and promotion
decisions that discriminated against them on the basis of
their sex. In ruling that the case could not go forward as
a class action, the Court concluded that even though the
55
plaintiffs all claimed to have experienced sex discrimination as a result of a supposed corporate practice, this surface similarity in the discrimination allegations was not
enough to satisfy a key class action certification requirement: the need for the plaintiffs’ claims to reflect common questions of law and fact. According to the Court,
this “commonality” requirement called for the plaintiffs
to show that they “suffered the same injury” in a specific
sense. The Court reasoned that they could not do so, given
the large number of store managers who exercised discretion in making decisions regarding individual employees
and given the variability in the particular harms—and extent of harms—experienced by the employees. Although
the Court did not invoke the “too big” argument referred
to in an earlier paragraph, it seems possible that such a
concern may have lurked in the background.
Of course, the decision in Wal-Mart did not mean that
the plaintiffs were automatically deprived of legal recourse for the alleged wrongs they claimed. They could
still pursue their cases individually. As might be expected,
however, only a small percentage of the employees and
former employees opted to pursue their own individual
cases once the Court denied them the opportunity to band
together as a class.
Wal-Mart appeared to suggest that courts should
closely scrutinize class action requests and that class
action certification would likely become more difficult
for plaintiffs to obtain. A 2016 Supreme Court decision,
however, reveals that class actions are not necessarily
a dying breed after Wal-Mart. In Tyson Foods, Inc. v.
Bouaphakeo, which follows, the Court affirms the lower
courts’ grant of class action certification. Besides concluding that the commonality element held lacking in
Wal-Mart was present in Bouaphakeo, the Court focuses on the related yet separate question of whether the
common questions in the dispute predominate over the
individual ones. In addition, the Court addresses an important evidentiary question.
Tyson Foods, Inc. v. Bouaphakeo 136 S. Ct. 1036 (2016)
A federal law, the Fair Labor Standards Act (FLSA), requires that if employees covered by the statute work more than 40 hours
during a week, their employers must pay them overtime compensation. For those excess hours, employees are to be paid one and
one-half times their regular hourly rate. The FLSA also requires employers to pay employees for activities that are integral and
indispensable to their regular work, even if those activities do not occur at the employees’ workstations. In addition, the FLSA
requires employers to keep records of employees’ wages, hours worked, and employment conditions.
Peg Bouaphakeo and numerous other employees of Tyson Foods Inc. were covered by the FLSA. They worked in the kill, cut,
and re-trim departments of a Tyson pork processing plant. Safety considerations associated with the nature of their work necessitated that these employees wear protective gear. The exact composition of the gear depended on the tasks they were assigned
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Part One Foundations of American Law
to perform on a given day. Tyson compensated some of the employees for the time spent in donning and doffing the protective
gear. These employees were paid for an extra four minutes each day because Tyson estimated that four minutes was the time
necessary to put on and take off the protective gear. For certain other employees, Tyson estimated that eight minutes was the
relevant amount of time. Tyson, therefore, paid those employees for an extra eight minutes per day. Still other Tyson employees,
though required to wear protective gear, were not paid for the donning-and-doffing time. Although Tyson recorded the amount
of time each employee spent at his or her actual workstation, it did not record the time each employee spent in putting on and
taking off the required protective gear. The employees took the position that this time significantly exceeded the four- and eightminute estimates Tyson used.
Bouaphakeo and the other employees sued Tyson in a federal district court, alleging that in either not including or not accurately including the donning-and-doffing time in hours the employees worked, Tyson had denied the employees overtime compensation required by the FLSA. The employees contended that wearing the protective gear was integral and indispensable to
their work and that if their time spent putting on and taking off the required protective gear had been included in hours worked,
they would have exceeded the 40-hours-per-week threshold for overtime pay.
The employees sought to have their claims against Tyson certified as a class action under a collective action provision in the
FLSA. Tyson argued that because of the variance in protective gear the respective employees wore, the employees’ claims were
not sufficiently similar to be resolved in a class action. The district court concluded, however, that class action certification was
warranted because common questions, such as whether putting on and taking off required protective gear was compensable
under the FLSA, were present even if not all of the workers wore the same gear.
Because Tyson did not keep records of the donning-and-doffing time, the employees relied on evidence stemming from a
study by an industrial relations expert. The expert conducted more than 700 videotaped observations of how long various
donning-and-doffing activities took and then averaged the time taken. This process yielded an estimate of 18 minutes per day
for the cut and re-trim departments and 21.25 minutes per day for the kill department. These estimates were then added to the
timesheets of each employee to ascertain which class members worked more than 40 hours in a week and to shed light on a possible class-wide recovery. The jury awarded the class approximately $2.9 million in unpaid wages. Before that amount was paid
by Tyson and distributed to class members, Tyson appealed to the U.S. Court of Appeals for the Eighth Circuit. Tyson argued
that the district court erred in certifying the case as a class action. After the Eighth Circuit affirmed the lower court’s decision,
the U.S. Supreme Court agreed to decide the case.
Kennedy, Justice
Tyson challenges the certification of the FLSA collective action. The parties do not dispute that the standard for certifying a
collective action under the FLSA is no more stringent than the
standard for certifying a class under the Federal Rules of Civil
Procedure. This opinion assumes, without deciding, that this is
correct. For purposes of this case, then, if certification of respondents’ class action under the Federal Rules was proper, certification of the collective action was proper as well.
Federal Rule of Civil Procedure 23(b)(3) requires that, before a class is certified under that subsection, a district court
must find that “questions of law or fact common to class members predominate over any questions affecting only individual
members.” The “predominance inquiry tests whether proposed
classes are sufficiently cohesive to warrant adjudication by representation.” Amchem Products, Inc. v. Windsor, 521 U. S. 591,
623 (1997). This calls upon courts to give careful scrutiny to the
relation between common and individual questions in a case. An
individual question is one where “members of a proposed class
will need to present evidence that varies from member to member,” while a common question is one where “the same evidence
will suffice for each member to make a prima facie showing [or]
the issue is susceptible to generalized, class-wide proof.” [Citation omitted.] The predominance inquiry “asks whether the common, aggregation-enabling, issues in the case are more prevalent
or important than the non-common, aggregation-defeating, individual issues.” [Citation omitted.] When “one or more of the
central issues in the action are common to the class and can be
said to predominate, the action may be considered proper under
Rule 23(b)(3) even though other important matters will have to
be tried separately, such as damages or some affirmative defenses
peculiar to some individual class members.” [Citation omitted.]
Here, the parties do not dispute that there are important questions common to all class members, the most significant of which
is whether time spent donning and doffing the required protective gear is compensable work under the FLSA. To be entitled to
recovery, however, each employee must prove that the amount of
time spent donning and doffing, when added to his or her regular
hours, amounted to more than 40 hours in a given week. Tyson
argues that these necessarily person-specific inquiries into individual work time predominate over the common questions raised
by the employees’ claims, making class certification improper.
The employees counter that these individual inquiries are unnecessary because it can be assumed each employee donned and
Chapter Two
The Resolution of Private Disputes
doffed for the same average time observed [by the industrial relations expert in his review of videotapes of employees putting on
protective gear]. Whether this inference is permissible becomes
the central dispute in this case. Tyson contends that [the expert’s] study manufactures predominance by assuming away the
very differences that make the case inappropriate for classwide
resolution. Reliance on a representative sample, Tyson argues,
absolves each employee of the responsibility to prove personal
injury, and thus deprives petitioner of any ability to litigate its
defenses to individual claims.
Calling this unfair, Tyson maintains that the Court should announce a broad rule against the use in class actions of what the
parties call representative evidence. A categorical exclusion of
that sort, however, would make little sense. A representative or
statistical sample, like all evidence, is a means to establish or
defend against liability. Its permissibility turns not on the form a
proceeding takes—be it a class or individual action—but on the
degree to which the evidence is reliable in proving or disproving
the elements of the relevant cause of action.
It follows that the Court would reach too far were it to establish general rules governing the use of statistical evidence,
or so-called representative evidence, in all class-action cases.
Evidence of this type is used in various substantive realms of
the law. Whether and when statistical evidence can be used to establish classwide liability will depend on the purpose for which
the evidence is being introduced and on the elements of the underlying cause of action.
In many cases, a representative sample is the only practicable means to collect and present relevant data establishing
a defendant’s liability. In a case where representative evidence
is relevant in proving a plaintiff’s individual claim, that evidence cannot be deemed improper merely because the claim
is brought on behalf of a class. One way for the employees to
show, then, that the sample relied upon here is a permissible
method of proving classwide liability is by showing that each
class member could have relied on that sample to establish liability if he or she had brought an individual action. If the sample could have sustained a reasonable jury finding as to hours
worked in each employee’s individual action, that sample is a
permissible means of establishing the employees’ hours worked
in a class action.
In this suit, the employees sought to introduce a representative sample to fill an evidentiary gap created by the employer’s
failure to keep adequate records. If the employees had proceeded
with 3,344 individual lawsuits, each employee likely would have
had to introduce [the expert’s] study to prove the hours he or she
worked. Rather than absolving the employees from proving individual injury, the representative evidence here was a permissible
means of making that very showing. Reliance on [the expert’s]
study did not deprive Tyson of its ability to litigate individual
57
defenses. Since there were no alternative means for the employees to establish their hours worked, Tyson’s primary defense was
to show that [the expert’s] study was unrepresentative or inaccurate. That defense is itself common to the claims made by all
class members.
Tyson’s reliance on Wal-Mart Stores, Inc. v. Dukes, 564 U. S.
338 (2011), is misplaced. Wal-Mart does not stand for the broad
proposition that a representative sample is an impermissible
means of establishing classwide liability.
Wal-Mart involved a nationwide Title VII class of over 1½
million employees. In reversing class certification, this Court did
not reach Rule 23(b)(3)’s predominance prong, holding instead
that the class failed to meet even Rule 23(a)’s more basic requirement that class members share a common question of fact or law.
The plaintiffs in Wal-Mart did not provide significant proof of a
common policy of discrimination to which each employee was
subject. “The only corporate policy that the plaintiffs’ evidence
convincingly establishe[d was] Wal-Mart’s ‘policy’ of allowing
discretion by local supervisors over employment matters”; and
even then, the plaintiffs could not identify “a common mode of
exercising discretion that pervade[d] the entire company.” Id. at
355-56.
The plaintiffs in Wal-Mart proposed to use representative
evidence as a means of overcoming this absence of a common
policy. Under their proposed methodology, a “sample set of
the class members would be selected, as to whom liability for
sex discrimination and the backpay owing as a result would be
determined in depositions supervised by a master.” Id. at 367.
The aggregate damages award was to be derived by taking the
percentage of claims determined to be valid from this sample
and applying it to the rest of the class, and then multiplying the
number of presumptively valid claims by the average backpay
award in the sample set. The Court held that this “Trial By Formula” was [improper] because it enlarged the class members’
substantive right[s] and deprived defendants of their right to litigate statutory defenses to individual claims.
The Court’s holding in the instant case is in accord with
Wal-Mart. The underlying question in Wal-Mart, as here, was
whether the sample at issue could have been used to establish
liability in an individual action. Since the Court held that the
employees were not similarly situated, none of them could have
prevailed in an individual suit by relying on depositions detailing
the ways in which other employees were discriminated against
by their particular store managers. By extension, if the employees had brought 1½ million individual suits, there would be little
or no role for representative evidence. Permitting the use of that
sample in a class action, therefore, would have [been inappropriate because it would have given] plaintiffs and defendants different rights in a class proceeding than they could have asserted in
an individual action.
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Part One Foundations of American Law
In contrast, the study here could have been sufficient to sustain a jury finding as to hours worked if it were introduced in
each employee’s individual action. While the experiences of the
employees in Wal-Mart bore little relationship to one another, in
this case each employee worked in the same facility, did similar
work, and was paid under the same policy. [U]nder these circumstances the experiences of a subset of employees can be probative as to the experiences of all of them.
This is not to say that all inferences drawn from representative evidence in an FLSA case are just and reasonable. Representative evidence that is statistically inadequate or based
on implausible assumptions could not lead to a fair or accurate estimate of the uncompensated hours an employee has
worked. Tyson, however, did not raise a challenge to the methodology [used by the employees’ expert]. As a result, there is
no basis in the record to conclude it was legal error to admit
that evidence.
Once a district court finds evidence to be admissible, its
persuasiveness is, in general, a matter for the jury. Reasonable
minds may differ as to whether the average time [the expert] calculated is probative as to the time actually worked by each employee. Resolving that question, however, is the near-exclusive
province of the jury. The district court could have denied class
certification on this ground only if it concluded that no reasonable juror could have believed that the employees spent roughly
equal time donning and doffing. The district court made no such
finding, and the record here provides no basis for this Court to
second-guess that conclusion.
Alternative Dispute Resolution
parties. Most cases settle at some stage in the proceedings
described previously. The usual settlement agreement is a
contract whereby the defendant, without admitting liability, agrees to pay the plaintiff a sum of money in exchange
for the plaintiff’s promise to drop the claim against the
defendant. Such agreements must satisfy the requirements
of contract law discussed later in this text. In some cases,
moreover, the court must approve the settlement in order
for it to be enforceable. Examples include class actions
and litigation involving minors.
LO2-7
Explain the differences among the major forms of
alternative dispute resolution.
Lawsuits are not the only devices for resolving civil
disputes. Nor are they always the best means of doing
so. Settling private disputes through the courts can be a
cumbersome, lengthy, and expensive process for litigants.
With the advent of a litigious society and the increasing caseloads it has produced, handling disputes in this
fashion also imposes ever-greater social costs. For these
reasons and others, various forms of alternative dispute
resolution (ADR) have assumed increasing importance
in recent years. Proponents of ADR cite many considerations in its favor. These include ADR’s (1) quicker resolution of disputes; (2) lower costs in time, money, and
aggravation for the parties; (3) lessening of the strain on
an overloaded court system; (4) use of decision makers
with specialized expertise; and (5) potential for compromise decisions that promote and reflect consensus
between the parties. As will be seen in later discussion,
however, there are ADR skeptics.
Common Forms of ADR
Settlement The settlement of a civil lawsuit is not everyone’s idea of an alternative dispute resolution mechanism.
It is an important means, however, of avoiding protracted
litigation—one that often is a sensible compromise for the
Judgment of Eighth Circuit Court of Appeals affirmed.
Arbitration Arbitration is the submission of a dispute
to a neutral, nonjudicial third party (the arbitrator) who
issues a binding decision resolving the dispute. Arbitration usually results from the parties’ agreement. That
agreement normally is made before the dispute arises
(most often through an arbitration clause in a contract).
As noted in the Concepcion case, which follows shortly,
the Federal Arbitration Act requires judicial enforcement
of a wide range of agreements to arbitrate claims.
This means that if a contract contains a clause requiring arbitration of certain claims but one of the parties
attempts to litigate such a claim in court, the court is
very likely to dismiss the case and compel arbitration of
the dispute.
Arbitration may also be compelled by other statutes.
One example is the compulsory arbitration many states
require as part of the collective bargaining process for
certain public employees. Finally, parties who have not
agreed in advance to submit future disputes to arbitration
may agree upon arbitration after the dispute arises.
Chapter Two
The Resolution of Private Disputes
Arbitration usually is less formal than regular court
proceedings. The arbitrator may or may not be an attorney. Often, she is a professional with expertise in the subject matter of the dispute. Although arbitration hearings
often resemble civil trials, the applicable procedures, the
rules for admission of evidence, and the record-keeping
requirements typically are not as rigorous as those governing courts. Arbitrators sometimes have freedom to ignore
rules of substantive law that would bind a court.
The arbitrator’s decision, called an award, is filed with a
court, which will enforce it if necessary. The losing party may
object to the arbitrator’s award, but judicial review of arbitration proceedings is limited. According to the Federal Arbitration Act (FAA), grounds for overturning an arbitration award
include (1) a party’s use of fraud, (2) the arbitrator’s partiality
or corruption, and (3) other misconduct by the arbitrator.
The previously noted advantages of arbitration and
the enforceability of arbitration clauses in contracts have
combined in recent years to make such clauses common
features in various types of contracts. Skeptics of arbitration, however, worry about this development, particularly when the relevant contract is one drafted entirely or
almost entirely by the party with greater economic power
and business sophistication. These critics point to arbitration’s potential for unfairness to ordinary consumers
or employees of, say, a large corporation when they find
that their dispute with the corporation cannot be resolved
in court but must instead be submitted to arbitration because of an arbitration clause in the parties’ contract. In
such situations, the contract’s terms probably would have
been dictated by the corporation rather than having been
arrived at through a genuine bargaining process.
Although most arbitrators almost certainly strive to be
fair, critics cite the supposed danger that some arbitrators
may tend to favor parties with greater economic clout because, as the old saying goes, “they know which side their
bread is buttered on.” These arguments about the potential
for second-class justice, whether accurate or overblown, have
59
led to calls in some quarters for legislative action in which
Congress would tinker with the FAA by denying or restricting the ability of business organizations to include binding
arbitration clauses in their contracts with ordinary consumers
or employees (as opposed to contracts with other business
entities). However, as this book went to press in the immediate aftermath of the 2016 elections, any such legislation did
not appear to be high on the congressional priority list.
During recent years, this further question about arbitration has arisen: If state law permits the creation of a
classwide arbitration that combines individual arbitrations
presenting the same issues, is an arbitration clause enforceable under the FAA if it not only requires individual arbitration but also bans classwide arbitration? The two Supreme
Court decisions discussed below address that question.
AT&T Mobility LLC v. Concepcion, which follows
shortly, addresses the FAA’s purposes and emphasizes
that the FAA’s provision requiring enforcement of agreements to arbitrate controls over nearly all state laws that
would stand in the way of enforcement of such an agreement. The Supreme Court goes on to hold that contract
provisions requiring arbitration of claims on an individual
basis—and prohibiting joinder of those claims with others
in a class action–type arbitration—are both permissible
and enforceable under the FAA, notwithstanding any state
law to the contrary.
In American Express Co. v. Italian Colors Restaurant,
133 S. Ct. 2304 (2013), the Supreme Court followed the
lead of Concepcion and held that a court must respect a
contractual waiver of class arbitration even if plaintiffs
seeking a bring a class action in court contend that the
plaintiffs’ costs of individually arbitrating claims for an
alleged violation of federal law would exceed the potential recovery. Taken together, the two decisions probably
will make class arbitration an increasingly rare species, as
corporations seem likely to draft arbitration clauses so that
they not only mandate arbitration but require it to be of the
individual claim variety.
AT&T Mobility LLC v. Concepcion 563 U.S. 333 (U.S. Sup. Ct. 2011)
Vincent and Liza Concepcion entered into a contract for the sale and servicing of cellular phones with AT&T Mobility LLC
(AT&T). AT&T used the same contract in its dealings with other customers. The agreement called for arbitration of all disputes
between the parties but required that claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”
AT&T advertised the service that the Concepcions purchased as including the provision of free phones. Although the Concepcions
were not charged for the phones, they were charged $30.22 in sales tax based on the phones’ retail value. The Concepcions later sued
AT&T in the U.S. District Court for the Southern District of California. Their complaint was consolidated with a class action case alleging, among other things, that AT&T had engaged in false advertising and fraud by charging sales tax on phones it advertised as free.
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Part One Foundations of American Law
AT&T filed a motion asking the court to compel arbitration under the terms of its contract with the Concepcions. The Concepcions opposed the motion, contending that the arbitration agreement was unconscionable and otherwise objectionable under
California law because it disallowed classwide procedures. Finding the arbitration provision unconscionable because AT&T
had not shown that arbitration of individual disputes adequately substituted for the deterrent effects of class actions, the district
court denied AT&T’s motion. In so ruling, the court relied on the California Supreme Court’s decision in Discover Bank v.
Superior Court, 113 P.3d 1100 (2005). The U.S. Court of Appeals for the Ninth Circuit affirmed on the same ground. The Ninth
Circuit also held that the Federal Arbitration Act (FAA) did not preempt the California rule stemming from Discover Bank. The
U.S. Supreme Court granted AT&T’s request that it decide the case.
Scalia, Justice
Section 2 of the FAA makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at
law or in equity for the revocation of any contract.” We consider
whether the FAA prohibits states from conditioning the enforceability of certain arbitration agreements on the availability of
classwide arbitration procedures.
The FAA was enacted in 1925 in response to widespread judicial hostility to arbitration agreements. We have described [§ 2 of
the FAA] as reflecting both a “liberal federal policy favoring arbitration” and the “fundamental principle that arbitration is a matter
of contract.” [Case citations omitted.] In line with these principles,
courts must place arbitration agreements on an equal footing with
other contracts, and enforce them according to their terms.
The final phrase of § 2, however, permits arbitration agreements to be declared unenforceable “upon such grounds as exist
at law or in equity for the revocation of any contract.” This saving clause permits agreements to arbitrate to be invalidated by
“generally applicable contract defenses, such as fraud, duress, or
unconscionability,” but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement
to arbitrate is at issue. [Case citations omitted.] The question in
this case is whether § 2 preempts California’s rule classifying
most collective-arbitration waivers in consumer contracts as unconscionable. We refer to this rule as the Discover Bank rule.
Under California law, courts may refuse to enforce any contract found “to have been unconscionable at the time it was
made,” or may “limit the application of any unconscionable
clause.” [Statutory citation omitted.] A finding of unconscionability requires “a ‘procedural’ and a ‘substantive’ element, the
former focusing on ‘oppression’ or ‘surprise’ due to unequal
bargaining power, the latter on ‘overly harsh’ or ‘one-sided’ results.” [Case citation omitted.] In Discover Bank, the California
Supreme Court applied this framework to class-action waivers in
arbitration agreements and held as follows:
[W]hen the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting
parties predictably involve small amounts of damages, and
when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat
large numbers of consumers out of individually small sums
of money, then . . . the waiver becomes in practice the exemption of the party from responsibility for [its] own fraud,
or willful injury to the person or property of another. Under
these circumstances, such waivers are unconscionable under
California law and should not be enforced.
California courts have frequently applied this rule to find arbitration agreements unconscionable.
The Concepcions argue that the Discover Bank rule, given
its origins in California’s unconscionability doctrine and California’s policy against exculpat[ory] [agreements] is a ground that
“exist[s] at law or in equity for the revocation of any contract”
under FAA § 2. Moreover, they argue that even if we construe the
Discover Bank rule as a prohibition on collective-action waivers
rather than simply an application of unconscionability, the rule
would still be applicable to all dispute-resolution contracts, since
California prohibits waivers of class litigation as well.
When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA. Preston v. Ferrer, 552 U.S.
346, 353 (2008). But the inquiry becomes more complex when
a doctrine normally thought to be generally applicable, such as
duress or, as relevant here, unconscionability, is alleged to have
been applied in a fashion that disfavors arbitration. In Perry v.
Thomas, 482 U.S. 483 (1987), for example, we noted that the
FAA’s preemptive effect might extend even to grounds traditionally thought to exist “‘at law or in equity for the revocation of any
contract.’” We said that a court may not “rely on the uniqueness
of an agreement to arbitrate as a basis for a state-law holding that
enforcement would be unconscionable, for this would enable the
court to effect what . . . the state legislature cannot.”
An obvious illustration of this point would be a case finding unconscionable or unenforceable as against public policy
consumer arbitration agreements that fail to provide for judicially monitored discovery. The rationalizations for such a holding are neither difficult to imagine nor different in kind from
those articulated in Discover Bank. A court might reason that
no consumer would knowingly waive his right to full discovery,
as this would enable companies to hide their wrongdoing [and
possibly evade legal responsibility]. And, the reasoning would
continue, because such a rule applies the general principle of
Chapter Two
The Resolution of Private Disputes
unconscionability or public-policy disapproval of exculpatory
agreements, it is applicable to “any” contract and thus preserved
by § 2 of the FAA. In practice, of course, the rule would have a
disproportionate impact on arbitration agreements, but it would
presumably apply to contracts purporting to restrict discovery in
litigation as well.
Although § 2’s saving clause preserves generally applicable
contract defenses, nothing in it suggests an intent to preserve
state-law rules that stand as an obstacle to the accomplishment of
the FAA’s objectives. The “principal purpose” of the FAA is to
“ensur[e] that private arbitration agreements are enforced according to their terms.” [Case citation omitted.] [Accordingly,] we
have held that parties may agree to limit the issues subject to arbitration, to arbitrate according to specific rules, and to limit with
whom a party will arbitrate its disputes. [Case citations omitted.]
The point of affording parties discretion in designing arbitration
processes is to allow for efficient, streamlined procedures tailored
to the type of dispute. It can be specified, for example, that the
decision-maker be a specialist in the relevant field, or that proceedings be kept confidential to protect trade secrets. And the informality of arbitral proceedings is itself desirable, reducing the cost and
increasing the speed of dispute resolution.
[O]ur cases . . . have repeatedly described the FAA as
“embod[ying] [a] national policy favoring arbitration,” and “a
liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the
contrary.” [Case citations omitted.] Thus, in Preston v. Ferrer,
holding preempted a state-law rule requiring exhaustion of administrative remedies before arbitration, we said: “A prime objective of an agreement to arbitrate is to achieve ‘streamlined
proceedings and expeditious results,’” which objective would be
“frustrated” by requiring a dispute to be heard by an agency first.
That rule, we said, would “at the least, hinder speedy resolution
of the controversy.”
California’s Discover Bank rule similarly interferes with arbitration. Although the rule does not require classwide arbitration, it allows any party to a consumer contract to demand it ex
post. The rule also requires that damages be predictably small,
and that the consumer allege a scheme to cheat consumers. The
former requirement, however, is toothless and malleable, and the
latter has no limiting effect, as all that is required is an allegation.
Consumers remain free to bring and resolve their disputes on a
bilateral basis under Discover Bank, and some may well do so;
but there is little incentive for lawyers to arbitrate on behalf of
individuals when they may do so for a class and reap far higher
fees in the process. And faced with inevitable class arbitration,
companies would have less incentive to continue resolving potentially duplicative claims on an individual basis.
Although we have had little occasion to examine classwide arbitration, our decision in Stolt-Nielsen S.A. v. Animal Feeds Int’l
61
Corp., 130 S. Ct. 1758 (2010), is instructive. In that case we held
that an arbitration panel exceeded its power under . . . the FAA by
imposing class procedures based on policy judgments rather than
the arbitration agreement itself or some background principle of
contract law that would affect its interpretation. We then held
that the agreement at issue, which was silent on the question of
class procedures, could not be interpreted to allow them because
the “changes brought about by the shift from bilateral arbitration to class-action arbitration” are “fundamental.” Classwide
arbitration includes absent parties, necessitating additional and
different procedures and involving higher stakes. Confidentiality becomes more difficult. And while it is theoretically possible
to select an arbitrator with some expertise relevant to the classcertification question, arbitrators are not generally knowledgeable in the often-dominant procedural aspects of certification,
such as the protection of absent parties. The conclusion follows
that class arbitration, to the extent it is manufactured by Discover
Bank rather than consensual, [interferes with fundamental attributions of arbitration and] is inconsistent with the FAA.
First, the switch from bilateral to class arbitration sacrifices
the principal advantage of arbitration—its informality—and
makes the process slower, more costly, and more likely to generate procedural morass than final judgment. [B]efore an arbitrator
may decide the merits of a claim in classwide procedures, he must
first decide, for example, whether the class itself may be certified,
whether the named parties are sufficiently representative and typical, and how discovery for the class should be conducted. A cursory comparison of bilateral and class arbitration illustrates the
difference. According to the American Arbitration Association
(AAA), the average consumer arbitration between January and
August 2007 resulted in a disposition on the merits in six months.
As of September 2009, the AAA had opened 283 class arbitrations. Of those, 121 remained active, and 162 had been settled,
withdrawn, or dismissed. Not a single one, however, had resulted
in a final award on the merits. For those cases that were no longer
active, the [mean] time from filing to settlement, withdrawal, or
dismissal—not judgment on the merits—was . . . 630 days.
Second, class arbitration requires procedural formality. The
AAA’s rules governing class arbitrations mimic the Federal
Rules of Civil Procedure for class litigation. And while parties
can alter those procedures by contract, an alternative is not obvious. If procedures are too informal, absent class members would
not be bound by the arbitration. For a class-action money judgment to bind absentees in litigation, class representatives must
at all times adequately represent absent class members, and
absent members must be afforded notice, an opportunity to be
heard, and a right to opt out of the class. At least this amount
of process would presumably be required for absent parties to
be bound by the results of arbitration. We find it unlikely that
in passing the FAA, Congress meant to leave the disposition of
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Part One Foundations of American Law
these procedural requirements to an arbitrator. Indeed, class arbitration was not even envisioned by Congress when it passed
the FAA in 1925.
Third, class arbitration greatly increases risks to defendants. Informal procedures do of course have a cost: The absence of multilayered review makes it more likely that errors
will go uncorrected. Defendants are willing to accept the costs
of these errors in arbitration, since their impact is limited to
the size of individual disputes, and presumably outweighed
by savings from avoiding the courts. But when damages allegedly owed to tens of thousands of potential claimants are
aggregated and decided at once, the risk of an error will often
become unacceptable. Faced with even a small chance of a
devastating loss, defendants will be pressured into settling
questionable claims.
The dissent claims that class proceedings are necessary to
prosecute small-dollar claims that might otherwise slip through
the legal system. But states cannot require a procedure that is
inconsistent with the FAA, even if it is desirable for unrelated
reasons. Because it “stands as an obstacle to the accomplishment
and execution of the full purposes and objectives of Congress,”
[case citation omitted,] California’s Discover Bank rule is preempted by the FAA.
Court-Annexed Arbitration In this form of ADR, certain civil lawsuits are diverted into arbitration. One example might be cases in which less than a specified dollar
amount is at issue. Most often, court-annexed arbitration
is mandatory and is ordered by the judge, but some jurisdictions merely offer litigants the option of arbitration.
The losing party in a court-annexed arbitration still has the
right to a regular trial.
trial, they still are entitled to a regular court trial. There is
some disagreement over whether courts can compel the
parties to take part in a summary jury trial.
Mediation In mediation, a neutral third party called a
mediator helps the parties reach a cooperative resolution of
their dispute by facilitating communication between them,
clarifying their areas of agreement and disagreement,
helping them see each other’s viewpoints, and suggesting
settlement options. Mediators, unlike arbitrators, cannot
make decisions that bind the parties. Instead, a successful
mediation process results in a mediation agreement. Such
agreements normally are enforced under regular contract
law principles.
Mediation is used in a wide range of situations, including labor, commercial, family, and environmental
disputes. It may occur by agreement of the parties after
a dispute has arisen. It may also result from a previous
contractual agreement by the parties. Increasingly, courtannexed mediation is either compelled or made available
by courts in certain cases.
Summary Jury Trial Sometimes settlement of civil litigation is impeded because the litigants have vastly different
perceptions about the merits of their cases. In such cases,
the summary jury trial may give the parties a needed dose
of reality. The summary jury trial is an abbreviated, nonpublic mock jury trial that does not bind the parties. If the
parties do not settle after completion of the summary jury
Decision of Ninth Circuit Court of Appeals reversed, and case
remanded for further proceedings.
Minitrial A minitrial is an informal, abbreviated private
“trial” whose aim is to promote settlement of disputes.
Normally, it arises out of a private agreement that also
describes the procedures to be followed. In the typical minitrial, counsel for the parties present their cases
to a panel composed of senior management from each
side. Sometimes a neutral advisor such as an attorney
or a retired judge presides. This advisor may also offer
an opinion about the case’s likely outcome in court.
After the presentations, the managers attempt to negotiate a settlement.
Other ADR Devices Other ADR devices include
(1) med/arb (a hybrid of mediation and arbitration in
which a third party first acts as a mediator, and then as an
arbitrator), (2) the use of magistrates and special masters
to perform various tasks during complex litigation in the
federal courts, (3) early neutral evaluation (ENE) (a courtannexed procedure involving early, objective evaluation
of the case by a neutral private attorney with experience
in its subject matter), (4) private judging (in which litigants hire a private referee to issue a decision that may be
binding but that usually does not preclude recourse to the
courts), and (5) private panels instituted by an industry or
an organization to handle claims of certain kinds (e.g., the
Better Business Bureau). In addition, some formal legal
processes are sometimes called ADR devices. Examples
include small claims courts and the administrative procedures used to handle claims for veterans’ benefits or Social
Security benefits.
Chapter Two
The Resolution of Private Disputes
Problems and Problem Cases
1. Victoria Wilson, a resident of Illinois, wishes to
bring an invasion of privacy lawsuit against XYZ
Co. because XYZ used a photograph of her, without
her consent, in an advertisement for one of the company’s products. Wilson will seek money damages
of $150,000 from XYZ, whose principal offices are
located in New Jersey. A New Jersey newspaper was
the only print media outlet in which the advertisement
was published. However, XYZ also placed the advertisement on the firm’s website. This website may be
viewed by anyone with Internet access, regardless of
the viewer’s geographic location. Where, in a geographic sense, may Wilson properly file and pursue
her lawsuit against XYZ? Must Wilson pursue her
case in a state court, or does she have the option of
litigating in federal court? Assuming that Wilson files
her case in state court, what strategic option may XYZ
exercise if it acts promptly?
2. Alex Ferrer, a former judge who appeared as “Judge
Alex” on a television program, entered into a contract with Arnold Preston, a California attorney who
rendered services to persons in the entertainment industry. Seeking fees allegedly due under the contract,
Preston invoked the clause setting forth the parties’
agreement to arbitrate “any dispute . . . relating to the
terms of [the contract] or the breach, validity, or legality thereof . . . in accordance with the rules [of the
American Arbitration Association].” Ferrer countered
Preston’s demand for arbitration by filing, with the
California Labor Commissioner, a petition in which he
contended that the contract was unenforceable under
the California Talent Agencies Act (CTAA) because
Preston supposedly acted as a talent agent without
the license required by the CTAA. In addition, Ferrer
sued Preston in a California court, seeking a declaration that the dispute between the parties regarding the
contract and its validity was not subject to arbitration.
Ferrer also sought an injunction restraining Preston
from proceeding before the arbitrator unless and until
the Labor Commissioner concluded that she did not
have authority to rule on the parties’ dispute. Preston
responded by moving to compel arbitration, in reliance on the Federal Arbitration Act. The California
court denied Preston’s motion to compel arbitration
and issued the injunction sought by Ferrer. Was the
court correct in doing so?
3. Dog-breeders Ron and Catherine Bombliss lived in Illinois. They bred Tibetan mastiffs, as did Oklahoma
63
residents Anne and Jim Cornelsen. When Anne Cornelson telephoned the Bomblisses and said she was
ready to sell two litters of Tibetan mastiff puppies,
Ron Bombliss expressed interest in purchasing two
females of breeding quality. The Cornelsens had a
website that allowed communications regarding dogs
available for purchase but did not permit actual sales
via the website. The Bomblisses traveled to Oklahoma
to see the Cornelsens’ puppies and ended up purchasing two of them. The Cornelsens provided a guarantee
that the puppies were suitable for breeding purposes.
Following the sale, the Cornelsens mailed, to the
Bomblisses’ home in Illinois, American Kennel Club
registration papers for the puppies. Around this same
time, Anne Cornelsen posted comments in an Internet
chat room frequented by persons interested in Tibetan
mastiffs. These comments suggested that the mother
of certain Tibetan mastiff puppies (including one the
Bomblisses had purchased) may have had a genetic
disorder. The comments were made in the context
of an apparent dispute between the Cornelsens and
Richard Eichhorn, who owned the mother mastiff and
had made it available to the Cornelsens for breeding
purposes. The Bomblisses believed that the comments
would have been seen by other persons in Illinois and
elsewhere and would have impaired the Bomblisses’
ability to sell their puppies even though, when tested,
their puppies were healthy. The Bomblisses therefore
sued the Cornelsens in an Illinois court on various
legal theories. The Cornelsens asked the Illinois court
to dismiss the case on the ground that the court lacked
in personam jurisdiction over them. Did the Illinois
court lack in personam jurisdiction?
4. Hall Street Associates was the landlord and Mattel Inc.
was the tenant under various leases for property that
Mattel used as a manufacturing site for many years.
The leases provided that the tenant would indemnify
the landlord for any costs resulting from the tenant’s
failure to follow environmental laws while using the
premises. Tests of the property’s well water in 1998
showed high levels of trichloroethylene (TCE), the apparent residue of manufacturing discharges connected
with Mattel’s operations on the site between 1951 and
1980. After the Oregon Department of Environmental Quality (DEQ) discovered even more pollutants,
Mattel signed a consent order with the DEQ providing for cleanup of the site. After Mattel gave notice
of intent to terminate the lease in 2001, Hall Street
sued, contesting Mattel’s right to vacate on the date
it gave and claiming that the leases obliged Mattel to
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Part One Foundations of American Law
indemnify Hall Street for the costs of cleaning up the
TCE. A federal district court ruled in Mattel’s favor
on the termination issue. The parties then proposed
that they be permitted to submit the indemnification
issue to arbitration rather than having the court rule
on it. The court was amenable. The parties drew up an
arbitration agreement, which the court approved and
entered as an order. One paragraph of the agreement
provided that
[t]he United States District Court for the District
of Oregon may enter judgment upon any [arbitration]
award, either by confirming the award or by vacating,
modifying or correcting the award. The court shall vacate, modify or correct any award: (i) where the arbitrator’s findings of facts are not supported by substantial
evidence, or (ii) where the arbitrator’s conclusions of law
are erroneous.
The arbitrator initially decided in Mattel’s favor on
the indemnification question, but the federal district
court vacated the arbitrator’s decision on the ground
of legal error (the basis set forth in the parties’ arbitration agreement). On remand, the arbitrator ruled in
favor of Hall Street. The district court upheld this ruling. Mattel then appealed to the U.S. Court of Appeals
for the Ninth Circuit, arguing that the arbitrator’s initial decision in Mattel’s favor should be reinstated. In
particular, Mattel argued that the agreement calling
for the district court to vacate the arbitrator’s decision
in the event of legal error amounted to an unenforceable attempt to expand the legally permitted grounds
for setting aside an arbitrator’s decision (as set forth in
the Federal Arbitration Act). How did the Ninth Circuit rule?
5. WWP Inc. (WWP) is a charitable organization that
furnishes assistance to injured military veterans and
their families. WWP conducts its operations under the
name “Wounded Warrior Project.” After WWP had
been in existence for approximately a year, a separate, unaffiliated charitable organization, Wounded
Warriors Family Support Inc. (WWFS), began providing assistance to injured veterans and their families. WWFS operated outside the United States as of
2002 but later became active within the United States.
WWFS also launched a website whose domain name,
“wounded warriors.org,” was similar to a domain
name used by WWP. In addition, WWFS’s website
included content referring to a “Wounded Warriors
Hospital Fund.” Through use of this website, WWFS
received large amounts of donated funds. WWP sued
WWFS in the U.S. District Court for the District of
Nebraska. Relying on various legal theories, WWP alleged that WWFS created confusion through its website as to whether WWP and WWFS were affiliated
and that WWFS had been unjustly enriched through
receipt and retention of donations actually meant for
WWP. After a jury trial, the district court awarded
WWP approximately $1.7 million in damages and
issued an injunction meant to curb further instances
of confusion. WWFS appealed to the U.S. Court of
Appeals for the Eighth Circuit. In its appeal, WWFS
argued (among other things) that the district court had
erred in denying WWFS’s motion to compel WWP
to produce “[a]ll documents relating to or evidencing
any donations received by [WWP] from January 1,
2002 to the present” after WWP refused to provide
the documents. WWFS also argued on appeal that the
district court erred in allowing a forensic accountant
to testify as an expert witness who offered an opinion
regarding the amount of damages allegedly sustained
by WWP. WWFS argued that the forensic accountant
should not have been permitted to testify as an expert
because he utilized what WWFS regarded as simple
mathematical calculations and because his opinion on
damages was insufficiently connected with the facts
of the case. Did the district court err in denying the
motion to compel production of the requested documents? Did the district court err in permitting the forensic accountant to offer an expert opinion?
6. Jerrie Gray worked at a Tyson Foods plant where she
was exposed to comments, gestures, and physical contact that, she alleged, constituted sexual harassment.
Tyson disputed the allegation, arguing that the behavior was not unwelcome; that the complained-about
conduct was not based on sex; that the conduct did
not affect a term, condition, or privilege of employment; and that proper remedial action was taken in
response to any complaint by Gray of sexual harassment. During the trial in federal court, a witness for
Gray repeatedly volunteered inadmissible testimony
that the judge had to tell the jury to disregard. At one
point, upon an objection from the defendant’s counsel,
the witness asked, “May I say something here?” The
judge told her she could not. Finally, after the jury
left the courtroom, the witness had an angry outburst
that continued into the hallway, in view of some of
the jurors.
The jury awarded Gray $185,000 in compensatory and $800,000 in punitive damages. Tyson believed that it should not have been liable, that the
awards of damages were excessive and unsupported
Chapter Two
The Resolution of Private Disputes
by evidence, and that the inadmissible evidence and
improper conduct had tainted the proceedings. What
courses of action may Tyson pursue?
7. Oklahoma resident Samantha Guffey purchased a used
2009 Volvo XC90 (Volvo) from Odil Ostonakulov
and Motorcars of Nashville Inc. (MNI). Ostonakulov
resides in Tennessee. MNI is a Tennessee corporation
with its principal place of business in Nashville, Tennessee. Ostonakulov and MNI operate a used car lot
in Nashville. The sale occurred after Guffey was the
winning bidder for the car in an auction by MNI on
eBay. After receiving the Volvo, Guffey determined
that it was not in the condition advertised. She later
sued Ostonakulvo and MNI in an Oklahoma state trial
court for alleged fraud and alleged violations of an
Oklahoma consumer protection law. The defendants
moved to dismiss for lack of in personam jurisdiction.
In an affidavit Guffey provided for the court as it
considered the defendants’ jurisdiction objection,
Guffey stated that she bid on the Volvo listed on eBay
based, in part, on the representation of a 30-day limited warranty on the car. The affidavit also stated that
after she submitted her bid, but several days before
the closing date of the auction, she received an e-mail
solicitation from Ostonakulov suggesting that she
contact him by phone and negotiate a “buy-it-now”
price for the vehicle. She chose not to do so, but only
after calling and speaking with him personally about
the matter. After Gulley learned that she had won the
auction with the highest bid, she had her father call
and speak to Ostonakulov about final details and payment instructions. Ostonakulov mailed a purchase
agreement to Gulley’s father’s office in Oklahoma
City. Gulley signed the agreement and returned it to
Tennessee. Ostonakulov also helped arrange shipping of the vehicle to Oklahoma, where Guffey took
delivery. According to Guffey’s affidavit, the eBay
sale to her was not an isolated transaction for the defendants and that they have between 12 and 35 cars
listed for sale every day on eBay. The affidavit also
asserted that the defendants had sold at least three cars
in Oklahoma and that they have sold more than 30
cars to Oklahoma residents.
Oklahoma has a long-arm statute that applies to the
full extent permitted by due process principles. The
Oklahoma trial court dismissed the case after concluding that it did not have in personam jurisdiction
over the defendants. Guffey appealed to the Supreme
Court of Oklahoma. How did that court rule on the
jurisdiction question?
65
8. Abbott Laboratories manufactured and sold the Life
Care PCA, a pump that delivers medication into a person intravenously at specific time intervals. Beverly
Lewis sued Abbott in a Mississippi state court, alleging that a defective Life Care PCA had injured her by
delivering an excessive quantity of morphine. Abbott
served Lewis with a request for admission calling for
her to admit that her damages did not exceed $75,000.
Lewis did not answer the request for admission. Abbott removed the case to the U.S. District Court for
the Southern District of Mississippi, predicating the
court’s subject-matter jurisdiction on diversity of
citizenship and an amount in controversy exceeding
$75,000. Contending that her silence had amounted
to an admission that her damages were less than
$75,000, Lewis filed a motion asking that the federal
court remand the case to the state court. Did the federal court have subject-matter jurisdiction? How did
the federal court rule on Lewis’s motion to send the
case back to the state court?
9. The state of New Jersey says it is sovereign over certain landfilled portions of Ellis Island. The state of
New York disagrees, asserting that it is sovereign over
the whole of the island. New Jersey brings an action
in the U.S. District Court for the Southern District of
New York. Should the court hear the case?
10.Florian Hinrichs, a citizen of Germany and a member of the German military, had been assigned to Fort
Rucker for flight training. Fort Rucker is located in
Alabama. Hinrichs and Daniel Vinson were in the
same training program. On June 24, 2007 (during the
time of his assignment to Fort Rucker), Hinrichs was
riding in the front passenger seat of Vinson’s 2004
GMC Sierra 1500 pickup truck (the Sierra). Vinson
was driving the Sierra. As the vehicle proceeded
down an Alabama roadway, it was struck by a vehicle
whose intoxicated driver (Kenneth Earl Smith) caused
it to run a stop sign. The Sierra rolled over twice, and
Hinrichs suffered a spinal-cord injury that left him
paralyzed. In the litigation referred to below, Hinrichs
alleged that his injuries were caused by the defective
design of the Sierra’s roof. This design, Hinrichs contended, allowed the roof over the passenger compartment to collapse during the rollover. Hinrichs also
alleged that Sierra’s seatbelt, which he was wearing at
the time of the accident, was defectively designed because it failed to restrain him. General Motors Corp.
designed the Sierra. General Motors of Canada Ltd.
(GM Canada), whose principal place of business is in
Ontario, Canada, is a separate legal entity from GM.
66
Part One Foundations of American Law
GM Canada was incorporated under Canadian law and
has its principal place of business in Ontario, Canada.
It does not do businesses directly in the United States.
GM Canada manufactured certain parts of the Sierra
eventually purchased by Vinson, assembled the vehicle in Canada, and sold it to GM. The transfer of
title to the vehicle (i.e., from GM Canada to GM) occurred in Canada. GM then distributed the Sierra for
sale in the United States through a dealer located in
Pennsylvania. Vinson purchased the Sierra from the
Pennsylvania dealer in 2003. He drove it to Alabama
in 2006 when he was assigned to Fort Rucker.
Besides suing Smith (the intoxicated driver) for
negligence, Hinrichs brought product liability claims
against both GM and GM Canada in an Alabama
trial court. Arguing that the Alabama court lacked
in personam jurisdiction over it, GM Canada moved
for dismissal. In opposition to the motion, Hinrichs
stressed that even if GM Canada does not do business
directly in the United States, it anticipates that almost
all of the vehicles it assembles in Canada will end
up in the stream of commerce in the United States
and that Alabama is among the states in which the
vehicles will be sold or driven. The Alabama trial
court dismissed the claim against GM Canada on the
ground that in personam jurisdiction was lacking.
Hinrichs appealed the dismissal. Was the trial court’s
ruling correct?
CHAPTER 3
BUSINESS AND THE CONSTITUTION
A
federal statute and related regulations prohibited producers of beer from listing, on a product label, the
alcohol content of the beer in the container on which the label appeared. The regulation existed because
the U.S. government believed that if alcohol content could be disclosed on labels, certain producers of
beer might begin marketing their brand as having a higher alcohol content than competing beers. The government was concerned that “strength wars” among producers could then develop, that consumers would seek out
beers with higher alcohol content, and that adverse public health consequences would follow. Because it wished
to include alcohol content information on container labels for its beers, Coors Brewing Co. filed suit against the
U.S. government and asked the court to rule that the statute and regulations violated Coors’s constitutional right
to freedom of speech.
Consider the following questions as you read Chapter 3:
∙∙ On which provision in the U.S. Constitution was Coors relying in its challenge of the statute and regulations?
∙∙ Does a corporation such as Coors possess the same constitutional right to freedom of speech possessed by an
individual human being, or does the government have greater latitude to restrict the content of a corporation’s
speech?
∙∙ The alcohol content disclosures that Coors wished to make with regard to its product would be classified as
commercial speech. Does commercial speech receive the same degree of constitutional protection that political
or other noncommercial speech receives?
∙∙ Which party—Coors or the federal government—won the case, and why?
∙∙ Do producers and other sellers of alcoholic beverages have, in connection with the sale of their products, special ethical obligations that sellers of other products might not have? If so, what are those obligations and why
do they exist?
LO
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
3-1
3-2
3-3
Describe the role of courts in interpreting
constitutions and in determining whether statutes
or other government actions are constitutional.
Explain the key role of the U.S. Constitution’s
Commerce Clause in authorizing action by
Congress.
Describe the incorporation doctrine’s role in
making most guarantees of the Bill of Rights
operate to protect persons not only against certain
3-4
3-5
federal government actions, but also against
certain state and local government actions.
Explain the differences among the means-ends
tests used by courts when the constitutionality
of government action is being determined (strict
scrutiny, intermediate scrutiny, and rational basis).
Describe the differences between noncommercial
speech and commercial speech and the respective
levels of First Amendment protection they receive.
68
3-6
3-7
3-8
Part One Foundations of American Law
Explain the difference between procedural due
process and substantive due process.
Identify the instances when an Equal Protection
Clause–based challenge to government action
triggers more rigorous scrutiny than the rational
basis test.
Explain the burden-on-commerce doctrine’s
role in making certain state government actions
unconstitutional.
CONSTITUTIONS SERVE TWO general functions.
First, they set up the structure of government, allocating power among its various branches and subdivisions.
Second, they prevent government from taking certain
actions—especially actions that restrict individual or, as
suggested by the Coors scenario that opened this chapter, corporate rights. This chapter examines the U.S. Constitution’s performance of these functions and considers
how that performance affects government regulation of
business.
An Overview of the
U.S. Constitution
The U.S. Constitution exhibits the principle of separation
of powers by giving distinct powers to Congress, the
president, and the federal courts. Article I of the Constitution establishes a Congress composed of a Senate and a
House of Representatives, gives it sole power to legislate
at the federal level, and sets out rules for the enactment of
legislation. Article I, § 8 also defines when Congress can
make law by stating its legislative powers. Three of those
powers—the commerce, tax, and spending powers—are
discussed later in the chapter.
Article II gives the president the executive power—the
power to execute or enforce the laws passed by Congress.
Section 2 of that article lists other presidential powers, including the powers to command the nation’s armed forces
and to make treaties. Article III gives the judicial power
of the United States to the Supreme Court and the other
federal courts later established by Congress. Article III
also determines the types of cases the federal courts may
decide.
Besides creating a separation of powers, Articles I, II,
and III set up a system of checks and balances among
Congress, the president, and the courts. For example,
Identify the major circumstances in which federal
law will preempt state law.
3-10 Explain the power granted to the government by
the Takings Clause, as well as the limits on that
power.
3-9
Article I gives the president the power to veto legislation passed by Congress, but allows Congress to override
such a veto by a two-thirds vote of each House. Articles
I and II provide that the president, the vice president, and
other federal officials may be removed from office if, following an impeachment trial in the Senate, two-thirds of
the Senate concludes that the impeached office-holder
committed “Treason, Bribery, or other high Crimes and
Misdemeanors.” Article II states that treaties agreed to by
the president must be approved by a two-thirds vote of the
Senate. Article III gives Congress some control over the
Supreme Court’s appellate jurisdiction.
The Constitution recognizes the principle of federalism
in the way it structures power relations between the federal
government and the states. After listing the powers Congress holds, Article I lists certain powers that Congress
cannot exercise. The Tenth Amendment provides that
those powers the Constitution neither gives to the federal
government nor denies to the states are reserved to the
states or the people.
Article VI, however, makes the Constitution, laws,
and treaties of the United States supreme over state law.
As will be seen, this principle of federal supremacy
may cause federal statutes to preempt inconsistent state
laws. The Constitution also puts limits on the states’ lawmaking powers. One example is Article I’s command
that states shall not pass laws impairing the obligation
of contracts.
Article V sets forth the procedures for amending
the Constitution. The Constitution has been amended
27 times. The first 10 of these amendments comprise the
Bill of Rights. Although the rights guaranteed in the first
10 amendments once restricted only federal government
action, most of them now limit state government action
as well. As you will learn, this results from their incorporation within the Due Process Clause of the Fourteenth
Amendment.
Chapter Three Business and the Constitution
The Evolution of the
Constitution and the Role
of the Supreme Court
Describe the role of courts in interpreting constitutions
LO3-1 and in determining whether statutes or other government
actions are constitutional.
According to the legal realists discussed in Chapter 1, written “book law” is less important than what public decision
makers actually do. Using this approach, we discover a
Constitution that differs from the written Constitution just
described. The actual powers of today’s presidency, for instance, exceed anything one would expect from reading
Article II. As you will see, moreover, some constitutional
provisions have acquired a meaning different from their
meaning when first enacted. American constitutional law
has evolved rather than being static.
Many of these changes result from the way one public decision maker—the nine-member U.S. Supreme
Court—has interpreted the Constitution over time. Formal
constitutional change can be accomplished only through
the amendment process. Because this process is difficult to employ, however, amendments to the Constitution have been relatively infrequent. As a practical matter,
the Supreme Court has become the Constitution’s main
“amender” through its many interpretations of constitutional provisions. Various factors help explain the Supreme
Court’s ability and willingness to play this role. Because of
their vagueness, some key constitutional provisions invite
diverse interpretations. “Due process of law” and “equal
protection of the laws” are examples. In addition, the history surrounding the enactment of constitutional provisions sometimes is sketchy, confused, or contradictory.
Probably more important, however, is the perceived need
to adapt the Constitution to changing social conditions. As
the old saying goes, Supreme Court decisions tend to “follow the election returns.” (Regardless of where one finds
himself or herself on the political spectrum, the old saying
has taken on a new twist after Bush v. Gore, the historic
2000 decision referred to later in this chapter.)
Under the power of judicial review, courts can declare
the actions of other government bodies unconstitutional.
How courts exercise this power depends on how they
choose to read the Constitution. Courts thus have political
power—a conclusion especially applicable to the Supreme
Court. Indeed, the Supreme Court’s justices are, to a considerable extent, public policy makers. Their beliefs are
important in the determination of how the United States is
69
governed. This is why the justices’ nomination and confirmation often involve so much political controversy.
Yet even though the Constitution frequently is what the
courts say it is, judicial power to shape the Constitution
has limits. Certain limits spring from the Constitution’s
language, which sometimes is quite clear. Others result
from the judges’ adherence to the stare decisis doctrine
discussed in Chapter 1. Perhaps the most significant limits
on judges’ power, however, stem from the tension between
modern judicial review and democracy. Legislators are
chosen by the people, whereas judges—especially appellate level judges—often are appointed, not elected. Today,
judges exercise political power by declaring the actions
of legislatures unconstitutional under standards largely
of the judiciary’s own devising. This sometimes leads to
charges that courts are undemocratic, elitist institutions.
Such charges put political constraints on judges because
courts depend on the other branches of government—and
ultimately on public belief in judges’ fidelity to the rule of
law—to make their decisions effective. Therefore, judges
sometimes may be reluctant to declare statutes unconstitutional because they are wary of power struggles with a
more representative body such as Congress.
LOG ON
For a great deal of information about the U.S. Supreme
Court and access to the Court’s opinions in recent cases, see
the Court’s website at http://www.supremecourtus.gov.
The Coverage and Structure
of This Chapter
This chapter examines certain constitutional provisions that
are important to business; it does not discuss constitutional
law in its entirety. These provisions help define federal and
state power to regulate the economy. The U.S. Constitution
limits government regulatory power in two general ways.
First, it restricts federal legislative authority by listing the
powers Congress can exercise. These are known as the
enumerated powers. Federal legislation cannot be constitutional if it is not based on a power specifically stated in
the Constitution. Second, the U.S. Constitution limits both
state and federal power by placing certain independent
checks in the path of each. In effect, the independent
checks establish that even if Congress has an enumerated
power to legislate on a particular matter or a state constitution authorizes a state to take certain actions, there still
are certain protected spheres into which neither the federal
government nor the state government may reach.
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Part One Foundations of American Law
Accordingly, a federal law must meet two general tests in
order to be constitutional: (1) it must be based on an enumerated power of Congress, and (2) it must not collide with any
of the independent checks. For example, Congress has the
power to regulate commerce among the states. This power
might seem to allow Congress to pass legislation forbidding
women from crossing state lines to buy or sell goods. Yet
such a law, though arguably based on an enumerated power,
surely would be unconstitutional because it conflicts with
an independent check—the equal protection guarantee discussed later in the chapter. Today, the independent checks
are the main limitations on congressional power. The most
important reason for the decline of the enumerated powers
limitation is the perceived need for active federal regulation
of economic and social life. Recently, however, the enumerated powers limitation has begun to assume somewhat more
importance, as will be seen.
After discussion of the most important state and federal powers to regulate economic matters, the chapter explores certain independent checks that apply to the federal
government and the states. The chapter then examines
some independent checks that affect the states alone. It
concludes by discussing a provision—the Takings Clause
of the Fifth Amendment—that both recognizes a governmental power and limits its exercise.
State and Federal Power
to Regulate
State Regulatory Power
Although state constitutions may do so, the U.S. Constitution does not list the
powers state legislatures can exercise. The U.S. Constitution does place certain independent checks in the path
of state lawmaking, however. It also declares that certain powers (e.g., creating currency and taxing imports)
can be exercised only by Congress. In many other areas,
though, Congress and the state legislatures have concurrent powers. Both can make law within those areas unless
Congress preempts state regulation under the Supremacy
Clause. A very important state legislative power that operates concurrently with many congressional powers is the
police power, a broad state power to regulate for the public health, safety, morals, and welfare.
Federal Regulatory Power Article I, § 8 of
the U.S. Constitution specifies a number of ways in which
Congress may legislate concerning business and commercial matters. For example, it empowers Congress to
coin and borrow money, regulate interstate commerce, establish uniform laws regarding bankruptcies, create post
offices, and enact copyright and patent laws. The most important congressional powers contained in Article I, § 8,
however, are the powers to regulate commerce among the
states, to lay and collect taxes, and to spend for the general
welfare. Because they now are read broadly, these three
powers are the main constitutional bases for the extensive
federal social and economic regulation that exists today.
The Commerce Power
LO3-2
Explain the key role of the U.S. Constitution’s Commerce
Clause in authorizing action by Congress.
Article I, § 8 states that “The Congress shall have Power. . . . To
regulate Commerce . . . among the several States.” The
original reason for giving Congress this power to regulate interstate commerce was to nationalize economic
matters by blocking the protectionist state restrictions on
interstate trade that were common after the Revolution.
As discussed later in the chapter, the Commerce Clause
serves as an independent check on state regulation that unduly restricts interstate commerce. Our present concern,
however, is the Commerce Clause’s role as a source of
congressional regulatory power.
The literal language of the Commerce Clause simply
empowers Congress to regulate commerce that occurs
among the states. Supreme Court decisions interpreting
the Commerce Clause have held, however, that it sets up
three categories of actions in which Congress may engage:
first, regulating the channels of interstate commerce; second, regulating and protecting the instrumentalities of
interstate commerce, as well as persons or things in interstate commerce; and third, regulating activities that substantially affect interstate commerce. Largely because of
judicial decisions regarding congressional action falling
within the third category, the Commerce Clause has become a federal power with an extensive regulatory reach.
How has this transformation occurred?
The most important step in the transformation was
the Supreme Court’s conclusion that the power to regulate interstate commerce includes the power to regulate
intrastate activities that affect interstate commerce. For
example, in a 1914 decision, the Supreme Court upheld
the Interstate Commerce Commission’s regulation of railroad rates within Texas (an intrastate matter outside the
language of the Commerce Clause) because those rates
affected rail traffic between Texas and Louisiana (an interstate matter within the clause’s language). This “affecting
commerce” doctrine eventually was used to justify federal
police power measures with significant intrastate reach.
For instance, the Supreme Court upheld the application
Chapter Three Business and the Constitution
of the 1964 Civil Rights Act’s “public accommodations”
section to a family-owned restaurant in Birmingham,
Alabama. It did so because the restaurant’s racial discrimination affected interstate commerce by reducing the
restaurant’s business and limiting its purchases of out-ofstate meat and by restricting the ability of blacks to travel
among the states.
By the early 1990s, broad judicial interpretations of
the Commerce Clause led many observers to conclude
that the clause established a federal power with almost unlimited reach. Then two Supreme Court decisions, United
Gonzales v. Raich 71
States v. Lopez (1995) and United States v. Morrison
(2000), offered clear reminders that the power to regulate
interstate commerce is not without limits. In Gonzales v.
Raich, which appears below, the Supreme Court distinguished Lopez and Morrison and explained why the law at
issue fit squarely within the expansive federal regulatory
authority contemplated by the Court’s earlier Commerce
Clause decisions. Read Raich and then consider that decision alongside National Federation of Independent
Business v. Sebelius, discussion of which appears after
Raich in Figure 1.
545 U.S. 1 (U.S. Sup. Ct. 2005)
Although federal statutes and nearly all states’ laws criminalize marijuana possession and sale, a 1996 California statute made
California the first state to authorize limited use of the drug for medicinal purposes. The Compassionate Use Act created an
exemption from criminal prosecution for patients and primary caregivers who possess or cultivate marijuana for medicinal
purposes with a physician’s approval.
California residents Angel Raich and Diane Monson suffered from serious medical conditions. After prescribing numerous
conventional medicines, physicians had concluded that marijuana was the only effective treatment for Raich and Monson. Both
women had been using marijuana as a medication pursuant to their doctors’ recommendations, and both relied heavily on marijuana so that they could function without extreme pain. Monson cultivated her own marijuana. Two caregivers provided Raich
with locally grown marijuana at no charge.
In 2002, county deputy sheriffs and agents from the federal Drug Enforcement Administration (DEA) came to Monson’s
home. Although the deputies concluded that Monson’s use of marijuana was lawful under California law, the federal agents
seized and destroyed all six of her cannabis plants. Raich and Monson thereafter sued the Attorney General of the United States
and the head of the DEA in an effort to obtain an injunction barring enforcement of the federal Controlled Substances Act (CSA),
to the extent that it prevented them from possessing, obtaining, or manufacturing cannabis for their personal medical use in
accordance with California law. The CSA classifies marijuana as a controlled substance and criminalizes its possession and
sale. In their complaint, Raich and Monson claimed that enforcing the CSA against them would violate the U.S. Constitution’s
Commerce Clause and the Due Process Clause of the Fifth Amendment. The federal district court denied the request for a preliminary injunction. The U.S. Court of Appeals for the Ninth Circuit, however, directed the lower court to issue a preliminary
injunction prohibiting enforcement of the CSA against Raich and Monson (often referred to below as respondents). The U.S.
Supreme Court granted the federal government’s petition for a writ of certiorari.
Stevens, Justice
The question presented in this case is whether the power vested
in Congress by [the Commerce Clause] includes the power to
prohibit the local cultivation and use of marijuana in compliance
with California law. [This] case is made difficult by respondents’
strong arguments that they will suffer irreparable harm because,
despite a congressional finding to the contrary, marijuana does
have valid therapeutic purposes. The [issue] before us, however,
is not whether it is wise to enforce the statute in these circumstances; rather, it is whether Congress’ power to regulate interstate markets for medicinal substances encompasses the portions
of those markets that are supplied with drugs produced and consumed locally.
[Enacted in 1970], the CSA repealed most of the earlier
[federal] drug laws in favor of a comprehensive regime to combat
the international and interstate traffic in illicit drugs. Congress
devised a closed regulatory system making it unlawful to manufacture, distribute, dispense, or possess any controlled substance
except in a manner authorized by the CSA, [which] categorizes
all controlled substances into five schedules.
Congress classified marijuana [in] Schedule I. Schedule I
drugs are categorized as such because of their high potential
for abuse, lack of any accepted medical use, and absence of
any accepted safety for use in medically supervised treatment.
These three factors, in varying gradations, are also used to
categorize drugs in the other four schedules. [As Congress
72
Part One Foundations of American Law
acknowledged in the CSA, many drugs listed on the other
schedules do have accepted medical uses.] By classifying
marijuana as a Schedule I drug, [Congress made] the manufacture, distribution, or possession of marijuana . . . a criminal
offense.
Respondents . . . do not dispute that passage of the CSA . . .
was well within Congress’ commerce power. Rather, respondents’ challenge is actually quite limited; they argue that the
CSA’s categorical prohibition of the manufacture and possession of marijuana as applied to the intrastate manufacture
and possession of marijuana for medical purposes pursuant to
California law exceeds Congress’ authority under the Commerce Clause.
[This Court’s cases] have identified three general categories
of regulation in which Congress is authorized to engage under
its commerce power. First, Congress can regulate the channels
of interstate commerce. Second, Congress has authority to regulate and protect the instrumentalities of interstate commerce,
and persons or things in interstate commerce. Third, Congress
has the power to regulate activities that substantially affect interstate commerce. Only the third category is implicated in the
case at hand.
Our case law firmly establishes Congress’ power to regulate
purely local activities that are part of an economic “class of activities” [having] a substantial effect on interstate commerce.
See, e.g., Wickard v. Filburn, 317 U.S. 111 (1942). As we stated
in Wickard, “even if appellee’s activity be local and though it
may not be regarded as commerce, it may still, whatever its nature, be reached by Congress if it exerts a substantial economic
effect on interstate commerce.” In Wickard, we upheld the application of regulations promulgated under the Agricultural
Adjustment Act of 1938, which were designed to control the
volume of wheat moving in interstate and foreign commerce in
order to avoid surpluses and consequent abnormally low prices.
The regulations established an allotment of 11.1 acres for
Filburn’s 1941 wheat crop, but he sowed 23 acres, intending to
use the excess by consuming it on his own farm. Filburn argued
that even though Congress [had the] power to regulate the production of goods for commerce, that power did not authorize
“federal regulation [of] production not intended in any part for
commerce but wholly for consumption on the farm.” Justice
Jackson’s opinion for a unanimous Court rejected this submission. He wrote:
The effect of the statute before us is to restrict the amount
which may be produced for market and the extent as well to
which one may forestall resort to the market by producing
to meet his own needs. That [Filburn’s] own contribution to
the demand for wheat may be trivial by itself is not enough
to remove him from the scope of federal regulation where, as
here, his contribution, taken together with that of many others
similarly situated, is far from trivial.
Wickard thus establishes that Congress can regulate purely
intrastate activity that is not itself “commercial,” in that it is not
produced for sale, if it concludes that failure to regulate that class
of activity would undercut the regulation of the interstate market
in that commodity.
The similarities between this case and Wickard are striking. Like the farmer in Wickard, respondents are cultivating, for
home consumption, a fungible commodity for which there is an
established, albeit illegal, interstate market. Just as the Agricultural Adjustment Act was designed “to control the volume [of
wheat] moving in interstate and foreign commerce in order to
avoid surpluses” and consequently control the market price, a
primary purpose of the CSA is to control the supply and demand of controlled substances in both lawful and unlawful drug
markets. In Wickard, we had no difficulty concluding that Congress had a rational basis for believing that . . . leaving homeconsumed wheat outside the regulatory scheme would have a
substantial influence on price and market conditions. Here too,
Congress had a rational basis for concluding that leaving homeconsumed marijuana outside federal control would similarly affect price and market conditions.
More concretely, one concern prompting inclusion of wheat
grown for home consumption in the 1938 Act was that rising
market prices could draw such wheat into the interstate market,
resulting in lower market prices. The parallel concern making
it appropriate to include marijuana grown for home consumption in the CSA is the likelihood that the high demand in the
interstate market will draw such marijuana into that market.
While the diversion of homegrown wheat tended to frustrate the
federal interest in stabilizing prices by regulating the volume of
commercial transactions in the interstate market, the diversion
of homegrown marijuana tends to frustrate the federal interest
in eliminating commercial transactions in the interstate market
in their entirety. In both cases, the regulation is squarely within
Congress’ commerce power because production of the commodity meant for home consumption, be it wheat or marijuana, has
a substantial effect on supply and demand in the national market
for that commodity.
To support their [argument that applying the CSA to them
would violate the Commerce Clause], respondents rely heavily
on two of our more recent Commerce Clause cases, United States
v. Lopez, 514 U.S. 549 (1995), and United States v. Morrison,
529 U.S. 598 (2000). [However, respondents] overlook the larger
context of modern-era Commerce Clause jurisprudence preserved by those cases. [T]he statutory challenges in Lopez and
Morrison were markedly different from the [statutory] challenge
Chapter Three Business and the Constitution
in the case at hand. Here, respondents ask us to excise individual
applications of a concededly valid statutory scheme. In contrast,
in both Lopez and Morrison, the parties asserted that a particular
statute or provision fell outside Congress’ commerce power in its
entirety. This distinction is pivotal, for we have often reiterated
that “where the class of activities is regulated and that class is
within the reach of federal power, the courts have no power ‘to
excise, as trivial, individual instances’ of the class.” [Citations of
authority omitted.]
At issue in Lopez was the validity of the Gun-Free School
Zones Act of 1990, which was a brief, single-subject statute
making it a [federal] crime for an individual to possess a gun
in a school zone. Distinguishing our earlier cases holding that
comprehensive regulatory statutes may be validly applied to
local conduct that does not, when viewed in isolation, have a
significant impact on interstate commerce, we held the statute
invalid.
The statutory scheme that the government is defending in this
litigation is at the opposite end of the regulatory spectrum. [The
CSA is] a lengthy and detailed statute creating a comprehensive framework for regulating the production, distribution, and
possession of five classes of controlled substances. [The CSA’s
classification of marijuana], unlike the discrete prohibition established by the Gun-Free School Zones Act of 1990, was merely
one of many “essential parts of a larger regulation of economic
activity, in which the regulatory scheme could be undercut unless the intrastate activity were regulated.” [Citation omitted.]
Our opinion in Lopez casts no doubt on the validity of such a
program.
Nor does this Court’s holding in Morrison. The Violence
Against Women Act of 1994 created a federal civil remedy
for the victims of gender-motivated crimes of violence. The
remedy . . . generally depended on proof of the violation of a
state law. We held the statute unconstitutional because, like the
statute in Lopez, it did not regulate economic activity.
Unlike those at issue in Lopez and Morrison, the activities regulated by the CSA are quintessentially economic. The
CSA regulates the production, distribution, and consumption
of commodities for which there is an established, and lucrative, interstate market. Prohibiting the intrastate possession or
manufacture of an article of commerce is a rational (and commonly utilized) means of regulating commerce in that product.
Because the CSA is a statute that directly regulates economic,
commercial activity, our opinion in Morrison casts no doubt on
its constitutionality.
One need not have a degree in economics to understand why
a nationwide exemption for the vast quantity of marijuana . . .
locally cultivated for personal use (which presumably would
include use by friends, neighbors, and family members) may
73
have a substantial impact on the interstate market for this extraordinarily popular substance. The congressional judgment
that an exemption for such a significant segment of the total
market would undermine the orderly enforcement of the entire regulatory scheme is entitled to a strong presumption of
validity.
[T]hat the California exemptions will have a significant impact on both the supply and demand sides of the market for marijuana is . . . readily apparent. [Although] most prescriptions for
legal drugs . . . limit the dosage and duration of the usage, under
California law the doctor’s permission to recommend marijuana
use is open-ended. The [California statute’s authorization for the
doctor] to grant permission whenever the doctor determines that
a patient is afflicted with “any other illness for which marijuana
provides relief” is broad enough to allow even the most scrupulous doctor to conclude that some recreational uses would be
therapeutic. And our cases have taught us that there are some unscrupulous physicians who overprescribe when it is sufficiently
profitable to do so.
The exemption for cultivation by patients and caregivers can
only increase the supply of marijuana in the California market.
The likelihood that all such production will promptly terminate
when patients recover or will precisely match the patients’ medical needs during their convalescence seems remote, whereas the
danger that excesses will satisfy some of the admittedly enormous demand for recreational use seems obvious. Moreover,
that the national and international narcotics trade has thrived in
the face of vigorous criminal enforcement efforts suggests that
no small number of unscrupulous people will make use of the
California exemptions to serve their commercial ends whenever
it is feasible to do so.
[T]he case for the exemption comes down to the claim that a
locally cultivated product that is used domestically rather than
sold on the open market is not subject to federal regulation.
Given the findings in the CSA and the undisputed magnitude of
the commercial market for marijuana, our decisions in Wickard v.
Filburn and the later [cases] endorsing its reasoning foreclose
that claim.
We do note, however, the presence of another avenue of relief
[for the respondents: the CSA-authorized procedures that can
lead to] reclassification of Schedule I drugs. But perhaps even
more important than these legal avenues is the democratic process, in which the voices of voters allied with these respondents
may one day be heard in the halls of Congress. Under the present
state of the law, however, the judgment of the Court of Appeals
[cannot stand].
Court of Appeals decision vacated; case remanded for further
proceedings.
74
Part One Foundations of American Law
Figure 1 A Note on the Affordable Care Act Decision
Congress enacted the Patient Protection and Affordable Care Act (hereinafter, Affordable Care Act) in 2010. Several cases
filed shortly thereafter in federal courts presented constitutional challenges to two provisions in the statute: (1) the requirement, applicable to most Americans, that they have health insurance in force by a certain date specified in the law or, instead,
pay what the statute termed a “[s]hared responsibility payment” (a provision that has come to be known as the individual mandate and will be referred to by that designation here) and (2) the requirement that states participate in an expansion of Medicaid, the long-standing federally created program under which the federal government and the states act together to fund health
care for low-income persons and others with special needs.
After the lower courts issued conflicting decisions, the Supreme Court agreed to decide the constitutionality of the challenged provisions. National Federation of Independent Business v. Sebelius (hereinafter, NFIB) proved to be not only an important Commerce Clause case, but also a major decision regarding two other enumerated powers, the taxing power and the
spending power. This note focuses on NFIB’s treatment of the Commerce Clause issue triggered by the individual mandate
referred to above. An edited version of NFIB appears somewhat later in the chapter. It focuses on the 2012 decision’s taxingpower and spending-power analyses, which dealt, respectively, with the individual mandate and the Medicaid expansion
provision.
When Congress enacted the Affordable Care Act, it relied chiefly on the Commerce Clause as the source of power to enact
the law. The federal government, accordingly, placed primary emphasis on the Commerce Clause when it sought to defend the
individual mandate in the courts. The government invoked its taxing power as an alternative justification.
Although there was no true majority opinion for the Supreme Court on the commerce-power question in NFIB, five
justices concluded that the individual mandate exceeded the regulatory authority Congress possesses under the Commerce
Clause. Chief Justice Roberts, who wrote for a majority of the Court on the taxing-power question, garnered no official votes
for the portion of his opinion dealing with the commerce power. However, the four dissenting justices—Scalia, Kennedy,
Thomas, and Alito—joined in an opinion adopting a commerce-power analysis that closely resembled the Chief Justice’s analysis. (The dissenters’ extreme dissatisfaction with the Chief Justice’s treatment of the taxing-power issue probably kept them
from joining any part of the Roberts opinion despite their apparent agreement with his Commerce Clause analysis.)
Chief Justice Roberts and the four dissenters separately acknowledged that the Court’s precedents contemplated expansive
authority for Congress under the Commerce Clause. They concluded, however, that the individual mandate went beyond what
those precedents would authorize. The Chief Justice stressed that in giving Congress the power to “regulate” commerce, the
Commerce Clause presupposes the existence of relevant activity to be regulated. The individual mandate, he observed, sought
to compel persons not otherwise inclined to engage in commercial activity to do so by purchasing insurance. Noting the
seemingly unprecedented nature of a congressional requirement that persons make a purchase from a private party, the Chief
Justice asserted that the Court’s precedents dealing with activities substantially affecting interstate commerce could not be
stretched far enough to let Congress reach the absence of commercial activity and regulate it by requiring such activity.
The four dissenters took a similar tack, emphasizing that the individual mandate amounted to an impermissible attempt to
regulate inactivity rather than the activity necessary, in their view, to make the Commerce Clause a potential source of regulatory
authority. (The other four justices—Ginsburg, Breyer, Sotomayor, and Kagan—regarded the Court’s “affecting commerce” precedents as leading logically to the conclusion that the individual mandate should be seen as authorized under the Commerce Clause,
given the inevitability that everyone will need health care at some point and the notion that the insurance requirement was largely
a payment mechanism designed to help control health care costs. Their Commerce Clause arguments failed, however.)
With five justices concluding that the Commerce Clause did not authorize the individual mandate, it became necessary for
the Court to determine whether a separate enumerated power—the taxing power—would provide the necessary constitutional
foundation for the provision (which, as noted earlier, required that an individual make a “[s]hared responsibility payment” if
he or she did not obtain health insurance). Although the taxing-power argument was its backup argument, the government
succeeded with it. Chief Justice Roberts, joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan, determined that the congressional power to tax justified the provision. (See the later edited version of NFIB, which focuses on the taxing-power issue
as well as the spending-power issue raised by the Affordable Care Act’s Medicaid expansion provision.)
Critics of the Affordable Care Act and of the notion that the Commerce Clause permits expansive federal power likely
were heartened by the government’s failure to succeed with its commerce-power argument in NFIB. But if critics won the
Commerce Clause battle, they lost the constitutional war. The government’s success with the taxing-power argument meant
that the individual mandate—often described as the centerpiece of the Affordable Care Act—was every bit as constitutional
as it would have been if the government had succeeded with the Commerce Clause argument.
It may be too soon to determine the full impact of NFIB’s treatment of the Commerce Clause issue on future cases. Some
preliminary conclusions can be drawn, however. NFIB seemingly prohibits congressional attempts to compel purchases of
Chapter Three Business and the Constitution
75
products from private parties or to require, in some similar fashion, otherwise disinclined persons to engage in economic
activity. That lesson from NFIB is important, though the concerns expressed by five of the justices about the supposedly unprecedented nature of what Congress attempted to do in the individual mandate suggest that congressional attempts to require
the commercially inactive to become active had not previously occurred and thus might not have become a frequent regulatory angle anyway. Importantly, too, NFIB does not appear to limit the otherwise broad-ranging authority that the Commerce
Clause, as interpreted in earlier decisions, gives Congress regarding economic activity.
The Taxing Power Article I, § 8 of the Constitution
states that “The Congress shall have Power To lay and
collect Taxes, Duties, Imposts and Excises.” The main
purpose of this taxing power is to provide a means of raising revenue for the federal government. The taxing power,
however, may also serve as a regulatory device. Congress
may choose to regulate a disfavored activity by taxing
it heavily or may opt to encourage a favored activity by
lowering or eliminating a tax on it. Today, the reach of
the taxing power is seen as very broad, as evidenced by
National Federation of Independent Business v. Sebelius,
which follows shortly.
The Spending Power If taxing-power regulation uses
a federal club, congressional spending-power regulation
employs a federal carrot. Article I, § 8 also gives Congress
a broad ability to spend for the general welfare. By basing
the receipt of federal money on the performance of certain
conditions, Congress can use the spending power to encourage states to take certain actions and thereby advance
specific regulatory ends. Conditional federal grants to the
states, for instance, are common today.
Over the past several decades, congressional
spending-power regulation routinely has been upheld.
There are limits, however, on its use. First, an exercise of
the spending power must serve general public purposes
rather than particular interests. Second, when Congress
conditions the receipt of federal money on certain conditions, it must do so clearly. Third, the condition must be
reasonably related to the purpose underlying the federal
expenditure. This means, for instance, that Congress
probably could not condition a state’s receipt of federal
highway money on the state’s adoption of a one-house
legislature. Fourth, though Congress may use conditional grants of funding to states to encourage them to
take certain regulatory actions, Congress can neither
compel states to enact a desired regulatory program nor
otherwise coerce them into doing so. For an example of
issues arising under this last limit on Congress’s spending power, see the National Federation case, which follows shortly.
The Necessary and Proper Clause After listing the
commerce power, the taxing and spending powers, and
various other powers extended to Congress, Article I,
§ 8 concludes with a provision granting Congress the
further power to “make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers. . . .” The Necessary and Proper Clause is
dependent upon Article I, § 8’s previously listed powers but augments them by permitting Congress to enact
laws that are useful or conducive to the exercise of those
enumerated powers. For instance, in Gonzales v. Raich
(which appeared earlier in the chapter), the Supreme
Court held that the Necessary and Proper Clause aided
the Commerce Clause in sustaining, against constitutional attack, the application of the federal law banning
marijuana possession against persons who used marijuana under a state law that permitted such use for medicinal purposes.
National Federation of Independent Business v. Sebelius
567 U.S. 519 (U.S. Sup. Ct. 2012)
Congress enacted the Patient Protection and Affordable Care Act in 2010 (hereinafter, ACA) in an effort to increase the number of Americans covered by health insurance and decrease the cost of health care. As noted earlier in Figure 1, one key ACA
provision has come to be known as the individual mandate. That provision requires most Americans to maintain “minimum
essential” health insurance coverage. For persons who are not exempt, and who do not receive health insurance through an
employer or government program, the means of satisfying the requirement is to purchase insurance from a private company.
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Part One Foundations of American Law
The ACA further requires that those who do not comply with the mandate to have insurance in force must make a “[s]hared
responsibility payment” to the federal government. That payment, which the ACA describes as a “penalty,” is calculated as
a percentage of household income, subject to a floor based on a specified dollar amount and a ceiling based on the average
annual premium the individual would have to pay for qualifying private health insurance. The ACA states that this “penalty”
will be paid to the Internal Revenue Service (IRS) with an individual’s taxes, and “shall be assessed and collected in the same
manner” as tax penalties. Some individuals who are subject to the insurance mandate are nonetheless exempt from the shared
responsibility payment if their income is below a certain threshold.
As noted in Figure 1, the ACA also features a provision calling for an expansion of the Medicaid program, which offers federal funding to states to assist low-income families, children, pregnant women, the blind, the elderly, and the disabled in obtaining medical care. The ACA provision at issue expands Medicaid’s scope and increases the number of individuals the states must
cover. For example, the ACA calls for state programs to provide Medicaid coverage to adults with incomes up to 133 percent
of the federal poverty level, whereas many states historically have covered adults with children only if their income is considerably lower and have not covered childless adults at all. The ACA’s Medicaid provision increases federal funding to cover all of
the states’ costs in expanding Medicaid coverage in early years of the expansion and most of those costs in succeeding years.
However, the ACA also provides that if a state does not comply with the new Medicaid coverage requirements, the state could
lose not merely the federal funding for those requirements, but potentially all of its federal Medicaid funds.
In various federal court cases, plaintiffs challenged the above-referred-to ACA provisions on constitutional grounds. The
cases yielded conflicting results. Included among the cases was one filed by 26 states, several individuals, and the National
Federation of Independent Business. In that case, the U.S. Court of Appeals for the Eleventh Circuit concluded that Congress
lacked constitutional authority to enact the individual mandate. However, the Eleventh Circuit upheld the Medicaid expansion
as a valid exercise of Congress’s spending power. The U.S. Supreme Court agreed to decide the case.
As explained in Figure 1, five justices concluded in National Federation of Independent Business v. Sebelius that the Commerce Clause could not be interpreted as authorizing the individual mandate. The following edited version of the opinion authored by Chief Justice Roberts focuses on whether Congress’s taxing power authorizes the individual mandate and on whether
Congress’s spending power justifies the Medicaid expansion. Justices Ginsburg, Breyer, Sotomayor, and Kagan joined the
Chief Justice to form a majority on the taxing-power question. On the spending-power question, Justices Breyer and Kagan
subscribed to the Chief Justice’s analysis. Justices Ginsburg and Sotomayor provided the fourth and fifth votes for the outcome
reached by the Chief Justice’s opinion on the Medicaid expansion, though they otherwise disagreed with his analysis.
Roberts, Chief Justice
Today we resolve constitutional challenges to two provisions of
the ACA: the individual mandate, which requires individuals to
purchase a health insurance policy providing a minimum level of
coverage [or, instead, make a “[s]hared responsibility payment”];
and the Medicaid expansion, which gives funds to the states on
the condition that they provide specified health care to all citizens whose income falls below a certain threshold.
[R]ather than granting general authority to perform all the
conceivable functions of government, the Constitution lists, or
enumerates, the federal government’s powers. The same does not
apply to the states, because the Constitution is not the source of
their power. The Constitution may restrict state governments—as
it does, for example, by forbidding them to deny any person the
equal protection of the laws. But where such prohibitions do not
apply, state governments do not need constitutional authorization
to act. The states thus can and do perform many of the vital functions of modern government—punishing street crime, running
public schools, and zoning property for development, to name
but a few. Our cases refer to this general power, possessed by
the states but not by the federal government, as the police power.
This case concerns . . . powers that the Constitution does
grant the federal government, but which must be read carefully
to avoid creating a general federal authority akin to the police
power. The Constitution authorizes Congress to “regulate Commerce with foreign Nations, and among the several States, and
with the Indian Tribes.” Art. I, § 8, cl. 3. Congress may also “lay
and collect Taxes, Duties, Imposts and Excises, to pay the Debts
and provide for the common Defence and general Welfare of the
United States.” Art. I, § 8, cl. 1. Put simply, Congress may tax
and spend. This grant gives the federal government considerable
influence even in areas where it cannot directly regulate. The
federal government may enact a tax on an activity that it cannot authorize, forbid, or otherwise control. And in exercising its
spending power, Congress may offer funds to the states, and may
condition those offers on compliance with specified conditions.
These offers may well induce the states to adopt policies that the
federal government itself could not impose.
The reach of the federal government’s enumerated powers
is broader still because the Constitution authorizes Congress to
“make all Laws which shall be necessary and proper for carrying
into Execution the foregoing Powers.” Art. I, § 8, cl. 18. We have
Chapter Three Business and the Constitution
long read this provision to give Congress great latitude in exercising its powers. Our respect for Congress’s policy judgments
[, however,] can never extend so far as to disavow restraints on
federal power that the Constitution carefully constructed.
The Individual Mandate and the Taxing Power
The government advances two theories for the proposition that
Congress had constitutional authority to enact the ACA’s individual mandate. First, the government argues that Congress had
the power to enact the mandate under the Commerce Clause.
[Alternatively], the government argues that if the commerce
power does not support the mandate, we should nonetheless uphold it as an exercise of Congress’s power to tax.
[Authors’ note: As explained earlier, the government failed to
succeed with its Commerce Clause argument. For discussion of
the Court’s Commerce Clause analysis, see Figure 1.]
Because the Commerce Clause does not support the individual mandate, it is necessary to turn to the government’s second
argument: that the mandate may be upheld as within Congress’s
enumerated power to “lay and collect Taxes.” Under the mandate, if an individual does not maintain health insurance, the only
consequence is that he must make an additional payment to the
IRS when he pays his taxes. That, according to the government,
means the mandate can be regarded as establishing a condition—
not owning health insurance—that triggers a tax—the required
payment to the IRS. Under that theory, the mandate is not a legal
command to buy insurance. Rather, it makes going without insurance just another thing the government taxes, like buying
gasoline or earning income. And if the mandate is in effect just
a tax hike on . . . taxpayers who do not have health insurance, it
may be within Congress’s constitutional power to tax. Granting
the ACA the full measure of deference owed to federal statutes,
it can be so read.
The exaction the Affordable Care Act imposes on those without health insurance looks like a tax in many respects. The “[s]
hared responsibility payment,” as the statute entitles it, is paid
into the Treasury by “taxpayer[s]” when they file their tax returns. It does not apply to individuals who do not pay federal
income taxes because their household income is less than the
filing threshold in the Internal Revenue Code. For taxpayers who
do owe the payment, its amount is determined by such familiar
factors as taxable income, number of dependents, and joint filing
status. The requirement to pay is found in the Internal Revenue
Code and enforced by the IRS, which . . . must assess and collect
it “in the same manner as taxes.” This process yields the essential feature of any tax: it produces at least some revenue for the
government. Indeed, the payment is expected to raise about $4
billion per year by 2017.
It is of course true that the Act describes the payment as a
“penalty,” not a “tax.” But . . . that label . . . does not determine
77
whether the payment may be viewed as an exercise of Congress’s
taxing power. [We have decided cases in which something labeled as a “penalty” was nevertheless a tax, and other cases in
which something labeled a “tax” was nevertheless a penalty.]
The [use of a functional analysis that is not tied to labels]
suggests that the shared responsibility payment may for constitutional purposes be considered a tax, not a penalty. First, for most
Americans the amount due will be far less than the price of insurance, and, by statute, it can never be more. In 2016, for example,
individuals making $35,000 a year are expected to owe the IRS
about $60 for any month in which they do not have health insurance. Someone with an annual income of $100,000 a year
would likely owe about $200. The price of a qualifying insurance
policy is projected to be around $400 per month. It may often be
a reasonable financial decision to make the payment rather than
purchase insurance, unlike [a situation in which there would be
a large] financial punishment. Second, the individual mandate
contains no . . . requirement [of knowing wrongdoing or other
corrupt intent]. Third, the payment is collected solely by the IRS
through the normal means of taxation—except that the IRS is not
allowed to use those means most suggestive of a punitive sanction, such as criminal prosecution. The [types of] reasons the
Court [has used in previous cases for concluding that] what was
called a “tax” . . . was a penalty support the conclusion that what
is called a “penalty” here may be viewed as a tax.
None of this is to say that the payment is not intended to affect individual conduct. Although the payment will raise considerable revenue, it is plainly designed to expand health insurance
coverage. But taxes that seek to influence conduct are nothing
new. Some of our earliest federal taxes sought to deter the purchase of imported manufactured goods in order to foster the
growth of domestic industry. Today, federal and state taxes can
compose more than half the retail price of cigarettes, not just to
raise more money, but to encourage people to quit smoking. And
we have upheld such obviously regulatory measures as taxes on
selling marijuana and sawed-off shotguns.
Indeed, “[e]very tax is in some measure regulatory. To some
extent it interposes an economic impediment to the activity taxed
as compared with others not taxed.” [Citation omitted.] That
[the challenged ACA provision] seeks to shape decisions about
whether to buy health insurance does not mean that it cannot be
a valid exercise of the taxing power. Because the Constitution
permits such a tax, it is not our role to forbid it, or to pass upon
its wisdom or fairness.
The Medicaid Expansion and the Spending Power
The states also contend that the Medicaid expansion exceeds
Congress’s authority under [its spending power]. They claim that
Congress is coercing the states to adopt the changes it wants by
threatening to withhold all of a state’s Medicaid grants, unless
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Part One Foundations of American Law
the state accepts the new expanded funding and complies with
the conditions that come with it. This, they argue, violates the
basic principle that the “federal government may not compel the
states to enact or administer a federal regulatory program.” New
York v. United States, 505 U.S. 144, 188 (1992).
There is no doubt that the ACA [calls for] dramatic[] increases
[in] state obligations under Medicaid. The current Medicaid program requires states to cover only certain discrete categories of
needy individuals—pregnant women, children, needy families,
the blind, the elderly, and the disabled. There is no mandatory
coverage for most childless adults, and the states typically do
not offer any such coverage. The states also enjoy considerable
flexibility with respect to the coverage levels for parents of needy
families. On average states cover only those unemployed parents
who make less than 37 percent of the federal poverty level, and
only those employed parents who make less than 63 percent of
the poverty line.
The Medicaid provisions of the ACA, in contrast, require
states to expand their Medicaid programs by 2014 to cover all
individuals under the age of 65 with incomes below 133 percent
of the federal poverty line. The ACA provides that the federal
government will pay 100 percent of the costs of covering these
newly eligible individuals through 2016. In the following years,
the federal payment level gradually decreases, to a minimum of
90 percent. In light of the expansion in coverage mandated by the
ACA, the federal government estimates that its Medicaid spending will increase by approximately $100 billion per year.
The [Constitution’s] Spending Clause grants Congress the
power “to pay the Debts and provide for the . . . general Welfare
of the United States.” Art. I, § 8, cl. 1. We have long recognized
that Congress may use this power to grant federal funds to the
states, and may condition such a grant upon the states’ “taking
certain actions that Congress could not require them to take.”
[Citation omitted.] Such measures “encourage a state to regulate
in a particular way, [and] influenc[e] a state’s policy choices.”
[Citation omitted.]
At the same time, our cases have recognized limits on
Congress’s power under the Spending Clause to secure state
compliance with federal objectives. We have repeatedly characterized . . . Spending Clause legislation as “much in the nature
of a contract” ’ [Citations omitted.] The legitimacy of Congress’s exercise of the spending power “thus rests on whether
the State voluntarily and knowingly accepts the terms of the
contract.” [Citation omitted.] Respecting this limitation is critical to ensuring that Spending Clause legislation does not undermine the status of the states as independent sovereigns in our
federal system.
That insight has led this Court to strike down federal legislation that commandeers a state’s legislative or administrative
apparatus for federal purposes. It has also led us to scrutinize
Spending Clause legislation to ensure that Congress is not using
financial inducements to exert a “power akin to undue influence.” [Citation omitted.] Congress may use its spending power
to create incentives for states to act in accordance with federal
policies. But when pressure turns into compulsion, the legislation runs contrary to our system of federalism. Spending Clause
programs do not pose this danger when a state has a legitimate
choice whether to accept the federal conditions in exchange for
federal funds. In such a situation, state officials can fairly be held
politically accountable for choosing to accept or refuse the federal offer. But when the state has no choice, the federal government can achieve its objectives without accountability.
Congress may attach appropriate conditions to federal taxing
and spending programs to preserve its control over the use of
federal funds. In the typical case we look to the states to defend
their prerogatives by adopting “the simple expedient of not yielding” to federal blandishments when they do not want to embrace
the federal policies as their own. [Citation omitted.] The states,
however, argue that the Medicaid expansion is far from the typical case. They object that [instead] of simply refusing to grant
the new funds to states that will not accept the new conditions,
Congress has also threatened to withhold those states’ existing
Medicaid funds. The states claim that this threat serves no purpose other than to force unwilling states to sign up for the dramatic expansion in health care coverage effected by the ACA.
Given the nature of the threat and the programs at issue here, we
must agree.
In South Dakota v. Dole, 483 U.S. 203 (1987), we considered
a challenge to a federal law that threatened to withhold five percent of a State’s federal highway funds if the State did not raise
its drinking age to 21. The Court found that the condition was
“directly related to one of the main purposes for which highway
funds are expended—safe interstate travel.” 483 U.S. at 208. At
the same time, the condition was not a restriction on how the
highway funds—set aside for specific highway improvement and
maintenance efforts—were to be used. We accordingly asked
whether “the financial inducement offered by Congress” was “so
coercive as to pass the point at which pressure turns into compulsion.” Id. at 211. By “financial inducement” the Court meant the
threat of losing 5 percent of highway funds; no new money was
offered to the states to raise their drinking ages. We found that
the inducement was not impermissibly coercive, because Congress was offering only “relatively mild encouragement to the
States.” Id. We observed that “all South Dakota would lose if she
adheres to her chosen course as to a suitable minimum drinking
age is 5 percent” of her highway funds. Id. In fact, the federal
funds at stake constituted less than half of one percent of South
Dakota’s budget at the time. In consequence, “we conclude[d]
that [the] encouragement to state action [was] a valid use of the
spending power.” Id. at 212. Whether to accept the drinking age
Chapter Three Business and the Constitution
79
change “remain[ed] the prerogative of the states not merely in
theory but in fact.” Id. at 211–212.
In this case, the financial “inducement” Congress has chosen is much more than “relatively mild encouragement”—it is a
gun to the head. A state that opts out of the ACA’s expansion in
health care coverage . . . stands to lose not merely “a relatively
small percentage” of its existing Medicaid funding, but all of it.
Medicaid spending accounts for over 20 percent of the average
state’s total budget, with federal funds covering 50 to 83 percent
of those costs. It is easy to see how the Dole Court could conclude that the threatened loss of less than half of one percent
of South Dakota’s budget left that state a “prerogative” to reject
Congress’s desired policy, “not merely in theory but in fact.” The
threatened loss of over 10 percent of a state’s overall budget, in
contrast, is economic dragooning that leaves the states with no
real option but to acquiesce in the Medicaid expansion.
Nothing in our opinion precludes Congress from offering funds under the ACA to expand the availability of health
care, and requiring that states [agreeing to accept] such funds
comply with the conditions on their use. What Congress is not
free to do is to penalize states that choose not to participate in
that new program by taking away their existing Medicaid funding. In light of the Court’s holding, the [federal government]
cannot . . . withdraw existing Medicaid funds [from states] for
failure to comply with the requirements set out in the [ACA’s
Medicaid] expansion.
The Court today limits the financial pressure the [federal government] may apply to induce states to accept the terms of the
Medicaid expansion. As a practical matter, that means states may
now choose to reject the expansion. Some states may indeed decline to participate. Other states, however, may voluntarily sign
up, finding the idea of expanding Medicaid coverage attractive,
particularly given the level of federal funding the ACA offers at
the outset.
Independent Checks on
the Federal Government
and the States
Fourteenth Amendment says that no state shall “deny to
any person . . . the equal protection of the laws.”
Thus, although the due process guarantees clearly apply
to both the federal government and the states, the First
Amendment seems to apply only to the federal government and the Equal Protection Clause only to the states.
The First Amendment’s free speech guarantee, however,
has been included within the “liberty” protected by Fourteenth Amendment due process as a result of Supreme
Court decisions. The free speech guarantee, therefore,
restricts state governments as well as the federal government. This is an example of the process of incorporation,
by which almost all Bill of Rights provisions now apply
to the states. The criminal procedure–related provisions
in the Fourth, Fifth, and Sixth Amendments (examined
in Chapter 5 of this text) are further examples of Bill of
Rights protections that the federal government must honor
but that state and local governments must respect as well,
because of the incorporation doctrine. The Fourteenth
Amendment’s equal protection guarantee, on the other
hand, has been made applicable to federal government action through incorporation of it within the Fifth Amendment’s Due Process Clause.
Even if a regulation is within Congress’s enumerated powers or a state’s police power, it still is unconstitutional if it
collides with one of the Constitution’s independent checks.
This section discusses three checks that limit federal and
state regulation of the economy: freedom of speech, due
process, and equal protection. Before discussing these
guarantees, however, we must consider three foundational
matters.
Incorporation
Describe the incorporation doctrine’s role in making most
guarantees of the Bill of Rights operate to protect persons
LO3-3
not only against certain federal government actions, but
also against certain state and local government actions.
The Fifth Amendment prevents the federal government
from depriving “any person . . . of life, liberty, or property,
without due process of law.” The Fourteenth Amendment
creates the same prohibition with regard to the states.
The literal language of the First Amendment, however,
restricts only federal government action. Moreover, the
Judgment of Eleventh Circuit affirmed insofar as it held that
individual mandate exceeded commerce power, reversed insofar as it held that individual mandate was not authorized by
taxing power, and reversed insofar as it held that Medicaid expansion was justified under spending power.
Government Action People often talk as if the
Constitution protects them against anyone who might
threaten their rights. However, most of the Constitution’s
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Part One Foundations of American Law
individual rights provisions block only the actions of government bodies, federal, state, and local.1 Private behavior that denies individual rights, while perhaps forbidden
by statute, is very seldom a constitutional matter. This
government action or state action requirement forces
courts to distinguish between governmental behavior and
private behavior. Judicial approaches to this problem have
varied over time.
Before World War II, only formal arms of government
such as legislatures, administrative agencies, municipalities, courts, prosecutors, and state universities were
deemed state actors. After the war, however, the scope
of government action increased considerably, with various sorts of traditionally private behavior being subjected
to individual rights limitations. The Supreme Court, in
Marsh v. Alabama (1946), treated a privately owned company town’s restriction of free expression as government
action under the public function theory because the town
was nearly identical to a regular municipality in most
respects. In Shelley v. Kraemer (1948), the Court held
that when state courts enforced certain white homeowners’ private agreements not to sell their homes to blacks,
there was state action that violated the Equal Protection
Clause. Later, in Burton v. Wilmington Parking Authority
(1961), the Court concluded that racial discrimination by
a privately owned restaurant located in a state-owned and
state-operated parking garage was unconstitutional state
action, in part because the garage and the restaurant were
intertwined in a mutually beneficial “symbiotic” relationship. Among the other factors leading courts to find state
action during the 1960s and 1970s were extensive government regulation of private activity and government financial aid to a private actor.
The Court, however, severely restricted the reach
of state action during the 1970s and 1980s. Since then,
private behavior generally has not been held to constitute state action unless a regular unit of government is
directly responsible for the challenged private behavior
because it has coerced or encouraged such behavior. The
public function doctrine, moreover, has been limited to
situations in which a private entity exercises powers that
have traditionally been exclusively reserved to the state;
private police protection is a possible example. In addition, government regulation and government funding have
become somewhat less important factors in state action
determinations.
However, the Thirteenth Amendment, which bans slavery and involuntary servitude throughout the United States, does not have a government
action requirement. Some state constitutions, moreover, have individual
rights provisions that lack a state action requirement.
1
Means-Ends Tests
Explain the differences among the means-ends tests used
LO3-4 by courts when the constitutionality of government action
is being determined (strict scrutiny, intermediate scrutiny,
and rational basis).
Throughout this chapter, you will see tests of constitutionality that may seem strange at first glance. One example is the
test for determining whether laws that discriminate on the
basis of sex violate equal protection. This test says that to
be constitutional, such laws must be substantially related to
the achievement of an important government purpose. The
Equal Protection Clause does not contain such language. It
simply says that “No State shall . . . deny to any person . . . the
equal protection of the laws.” What is going on here?
The sex discrimination test just stated is a means-ends
test developed by the Supreme Court. Such tests are judicially
created because no constitutional right is absolute and because judges, therefore, must weigh individual rights against
the social purposes served by laws that restrict those rights.
In other words, means-ends tests determine how courts strike
the balance between individual rights and the social needs
that may justify their suppression. The “ends” component
of a means-ends test specifies how significant a social purpose must be in order to justify the restriction of a right. The
“means” component states how effectively the challenged law
must promote that purpose in order to be constitutional. In
the sex discrimination test, for example, the challenged law
must serve an “important” government purpose (the significance of the end) and must be “substantially” related to the
achievement of that purpose (the effectiveness of the means).
Some constitutional rights are deemed more important
than others. Accordingly, courts use tougher tests of constitutionality in certain cases and more lenient tests in other
situations. Sometimes these tests are lengthy and complicated. Throughout the chapter, therefore, we will simplify
by referring to three general kinds of means-ends tests:
1. The rational basis test. This is a very relaxed test of
constitutionality that challenged laws usually pass
with ease. A typical formulation of the rational basis
test might say that government action need only have a
reasonable relation to the achievement of a legitimate
government purpose to be constitutional.
2. Intermediate scrutiny. This comes in many forms; the
sex discrimination test discussed above is an example.
3. Full strict scrutiny. Here, the court might say that the
challenged law must be necessary to the fulfillment
of a compelling government purpose. (Sometimes a
Chapter Three Business and the Constitution
court might choose different phrasing, such as by saying that the challenged law must be narrowly tailored
to fulfillment of the government’s compelling purpose.
Despite the different phrasing, the test is substantively
the same.) Government action that is subjected to this
rigorous test of constitutionality is usually struck down.
Business and the First Amendment
Describe the differences between noncommercial speech
LO3-5 and commercial speech and the respective levels of the
First Amendment protection they receive.
The First Amendment provides that “Congress shall make
no law . . . abridging the freedom of speech.” Despite its
absolute language (“no law”), the First Amendment does
not prohibit every law that restricts speech. Although the
First Amendment’s free speech guarantee is not absolute,
government action restricting the content of speech usually receives close scrutiny from the courts. One justification for this high level of protection is the “marketplace”
rationale, under which the free competition of ideas is seen
as the surest means of attaining truth. The marketplace of
ideas operates most effectively, according to this rationale,
when restrictions on speech are kept to a minimum and all
viewpoints can be considered.
During recent decades, the First Amendment has been
applied to a wide variety of government restrictions on
the expression of individuals and organizations, including
corporations. This chapter does not attempt a comprehensive discussion of the many applications of the freedom of
speech guarantee. Instead, it explores basic First Amendment concepts before turning to an examination of the free
speech rights of corporations. (The First Amendment also
contains the Establishment Clause, which bars the government from establishing a religion, and the Free Exercise
Clause, which restricts the government’s ability to interfere
with persons’ freedom to exercise their religious beliefs.
These clauses and the interesting court decisions they have
spawned are beyond the scope of this text, however.)
Restrictions on Content of Speech For constitutional
purposes, there is a fundamental distinction between conduct
and speech (or, to use a frequently employed alternative term,
expression). Because conduct usually does not receive constitutional protection, the government typically has considerable latitude to regulate it. Speech, on the other hand, enjoys
First Amendment protection. The line between unprotected
conduct and potentially protected speech may seem conceptually clear, but it is not always so in actual practice. Consider
81
the cases involving so-called expressive conduct—conduct
so inherently expressive that it is treated for First Amendment
purposes the same as speech uttered verbally or communicated in writing. As the Supreme Court has held, flag-burning is an example of expressive conduct. Most conduct is not
considered to be inherently expressive, however, and thus
does not receive First Amendment protection.
In a recent Supreme Court decision, Expressions Hair
Design v. Schneiderman, 137 S. Ct. 1144 (U.S. Sup. Ct. 2017),
the conduct-versus-speech issue came to the forefront. A New
York statute barred merchants from imposing, on customers
who paid by credit card, a surcharge in addition to the price
charged to cash-paying customers. Expressions Hair Design
(EHD) wished to post notices that announced a price for cashpaying customers and that an added fee would be tacked on
for credit-card-paying customers. Because it feared that posting
such notices could leave it vulnerable to legal proceedings for
alleged violations of the statute, EHD challenged the statute on
First Amendment grounds. The State of New York argued that
the statute merely regulated price and was therefore a conduct
regulation undeserving of First Amendment. The Supreme
Court disagreed, classifying the statute as a speech restriction—
and hence potentially a violation of the First Amendment—
because it had the effect of prohibiting the communication of
the price information that EHD wished to convey.
If speech stands to be affected by a law or other government action speech, the next key question is whether the
government action restricts the content of speech, as opposed to operating in a content-neutral way by regulating
such matters as time, place, or manner of speech. Whereas
content-neutral restrictions are evaluated under a looser
test for First Amendment purposes, content restrictions
strike at the heart of the freedom of speech guarantee and
are reviewed with strict scrutiny.
An example comes from Reed v. Town of Gilbert,
135 S. Ct. 2218 (2015), which pertained to an Arizona
town’s sign code that prohibited the display of outdoor
signs without a permit but set forth various exemptions
from the prohibition. One exemption was for “Ideological
Signs,” another was for “Political Signs,” and another was
for “Temporary Directional Signs.” Signs in the first two
categories could be much larger than those in the Temporary Directional Signs category, and either had no placement or time-of-display restrictions (Ideological Signs)
or could be displayed during a time period of significant
length (Political Signs, which could be displayed during
an election season). Temporary Directional Signs, however, had to be much smaller. Moreover, they could only
be displayed not more than 12 hours before a qualifying
event and not more than one hour afterward. A church
that was cited for violating the Temporary Directional
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Part One Foundations of American Law
Signs time restrictions challenged the town code provisions as a violation of the First Amendment. Rejecting
the town’s argument that the code’s sign provisions were
content-neutral because they did not single out particular
viewpoints for adverse treatment, the Supreme Court emphasized that the provisions still were content restrictions
because their application depended completely on the
communicative content of the signs. The Court concluded
that the code provisions could not withstand strict scrutiny
because even if it were assumed that the town possessed
compelling interests in aesthetics and public safety, there
were content-neutral ways of furthering those objectives
(such as by consistently regulating such matters as sign
size, materials, lighting, and portability). Therefore, the
sign provisions violated the First Amendment.
The Court also noted in Reed that viewpointdiscrimination, though not present in the case and not
necessary for a content restriction to be identified, is a
particularly egregious type of content restriction. Matal
v. Tam, which appears later in the chapter, provides an example of viewpoint discrimination and the role it plays in
First Amendment analysis.
Political and Other Noncommercial Speech Political
speech—expression that deals in some fashion with government, government issues or policies, public officials, or political candidates—is often described as being at the “core”
of the First Amendment. Various Supreme Court decisions
have held, however, that the freedom of speech guarantee
applies not only to political speech, but also to noncommercial expression that does not have a political content
or flavor. According to these decisions, the First Amendment protects speech of a literary or artistic nature; speech
dealing with scientific, economic, educational, and ethical
issues; and expression on many other matters of public interest or concern. Government attempts to restrict the content of political or other noncommercial speech normally
receive full strict scrutiny when challenged in court. Unless
the government is able to meet the exceedingly difficult
burden of proving that the speech restriction is necessary to
the fulfillment of a compelling government purpose, a First
Amendment violation will be found. Because government
restrictions on political or other noncommercial speech
trigger the full strict scrutiny test, such speech is referred to
as carrying “full” First Amendment protection.
Do corporations, however, have the same First Amendment rights that individual human beings possess? The
Supreme Court has consistently provided a “yes” answer to
this question. Therefore, if a corporation engages in political or other noncommercial expression, it is entitled to full
First Amendment protection, just as an individual would be
if he or she engaged in such speech. In the much-publicized
Citizens United case, which follows shortly, the Supreme
Court ruled on a First Amendment–based challenge to a
federal statute that restricted uses of corporate funds for
“electioneering communications” close to the time of an
election and for advertisements amounting to express advocacy for or against a candidate who was seeking office.
Treating the funding restrictions as speech restrictions, a
five-justice majority of the Court held that they violated
the First Amendment because they could not withstand
strict scrutiny. For further discussion of campaign finance
restrictions and the First Amendment in light of Citizens
United, see Figure 2 (which appears after Citizens United).
Although corporate speakers have First Amendment
rights, not all speech of a corporation is fully protected.
Some corporate speech is classified as commercial
speech, a category of expression examined later in the
chapter. As will be seen, commercial speech receives First
Amendment protection but not the full variety extended to
political or noncommercial speech. The mere fact, however, that a profit motive underlies speech does not make
the speech commercial in nature. Books, movies, television programs, musical works, works of visual art, and
newspaper, magazine, and journal articles are normally
classified as noncommercial speech—and are thus fully
protected—despite the typical existence of an underlying
profit motive. Their informational, educational, artistic,
or entertainment components are thought to outweigh, for
First Amendment purposes, the profit motive.
Citizens United v. Federal Election Commission
558 U.S. 310 (U.S. Sup. Ct. 2010)
Citizens United, a nonprofit corporation with a $12 million annual budget, receives most of its funds in the form of donations by
individuals. A small portion comes from for-profit corporations. In January 2008, Citizens United released a film titled Hillary:
The Movie (hereinafter Hillary). It is a 90-minute documentary about then-senator Hillary Clinton, a candidate in the Democratic Party’s 2008 presidential primary elections. Hillary depicts interviews with political commentators and other persons,
most of them quite critical of Senator Clinton.
Chapter Three Business and the Constitution
83
Hillary was released in theaters and on DVD, but Citizens United wanted to increase distribution by making it available
through video-on-demand. Although video-on-demand services often require viewers to pay a small fee to view a selected program, Citizens United planned to pay for the service and to make Hillary available to viewers free of charge. To promote the
film, Citizens United produced two 10-second advertisements and one 30-second ad for airing on broadcast and cable television. Each ad included a pejorative statement about Senator Clinton, followed by the name of the movie and the address of a
website for the movie.
Before the Bipartisan Campaign Reform Act of 2002 (BCRA), federal law prohibited corporations and unions from using
general treasury funds for direct contributions to candidates or as independent expenditures expressly advocating, through any
form of media, the election or defeat of a candidate in certain qualified federal elections. 2 U.S.C. § 441b. The BCRA amended
§ 441b to include any “electioneering communication” as well. The statute defined “electioneering communication” as “any
broadcast, cable, or satellite communication” that “refers to a clearly identified candidate for Federal office” and is made
within 30 days of a primary election or 60 days of a general election.
When combined, the federal law that preexisted the BCRA and the amendments added by the BCRA barred corporations
and unions from using their general treasury funds for express advocacy or electioneering communications. However, they were
permitted to establish a “separate segregated fund” (known as a political action committee, or PAC) for these purposes. The
funds to be received by the PAC were limited to donations from the corporation’s stockholders and employees or from the union’s
members.
The BCRA also set forth disclaimer and disclosure requirements. A televised electioneering communication funded by anyone
other than a candidate must include a clearly spoken and clearly readable statement that “____ is responsible for the content of
this advertising,” as well as a statement that the communication “is not authorized by any candidate or candidate’s committee.”
The electioneering communication must also display the name and address (or website address) of the person or group that funded
the advertisement. § 441d(a)(3). In addition, the BCRA requires any person or entity spending more than $10,000 on electioneering communications within a calendar year to file a disclosure statement with the Federal Election Commission (FEC).
Citizens United wanted to make Hillary available through video-on-demand within 30 days of the 2008 primary elections. It
feared, however, that both the film and the ads promoting it would be covered by § 441b’s ban on corporate-funded independent
expenditures and could thus subject the corporation to civil and criminal penalties. Citizens United therefore sought declaratory
and injunctive relief against the FEC, arguing that § 441b was unconstitutional on its face and as applied to Hillary and that the
BCRA’s disclaimer and disclosure requirements were unconstitutional as applied to Hillary and to the three ads for the movie.
A federal district court granted the FEC’s motion for summary judgment. The court held that § 441b was constitutional under
previous Supreme Court precedents, as were the statute’s disclaimer and disclosure requirements. Citizens United sought review
by the Supreme Court (rather than a circuit court of appeals) under a review provision in the challenged law.
Kennedy, Justice
Federal law prohibits corporations and unions from using their
general treasury funds to make independent expenditures for
speech defined as an “electioneering communication” or for
speech expressly advocating the election or defeat of a candidate.
2 U.S.C. § 441b. Limits on electioneering communications were
upheld in McConnell v. Federal Election Comm’n, 540 U.S. 93
(2003). The holding of McConnell rested to a large extent on an
earlier case, Austin v. Michigan Chamber of Commerce, 494 U.S.
652 (1990). In this case we are asked to reconsider Austin and,
in effect, McConnell.
The law before us is an outright ban [on speech], backed
by criminal sanctions. Section 441b makes it a felony for all
corporations—including nonprofit advocacy corporations—either
to expressly advocate the election or defeat of candidates or to
broadcast electioneering communications within 30 days of a
primary election and 60 days of a general election. These prohibitions are classic examples of censorship.
Section 441b is a ban on corporate speech notwithstanding
the fact that a PAC created by a corporation can still speak. A
PAC is a separate association from the corporation. So the PAC
exemption from § 441b’s expenditure ban does not allow corporations to speak. Even if a PAC could somehow allow a corporation to speak—and it does not—the option to form PACs does not
alleviate the First Amendment problems with § 441b. PACs are
burdensome alternatives; they are expensive to administer and
subject to extensive regulations. [Also,] PACs must file detailed
monthly reports with the FEC. PACs have to comply with these
regulations just to speak. This might explain why fewer than
2,000 of the millions of corporations in this country have PACs.
[P]olitical speech must prevail against laws that would suppress it, whether by design or inadvertence. Laws that burden
political speech are subject to strict scrutiny, which requires the
Government to prove that the restriction furthers a compelling
interest and is narrowly tailored to achieve that interest. Premised
on mistrust of governmental power, the First Amendment stands
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Part One Foundations of American Law
against attempts to disfavor certain subjects or viewpoints.
Prohibited, too, are restrictions distinguishing among different
speakers, allowing speech by some but not others. The Court has
recognized [in various cases] that First Amendment protection
extends to corporations. [E.g.,] First National Bank of Boston v.
Bellotti, 435 U.S. 765 (1978). This protection has been extended
by explicit holdings to the context of political speech.
At least since the latter part of the 19th century, the laws of
some states and of the United States imposed a ban on corporate
direct contributions to candidates. Yet not until 1947 did Congress first prohibit independent expenditures by corporations
and labor unions. For almost three decades thereafter, the Court
did not reach the question whether restrictions on corporate and
union expenditures are constitutional.
In Buckley v. Valeo, 424 U.S. 1 (1976), the Court addressed
various challenges to the Federal Election Campaign Act of 1971
(FECA), as amended in 1974. [FECA limited direct contributions to candidates, established] an independent expenditure ban
. . . that applied to individuals as well as corporations and labor
unions, [and included a separate ban on corporate and union independent expenditures.] [Buckley considered only the direct contributions provision and the broader independent expenditure ban
that applied to individuals as well as corporations and unions.]
Before addressing the constitutionality of [the broader] independent expenditure ban, Buckley first upheld . . . FECA’s
limits on direct contributions to candidates. The Buckley Court
recognized a “sufficiently important” governmental interest in
“the prevention of corruption and the appearance of corruption.”
This followed from the Court’s concern that large contributions
could be given “to secure a political quid pro quo.” The Buckley
Court explained that the potential for quid pro quo corruption
distinguished direct contributions to candidates from independent expenditures. The Court emphasized that “the independent
expenditure ceiling . . . fails to serve any substantial governmental interest in stemming the reality or appearance of corruption in
the electoral process,” because “[t]he absence of prearrangement
and coordination . . . alleviates the danger that expenditures will
be given as a quid pro quo for improper commitments from the
candidate.” Buckley invalidated [FECA’s broader] restriction on
independent expenditures.
Buckley did not consider [FECA’s] separate ban [that specifically applied to] corporate and union independent expenditures.
Had [that specific ban] been challenged in the wake of Buckley,
however, it could not have been squared with the reasoning and
analysis of that precedent. [Nevertheless], Congress recodified
[the] corporate and union expenditure ban at 2 U.S.C. § 441b
four months after Buckley was decided. Section 441b is the independent expenditure restriction challenged here.
Less than two years after Buckley, Bellotti reaffirmed the
First Amendment principle that the government cannot restrict
political speech based on the speaker’s corporate identity.
Bellotti could not have been clearer when it struck down a statelaw prohibition on corporate independent expenditures related
to referenda issues. Bellotti did not address the constitutionality of the state’s ban on corporate independent expenditures to
support candidates. In our view, however, that restriction would
have been unconstitutional under Bellotti’s central principle: that
the First Amendment does not allow political speech restrictions
based on a speaker’s corporate identity.
Thus the law stood until Austin, [which] “uph[eld] a direct
restriction on the independent expenditure of funds for political speech for the first time in [this Court’s] history.” (Kennedy,
J., dissenting in Austin.) [In Austin], the Michigan Chamber of
Commerce sought to use general treasury funds to run a newspaper ad supporting a specific candidate. Michigan law, however,
prohibited corporate independent expenditures that supported
or opposed any candidate for state office. The Austin Court sustained the speech prohibition. To bypass Buckley and Bellotti, the
Court identified a new governmental interest in limiting political speech: an anti-distortion interest. Austin found a compelling
governmental interest in preventing “the corrosive and distorting
effects of immense aggregations of wealth that are accumulated
with the help of the corporate form and that have little or no correlation to the public’s support for the corporation’s political ideas.”
The Court is thus confronted with conflicting lines of precedent: a pre-Austin line that forbids restrictions on political speech
based on the speaker’s corporate identity and a post-Austin line
that permits them. No case before Austin had held that Congress
could prohibit independent expenditures for political speech
based on the speaker’s corporate identity. In its defense of the
corporate-speech restrictions in § 441b, the government notes
the anti-distortion rationale on which Austin and its progeny rest
in part, yet . . . the government does little to defend it. And with
good reason, for the rationale cannot support § 441b.
If the First Amendment has any force, it prohibits Congress
from fining or jailing citizens, or associations of citizens, for
simply engaging in political speech. If the anti-distortion rationale were to be accepted, however, it would permit government
to ban political speech simply because the speaker is an association that has taken on the corporate form. If Austin were correct,
the government could prohibit a corporation from expressing
political views in media beyond those presented here, such as
by printing books. The government responds “that the FEC has
never applied this statute to a book,” and if it did, “there would
be quite [a] good as-applied [constitutional] challenge.” This
troubling assertion of brooding governmental power cannot be
reconciled with the confidence and stability in civic discourse
that the First Amendment must secure.
[As noted in Bellotti,] [p]olitical speech is “indispensable to
decisionmaking in a democracy, and this is no less true because
Chapter Three Business and the Constitution
the speech comes from a corporation rather than an individual.”
This protection for speech is inconsistent with Austin’s antidistortion rationale. Austin sought to defend the anti-distortion
rationale as a means to prevent corporations from obtaining
“‘an unfair advantage in the political marketplace’” by using
“‘resources amassed in the economic marketplace.’” But Buckley
rejected the premise that the government has an interest “in
equalizing the relative ability of individuals and groups to influence the outcome of elections.” Buckley was specific in stating
that “the skyrocketing cost of political campaigns” could not sustain the governmental prohibition.
The censorship we now confront is vast in its reach. The government has “muffle[d] the voices that best represent the most
significant segments of the economy” (opinion of Scalia, J., in
McConnell). The purpose and effect of this law is to prevent
corporations, including small and nonprofit corporations, from
presenting both facts and opinions to the public. This makes Austin’s
anti-distortion rationale all the more an aberration. When government seeks to use its full power, including the criminal law,
to command where a person may get his or her information or
what distrusted source he or she may not hear, it uses censorship
to control thought. This is unlawful. The First Amendment confirms the freedom to think for ourselves.
What we have said also shows the invalidity of [another argument] made by the government. For the most part relinquishing
the anti-distortion rationale, the government falls back on the
argument that corporate political speech can be banned in order
to prevent corruption or its appearance. The Buckley Court . . .
sustained limits on direct contributions in order to ensure against
the reality or appearance of corruption. That case did not extend
this rationale to independent expenditures, and the Court does
not do so here.
[The Court stated in Buckley that] “[t]he absence of prearrangement and coordination of an expenditure with the candidate
or his agent not only undermines the value of the expenditure to
the candidate, but also alleviates the danger that expenditures will
be given as a quid pro quo for improper commitments from the
candidate.” Limits on independent expenditures, such as § 441b,
have a chilling effect extending well beyond the government’s interest in preventing quid pro quo corruption. The anti-corruption
interest is not sufficient to displace the speech here in question.
For the reasons above, it must be concluded that Austin was
not well reasoned. Austin is [also] undermined by experience
since its announcement. Political speech is so ingrained in our
culture that speakers find ways to circumvent campaign finance
laws. Our nation’s speech dynamic is changing, and informative
voices should not have to circumvent onerous restrictions to exercise their First Amendment rights.
Rapid changes in technology—and the creative dynamic
inherent in the concept of free expression—counsel against
85
upholding a law that restricts political speech in certain media or
by certain speakers. Today, 30-second television ads may be the
most effective way to convey a political message. Soon, however,
it may be that Internet sources, such as blogs and social networking websites, will provide citizens with significant information
about political candidates and issues. Yet, § 441b would seem
to ban a blog post expressly advocating the election or defeat of
a candidate if that blog were created with corporate funds. The
First Amendment does not permit Congress to make these categorical distinctions based on the corporate identity of the speaker
and the content of the political speech.
Due consideration leads to this conclusion: Austin should be
and now is overruled. We return to the principle established in
Buckley and Bellotti that the government may not suppress political speech on the basis of the speaker’s corporate identity. No
sufficient governmental interest justifies limits on the political
speech of nonprofit or for-profit corporations.
Austin is overruled, so it provides no basis for allowing the
government to limit corporate independent expenditures. As the
government appears to concede [in its brief], overruling Austin
“effectively invalidate[s] not only [the BCRA’s amendments to
§ 441(b)] but also § 441b’s prohibition on the use of corporate
treasury funds for express advocacy.” Section 441b’s restrictions
on corporate independent expenditures are therefore invalid and
cannot be applied to Hillary. Given our conclusion, we are further required to overrule the part of McConnell that upheld [the
BCRA’s] extension of § 441b’s restrictions on corporate independent expenditures.
Citizens United next challenges the BCRA’s disclaimer and
disclosure provisions as applied to Hillary and the three advertisements for the movie. Disclaimer and disclosure requirements
may burden the ability to speak, but they “impose no ceiling
on campaign-related activities” (quoting Buckley), and “do not
prevent anyone from speaking” (quoting McConnell). [W]e uphold the application of [the BCRA’s disclaimer and disclosure
requirements] to the ads [for Hillary]. We [also] find no constitutional impediment to the application of [the] disclaimer and
disclosure requirements to [Hillary], a movie [to be] broadcast
via video-on-demand.
District court’s judgment reversed as to constitutionality of
restrictions on corporate independent expenditures but affirmed as to constitutionality of disclaimer and disclosure
requirements.
Stevens, Justice (joined by Ginsburg, Breyer, and Sotomayor,
Justices), concurring in part and dissenting in part
Although I concur in the Court’s decision to sustain the BCRA’s
disclaimer and disclosure provisions, I emphatically dissent from
its principal holding.
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Part One Foundations of American Law
Citizens United is a wealthy nonprofit corporation that runs a
PAC with millions of dollars in assets. Under the BCRA, it could
have used those assets to televise and promote Hillary wherever
and whenever it wanted to. It also could have spent unrestricted
sums to broadcast Hillary at any time other than the 30 days before the last primary election. Neither Citizens United’s nor any
other corporation’s speech has been “banned.” All that the parties
dispute is whether Citizens United had a right to use the funds in
its general treasury to pay for broadcasts during the 30-day period. The notion that the First Amendment dictates an affirmative
answer to that question is, in my judgment, profoundly misguided.
The Court today rejects a century of history when it treats the
distinction between corporate and individual campaign spending as
an invidious novelty born of Austin. Relying largely on individual
dissenting opinions, the majority blazes through our precedents,
overruling or disavowing a [large] body of case law. The only thing
preventing the majority from affirming the district court, or adopting a narrower ground that would retain Austin, is its disdain for
Austin. The laws upheld in Austin and McConnell leave open many
additional avenues for corporations’ political speech.
Roaming far afield from the case at hand, the majority worries that the government will use [the statute at issue] to ban
books, pamphlets, and blogs. Yet by its plain terms, [the statute]
does not apply to printed material. And . . . we highly doubt that
[§ 441b] could be interpreted to apply to a website or book that
happens to be transmitted at some stage over airwaves or cable
lines, or that the FEC would ever try to do so.
So let us be clear: Neither Austin nor McConnell held or
implied that corporations may be silenced; the FEC is not a
“censor”; and in the years since these cases were decided, corporations have continued to play a major role in the national dialogue. Laws such as [§ 441b] target a class of communications
that is especially likely to corrupt the political process. Such laws
burden political speech, and that is always a serious matter, demanding careful scrutiny. But the majority’s incessant talk of a
“ban” aims at a straw man.
In [our] democratic society, the longstanding consensus on
the need to limit corporate campaign spending [reflects] the common sense of the American people, who have . . . fought against
the distinctive corrupting potential of corporate electioneering
since the days of Theodore Roosevelt. It is a strange time to repudiate that common sense. While American democracy is imperfect, few outside the majority of this Court would have thought
its flaws included a dearth of corporate money in politics.
Figure 2 A Note on Post–Citizens United Developments and the McCutcheon Decision
After Citizens United, not-for-profit and for-profit corporations were free to spend unlimited sums from their general treasury
funds for express advocacy purposes or for other electioneering communications regarding candidates for federal election,
as long as the spending took place independently from the campaigns of favored candidates. Corporations could fund such
advertisements directly, without being bound by the invalidated requirement of using a PAC to which only employees and
shareholders could contribute. Further, they could engage in such independent expenditures by providing unlimited funds to
so-called Super PACs—organizations that were not formally affiliated with candidates for office but accepted money from any
individual or organization for the purpose of producing advertisements favoring or disfavoring candidates.
In the run-up to the 2012 elections, some corporations donated significant amounts to Super PACs and other not-for-profit
organizations in order to help fund such advertisements. So did many individual persons. This tendency became especially pronounced after a federal court of appeals reasoned that given the conclusions drawn in Citizens United and the Supreme Court’s
long-standing position that the First Amendment rights of individuals and corporations are coextensive, individuals should be free
to engage in unlimited spending for express advocacy purposes. In the 2012 elections, certain very wealthy individuals proved to
be even bigger spenders in this regard than corporate entities were. The total dollars spent in connection with the 2012 elections
easily surpassed the spending levels in previous elections. Similar patterns could be observed in the 2014 and 2016 elections.
The Independent Expenditures vs. Direct Contributions Distinction
Citizens United made plain that for purposes of the First Amendment’s application to matters of campaign finance, there is
an important distinction between direct contributions to candidates, campaigns, and political parties and independent expenditures supporting the expression of views that favor or disfavor candidates but are not coordinated with the candidates, their
campaigns, or their political parties. Citizens United dealt only with independent expenditures. The government asserted that
the independent expenditure restrictions at issue were meant to prevent those with large amounts of money from distorting the
public debate, but the Court concluded that prevention of distortion was not a compelling interest and thus was of no help to
the government under the applicable strict scrutiny test.
Chapter Three Business and the Constitution
The Court conceded in Citizens United that prevention of corruption may be a particularly important government interest
in the campaign finance realm because of the need to guard against the quid pro quo that could result if an elected candidate
would feel obligated to do the bidding—perhaps the illicit bidding—of big donors to his or her campaign. However, the Court
categorically rejected the idea that quid pro quo corruption could occur in the independent expenditures setting and emphasized that prevention of corruption was a relevant government purpose only in a context not present in Citizens United: the
direct-contribution context.
For many years, federal law has dealt with direct contributions by imposing base contribution limits and aggregate contribution limits. Base contribution limits are ceilings on amounts an individual person can give directly to a candidate for
federal office, to his or her campaign, or to a political party or party committee. (Corporations and similar organizations are
barred by federal law from making direct contributions.) For instance, an individual’s base contribution limit for donations
directly to a specific candidate was $2,600 per election at the time of the McCutcheon decision, discussed below. (The amount
is somewhat larger now.). Larger base contribution limits apply to an individual’s donations to political parties and party
committees.
Aggregate contribution limits are ceilings on the total amounts an individual may give to all candidates, campaigns, parties, or party committees the individual chooses to support in the context of an election or during a calendar year. For example, until the McCutcheon decision discussed below, federal law provided that for direct contributions to candidates in an
election, an individual’s aggregate donation limit was $48,600. Considered alongside the base contribution limit of $2,600 per
candidate, the $48,600 aggregate limit had the effect of capping the number of candidates to whom an individual could give
the maximum base amount. Aggregate limits in higher amounts applied to the total of an individual’s donations to political
parties or political committees.
The McCutcheon Decision
The aggregate limits set forth in federal law came under constitutional attack in McCutcheon v. Federal Election Commission,
134 S. Ct. 1434 (2014). McCutcheon wished to contribute the maximum of $2,600 per candidate to more candidates than the
$48,600 aggregate limit would allow. He contended, therefore, that the aggregate limits violated the First Amendment. The
Republican National Committee joined him in this challenge.
A three-judge federal district court upheld the aggregate limits, citing the government’s prevention-of-corruption purpose
and the role the aggregate limits could play in guarding against circumvention of the base limits. The prevention-of-corruption
purpose has long been regarded as sufficiently important to afford direct-contribution limits a good chance of surviving a First
Amendment–based challenge. (Recall that the Citizens United majority characterized prevention of corruption as a key government interest of relevance in the direct contributions setting, even though the Court did not consider that interest relevant in
the independent expenditures context.)
In McCutcheon, however, a five-justice majority of the Supreme Court struck down the aggregate limits. The Court regarded the aggregate limits as a serious restraint on First Amendment rights insofar as those limits prohibited donations to
some of the candidates or political party committees to whom (or to which) an individual wanted to donate the maximum
base amount. Moreover, the Court concluded that the aggregate limits were insufficiently connected with the preventionof-corruption purpose and observed that the government could alleviate its concern about circumvention of the base limits
through other enforcement mechanisms that would not infringe on rights of free speech.
After McCutcheon, therefore, the aggregate limits are gone. An individual donor now may, for instance, donate the maximum amount allowed by the base limits to each of whatever number of federal candidates the individual wishes to support.
The base limits, however, remain in force. However, given Citizens United’s deregulation of the independent expenditures
arena on constitutional grounds and McCutcheon’s striking down of the aggregate limits component of the direct contribution restrictions, it seems likely that the base contribution limits—or at least some applications of them—may face First
Amendment–based challenges.
Comments by the Court in Citizens United and McCutcheon suggest that the government’s concerns about preventing quid
pro quo corruption are likely to ring more true in the base contribution limits setting than in the contexts of independent expenditures and aggregate limits. If so, the general notion of base contribution limits may remain constitutionally viable. Nevertheless, the Court’s skeptical view of the government’s positions in Citizens United and McCutcheon may mean that certain
base contribution limits could be vulnerable to a First Amendment–based attack if the specific lines drawn by them restrict
political expression to a greater extent than seems reasonably necessary to prevent quid pro quo corruption. One also assumes
that because of the emphasis in Citizens United and earlier cases on corporate speech rights being coextensive with those of
individuals, federal law’s prohibition on direct contributions by corporations may face a First Amendment–based challenge
even if the dollar amounts set forth in base contribution limits remain in force.
87
88
Part One Foundations of American Law
Commercial Speech The exact boundaries of the commercial speech category are not certain, though the Supreme
Court has usually defined commercial speech as speech that
proposes a commercial transaction. As a result, most cases
on the subject involve advertisements for the sale of products or services or for the promotion of a business. In 1942,
the Supreme Court held that commercial speech fell outside
the First Amendment’s protective umbrella. The Court reversed its position, however, during the 1970s. It reasoned
that informed consumer choice would be furthered by the
removal of barriers to the flow of commercial information
in which consumers would find an interest. Since the mid1970s, commercial speech has received an intermediate
level of First Amendment protection if it deals with a lawful
activity and is nonmisleading. Commercial speech receives
no protection, however, if it misleads or seeks to promote
an illegal activity. As a result, there is no First Amendment obstacle to federal or state regulation of deceptive
commercial advertising. (Political or other noncommercial
speech, on the other hand, generally receives—with very
few exceptions—full First Amendment protection even if it
misleads or deals with unlawful matters.)
Because nonmisleading commercial speech about
a lawful activity receives intermediate protection, the
government has greater ability to regulate such speech
without violating the First Amendment than when the
government seeks to regulate fully protected political or
other noncommercial speech. Nearly four decades ago,
the Supreme Court developed a still-controlling test
that amounts to intermediate scrutiny. Under this test, a
government restriction on protected commercial speech
does not violate the First Amendment if the government
proves each of these elements: that a substantial government interest underlies the restriction, that the restriction directly advances the underlying interest, and that
the restriction is no more extensive than necessary to
further the interest (i.e., that the restriction is narrowly
tailored). It usually is not difficult for the government
to prove that a substantial interest supports the commercial speech restriction. Almost any asserted interest
connected with the promotion of public health, safety,
or welfare will suffice. The government is likely to encounter more difficulty, however, in proving that the
restriction at issue directly advances the underlying interest without being more extensive than necessary—the
elements that address the “fit” between the restriction
and the underlying interest. If the government fails to
prove any element of the test, the restriction violates the
First Amendment.
Although the same test has been used in evaluating
commercial speech restrictions for nearly four decades,
the Supreme Court has varied the intensity with which it
has applied the test. From the mid-1980s until 1995, the
Court sometimes applied the test loosely and in a manner favorable to the government. The Court has applied
the test—especially the “fit” elements—more strictly
since 1995, however. For instance, in Coors v. Rubin
(1995), the Court struck down federal restrictions that
kept beer producers from listing the alcohol content
of their beer on product labels. (The Coors case was
the subject of the introductory problem that began this
chapter.) In 44 Liquormart v. Rhode Island (1996), the
Court held that Rhode Island’s prohibition on price disclosures in alcoholic beverage advertisements violated
the First Amendment. A 1999 decision, Greater New
Orleans Broadcasting Association v. United States,
established that a federal law barring broadcast advertisements for a variety of gambling activities could not
constitutionally be applied to radio and television stations located in the same state as the gambling casino
whose lawful activities were being advertised. Sorrell v.
IMS Health, Inc., 564 U.S. 552 (2011), involved a challenge to a Vermont law that barred pharmacies from
releasing data about physicians’ prescribing practices
and tendencies if the release would be to parties wishing to use the information for marketing purposes.
The law, however, allowed pharmacies to disclose
such information if it would be used for various other
purposes. Continuing to display its inclination to afford significant protection to commercial speech, the
Court held that in singling out marketing-related uses
for adverse treatment while otherwise allowing the disclosure of the information, the statute violated the First
Amendment.
In its commercial speech decisions during the past
two-plus decades, the Court has tended to emphasize that
the government restrictions at issue suffered from a “fit”
problem. Sometimes the defective fit consisted of too
tenuous a relationship between the restriction and the government interest underlying it. More frequently the restriction prohibited more speech than was necessary because
the government failed to adopt alternative measures that
would have furthered the underlying public health, safety,
or welfare interest just as well, if not better.
Two key conclusions may be drawn from the Court’s
commercial speech decisions since 1995: (1) the government has found it more difficult to justify restrictions on
commercial speech, and (2) the gap between the intermediate protection for commercial speech and the full protection for political and other noncommercial speech has
effectively become smaller than it was roughly 25 years
ago. Although the Court has hinted that it might consider
Chapter Three Business and the Constitution
89
Concept Review
The First Amendment
Type of Speech
Level of First
Amendment
Protection
Noncommercial
Full
Government action is constitutional only if action is necessary to
fulfillment of compelling government purpose. Otherwise, government action violates First Amendment.
Commercial (nonmisleading
and about lawful activity)
Intermediate
Government action is constitutional if government has substantial underlying interest, action directly advances that interest, and
action is no more extensive than necessary to fulfillment of that
interest (i.e., action is narrowly tailored).
Commercial (misleading
or about unlawful activity)
None
Government action is constitutional.
Consequences When Government Regulates
Content of Speech
formal changes in commercial speech doctrine (so as to
enhance First Amendment protection for commercial
speech), it had not made formal doctrinal changes as of
the time this book went to press.
Matal v. Tam, which appears later in the chapter, addresses the four-part test utilized in determining the
constitutionality of commercial speech restrictions, and
illustrates the rigor with which the Supreme Court has applied the third and fourth parts of the test in recent years.
The Government Speech Doctrine Previous discussion has revealed that when the government restricts the
content of private parties’ speech, a First Amendment
violation is likely to have occurred. But when the government itself speaks, it is free to convey its preferred
viewpoints and to reject contrary views that private parties wish to express. Such is the premise of the recently
developed, and still not precisely defined, government
speech doctrine.
Whether government speech is present depends
largely upon the extent to which the government crafted
the conveyed messages or supervised, through heavy
involvement, the communication of the messages. In
Johanns v. Livestock Marketing Association, 544 U.S. 550
(2005), for instance, the Supreme Court upheld a federal statute that set up a program of paid advertisements
designed to promote the image and sale of beef products. The Court emphasized that the U.S. Department of
Agriculture designed the program, established its contours, and exercised close supervisory authority over the
messages that were communicated in the advertisements.
Therefore, the Court, reasoned, the government speech
doctrine applied and shielded the program against a First
Amendment–based challenge by an association that did
not want to participate in the government-created program. More recently, in Walker v. Texas Division, Sons
of Confederate Veterans, Inc., 135 S. Ct. 2239 (2015),
the Supreme Court held that the First Amendment was
not violated—and that the government speech doctrine
applied—when the State of Texas rejected a group’s request for a specialty license plate consisting of an image
of the Confederate battle flag. In deciding that the government speech doctrine applied, the Court stressed the
government’s historic use of license plates to convey
messages and the supervisory control maintained by
the government in running the specialty license plate
program.
In Matal v. Tam, which follows, the Supreme Court
strikes down, on First Amendment grounds, a provision
in federal law that allowed the government to refuse to
register a trademark that is disparaging to individuals or
groups. (Trademark registration is addressed in Chapter 8.
Discussion of Tam also appears there.) In so ruling, the
Court rejects the government’s attempt to invoke the government speech doctrine and reminds readers that the First
Amendment protects a great deal of speech that is offensive in nature. Tam also explores an issue noted earlier in
the chapter: the problematic nature, for First Amendment
purposes, of laws that discriminate among speakers on the
basis of the viewpoints they express.
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Part One Foundations of American Law
Matal v. Tam 137 S. Ct. 1744 (U.S. Sup. Ct. 2017)
Simon Tam is the lead singer of a musical group known as “The Slants.” Members of the band are Asian Americans. Although
“Slants” has been used as a derogatory term for persons of Asian descent, Tam and the other band members believe that by
taking the term as the name of their group, they will help to “reclaim” the term and drain its denigrating force.
Tam sought to have THE SLANTS registered as a trademark on the federal Principal Register. An examining attorney at the
U.S. Patent and Trademark Office (PTO) denied Tam’s application, invoking a Lanham Act provision (referred to here as the
disparagement clause). That provision bars the registration of trademarks that may “disparage . . . or bring . . . into contemp[t]
or disrepute” any “persons, living or dead.” In the examining attorney’s judgment, THE SLANTS was disparaging with regard
to persons of Asian descent.
Tam unsuccessfully appealed the examining attorney’s denial of registration to the PTO’s Trademark Trial and Appeal
Board. He then appealed to the U.S. Court of Appeals for the Federal Circuit, which held the disparagement clause unconstitutional under the First Amendment. The PTO filed a petition for certiorari, which the U.S. Supreme Court granted in order to
decide whether the disparagement clause violates the First Amendment.
Alito, Justice
“The principle underlying trademark protection is that distinctive marks—words, names, symbols, and the like—can help distinguish a particular artisan’s goods from those of others.” B&B
Hardware, Inc. v. Hargis Industries, Inc., 135 S. Ct. 1293 (2015).
A trademark . . . helps consumers identify goods and services
that they wish to purchase, as well as those they want to avoid.
Trademarks . . . were protected at common law and in equity at
the time of the founding of our country. Eventually, Congress
stepped in to provide a degree of national uniformity [through]
the Lanham Act, enacted in 1946. By that time, trademark had
expanded far beyond phrases that do no more than identify a
good or service. Then, as now, trademarks often consisted of
catchy phrases that convey a message.
Under the Lanham Act, trademarks that are used in commerce may be placed on the [federal] Principal Register. This
system of federal registration helps to ensure that trademarks are
fully protected and supports the free flow of commerce. Without
federal registration, a valid trademark may still be used in commerce [and] can be enforced against would-be infringers. Federal
registration, however, confers important legal rights and benefits
on trademark owners who register their marks. [Authors’ note:
Those rights and benefits are summarized in Chapter 8 of the
text and will not be discussed here.]
The Lanham Act contains provisions that bar certain trademarks from the Principal Register. At issue in this case is one
such provision, which we will call “the disparagement clause.”
This provision prohibits the registration of a trademark “which
may disparage . . . persons, living or dead, institutions, beliefs,
or national symbols, or bring them into contempt, or disrepute.”
When deciding whether a trademark is disparaging, an examiner at the PTO generally applies a two-part test [set forth
in the Trademark Manual of Examining Procedure]. The examiner first considers “the likely meaning of the matter in
question, taking into account not only dictionary definitions,
but also . . . the manner in which the mark is used in the marketplace in connection with the goods or services.” If that
meaning refers to “identifiable persons, institutions, beliefs
or national symbols,” the examiner moves to the second step,
asking “whether that meaning may be disparaging to a substantial [component] of the referenced group.” If the examiner
finds that a “substantial [component], although not necessarily
a majority, of the referenced group would find the proposed
mark . . . to be disparaging in the context of contemporary attitudes,” a prima facie case of disparagement is made out, and
the burden shifts to the applicant to prove that the trademark
is not disparaging. What is more, the PTO has specified that
“[t]he fact that an applicant may be a member of that group or
has good intentions underlying its use of a term does not obviate
the fact that a substantial composite of the referenced group
would find the term objectionable.” [The examiner in this case
applied the two-part test in concluding that THE SLANTS was
a disparaging term.]
[W]e must decide whether the disparagement clause violates the Free Speech Clause of the First Amendment. And at
the outset, we must consider [an argument] that would eliminate
any First Amendment protection. Specifically, the Government
contends that trademarks are government speech, not private
speech.
The First Amendment prohibits Congress and other government entities and actors from “abridging the freedom of speech”;
the First Amendment does not say that Congress and other government entities must abridge their own ability to speak freely. And
our cases recognize that “[t]he Free Speech Clause . . . does not
regulate government speech.” Pleasant Grove City v. Summum,
555 U. S. 460, 467 (2009). See Johanns v. Livestock Marketing
Association, 544 U. S. 550, 553 (2005) (“[T]he Government’s
own speech . . . is exempt from First Amendment scrutiny”).
As we have said, “it is not easy to imagine how government
could function” if it were subject to the restrictions that the First
Chapter Three Business and the Constitution
Amendment imposes on private speech. Summum, 555 U.S. at
468. See Walker v. Texas Division, Sons of Confederate Veterans,
Inc., 135 S. Ct. 2239 (2015). [Although] “the First Amendment
forbids the government to regulate speech in ways that favor
some viewpoints or ideas at the expense of others,” [citation
omitted,] . . . imposing a requirement of viewpoint-neutrality on
government speech would be paralyzing. When a government
entity embarks on a course of action, it necessarily takes a particular viewpoint and rejects others. The Free Speech Clause does
not require government to maintain viewpoint neutrality when its
officers and employees speak about that venture.
Here is a simple example. During the Second World War, the
Federal Government produced and distributed millions of posters to promote the war effort. There were posters urging enlistment, the purchase of war bonds, and the conservation of scarce
resources. These posters expressed a viewpoint, but the First
Amendment did not demand that the Government balance the
message of these posters by producing and distributing posters encouraging Americans to refrain from engaging in these
activities.
But while the government-speech doctrine is important—
indeed, essential—it is a doctrine that is susceptible to dangerous
misuse. If private speech could be passed off as government
speech by simply affixing a government seal of approval, government could silence or muffle the expression of disfavored
viewpoints. For this reason, we must exercise great caution before extending our government-speech precedents.
At issue here is the content of trademarks that are registered
by the PTO, an arm of the Federal Government. The Federal
Government does not dream up these marks, and it does not edit
marks submitted for registration. Except as required by the statute involved here, an examiner may not reject a mark based on
the viewpoint that it appears to express. Thus, unless that section is thought to apply, an examiner does not inquire whether
any viewpoint conveyed by a mark is consistent with Government policy or whether any such viewpoint is consistent with
that expressed by other marks already on the principal register.
Instead, if the mark meets the Lanham Act’s viewpoint-neutral
requirements, registration is mandatory. In light of all this, it is
far-fetched to suggest that the content of a registered mark is government speech. If the federal registration of a trademark makes
the mark government speech, the Federal Government is babbling prodigiously and incoherently. It is saying many unseemly
things. It is expressing contradictory views. (Compare, [for instance, these two registered marks:] “Abolish Abortion” [and]“I
Stand With Planned Parenthood.”) It is unashamedly endorsing a
vast array of commercial products and services. And it is providing Delphic advice to the consuming public.
For example, if trademarks represent government speech,
what does the Government have in mind when it advises
91
Americans to “make.believe” (Sony), “Think different” (Apple),
“Just do it” (Nike), or “Have it your way” (Burger King)? Was
the Government warning about a coming disaster when it registered the mark “EndTime Ministries”?
None of our government speech cases even remotely supports
the idea that registered trademarks are government speech.
In Johanns, we considered advertisements promoting the sale of
beef products. A federal statute called for the creation of a program of paid advertising “ ‘to advance the image and desirability
of beef and beef products.’ ” 544 U. S. at 561. Congress and the
Secretary of Agriculture provided guidelines for the content of
the ads, Department of Agriculture officials attended the meetings at which the content of specific ads was discussed, and the
Secretary could edit or reject any proposed ad. Noting that
“[t]he message set out in the beef promotions [was] from beginning
to end the message established by the Federal Government,” we
held that the ads were government speech. Id. at 560. The Government’s involvement in the creation of these beef ads bears
no resemblance to anything that occurs when a trademark is
registered.
[Moreover, trademarks] have not traditionally been used to
convey a Government message. With the exception of the enforcement of [the statute at issue here], the viewpoint expressed
by a mark has not played a role in the decision whether to place
it on the Principal Register. And there is no evidence that the
public associates the contents of trademarks with the Federal
Government.
This brings us to the case on which the Government relies
most heavily, Walker, which likely marks the outer bounds of
the government-speech doctrine. Holding that the messages on
Texas specialty license plates are government speech [and that
the State of Texas therefore did not violate the First Amendment
when it rejected a request for a specialty license consisting of a
representation of the Confederate battle flag], the Walker Court
cited three factors. First, license plates have long been used by
the States to convey state messages. Second, license plates “are
often closely identified in the public mind” with the State, since
they are manufactured and owned by the State, generally designed by the State, and serve as a form of “government ID.”
Third, Texas “maintain[ed] direct control over the messages conveyed on its specialty plates.” As explained above, none of these
factors is present in this case.
In sum, the federal registration of trademarks is vastly different from the beef ads in Johanns [and] the specialty license
plates in Walker. Holding that the registration of a trademark
converts the mark into government speech would constitute a
huge and dangerous extension of the government-speech doctrine. For if the registration of trademarks constituted government speech, other systems of government registration could
easily be characterized in the same way.
92
Part One Foundations of American Law
Perhaps the most worrisome implication of the Government’s argument concerns the system of copyright registration.
If federal registration makes a trademark government speech
and thus eliminates all First Amendment protection, would the
registration of the copyright for a book produce a similar transformation? The Government attempts to distinguish copyright
on the ground that it is “ ‘the engine of free expression,’ ” Brief
for Petitioner (quoting Eldred v. Ashcroft, 537 U. S. 186, 219
(2003)), but as this case illustrates, trademarks often have an
expressive content. Companies spend huge amounts to create
and publicize trademarks that convey a message. It is true that
the necessary brevity of trademarks limits what they can say.
But powerful messages can sometimes be conveyed in just a
few words.
Trademarks are private, not government, speech.
Having concluded that the disparagement clause cannot
be sustained under our government-speech [cases, we note
the existence of] a dispute between the parties on the question whether trademarks are commercial speech and are thus
subject to the relaxed scrutiny outlined in Central Hudson
Gas & Electric Corp. v. Public Service Commission, 447 U.
S. 557 (1980). The Government and amici supporting its position argue that all trademarks are commercial speech. They
note that the central purposes of trademarks are commercial
and that federal law regulates trademarks to promote fair and
orderly interstate commerce. Tam and his amici, on the other
hand, contend that many, if not all, trademarks have an expressive component. In other words, these trademarks do not simply identify the source of a product or service but go on to say
something more, either about the product or service or some
broader issue. The trademark in this case illustrates this point.
The name “The Slants” not only identifies the band but expresses a view about social issues.
We need not resolve this debate between the parties because the disparagement clause cannot withstand even Central
Hudson review. Under Central Hudson, a restriction of speech
must serve “a substantial interest,” and it must be “narrowly
drawn.” Id. at 564–565. This means, among other things, that
“[t]he regulatory technique may extend only as far as the interest it serves.” Id. at 565. The disparagement clause fails this
requirement.
It is claimed that the disparagement clause serves two interests. The first is phrased in a variety of ways in the briefs.
The Government asserts [in its brief] an interest in preventing
“ ‘underrepresented groups’ ” from being “ ‘bombarded with demeaning messages in commercial advertising.’ ” An amicus supporting the Government refers [in its brief] to “encouraging racial
tolerance and protecting the privacy and welfare of individuals.”
But no matter how the point is phrased, its unmistakable thrust
is this: The Government has an interest in preventing speech
expressing ideas that offend. And that idea strikes at the heart of
the First Amendment. Speech that demeans on the basis of race,
ethnicity, gender, religion, age, disability, or any other similar
ground is hateful; but the proudest boast of our free speech jurisprudence is that we protect the freedom to express “the thought
that we hate.” United States v. Schwimmer, 279 U. S. 644, 655
(1929) (Holmes, J., dissenting).
The second interest asserted is protecting the orderly flow
of commerce. Commerce, we are told, is disrupted by trademarks that “involv[e] disparagement of race, gender, ethnicity,
national origin, religion, sexual orientation, and similar demographic classification” [quoting the Federal Circuit’s decision
in this case]. Such trademarks are analogized to discriminatory
conduct, which has been recognized to have an adverse effect on
commerce. A simple answer to this argument is that the disparagement clause is not narrowly drawn to drive out trademarks
that support invidious discrimination. The clause reaches any
trademark that disparages any person, group, or institution. It
applies to trademarks [such as] the following: “Down with racists,” “Down with sexists,” “Down with homophobes.” It is not
an anti-discrimination clause; it is a happy-talk clause. In this
way, it goes much further than is necessary to serve the interest
asserted.
There is also a deeper problem with the argument that commercial speech may be cleansed of any expression likely to cause
offense. The commercial market is well stocked with merchandise that disparages prominent figures and groups, and the line
between commercial and non-commercial speech is not always
clear, as this case illustrates. If affixing the commercial label
permits the suppression of any speech that may lead to political
or social “volatility,” free speech would be endangered.
For these reasons, we hold that [regardless of whether trademarks are or are not commercial speech,] the disparagement
clause violates the Free Speech Clause of the First Amendment.
[The disparagement clause] offends a bedrock First Amendment principle: Speech may not be banned on the ground that it
expresses ideas that offend.
Justice Kennedy, with whom Justices Ginsburg, Sotomayor,
and Kagan join, concurring in part and concurring in the
judgment
As the Court is correct to hold, [the disparagement clause] constitutes viewpoint discrimination—a form of speech suppression so potent that it must be subject to rigorous constitutional
scrutiny. The Government’s action and the statute on which it
is based cannot survive this scrutiny. The Court is correct in its
judgment, and I join [most] of its opinion. This separate writing
explains in greater detail why the First Amendment’s protections
against viewpoint discrimination apply to the trademark here.
It submits further that the viewpoint discrimination rationale
Chapter Three Business and the Constitution
renders unnecessary any extended treatment of other questions
raised by the parties.
Those few categories of speech that the government can regulate or punish—for instance, fraud, defamation, or incitement—
are well established within our constitutional tradition. Aside
from these and a few other narrow exceptions, it is a fundamental
principle of the First Amendment that the government may not
punish or suppress speech based on disapproval of the ideas or
perspectives the speech conveys.
A law found to discriminate based on viewpoint is an “egregious form of content discrimination,” which is “presumptively
unconstitutional.” [Citation omitted.] At its most basic, the test
for viewpoint discrimination is whether . . . the government
has singled out a subset of messages for disfavor based on the
views expressed. In the instant case, the disparagement clause
the Government now seeks to implement and enforce identifies
the relevant subject as “persons, living or dead, institutions, beliefs, or national symbols.” Within that category, an applicant
may register a positive or benign mark but not a derogatory one.
The law thus reflects the Government’s disapproval of a subset
of messages it finds offensive. This is the essence of viewpoint
discrimination.
93
The parties dispute whether trademarks are commercial
speech. [This] issue may turn on whether certain commercial
concerns for the protection of trademarks might, as a general
matter, be the basis for regulation. However that issue is resolved, the viewpoint based discrimination at issue here [causes
the disparagement clause to violate the First Amendment].
Justice Thomas, concurring in part and concurring in the
judgment
I join [much of] the opinion of Justice Alito. I also write separately because “I continue to believe that when the government
seeks to restrict truthful speech in order to suppress the ideas it
conveys, strict scrutiny is appropriate, whether or not the speech
in question may be characterized as ‘commercial.’ ” Lorillard
Tobacco Co. v. Reilly, 533 U. S. 525, 572 (2001) (Thomas, J.,
concurring in part and concurring in judgment). I nonetheless
join . . . Justice Alito’s opinion [insofar as it] concludes that the
disparagement clause is unconstitutional even under the less
stringent test announced in Central Hudson Gas & Electric
Corp. v. Public Service Commission.
Judgment of Federal Circuit affirmed.
CYBERLAW IN ACTION
Some types of speech are classified as wholly outside
the protection of the First Amendment. For instance,
expression that constitutes obscenity under a test
developed by the Supreme Court carries no First
Amendment protection—meaning that the government
is free to regulate it on the basis of its content (including
criminalizing the possession or distribution of obscene material). For
more details concerning the obscenity doctrine, see the discussion
in Chapter 5.
Child pornography is another type of speech that carries no First
Amendment protection, in light of the obviously important public
interest in protecting minors against physical and psychological
harm. Thus, there is no First Amendment barrier to a criminal
prosecution against one who possesses or purveys material that
constitutes child pornography. Many of such prosecutions are
based on photos or other material stored on computers or shared
online.
Both obscenity and child pornography depend in part upon
graphic depictions of sexual content, though less in that regard
is required for child pornography than for obscenity. What about
speech that contains gratuitous and highly offensive depictions of
violence? May the government prohibit such depictions and impose
adverse consequences on those who purvey such material? The
Supreme Court has consistently said “no.”
In Brown v. Entertainment Merchants Association, 564 U.S. 786
(2011), for instance, the Court invoked the First Amendment in striking
down a California law that barred the sale of violent video games to
persons under the age of 18. The statute defined violent video games
as ones in which “the range of options available to a player includes
killing, maiming, dismembering, or sexually assaulting an image of a
human being” in a “patently offensive way” that appeals to minors’
“deviant or morbid interests” and lacks “serious literary, artistic,
political, or scientific value.” California appeared to borrow the
“serious literary, artistic, political, or scientific value” language from
the Supreme Court’s long-recognized test for obscenity. However,
video games to which the California law applied would not amount
to obscenity because the extremely graphic sexual content required
in the obscenity test would not be present. (See the discussion of
the obscenity test in Chapter 5.) California also sought to analogize
depictions of violence that minors would encounter in certain video
games to sexual depictions that, according to Supreme Court
precedents, may sometimes be regulated by the government on the
ground of indecency in order to protect minors against exposure to
sexually explicit material even if it is not obscene.
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Part One Foundations of American Law
In rejecting California’s justifications for the statute, the Court
showed no inclination to add depictions of violence to the list of
expressive subject matters that fall outside the First Amendment’s
protective scope. The Court also expressed concern about the
law’s vagueness and about the impermissible extent to which
Due Process
The Fifth and Fourteenth Amendments require that the federal government and the states
observe due process when they deprive a person of life,
liberty, or property. Due process has both procedural and
substantive meanings.
LO3-6
Explain the difference between procedural due process
and substantive due process.
Procedural Due Process The traditional conception of
due process, called procedural due process, establishes
the procedures that government must follow when it takes
life, liberty, or property. Although the requirements of
procedural due process vary from situation to situation,
their core idea is that one is entitled to adequate notice
of the government action to be taken against him and to
some sort of fair trial or hearing before that action can
occur.
For purposes of procedural due process claims, liberty
includes a very broad and poorly defined range of freedoms. It even includes certain interests in personal reputation. For example, the firing of a government employee
may require some kind of due process hearing if it is
publicized, the fired employee’s reputation is sufficiently
damaged, and her future employment opportunities are
restricted. The Supreme Court has said that procedural
due process property is not created by the Constitution
but by existing rules and understandings that stem from
an independent source such as state law. These rules and
understandings must give a person a legitimate claim of
entitlement to a benefit, not merely some need, desire, or
expectation for it. This definition includes almost all of
the usual forms of property, as well as utility service, disability benefits, welfare benefits, and a driver’s license. It
also includes the job rights of tenured public employees
who can be discharged only for cause, but not the rights of
untenured or probationary employees.
Substantive Due Process Procedural due process does
not challenge rules of substantive law—the rules that set
standards of behavior for organized social life. For example, imagine that State X makes adultery a crime and
it would restrict the rights of adults to have access to protected
expressive content even though the statute was meant to protect
minors. Decisions such as Brown furnish a reminder that the First
Amendment protects a great deal of speech that many people would
find offensive, disturbing, or otherwise objectionable.
allows people to be convicted of adultery without a trial.
Arguments that adultery should not be a crime go to the
substance of the statute, whereas objections to the lack of
a trial are procedural in nature.
Sometimes, the due process clauses have been used to
attack the substance of government action. For our purposes, the most important example of this substantive
due process occurred early in the 20th century, when
courts struck down various kinds of social legislation
as denying due process. They did so mainly by reading
freedom of contract and other economic rights into the
liberty and property protected by the Fifth and Fourteenth Amendments, and then interpreting “due process
of law” to require that laws denying such rights be subjected to means-ends scrutiny. The best-known example is the Supreme Court’s 1905 decision in Lochner v.
New York, which struck down a state law setting maximum hours of work for bakery employees because the
statute limited freedom of contract and did not directly
advance the legitimate state goal of promoting worker
health.
Since 1937, however, this “economic” form of substantive due process has been largely abandoned by the
Supreme Court and has not amounted to a significant
check on government regulation of economic matters.
Substantive due process attacks on such regulations now
trigger only a lenient type of rational basis review and
thus have had little chance of success. During the 1970s
and 1980s, however, substantive due process became increasingly important as a device for protecting noneconomic rights. The most important examples are the liberty
and privacy interests, which consist of several rights that
the Supreme Court regards as fundamental and as entitled to significant constitutional protection. The Court
has declared that these include the rights to marry, have
children and direct their education and upbringing, enjoy
marital privacy, use contraception, and, within certain
limits, elect to have an abortion. Laws restricting these
rights must be narrowly tailored to meet a compelling
government purpose in order to avoid being declared unconstitutional. Obergefell v. Hodges, which appears later
in the chapter, illustrates the influence of substantive due
process interests.
Chapter Three Business and the Constitution
Equal Protection
Identify the instances when an Equal Protection Clause–
LO3-7 based challenge to government action triggers more
rigorous scrutiny than the rational basis test.
The Fourteenth Amendment’s Equal Protection Clause
says that “[n]o State shall . . . deny to any person . . .
the equal protection of the laws.” Because the equal
protection guarantee has been incorporated within
Fifth Amendment due process, it also restricts the federal government. The equal protection guarantee potentially applies to all situations in which government
95
classifies or distinguishes people. The law inevitably
makes distinctions among people, benefiting or burdening some groups but not others. Equal protection
doctrine, as developed by the Supreme Court, sets the
standards such distinctions must meet in order to be
constitutional.
Economic Regulations The basic equal protection standard is the rational basis test described earlier. This is the
standard usually applied to social and economic regulations that are challenged as denying equal protection. As
the following case illustrates, this lenient test usually does
not impede state and federal regulation of social and economic matters.
Fitzgerald v. Racing Association of Central Iowa
539 U.S. 103 (U.S. Sup. Ct. 2003)
Before 1989, Iowa permitted only one form of gambling: parimutuel betting at racetracks. A 1989 Iowa statute authorized other
forms of gambling, including slot machines on riverboats. The 1989 law established that adjusted revenues from riverboat slot
machine gambling would be taxed at graduated rates, with a top rate of 20 percent. In 1994, Iowa enacted a law that authorized
racetracks to operate slot machines. That law also imposed a graduated tax upon racetrack slot machine adjusted revenues, with
a top rate that started at 20 percent and would automatically rise over time to 36 percent. The 1994 enactment left in place the
20 percent tax rate on riverboat slot machine adjusted revenues.
Contending that the 1994 legislation’s 20 percent versus 36 percent tax rate difference violated the federal Constitution’s
Equal Protection Clause, a group of racetracks and an association of dog owners brought suit against the State of Iowa (through
its state treasurer, Michael Fitzgerald). A state district court upheld the statute, but the Iowa Supreme Court reversed. The U.S.
Supreme Court granted Iowa’s petition for a writ of certiorari.
Breyer, Justice
We here consider whether a difference in state tax rates violates the Fourteenth Amendment’s mandate that “no State
shall . . . deny to any person . . . the equal protection of the
laws.” The law in question does not distinguish on the basis of,
for example, race or gender. It does not distinguish between instate and out-of-state businesses. Neither does it favor a State’s
long-time residents at the expense of residents who have more
recently arrived from other States. Rather, the law distinguishes
for tax purposes among revenues obtained within the State of
Iowa by two enterprises, each of which does business in the
State. Where that is so, the law is subject to rational-basis
review:
The Equal Protection Clause is satisfied so long as there is a
plausible policy reason for the classification, the legislative
facts on which the classification is apparently based rationally may have been considered to be true by the governmental decisionmaker, and the relationship of the classification
to its goal is not so attenuated as to render the distinction
arbitrary or irrational.
[Case citation omitted.] [We have also held that] rational-basis
review “is especially deferential in the context of classifications
made by complex tax laws.” [Case citation omitted.]
The Iowa Supreme Court found that the 20 percent/36 percent tax rate differential failed to meet this standard because, in
its view, that difference frustrated what it saw as the law’s basic
objective, namely, rescuing the racetracks from economic distress. And no rational person, it believed, could claim the contrary. The Iowa Supreme Court could not deny, however, that the
Iowa law, like most laws, might predominately serve one general
objective, say, helping the racetracks, while containing subsidiary provisions that seek to achieve other desirable (perhaps even
contrary) ends as well, thereby producing a law that balances
objectives but still serves the general objective when seen as a
whole. After all, if every subsidiary provision in a law designed
to help racetracks had to help those racetracks and nothing more,
then (since any tax rate hurts the racetracks when compared with
a lower rate) there could be no taxation of the racetracks at all.
Neither could the Iowa Supreme Court deny that the 1994
legislation, seen as a whole, can rationally be understood to
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Part One Foundations of American Law
do what that court says it seeks to do, namely, advance the
racetracks’ economic interests. Its grant to the racetracks of
authority to operate slot machines should help the racetracks
economically to some degree—even if its simultaneous imposition of a tax on slot machine adjusted revenue means that the
law provides less help than respondents might like. At least a
rational legislator might so believe. And the Constitution grants
legislators, not courts, broad authority (within the bounds of rationality) to decide whom they wish to help with their tax laws
and how much help those laws ought to provide. “The ‘task of
classifying persons for . . . benefits . . . inevitably requires that
some persons who have an almost equally strong claim to favored treatment be placed on different sides of the line,’ and the
fact the line might have been drawn differently at some points
is a matter for legislative, rather than judicial, consideration.”
[Case citation omitted.]
Once one realizes that not every provision in a law must
share a single objective, one has no difficulty finding the necessary rational support for the 20 percent/36 percent differential here at issue. That difference, harmful to the racetracks, is
helpful to the riverboats, which, as [those challenging the 1994
statute] concede, were also facing financial peril. These two
characterizations are but opposite sides of the same coin. Each
reflects a rational way for a legislator to view the matter. And
aside from simply aiding the financial position of the riverboats,
the legislators may have wanted to encourage the economic development of river communities or to promote riverboat history,
say, by providing incentives for riverboats to remain in the State,
rather than relocate to other States. Alternatively, they may have
wanted to protect the reliance interests of riverboat operators,
whose adjusted slot machine revenue had previously been taxed
at the 20 percent rate. All these objectives are rational ones,
which lower riverboat tax rates could further and which suffice
to uphold the different tax rates.
We conclude that there is “a plausible policy reason for the
classification,” that the legislature “rationally may have . . .
considered . . . true” the related justifying “legislative facts,” and
that the “relationship of the classification to its goal is not so
attenuated as to render the distinction arbitrary or irrational.”
[Case citation omitted.] Consequently the State’s differential tax
rate does not violate the Federal Equal Protection Clause.
Fundamental Rights The rational basis test is the basic
equal protection standard. Some classifications, however, receive tougher means-ends scrutiny. According to
Supreme Court precedent, laws that discriminate regarding fundamental rights or suspect classes must undergo
more rigorous review.
Although the list of rights regarded as fundamental for
equal protection purposes is not completely clear, it clearly
includes the right to marry. As made plain in Obergefell v.
Hodges, which follows shortly, this right exists regardless
of whether the couple to be married is of opposite genders
or of the same gender. The list also includes certain criminal procedure protections as well as the rights to vote and
engage in interstate travel. Laws creating unequal enjoyment of these rights receive full strict scrutiny. In 1969,
for instance, the Supreme Court struck down the District
of Columbia’s one-year residency requirement for receiving welfare benefits because that requirement unequally
and impermissibly restricted the right of interstate travel.
An equal protection claim involving the fundamental
right to vote was addressed in high-profile fashion by the
Supreme Court in Bush v. Gore, 531 U.S. 98 (2000). A
five-justice majority in the historic and controversial
decision terminated an ongoing vote recount in Florida
because, in the majority’s view, Florida law’s “intent of
the voter” test was not a sufficiently clear standard for determining whether a ballot not counted in the initial machine count should be counted as valid during the manual
recount. The majority was concerned that in the absence
of a more specific standard, vote counters taking part in
the recount might apply inconsistent standards in determining what the voter supposedly intended, and might
thereby value some votes over others. The termination of
the Florida recount meant that then-governor Bush won
the state of Florida, giving him enough Electoral College
votes to win the presidency despite the fact that candidate
Gore tallied more popular votes nationally. The four dissenters in Bush v. Gore faulted the majority for focusing
on the supposed equal protection violation it identified,
when, in the dissenters’ view, the Court ignored a potentially bigger equal protection problem created by termination of the recount: the prospect that large numbers of
ballots not counted during the machine count would never
be counted, even though they may have been valid votes
under Florida’s “intent of the voter” test.
In Crawford v. Marion County Election Board, 553
U.S.181 (2008), the Supreme Court again addressed the
fundamental right to vote. This time, the Court was faced
with determining whether an Indiana law violated the
Equal Protection Clause by requiring that voters produce
Iowa Supreme Court decision reversed, and case remanded for
further proceedings.
Chapter Three Business and the Constitution
a government-issued photo ID as a precondition to being
allowed to vote. Those who raised the equal protection
challenge to the requirement asserted that its burdens
would fall disproportionately on low-income and elderly
voters, who would be less likely than other persons to
have a driver’s license or other photo ID. The Court upheld the Indiana law, ruling that it did not violate the
Equal Protection Clause. Six justices agreed that even
though voter fraud at the polls had not been a demonstrated problem in Indiana, the photo ID requirement was
a generally applicable and not excessively burdensome
Obergefell v. Hodges 97
way of furthering the state’s purposes of preventing voter
fraud and preserving voter confidence in the integrity of
elections.
Since Crawford, lower courts have decided various
cases that presented constitutional challenges to voter ID
laws enacted in other states. Some such laws have been
upheld. In other cases, however, voter ID laws have been
struck down if they imposed more onerous ID requirements than the law at issue in Crawford and if the showing
of a disproportionate adverse effect on certain groups of
voters was especially strong.
135 S. Ct. 2584 (U.S. Sup. Ct. 2015)
Cases from Michigan, Kentucky, Ohio, and Tennessee—states whose statutes defined marriage as a union between one man and
one woman—were consolidated for purposes of the U.S. Supreme Court decision that appears below in edited form. The petitioners before the Supreme Court were 14 same-sex couples and two men whose same-sex partners were deceased. The respondents were state officials responsible for enforcing the laws in question. The petitioners claimed that the respondents violated
the Fourteenth Amendment to the U.S. Constitution by denying them the right to marry or by refusing to give full recognition to
marriages that were lawfully performed in another state.
The petitioners filed their cases in U.S. district courts in their home states. Each district court ruled in their favor. The respondents appealed these decisions to the U.S. Court of Appeals for the Sixth Circuit, which consolidated the cases and reversed
the judgments of the district courts. The Sixth Circuit held that a state has no constitutional obligation to license same-sex marriages or to recognize same-sex marriages performed out of state. This ruling conflicted with rulings by other federal courts of
appeals on the same set of issues.
The petitioners sought certiorari from the U.S. Supreme Court, which granted review regarding two questions. The first was
whether the Fourteenth Amendment requires a state to issue a marriage license to two persons of the same sex. The second was
whether the Fourteenth Amendment requires a state to recognize a same-sex marriage licensed and performed in a state that
does grant that right. (Further facts appear in the following edited version of the Supreme Court’s decision.)
Kennedy, Justice
The Constitution promises liberty to all within its reach, a liberty
that includes certain specific rights that allow persons . . . to
define and express their identity. The petitioners seek to find that
liberty by marrying someone of the same sex and having their
marriages deemed lawful on the same terms and conditions as
marriages between persons of the opposite sex.
[T]he annals of human history reveal the transcendent importance of marriage. Marriage is sacred to those who live by
their religions and offers unique fulfillment to those who find
meaning in the secular realm. There are untold references to the
beauty of marriage in religious and philosophical texts spanning
time, cultures, and faiths, as well as in art and literature in all
their forms. It is fair and necessary to say these references were
based on the understanding that marriage is a union between
two persons of the opposite sex. That history is the beginning of
these cases. The respondents say it should be the end as well. To
them, it would demean a timeless institution if the concept and
lawful status of marriage were extended to two persons of the
same sex. This view long has been held—and continues to be
held—in good faith by reasonable and sincere people here and
throughout the world.
The petitioners acknowledge this history but contend that
these cases cannot end there. [They do not seek] to demean the
revered idea and reality of marriage. To the contrary, it is the
enduring importance of marriage that underlies the petitioners’
contentions. [T]he petitioners seek [the right to marry] because
of their respect—and need—for its privileges and responsibilities. And their immutable nature dictates that same-sex marriage
is their only real path to this profound commitment.
Recounting the circumstances of three of these cases illustrates the urgency of the petitioners’ cause from their perspective. Petitioner James Obergefell, a plaintiff in the Ohio case, met
John Arthur over two decades ago. They fell in love and started
a life together. In 2011, however, Arthur was diagnosed with
amyotrophic lateral sclerosis, or ALS. This debilitating disease
is progressive, with no known cure. Two years ago, Obergefell
and Arthur decided to commit to one another, resolving to marry
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Part One Foundations of American Law
before Arthur died. To fulfill their mutual promise, they traveled
from Ohio to Maryland, where same-sex marriage was legal,
[and were wed there]. Three months later, Arthur died. Ohio law
does not permit Obergefell to be listed as the surviving spouse on
Arthur’s death certificate. By statute, they must remain strangers even in death, a state-imposed separation Obergefell deems
“hurtful for the rest of time.” He brought suit to be shown as the
surviving spouse on Arthur’s death certificate.
April DeBoer and Jayne Rowse are co-plaintiffs in the case
from Michigan. They celebrated a commitment ceremony to
honor their permanent relation in 2007. In 2009, DeBoer and
Rowse fostered and then adopted a baby boy. Later that same
year, they welcomed another son into their family. The new baby,
born prematurely and abandoned by his biological mother, required around-the-clock care. The next year, a baby girl with special needs joined their family. Michigan, however, permits only
opposite-sex married couples or single individuals to adopt, so
each child can have only one woman as his or her legal parent. If
an emergency were to arise, schools and hospitals may treat the
three children as if they had only one parent. And, were tragedy
to befall either DeBoer or Rowse, the other would have no legal
rights over the children she had not been permitted to adopt. This
couple seeks relief from the continuing uncertainty their unmarried status creates in their lives.
Army Sergeant Ijpe DeKoe and his partner Thomas Kostura,
co-plaintiffs in the Tennessee case, fell in love. In 2011, DeKoe
received orders to deploy to Afghanistan. Before leaving, he and
Kostura married in New York. When DeKoe returned [from his
deployment], the two settled in Tennessee, where DeKoe works
for the Army Reserve. Their lawful marriage is stripped from
them whenever they reside in Tennessee, returning and disappearing as they travel across state lines. DeKoe . . . endure[s] a
substantial burden [as a result].
The ancient origins of marriage confirm its centrality, but [its
history] is one of both continuity and change. For example, marriage was once viewed as an arrangement by the couple’s parents
based on political, religious, and financial concerns; but by the
time of the Nation’s founding, it was understood to be a voluntary contract between a man and a woman. [Another example
involves] the centuries-old doctrine of coverture, [under which]
a married man and woman were treated by the State as a single,
male-dominated legal entity. As women gained legal, political, and property rights, and as society began to understand that
women have their own equal dignity, the law of coverture was
abandoned. These and other developments in the institution of
marriage . . . worked deep transformations in its structure [and]
have strengthened, not weakened, the institution of marriage. Indeed, changed understandings of marriage are characteristic of
a Nation where new dimensions of freedom become apparent to
new generations, often through perspectives that begin in pleas
or protests and then are considered in the political sphere and the
judicial process.
This dynamic can be seen in the Nation’s experiences with
the rights of gays and lesbians. Until the mid-20th century, samesex intimacy long had been condemned as immoral by the State
itself in most Western nations, a belief often embodied in the
criminal law. For this reason, among others, many persons did
not deem homosexuals to have dignity in their own distinct identity. A truthful declaration by same-sex couples of what was in
their hearts had to remain unspoken. Even when a greater awareness of the humanity and integrity of homosexual persons came
in the period after World War II, the argument that gays and lesbians had a just claim to dignity was in conflict with both law
and widespread social conventions. Same-sex intimacy remained
a crime in many States. Gays and lesbians were prohibited from
most government employment, barred from military service, excluded under immigration laws, targeted by police, and burdened
in their rights to associate. For much of the 20th century, moreover, homosexuality was treated as . . . a mental disorder. Only in
more recent years have psychiatrists and others recognized that
sexual orientation is both a normal expression of human sexuality and immutable.
In the late 20th century, following substantial cultural and political developments, same-sex couples began to lead more open
and public lives and to establish families. This development was
followed by a quite extensive discussion of the issue in both governmental and private sectors and by a shift in public attitudes
toward greater tolerance. As a result, questions about the rights
of gays and lesbians reached the courts.
This Court first gave detailed consideration to the legal
status of homosexuals in Bowers v. Hardwick, 478 U.S. 186
(1986). There it upheld the constitutionality of a Georgia law
deemed to criminalize certain homosexual acts. Ten years later,
in Romer v. Evans, 517 U.S. 620 (1996), the Court invalidated
an amendment to Colorado’s Constitution that sought to foreclose any branch or political subdivision of the State from
protecting persons against discrimination based on sexual orientation. Then, in 2003, the Court overruled Bowers, holding
that laws making same-sex intimacy a crime “demea[n] the
lives of homosexual persons.” Lawrence v. Texas, 539 U.S. 558,
575 (2003).
Against this background, the legal question of same-sex marriage arose. In 1993, the Hawaii Supreme Court held Hawaii’s
law restricting marriage to opposite-sex couples constituted
a classification on the basis of sex and was therefore subject
to strict scrutiny under the Hawaii Constitution. Although this
decision did not mandate that same-sex marriage be allowed,
some States [chose to reaffirm] in their laws that marriage is
defined as a union between opposite-sex partners. So too in
1996, Congress passed the Defense of Marriage Act (DOMA),
Chapter Three Business and the Constitution
defining marriage for all federal-law purposes as “only a legal
union between one man and one woman as husband and wife.”
The new and widespread discussion of the subject led other
States to a different conclusion. In 2003, the Supreme Judicial
Court of Massachusetts held that the State’s constitution guaranteed same-sex couples the right to marry. After that ruling, some
additional States granted marriage rights to same-sex couples,
either through judicial or legislative processes. Two terms ago,
in United States v. Windsor, 133 S. Ct. 2675 (2013), this Court
invalidated DOMA to the extent it barred the federal government
from treating same-sex marriages as valid even when they were
lawful in the State where they were licensed. DOMA, the Court
held, impermissibly disparaged those same-sex couples “who
wanted to affirm their commitment to one another before their
children, their family, their friends, and their community.”
Numerous cases about same-sex marriage have reached
the United States Courts of Appeals in recent years. With the
exception of the opinion here under review and one other, the
Courts of Appeals have held that excluding same-sex couples
from marriage violates the Constitution. There also have been
many thoughtful district court decisions addressing same-sex
marriage—and most of them, too, have concluded same-sex
couples must be allowed to marry.
Under the Due Process Clause of the Fourteenth Amendment,
no State shall “deprive any person of life, liberty, or property,
without due process of law.” The fundamental liberties protected by this Clause include most of the rights enumerated in
the Bill of Rights. In addition, these liberties extend to certain
personal choices central to individual dignity and autonomy, including intimate choices that define personal identity and beliefs. See, e.g., Eisenstadt v. Baird, 405 U.S. 438, 453 (1972);
Griswold v. Connecticut, 381 U.S. 479, 484-486 (1965).
The identification and protection of fundamental rights is an
enduring part of the judicial duty to interpret the Constitution.
[I]t requires courts to exercise reasoned judgment in identifying
interests of the person so fundamental that the State must accord
them its respect. History and tradition guide and discipline this
inquiry but do not set its outer boundaries. That method respects
our history and learns from it without allowing the past alone
to rule the present. The nature of injustice is that we may not
always see it in our own times. The generations that wrote and
ratified the Bill of Rights and the Fourteenth Amendment did not
presume to know the extent of freedom in all of its dimensions,
and so they entrusted to future generations a charter protecting
the right of all persons to enjoy liberty as we learn its meaning.
When new insight reveals discord between the Constitution’s
central protections and a received legal stricture, a claim to liberty must be addressed.
Applying these established tenets, the Court has long
held that the right to marry is protected by the Constitution.
99
In Loving v. Virginia, 388 U.S. 1, 12 (1967), which invalidated
bans on interracial unions, a unanimous Court held that marriage
is “one of the vital personal rights essential to the orderly pursuit
of happiness by free men.” The Court reaffirmed that holding in
Zablocki v. Redhail, 434 U.S. 374, 384 (1978), which held the
right to marry was burdened by a law prohibiting fathers who
were behind on child support from marrying. Over time and in
other contexts, the Court has reiterated that the right to marry is
fundamental under the Due Process Clause. [Citations omitted.]
It cannot be denied that this Court’s cases describing the right
to marry presumed a relationship involving opposite-sex partners. The Court, like many institutions, has made assumptions
defined by the world and time of which it is a part. This was evident in Baker v. Nelson, 409 U.S. 810, a one-line summary decision issued in 1972, holding the exclusion of same-sex couples
from marriage did not present a substantial federal question.
Still, there are other, more instructive precedents. In defining the right to marry, [this Court’s] cases have identified essential attributes of that right based in history, tradition, and other
constitutional liberties inherent in this intimate bond. See, e.g.,
Zablocki; Loving; Griswold. And in assessing whether the force
and rationale of its cases apply to same-sex couples, the Court
must respect the basic reasons why the right to marry has been
long protected.
This analysis compels the conclusion that same-sex couples
may exercise the right to marry. The four principles and traditions to be discussed demonstrate that the reasons marriage is
fundamental under the Constitution apply with equal force to
same-sex couples.
A first premise of the Court’s relevant precedents is that the
right to personal choice regarding marriage is inherent in the
concept of individual autonomy. This abiding connection between marriage and liberty is why Loving invalidated interracial
marriage bans under the Due Process Clause. See 388 U.S. at
12. Like choices concerning contraception, family relationships,
procreation, and childrearing, all of which are protected by the
Constitution, decisions concerning marriage are among the most
intimate that an individual can make. The nature of marriage is
that, through its enduring bond, two persons together can find
other freedoms, such as expression, intimacy, and spirituality.
This is true for all persons, whatever their sexual orientation. See
Windsor, 133 S. Ct. 2675. There is dignity in the bond between
two men or two women who seek to marry and in their autonomy
to make such profound choices.
A second principle in this Court’s jurisprudence is that the
right to marry is fundamental because it supports a two-person
union unlike any other in its importance to the committed individuals. This point was central to Griswold v. Connecticut,
which held the Constitution protects the right of married couples
to use contraception. 381 U.S. at 485.
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As this Court held in Lawrence, same-sex couples have the
same right as opposite-sex couples to enjoy intimate association.
But while Lawrence confirmed a dimension of freedom that allows individuals to engage in intimate association without criminal liability, it does not follow that freedom stops there. Outlaw
to outcast may be a step forward, but it does not achieve the full
promise of liberty.
A third basis for protecting the right to marry is that it safeguards children and families and thus draws meaning from related
rights of childrearing, procreation, and education. The Court has
recognized these connections by describing the varied rights as a
unified whole: “[T]he right to marry, establish a home and bring
up children is a central part of the liberty protected by the Due
Process Clause.” Zablocki, 434 U.S. at 384. Under the laws of the
several States, some of marriage’s protections for children and
families are material. But marriage also confers more profound
benefits. By giving recognition and legal structure to their parents’ relationship, marriage allows children “to understand the
integrity and closeness of their own family and its concord with
other families in their community and in their daily lives.” Windsor,
133 St. Ct. 2675. Marriage also affords the permanency and stability important to children’s best interests.
As all parties agree, many same-sex couples provide loving
and nurturing homes to their children, whether biological or
adopted. And hundreds of thousands of children are presently
being raised by such couples. Most States have allowed gays and
lesbians to adopt, either as individuals or as couples, and many
adopted and foster children have same-sex parents. This provides
powerful confirmation from the law itself that gays and lesbians
can create loving, supportive families.
Excluding same-sex couples from marriage thus conflicts
with a central premise of the right to marry. Without the recognition, stability, and predictability marriage offers, their children
suffer the stigma of knowing their families are somehow lesser.
They also suffer the significant material costs of being raised
by unmarried parents, relegated through no fault of their own
to a more difficult and uncertain family life. The marriage laws
at issue here thus harm and humiliate the children of same-sex
couples.
That is not to say the right to marry is less meaningful for
those who do not or cannot have children. An ability, desire, or
promise to procreate is not and has not been a prerequisite for a
valid marriage in any State.
Fourth and finally, this Court’s cases and the Nation’s traditions make clear that marriage is a keystone of our social order.
[J]ust as a couple vows to support each other, so does society
pledge to support the couple, offering symbolic recognition and
material benefits to protect and nourish the union. [States] have
throughout our history made marriage the basis for an expanding list of governmental rights, benefits, and responsibilities.
These aspects of marital status include: taxation; inheritance and
property rights; rules of intestate succession; spousal privilege
in the law of evidence; hospital access; medical decisionmaking
authority; adoption rights; the rights and benefits of survivors;
birth and death certificates; professional ethics rules; campaign
finance restrictions; workers’ compensation benefits; health insurance; and child custody, support, and visitation rules. Valid
marriage under state law is also a significant status for over a
thousand provisions of federal law. The States have contributed
to the fundamental character of the marriage right by placing
that institution at the center of so many facets of the legal and
social order.
There is no difference between same- and opposite-sex couples with respect to this principle. Yet by virtue of their exclusion
from that institution, same-sex couples are denied the constellation of benefits that the States have linked to marriage. This harm
results in more than just material burdens. Same-sex couples are
consigned to an instability many opposite-sex couples would
deem intolerable in their own lives. As the State itself makes
marriage all the more precious by the significance it attaches to
it, exclusion from that status has the effect of teaching that gays
and lesbians are unequal in important respects. It demeans gays
and lesbians for the State to lock them out of a central institution
of the Nation’s society.
The limitation of marriage to opposite-sex couples may
long have seemed natural and just, but its inconsistency with
the central meaning of the fundamental right to marry is now
manifest. With that knowledge must come the recognition that
laws excluding same-sex couples from the marriage right impose stigma and injury of the kind prohibited by our basic charter. Under the Constitution, same-sex couples seek in marriage
the same legal treatment as opposite-sex couples, and it would
disparage their choices and diminish their personhood to deny
them this right.
The right of same-sex couples to marry that is part of the
liberty promised by the Fourteenth Amendment is derived,
too, from that Amendment’s guarantee of the equal protection
of the laws. The Due Process Clause and the Equal Protection
Clause are connected in a profound way, though they set forth
independent principles. Rights implicit in liberty and rights
secured by equal protection may rest on different precepts and
are not always coextensive, yet in some instances each may be
instructive as to the meaning and reach of the other. In any particular case one Clause may be thought to capture the essence of
the right in a more accurate and comprehensive way, even as the
two Clauses may converge in the identification and definition
of the right. This interrelation of the two principles furthers our
understanding of what freedom is and must become.
The Court’s cases touching upon the right to marry reflect
this dynamic. In Loving, the Court invalidated a prohibition on
Chapter Three Business and the Constitution
interracial marriage under both the Equal Protection Clause and
the Due Process Clause. The Court . . . stated: “There can be
no doubt that restricting the freedom to marry solely because of
racial classifications violates the central meaning of the Equal
Protection Clause.” 388 U.S. at 12. With this link to equal protection, the Court proceeded to hold that the prohibition offended
central precepts of liberty: “To deny this fundamental freedom
on so unsupportable a basis as the racial classifications embodied in these statutes, classifications so directly subversive of the
principle of equality at the heart of the Fourteenth Amendment,
is surely to deprive all the State’s citizens of liberty without due
process of law.” Id.
The synergy between the two protections is illustrated further in Zablocki. There the Court invoked the Equal Protection
Clause as its basis for invalidating the challenged law, which
barred fathers who were behind on child-support payments from
marrying without judicial approval. The equal protection analysis depended in central part on the Court’s holding that the law
burdened a right “of fundamental importance.” 434 U.S. at 383.
It was the essential nature of the marriage right that made apparent the law’s incompatibility with requirements of equality.
Each concept—liberty and equal protection—leads to a stronger
understanding of the other.
Other cases confirm this relation between liberty and equality. In M. L. B. v. S. L. J., 519 U.S. 102, 119–24 (1996), the Court
invalidated under due process and equal protection principles a
statute requiring indigent mothers to pay a fee in order to appeal
the termination of their parental rights. In Eisenstadt v. Baird,
the Court invoked both principles to invalidate a prohibition on
the distribution of contraceptives to unmarried persons but not
married persons. See 405 U.S. at 446–54.
In Lawrence, the Court acknowledged the interlocking nature of these constitutional safeguards in the context of the legal
treatment of gays and lesbians. Although Lawrence elaborated
its holding under the Due Process Clause, it acknowledged, and
sought to remedy, the continuing inequality that resulted from
laws making intimacy in the lives of gays and lesbians a crime
against the State. See 539 U.S. at 575. Lawrence therefore drew
upon principles of liberty and equality to define and protect the
rights of gays and lesbians, holding the State “cannot demean
their existence or control their destiny by making their private
sexual conduct a crime.” Id. at 578.
This dynamic also applies to same-sex marriage. It is now
clear that the challenged laws burden the liberty of same-sex
couples, and it must be further acknowledged that they abridge
central precepts of equality. Here the marriage laws enforced by
the respondents are in essence unequal: same-sex couples are
denied all the benefits afforded to opposite-sex couples and are
barred from exercising a fundamental right. Especially against a
long history of disapproval of their relationships, this denial to
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same-sex couples of the right to marry works a grave and continuing harm.
These considerations lead to the conclusion that the right to
marry is a fundamental right inherent in the liberty of the person,
and under the Due Process and Equal Protection Clauses of the
Fourteenth Amendment couples of the same-sex may not be deprived of that right and that liberty. The Court now holds that samesex couples may exercise the fundamental right to marry. No
longer may this liberty be denied to them. Baker v. Nelson must
be and now is overruled, and the State laws challenged by Petitioners in these cases are now held invalid to the extent they
exclude same-sex couples from civil marriage on the same terms
and conditions as opposite-sex couples.
There may be an initial inclination in these cases to proceed with caution—to await further legislation, litigation,
and debate. The respondents warn there has been insufficient
democratic discourse before deciding an issue so basic as the
definition of marriage. Yet there has been far more deliberation than this argument acknowledges. There have been referenda, legislative debates, and grassroots campaigns, as well as
countless studies, papers, books, and other popular and scholarly writings. There has been extensive litigation in state and
federal courts. Judicial opinions addressing the issue have been
informed by the contentions of parties and counsel, which, in
turn, reflect the more general, societal discussion of samesex marriage and its meaning that has occurred over the past
decades. As more than 100 amici make clear in their filings,
many of the central institutions in American life—state and
local governments, the military, large and small businesses,
labor unions, religious organizations, law enforcement, civic
groups, professional organizations, and universities—have
devoted substantial attention to the question. This has led to
an enhanced understanding of the issue—an understanding reflected in the arguments now presented for resolution as a matter of constitutional law.
Of course, the Constitution contemplates that democracy is
the appropriate process for change, so long as that process does
not abridge fundamental rights. But . . . when the rights of persons are violated, the Constitution requires redress by the courts,
notwithstanding the more general value of democratic decisionmaking. An individual can invoke a right to constitutional
protection when he or she is harmed, even if the broader public
disagrees and even if the legislature refuses to act. The idea of the
Constitution “was to withdraw certain subjects from the vicissitudes of political controversy, to place them beyond the reach of
majorities and officials and to establish them as legal principles
to be applied by the courts.” West Virginia Bd. of Ed. v. Barnette,
319 U.S. 624, 638 (1943). This is why “fundamental rights may
not be submitted to a vote; they depend on the outcome of no
elections.” Id.
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Part One Foundations of American Law
This is not the first time the Court has been asked to adopt
a cautious approach to recognizing and protecting fundamental rights. In Bowers, a bare majority upheld a law criminalizing same-sex intimacy. See 478 U.S. at 186. That approach might
have been viewed as a cautious endorsement of the democratic
process, which had only just begun to consider the rights of gays
and lesbians. Yet, in effect, Bowers upheld state action that denied gays and lesbians a fundamental right and caused them pain
and humiliation. Although Bowers was eventually repudiated
in Lawrence, men and women were harmed in the interim, and
the substantial effects of these injuries no doubt lingered long
after Bowers was overruled. Dignitary wounds cannot always be
healed with the stroke of a pen.
A ruling against same-sex couples would have the same
effect—and, like Bowers, would be unjustified under the Fourteenth Amendment. The petitioners’ stories [, as detailed earlier
in this opinion,] make clear the urgency of the issue they present
to the Court.
These cases also present the question whether the Constitution requires States to recognize same-sex marriages validly
performed out of State. As made clear by the case of Obergefell
and Arthur, and by that of DeKoe and Kostura, the recognition
bans inflict substantial and continuing harm on same-sex couples. Being married in one State but having that valid marriage
denied in another is one of “the most perplexing and distressing
complication[s]” in the law of domestic relations. [Citation omitted.] Leaving the current state of affairs in place would maintain and promote instability and uncertainty. For some couples,
even an ordinary drive into a neighboring State to visit family or
friends risks causing severe hardship in the event of a spouse’s
hospitalization while across state lines. In light of the fact that
many States already allow same-sex marriage—and hundreds
of thousands of these marriages already have occurred—the
disruption caused by the recognition bans is significant and
ever-growing.
The Court, in this decision, holds that same-sex couples may
exercise the fundamental right to marry in all States. It follows
that the Court also must hold—and it now does hold—that there
is no lawful basis for a State to refuse to recognize a lawful samesex marriage performed in another State on the ground of its
same-sex character.
No union is more profound than marriage, for it embodies
the highest ideals of love, fidelity, devotion, sacrifice, and family. [The petitioners’] hope is not to be . . . excluded from one of
civilization’s oldest institutions. They ask for equal dignity in the
eyes of the law. The Constitution grants them that right.
Suspect Classes Certain “suspect” bases of classification also trigger more rigorous equal protection review. As
of 2017, the suspect classes and the level of scrutiny they
attract are as follows:
developments have curtailed certain government-created
affirmative action programs but have not eliminated them.
In the companion cases of Gratz v. Bollinger, 539
U.S. 244 (2003), and Grutter v. Bollinger, 539 U.S. 306
(2003), the Supreme Court considered whether the University of Michigan violated the Equal Protection Clause
by taking minority students’ race into account in its undergraduate and law school admissions policies. The
Court recognized in the two cases that seeking student
diversity in a higher education context is a compelling
government interest. However, in Gratz, a five-justice
majority of the Court held that the university’s undergraduate admissions policy violated the Equal Protection
Clause because the policy’s consideration of minority applicants’ race became effectively the automatic
determining factor in admission decisions regarding
minority applicants. In Grutter, on the other hand, a different five-justice majority held that the university’s law
school admissions policy did not violate the Equal Protection Clause. The Grutter majority reasoned that the
law school’s policy, in considering minority applicants’
race, did so as part of individualized consideration of
applicants and of various types of diversity, not simply
race. Thus, the law school’s policy did not make race
1. Race and national origin. Classifications disadvantaging racial or national minorities receive the most rigorous
kind of strict scrutiny and are almost never constitutional.
For instance, in a recent decision that dealt not only with
the suspect class of race but also the fundamental right
to vote, the Supreme Court struck down North Carolina’s
formulation of certain legislative voting districts because
the formulation depended upon impermissible drawing
of race-based lines. (The case was Cooper v. Harris,
137 S. Ct. 1455 (2017).)
The Supreme Court has sometimes upheld governmentrequired affirmative action plans and what critics have called
reverse racial discrimination—government action that benefits racial minorities and allegedly disadvantages whites.
In 1989, however, a majority of the Court concluded that
state action of this kind should receive the same full strict
scrutiny as discrimination against racial or national minorities. A 1995 Supreme Court decision held that this is true
of federal government action as well as state action. These
Sixth Circuit’s judgment reversed.
Chapter Three Business and the Constitution
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Ethics in Action
As discussion in this chapter reveals, Supreme
Court precedent establishes that when government
action discriminates on the basis of race or sex,
the action will receive heightened scrutiny from the court if
an equal protection challenge is brought. Despite cases such
as Obergefell v. Hodges (in which the Supreme Court held
that same-sex couples cannot be denied the fundamental right
to marry), the Court has not recognized sexual orientation or
transgender status as a suspect class for equal protection purposes. Unless and until the Court does so, the government
the determining factor in the impermissible way that the
undergraduate policy did.
In the years following the decisions in Gratz and
Grutter, the composition of the Supreme Court changed.
When the Court agreed to decide a challenge to a raceconscious student admissions policy at the University
of Texas (a policy patterned in large part after what the
Court had approved in Grutter), speculation mounted that
the Court might use the case as a vehicle for overruling
Grutter or substantially cutting back on its effect. The
Court did not do so, however. In Fisher v. University of
Texas, 136 S. Ct. 2198 (2016), the Court reiterated a key
Grutter principle: that seeking diversity in the student
body at colleges and universities counts as a compelling
government purpose in the strict scrutiny analysis. The
Court also left unaltered Grutter’s approach of permitting
race to be considered in admissions decisions, as long as
it was among a number of other factors taken into account
in an individualized consideration of applicants and of
various types of diversity. According to the Court, the
challenged University of Texas plan passed the constitutional test by being narrowly tailored to achievement of
the compelling government interest in achieving student
body diversity.
In 2014, the Supreme Court decided an affirmative
action–related case that presented a different wrinkle in
the form of this question: If consideration of race in state
university admission decisions is sometimes permissible
(as Grutter and Fisher indicate), can the voters of a state
constitutionally bar the use of race as a consideration in
such decisions? In a Michigan referendum that took place
three years after the decision in Grutter, voters approved
an amendment to the state constitution that prohibited the
use of race-conscious affirmative action in public education, government contracting, and public employment.
Ruling on a challenge to this action, the Court emphasized
may have more legal latitude to regulate in ways that draw
lines on the basis of persons’ sexual orientation or transgender
status than in ways that classify on the basis of persons’ race
or sex. Now view this set of issues from an ethical perspective. Should the government be any freer to take actions that
discriminate against gays, lesbians, or transgender persons
than it is to take actions that discriminate on the basis of race
or sex? As you consider this question, you may wish to examine Chapter 4’s discussion of ethical theories and ethical
decision making.
in Schuette v. Coalition to Defend Affirmative Action,
134 S. Ct. 1623 (2014), that the case was “not about how
the debate about racial preferences should be resolved.”
Rather, it was “about who may resolve it.” The Court
went on to hold that there was “no authority in the [U.S.]
Constitution . . . or in this Court’s precedents for the judiciary to set aside Michigan laws that commit this policy
determination to the voters.”
2. Alienage. Classifications based on one’s status as an
alien also receive strict scrutiny of some kind, but this
standard almost certainly is not as tough as the full strict
scrutiny normally used in race discrimination cases.
Under the “political function” exception, moreover, laws
restricting aliens from employment in positions that are
intimately related to democratic self-government only receive rational basis review. This exception has been read
broadly to allow the upholding of laws that exclude aliens
from being state troopers, public school teachers, and probation officers.
3. Sex. Although the Supreme Court has been hesitant
to make a formal declaration that sex is a suspect class,
for roughly four decades laws discriminating on the basis
of gender have been subjected to a fairly rigorous form
of intermediate scrutiny. As the Court has said, such
laws require an “exceedingly persuasive” justification.
The usual test is that government action discriminating
on the basis of sex must be substantially related to the
furtherance of an important government purpose. Under
this test, measures discriminating against women have
almost always been struck down. The Supreme Court
has said that laws disadvantaging men receive the same
scrutiny as those disadvantaging women, but this has
not prevented the Court from upholding men-only draft
registration and a law making statutory rape a crime for
men alone.
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Part One Foundations of American Law
Concept Review
Equal Protection and Levels of Scrutiny
Type of Government Action
Controlling Test
Operation and Effect of Test
Government action that discriminates
but neither affects exercise of fundamental right nor discriminates against
suspect class (e.g., most social and economic regulation)
Rational basis
Lenient test—government action is constitutional
if rationally related to legitimate government
purpose.
Government action that discriminates
concerning ability to exercise fundamental right
Full strict scrutiny
Very rigorous test—government action is unconstitutional unless necessary to fulfillment of compelling government purpose.
Government action that discriminates
on basis of race or national origin
Full strict scrutiny
Very rigorous test—government action is unconstitutional unless necessary to fulfillment of compelling government purpose.
Government action that discriminates
on basis of alienage
Less than full strict scrutiny
as general rule; rational
basis when public function
exception applies
Rigorous test—though softer application of full
strict scrutiny requirements. When public function
exception applies, test is lenient.
Government action that discriminates
on basis of sex (gender)
Intermediate scrutiny
Moderately rigorous test—government action is
unconstitutional unless substantially related to fulfillment of important government purpose.
Government action that discriminates
on basis of illegitimacy
Intermediate scrutiny,
but to lesser degree than
in gender discrimination
cases
Moderately rigorous test—though softer application of intermediate scrutiny requirements.
With gender as a longstanding suspect class and with
legal developments such as the Obergefell decision’s extension of the right to marry to same-sex couples, will the
Supreme Court formally recognize sexual orientation and
transgender status as suspect classes for equal protection
purposes? Signs of such a development are at least discernible, but how immediately such a development may
occur is an open question.
4. Illegitimacy. Classifications based on one’s having been
born to unmarried parents receive a form of intermediate
scrutiny that probably is less strict than the scrutiny given
gender-based classifications. Under this vague standard,
the Court has struck down state laws discriminating against
so-called illegitimate offspring in areas such as recovery
for wrongful death, workers’ compensation benefits, Social
Security payments, inheritance, and child support.
Independent Checks Applying
Only to the States
The Contract Clause
Article I, § 10 of the Constitution states: “No State shall . . . pass any . . . Law impairing the Obligation of Contracts.” Known as the Contract
Clause, this provision deals with state laws that change the
parties’ performance obligations under an existing contract after that contract has been made.2 The original purpose of the Contract Clause was to strike down the many
debtor relief statutes passed by the states after the Revolution. These statutes impaired the obligations of existing
private contracts by relieving debtors of what they owed
Under the Fifth Amendment’s Due Process Cause, standards similar to
those described in this section apply to the federal government.
2
Chapter Three Business and the Constitution
to creditors. In two early 19th-century cases, however, the
Contract Clause was also held to protect the obligations of
governmental contracts, charters, and grants.
The Contract Clause probably was the most important
constitutional check on state regulation of the economy for
much of the 19th century. Beginning in the latter part of
that century, the clause gradually became subordinate to
legislation based on the states’ police powers. By the mid20th century, most observers treated the clause as being
of historical interest only. In 1977, however, the Supreme
Court gave the Contract Clause new life by announcing a
fairly strict constitutional test governing situations in which
a state impairs its own contracts, charters, and grants. Such
impairments, the Court said, must be “reasonable and necessary to serve an important public purpose.”
During recent decades, the Court has continued its deference toward state regulations that impair the obligations
of private contracts. Consider, for instance, Exxon Corp. v.
Eagerton (1983). For years, Exxon had paid a severance
tax under Alabama law on oil and gas it drilled within
the state. As the tax increased, appropriate provisions in
Exxon’s contracts with the purchasers of its oil and gas allowed Exxon to pass on the amounts of the increases to the
purchasers. Alabama, however, enacted a law that not only
increased the severance tax but also forbade producers of
oil and gas from passing on the increase to purchasers.
Exxon filed suit, seeking a declaration that the law’s passon prohibition violated the Contract Clause. Affirming
Alabama’s highest court, the U.S. Supreme Court observed
that the Contract Clause allows the states to adopt broad
regulatory measures without having to be concerned that
private contracts will be affected. The pass-on prohibition
was designed to advance a broad public interest in protecting consumers against excessive prices and was applicable to all oil and gas producers regardless of whether they
were then parties to contracts containing pass-on provisions. Therefore, the Court reasoned, the Alabama statute
did not violate the Contract Clause.
Burden on, or Discrimination against,
Interstate Commerce
LO3-8
Explain the burden-on-commerce doctrine’s role in
making certain state government actions unconstitutional.
In addition to empowering Congress to regulate interstate
commerce, the Commerce Clause limits the states’ ability
to burden or discriminate against such commerce. This
limitation is not expressly stated in the Constitution. Instead, it arises by implication from the Commerce Clause
105
and reflects that clause’s original purpose of blocking state
protectionism and ensuring free interstate trade. (Because
this limitation arises by implication, it is often referred
to as the “dormant” Commerce Clause.) The burdenon-commerce limitation and the nondiscrimination principle operate independently of congressional legislation
under the commerce power or other federal powers. If appropriate federal regulation is present, the preemption questions discussed in the next section may also arise.
Many different state laws can raise burden-on-commerce
problems. For example, state regulation of transportation
(e.g., limits on train or truck lengths) has been a prolific
source of litigation. The same is true of state restrictions
on the importation of goods or resources, such as laws
forbidding the sale of out-of-state food products unless
they meet certain standards. Such restrictions sometimes
benefit local economic interests and reflect their political
influence. Burden-on-commerce issues also arise if states
try to aid their own residents by blocking the export of
scarce or valuable products, thus denying out-of-state buyers access to those products.
In part because of the variety of state regulations it has
had to consider, the Supreme Court has not adhered to one
consistent test for determining when such regulations impermissibly burden interstate commerce. In a 1994 case,
the Court said that if a state law discriminates against interstate commerce, the strictest scrutiny will be applied in
the determination of the law’s constitutionality. Discrimination is express when state laws treat local and interstate
commerce unequally on their face.
State laws might also discriminate even though on their
face, they seem neutral regarding interstate commerce. This
occurs when their effect is to burden or hinder such commerce. In one case, for example, the Supreme Court considered a North Carolina statute that required all closed
containers of apples sold within the state to bear only the
applicable U.S. grade or standard. The State of Washington,
the nation’s largest apple producer, had its own inspection
and grading system for Washington apples. This system generally was regarded as superior to the federal system. The
Court struck down the North Carolina statute because it benefited local apple producers by forcing Washington sellers to
regrade apples sold in North Carolina (thus raising their costs
of doing business) and by undermining the competitive advantage provided by Washington’s superior grading system.
On the other hand, state laws that regulate evenhandedly and have only incidental effects on interstate commerce are constitutional if they serve legitimate state
interests and their local benefits exceed the burden they
place on interstate commerce. There is no sharp line between such regulations and those that are almost always
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Part One Foundations of American Law
unconstitutional under the tests discussed above. In a
1981 Supreme Court case, a state truck-length limitation
that differed from the limitations imposed by neighboring states failed to satisfy the tests for constitutionality.
The Court concluded that the measure did not further
the state’s legitimate interest in highway safety because
the trucks banned by the state generally were as safe as
those it allowed. In addition, whatever marginal safety advantage the law provided was outweighed by the numerous problems it posed for interstate trucking companies.
Laws may also unconstitutionally burden interstate
commerce when they directly regulate that commerce.
This can occur, for example, when state price regulations
require firms to post the prices at which they will sell
within the state and to promise that they will not sell below
those prices in other states. Because they affect prices in
other states, such regulations directly regulate interstate
commerce and usually are unconstitutional.
Federal Preemption
LO3-9
Identify the major circumstances in which federal law
will preempt state law.
The constitutional principle of federal supremacy dictates that when state law conflicts with valid federal law,
the federal law is supreme. In such a situation, the state
law is said to be preempted by the federal regulation. The
central question in most federal preemption cases is the intent of Congress. Thus, such cases often present complex
questions of statutory interpretation.
Federal preemption of state law generally occurs for
one or more of these reasons:
1. There is a literal conflict between the state and federal measures, so that it is impossible to follow both
simultaneously.
2. The federal law specifically states that it will preempt
state regulation in certain areas. Similar statements
may also appear in the federal statute’s legislative history. Courts sometimes find such statements persuasive
even when they appear only in the legislative history
and not in the statute itself.
3. The federal regulation is pervasive. If Congress has
“occupied the field” by regulating a subject in great
breadth and/or in considerable detail, such action by
Congress may suggest an intent to displace state regulation of the subject. This may be especially likely
where Congress has given an administrative agency
broad regulatory power in a particular area.
4. The state regulation is an obstacle to fulfilling the purposes of the federal law. Here, the party challenging
the state law’s constitutionality typically claims that the
state law interferes with the purposes she attributes to
the federal measure (purposes usually found in its legislative history).
Arizona v. United States, 567 U.S. 387 (2012), illustrates the principles set forth in the above discussion of
grounds for preemption. In that case, the Supreme Court
was faced with deciding whether certain provisions in an
Arizona law were preempted by federal immigration law,
which has been enacted pursuant to the power granted to
Congress over immigration matters in Article I, § 8 of
the Constitution. The Court held that the so-called show
me your papers provision in the Arizona law was not preempted. That provision called for state law enforcement
officers to determine the immigration status of anyone
they stopped or arrested if there was reason to suspect that
the person might be in the country illegally.
However, the Court held that federal immigration law
preempted three other provisions in the Arizona law: a
provision making it a crime under Arizona law for an immigrant to fail to register under a federal law, a provision
making it a crime under Arizona law for illegal immigrants
to work or seek work, and a provision allowing Arizona
law enforcement officers to make warrantless arrests if
the officers have probable cause to believe the arrested
persons committed acts that would make them subject to
deportation under federal law. The preempted provisions
either conflicted with federal law or posed too great an
impediment to fulfillment of the federal law’s objectives.
The Takings Clause
LO3-10
Explain the power granted to the government by the
Takings Clause, as well as the limits on that power.
The Fifth Amendment states that “private property [shall
not] be taken for public use, without just compensation.”
Because this Takings Clause has been incorporated within
Fourteenth Amendment due process, it applies to the states.
Traditionally, it has come into play when the government
formally condemns land through its power of eminent
domain,3 but it has many other applications as well.
The Takings Clause both recognizes government’s
power to take private property and limits the exercise of
Eminent domain and the Takings Clause’s application to land use problems are discussed in Chapter 24.
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Chapter Three Business and the Constitution
that power. It does so by requiring that when property is
subjected to a governmental taking, the taking must be
for a public use and the property owner must receive just
compensation. We now consider these four aspects of the
Takings Clause in turn.
1. Property. The Takings Clause protects other property
interests besides land and interests in land. Although its
full scope is unclear, the clause has been held to cover
takings of personal property, liens, trade secrets, and
contract rights.
2. Taking. Because of the range of property interests it
may cover, the Takings Clause potentially has a broad
scope. Another reason for the clause’s wide possible application is the range of government activities that may
be considered takings. Of course, the government’s use
of formal condemnation procedures to acquire private
property is a taking. There may also be a taking when
the government physically invades private property or
allows someone else to do so.
It has long been recognized, moreover, that overly extensive land use regulation may so diminish the value of
property or the owner’s enjoyment of it as to constitute a
taking. Among the factors courts consider in such “regulatory taking” cases are the degree to which government
deprives the owner of free possession, use, and disposition of his property; the overall economic impact of the
regulation on the owner; and how much the regulation interferes with the owner’s reasonable investment-backed
expectations regarding the future use of the property. In
Lucas v. South Carolina Coastal Council (1992), the
Supreme Court held that there is an automatic taking
when the government denies the owner all economically
beneficial uses of the land. When this is not the case,
courts tend to apply some form of means-ends scrutiny
in determining whether land use regulation has gone too
far and thus amounts to a regulatory taking.
3. Public use. Once a taking of property has occurred, it is
unconstitutional unless it is for a public use. The public
use element took center stage in a widely publicized
2005 Supreme Court decision, Kelo v. City of New
London. For discussion of Kelo, see Figure 3.
4. Just compensation. Even if a taking of property is for
a public use, it still is unconstitutional if the property
owner does not receive just compensation. Although
the standards for determining just compensation vary
with the circumstances, the basic test is the fair market
value of the property (or of the lost property right) at
the time of the taking.
Figure 3 Economic Development as Public Use?
Does the government’s taking of private property for the
purpose of economic development satisfy the public use
requirement set forth in the Fifth Amendment’s Takings
Clause? In Kelo v. City of New London, 545 U.S. 469
(2005), the U.S. Supreme Court answered “yes.”
New London, Connecticut, experienced economic decline for a considerable number of years. The city therefore
made economic revitalization efforts, which included a plan
to acquire 115 parcels of real estate in a 90-acre area and
create, in collaboration with private developers, a multifaceted zone that would combine commercial, residential,
and recreational elements. The planned development was
designed to increase tax revenue, create jobs, and otherwise
capitalize on the economic opportunities that city officials
expected would flow from a major pharmaceutical company’s already-announced plan to construct a large facility
near the area the city wished to develop.
The city was able to negotiate the purchase of most
parcels of property in the 90-acre area, but some property
owners refused to sell. The latter group included Susette
Kelo and Wilhelmina Dery. Kelo had lived in her home for
several years, had made substantial improvements to it, and
especially enjoyed the water view it afforded. Dery had lived
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her entire life in the home the city sought to acquire. Both
homes were well maintained. After the city decided to use
its eminent domain power to acquire the properties of those
owners who refused to sell, Kelo, Dery, and the other nonselling owners filed suit. They contended that the city’s plan
to take their property for the purpose of economic development did not involve a public use and thus would violate
the Fifth Amendment’s Takings Clause. The dispute made
its way through the Connecticut courts and then to the U.S.
Supreme Court, where a five-justice majority ruled in favor
of the city.
Writing for the majority in Kelo v. City of New London,
Justice Stevens noted that earlier decisions had identified three types of eminent domain settings in which the
government’s acquisition of private property satisfied the
constitutional public use element: first, when the government planned to develop a government-owned facility (e.g.,
a military base); second, when the government planned to
construct, or allow others to construct, improvements to
which the public would have broad access (e.g., highways
or railroads); and third, when the government sought to
further some meaningful public purpose. Justice Stevens
observed that precedents had recognized the public purpose
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Part One Foundations of American Law
type of public use even if the government would not ultimately retain legal title to the acquired property (unlike the
military base example) and the acquired property would not
be fully opened up for public access (unlike the highway
and railroad examples). The Court acknowledged that the
public use requirement clearly would not be satisfied if
the government took private party A’s property simply to
give it to private party B. However, the Court stressed, the
prospect that private parties might ultimately own or control
property the government had acquired through eminent
domain would not make the taking unconstitutional if an
overriding public purpose prompted the government’s use
of eminent domain. Similarly, even if certain private parties
(e.g., the pharmaceutical company and private developers
in the Kelo facts) would stand to benefit from the government’s exercise of eminent domain, such a fact would not
make the taking unconstitutional if a public purpose supported the taking.
The Kelo majority stressed the particular relevance of
two earlier Supreme Court decisions, Berman v. Parker,
348 U.S. 26 (1954), and Hawaii Housing Authority v. Midkiff,
467 U.S. 299 (1984). In Berman, the Court sustained
Washington, D.C.’s use of eminent domain to take property
that included businesses and “blighted” dwellings in order
to construct a low-income housing project and new streets,
schools, and public facilities. In Midkiff, the Court upheld
Hawaii’s use of eminent domain to effectuate a legislative
determination that Hawaii’s longstanding land oligopoly,
under which property ownership was highly concentrated
among a small number of property owners, had to be broken
up for social and economic reasons. The Kelo majority concluded that significant public purposes were present in both
Berman and Midkiff and that those decisions led logically to
the conclusion that economic development was a public purpose weighty enough to constitute public use for purposes of
the Takings Clause. Therefore, the Court upheld the city’s
exercise of eminent domain in Kelo.
Problems and Problem Cases
1. In 1967, Gary Jones purchased a house on North
Bryan Street in Little Rock, Arkansas. He and his
wife lived in the house until they separated in 1993.
Jones then moved into an apartment in Little Rock,
and his wife continued to live in the house. Jones paid
his mortgage each month for 30 years. The mortgage
company paid the property taxes on the house. After
Jones paid off his mortgage in 1997, the property
taxes went unpaid. In April 2000, the Arkansas Commissioner of State Lands (Commissioner) attempted
In his majority opinion, Justice Stevens was careful
to point out that because the constitutional question was
whether a public use existed, it was not the Court’s job
to determine the wisdom of the government’s attempt to
exercise eminent domain. Neither should the Court allow
its decision to be guided by the undoubted hardship that
eminent domain places on unwilling property owners
who must yield their homes to the state (albeit in return
for “just compensation”). Justice Stevens emphasized that
if state legislatures believed an economic development
purpose such as the one the City of New London had in
mind should not be used to support an exercise of eminent
domain, the legislatures were free to specify, in their state
statutes, that eminent domain could not be employed for an
economic development purpose. The Court’s determination
of what is a public use for purposes of the Takings Clause
sets a protective floor for property owners, with states
being free to give greater protection against takings by the
government.
The four dissenting justices in Kelo issued sharply
worded opinions expressing their disagreement with the
majority’s characterization of Berman and Midkiff as having
led logically to the conclusion that economic development
was a public use. In emotional terms, the dissenters accused
the majority of having effectively erased the public use requirement from the Takings Clause. The Kelo decision drew
considerable media attention, perhaps more because of what
appeared to be considerable hardship to property owners
such as Kelo and Dery than because of new legal ground—if
any—broken in the decision. For many observers, the case’s
compelling facts led to a perception that the city had engaged in overreaching. The Court’s decision in Kelo meant
that in a legal sense, there was no overreaching on the part
of the city. Was there, however, overreaching in an ethical
sense? How would utilitarians answer that question? What
about rights theorists? (As you consider the questions, you
may wish to consult Chapter 4.)
to notify Jones of his tax delinquency and his right
to redeem the property by paying the past-due taxes.
The Commissioner sought to provide this notice by
mailing a certified letter to Jones at the North Bryan
Street address. Arkansas law approved the use of such
a method of providing notice. The packet of information sent by the Commissioner stated that unless Jones
redeemed the property, it would be subject to public
sale two years later. No one was at home to sign for
the letter. No one appeared at the post office to retrieve
the letter within the next 15 days. The post office then
returned the unopened packet to the Commissioner
Chapter Three Business and the Constitution
with an “unclaimed” designation on it. In the spring
of 2002, a few weeks before the public sale scheduled
for Jones’s house, the Commissioner published a notice of public sale in a local newspaper. No bids were
submitted, meaning that under Arkansas law, the state
could negotiate a private sale of the property.
Several months later, Linda Flowers submitted a
purchase offer. The Commissioner then mailed another certified letter to Jones at the North Bryan
Street address, attempting to notify him that his
house would be sold to Flowers if he did not pay his
delinquent taxes. As with the first letter, the second
letter was returned to the Commissioner with an “unclaimed” designation. Flowers purchased the house.
Immediately after the expiration of the 30-day period
in which Arkansas law would have allowed Jones
to make a post-sale redemption of the property by
paying the past-due taxes, Flowers had an eviction
notice delivered to the North Bryan Street property.
The notice was served on Jones’s daughter, who contacted Jones and notified him of the tax sale. Jones
then filed a lawsuit in Arkansas state court against
the Commissioner and Flowers. In his lawsuit, Jones
contended that the Commissioner’s failure to provide
notice of the tax sale and of Jones’s right to redeem
resulted in the taking of his property without due process. The trial court ruled in favor of the Commissioner and Flowers, and the Arkansas Supreme Court
affirmed. The U.S. Supreme Court agreed to decide
the case and its central question of whether Jones
was afforded due process. How did the U.S. Supreme
Court rule?
2. Two Rhode Island statutes prohibited advertising the
retail price of alcoholic beverages. The first applied
to vendors licensed in Rhode Island as well as to outof-state manufacturers, wholesalers, and shippers.
It prohibited them from “advertising in any manner
whatsoever” the price of any alcoholic beverage
offered for sale in the state. The only exception to
the restriction was for price tags or signs displayed
with the merchandise within licensed premises, if
the tags or signs were not visible from the street.
The second statute barred the Rhode Island news
media from publishing or broadcasting advertisements that made reference to the price of any alcoholic beverages. 44 Liquormart Inc., a licensed
retailer of alcoholic beverages, operated a store in
Rhode Island. Because it wished to advertise prices it
would charge for alcoholic beverages, 44 Liquormart
filed a declaratory judgment action against the state.
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44 Liquormart asked the court to rule that the statutes
referred to above violated the First Amendment. The
district court concluded that the statutes failed the
applicable test for restrictions on commercial speech
and therefore struck them down. The U.S. Court of
Appeals for the First Circuit reversed, determining
that the statutes were constitutionally permissible restrictions on commercial speech. The U.S. Supreme
Court granted 44 Liquormart’s petition for a writ of
certiorari. How did the Supreme Court rule?
3. A federal statute, 8 U.S.C. § 1409, sets requirements
for acquisition of U.S. citizenship by a child born
outside the United States to unwed parents, only one
of whom is a U.S. citizen. If the mother is the U.S.
citizen, the child acquires citizenship at birth. Section 1409(a) states that when the father is the citizen
parent, the child acquires citizenship only if, before
the child reaches the age of 18, the child is legitimized under the law of the child’s residence or domicile, the father acknowledges paternity in writing
under oath, or paternity is established by a competent
court. Tuan Anh Nguyen was born in Vietnam to a
Vietnamese mother and a U.S. citizen father, Joseph
Boulais. At six years of age, Nguyen came to the
United States, where he became a lawful permanent
resident and was raised by his father. When Nguyen
was 22, he pleaded guilty in a Texas court to two
counts of sexual assault. The U.S. Immigration and
Naturalization Service initiated deportation proceedings against Nguyen, and an immigration judge found
him deportable. While Nguyen’s appeal to the U.S.
Board of Immigration Appeals was pending, Boulais
obtained from a state court an order of parentage
that was based on DNA testing. The board dismissed
Nguyen’s appeal, denying his citizenship claim on
the ground that he had not established compliance
with § 1409(a). Nguyen and Boulais appealed to the
U.S. Court of Appeals for the Fifth Circuit, which
rejected their contention that § 1409 discriminated on
the basis of gender and thus violated the Constitution’s equal protection guarantee. Was the Fifth Circuit’s decision correct?
4. As most other states do, the Commonwealth of
Kentucky taxes its residents’ income. Kentucky law
establishes that interest on bonds issued by Kentucky
and its political subdivisions is exempt from
Kentucky’s income tax, whereas interest on bonds
issued by other states and their political subdivisions is taxable. The tax exemption for Kentucky
bonds helps make those bonds attractive to in-state
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Part One Foundations of American Law
purchasers even if they carry somewhat lower rates
of interest than other states’ bonds or those issued by
private companies. Most other states have differential tax schemes that resemble Kentucky’s. Kentucky
residents George and Catherine Davis paid state
income tax on interest from out-of-state municipal
bonds, and then sued the Department of Revenue of
Kentucky in an effort to obtain a refund. The Davises
contended that Kentucky’s differential taxation of
municipal bond interest impermissibly discriminates
against interstate commerce in violation of the U.S.
Constitution’s Commerce Clause. Were the Davises
correct?
5. Nike Inc. mounted a public relations campaign in
order to refute news media allegations that its labor
practices overseas were unfair and unlawful. The
campaign involved the use of press releases, letters
to newspapers, a letter to university presidents and
athletic directors, and full-page advertisements in
leading newspapers. Relying on California statutes
designed to curb false and misleading advertising
and other forms of unfair competition, California
resident Mark Kasky filed suit in a California court
on behalf of the general public of the state. Kasky
contended that Nike had made false statements in its
campaign and that the court should therefore grant the
legal relief contemplated by the California statutes.
In terms of Nike’s potential liability, why would it
make a difference whether the speech in which Nike
engaged was commercial or, instead, noncommercial? What are the arguments in favor of a conclusion
that Nike was engaged in commercial speech? What
are the arguments in favor of a conclusion that Nike
was engaged in noncommercial speech? How did the
court rule on the speech classification issue—that is,
whether Nike’s speech was commercial or, instead,
that is noncommercial?
6. Public school districts in Seattle, Washington, and
Louisville, Kentucky, faced litigation in which it
was alleged that they violated the Equal Protection
Clause by considering race when assigning students
to schools. The Seattle district, which had neither
created segregated schools nor been subject to courtordered desegregation, generally allowed students
to choose which high school they wished to attend.
However, the district classified students as white or
nonwhite. It then used the racial classifications as a
“tiebreaker” to allocate available slots in particular
high schools and thereby seek to achieve racially diverse schools despite the existence of certain housing
patterns that would have produced little racial diversity at certain schools. The Louisville district had been
subject to a federal court’s desegregation decree during a two-decades-long period, but a court had lifted
the desegregation order after concluding that the district had eliminated the vestiges of prior segregation
to the greatest extent feasible. The Louisville district
then adopted a plan under which students were classified as black or “other.” Using these classifications in
making elementary school assignments and in ruling
on transfer requests, the district sought to achieve racial diversity in schools that would have reflected less
racial diversity in light of traditional housing patterns.
The cases challenging the two districts’ policies of
considering race made their way through the federal
courts and were later consolidated for decision by the
U.S. Supreme Court.
What test would the Seattle and Louisville school
districts need to pass in order to avoid a Supreme
Court determination that their policies violate the
Equal Protection Clause? Could the school districts
pass that test? Why or why not?
7. Marijuana is classified under federal law as an illegal drug. On what enumerated power would Congress
have relied when it enacted the federal statute that
outlaws marijuana and other specified drugs?
A number of states have legalized marijuana possession and use up to certain levels designated in their
laws. Several other states have legalized marijuana
possession and use for medicinal purposes, but for
those purposes only. As a constitutional matter, could
the federal government—if it were so inclined—
adopt an aggressive enforcement posture in which it
would override the state laws to the contrary? If so,
on what constitutional basis? If not, why not?
8. The Minnesota legislature passed a statute banning
the sale of milk in plastic nonrefillable, nonreusable
containers. However, it allowed sales of milk in other
nonrefillable, nonreusable containers such as paperboard cartons. One of the justifications for this ban
on plastic jugs was that it would ease the state’s solid
waste disposal problems because plastic jugs occupy
more space in landfills than other nonreturnable milk
containers. A group of dairy businesses challenged
the statute, arguing that its distinction between plastic
containers and other containers was unconstitutional
under the Equal Protection Clause. What means-ends
test or level of scrutiny applies in this case? Under that
test, is easing the state’s solid waste disposal problems
a sufficiently important end? Under that test, is there a
Chapter Three Business and the Constitution
sufficiently close “fit” between the classification and
that end to make the statutory means constitutional?
In answering the last question, assume for the sake
of argument that there probably were more effective
ways of alleviating the solid waste disposal problem
than banning plastic jugs while allowing paperboard
cartons.
9. The plaintiffs in the case described below were two
married same-sex couples who conceived children
through anonymous sperm donation. Leigh and Jana
Jacobs were married in Iowa in 2010, and Terrah and
Marisa Pavan were married in New Hampshire in
2011. Leigh and Terrah each gave birth to a child in
Arkansas in 2015. When it came time to secure birth
certificates for the newborns, each couple filled out
paperwork listing both spouses as parents—Leigh
and Jana in one case, Terrah and Marisa in the other.
Both times, however, the Arkansas Department of
Health issued certificates bearing only the birth
mother’s name. The department’s decision rested on
a provision of Arkansas law that specified which individuals will appear as parents on a child’s state-issued
birth certificate. The statute stated that “[f]or the purposes of birth registration, the mother is deemed to
be the woman who gives birth to the child.” The statute also instructed that “[i]f the mother was married
at the time of either conception or birth, the name of
[her] husband shall be entered on the certificate as the
father of the child.” The requirement that a married
woman’s husband appear on her child’s birth certificate applied, according to the state’s interpretation of
the statute, if the couple conceived by means of artificial insemination with the help of an anonymous
sperm donor.
The Jacobses and Pavans brought this suit in
Arkansas state court against the director of the Arkansas Department of Health in an effort to obtain a declaration that the state’s birth-certificate law violated
the U.S. Constitution. The trial court so ruled, but the
Arkansas Supreme Court reversed the trial court’s
decision. The U.S. Supreme Court agreed to decide
the case. What constitutional provision or provisions
do you see as relevant here? How did the Supreme
Court rule?
10. While it was preparing a comprehensive land use
plan in the area, the Tahoe Regional Planning Agency
(TRPA) imposed two moratoria on development of
property in the Lake Tahoe Basin. The moratoria together lasted 32 months. A group of property developers affected by the moratoria filed suit in federal court
111
alleging that the moratoria constituted an unconstitutional taking without just compensation. Were the
developers correct?
11. A federal statute criminalized the creation, sale, or
possession of certain depictions of animal cruelty.
For purposes of the statute, a depiction of “animal
cruelty” was defined as one “in which a living animal is intentionally maimed, mutilated, tortured,
wounded, or killed,” if the depicted conduct violated
federal or state law at the place where the creation,
sale, or possession took place. The legislative history of the statute indicated that it was prompted by
a congressional objective of eliminating dissemination of so-called crush videos (videos showing live
animals being crushed to death by persons stomping
on them).
Robert Stevens operated a website on which he sold
videos of pitbulls engaging in dogfighting and otherwise attacking animals. After he was convicted of violating the above described statute by selling the videos,
he appealed on the ground that the statute violated the
First Amendment. The case made its way to the U.S.
Supreme Court. How did the Court rule? Was Stevens
entitled to the protection of the First Amendment?
12. Florida’s Code of Judicial Conduct bars judges
and candidates running for election to a judgeship
from personally soliciting campaign contributions
of a financial nature. Attorney Lanell WilliamsYulee, a candidate running for election to a Florida
judgeship, drafted and mailed a letter to voters. In
the letter, she asked for donations to her campaign.
The State Bar of Florida brought a disciplinary proceeding against Williams-Yulee because of the letter. The proceedings concluded with a finding that
a public reprimand was in order because she had
violated the Code of Judicial Conduct. The Bar rejected Williams-Yulee’s argument that the ban on
personal solicitation violated her First Amendment
rights. The Supreme Court of Florida also rejected
that argument. The U.S. Supreme Court agreed to
decide the case. What kind of speech was WilliamsYulee engaging in through her letter soliciting contributions to her campaign? Did the Code of Judicial
Conduct’s restriction on personal solicitation violate
her First Amendment rights?
13. A federal law, the Immigration Reform and Control
Act (IRCA) makes it “unlawful for a person or other
entity . . . to hire, or to recruit or refer for a fee, for
employment in the United States an alien knowing the
alien is an unauthorized alien.” Employers that violate
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Part One Foundations of American Law
this prohibition may be subjected to civil and criminal
sanctions. IRCA also restricts the ability of states to
combat employment of unauthorized workers. It does
so by expressly preempting “any state or local law imposing civil or criminal sanctions (other than through
licensing and similar laws) upon those who employ, or
recruit or refer for a fee for employment, unauthorized
aliens.” In addition, IRCA requires employers to take
steps to verify an employee’s eligibility for employment. Seeking to improve that verification process,
Congress created E-Verify, an Internet-based system
employers can use to check the work authorization
status of employees. Federal law does not require the
use of E-Verify, however.
Arizona was among several states that enacted statutes designed to impose sanctions for the employment
of unauthorized aliens. According to an Arizona law
(the Legal Arizona Workers Act), the licenses of state
employers that knowingly or intentionally employ unauthorized aliens may be, and in certain circumstances
must be, suspended or revoked. The Arizona law also
requires that all Arizona employers use E-Verify. The
Chamber of Commerce of the United States and various business and civil rights organizations filed suit
against those charged with administering the Arizona
law. The plaintiffs argued that the state law’s license
suspension and revocation provisions were both expressly and impliedly preempted by federal immigration law, and that the mandatory use of E-Verify was
impliedly preempted. Were the plaintiffs right? Did
federal immigration law preempt the challenged provisions of the Arizona statute?
CHAPTER 4
BUSINESS ETHICS, CORPORATE
SOCIAL RESPONSIBILITY, CORPORATE
GOVERNANCE, AND CRITICAL
THINKING
W
hat defines ethical behavior? Think of a time when you thought that someone or some business did
something ethical. Was it someone going out of her way to help another person? Was it, for example, a
young man—a customer at a store—helping an elderly woman carry heavy packages to her car? Was
it someone entering a building during a pouring rain and giving her umbrella to a father and his small children who
were waiting to leave until the rain stopped?
Was it a corporate executive speaking for an hour to a friend’s daughter—a young college student—helping her
understand how to seek an internship and prepare for a career in the executive’s industry? Was it a business giving
a second chance to young man who fell in with the wrong crowd, made a mistake, and served time in prison?
Was it a company recalling and repairing an allegedly defective product, even when not required by the government, at great cost to its profits and shareholders? Was it a business that bought a failing company in the solar
industry? Was it a corporation buying a competitor, achieving synergies, improving options and pricing for consumers, and increasing the company’s profits?
Was it a business that chose to upgrade its factories in a midwestern town instead of moving manufacturing
operations overseas? Was it a business that opened a new plant in Indonesia, creating jobs for 1,000 workers? Was
it a corporation with excess cash opting to increase its dividend by 25 percent and buy back 10 percent of its stock,
thereby increasing returns to shareholders and the price of the shareholders’ stock in the company?
In these and other situations in which you observed what you believed was ethical conduct, what made you
think the behavior was ethical? Was it that the ethical actor obeyed some fundamental notion of rightness? Was it
that the person treated someone the way you would want to be treated? Was it that the actor gave an opportunity to
someone who was in greater need than most people? Was it that the company helped someone who deserved aid?
Was it that most people thought that it was the right thing to do or that the majority wanted it done, whether
right or not? Was it that the business took full advantage of the resources entrusted to it by society? Was it that the
business helped society use its scarce resources in a productive or fair way?
What defines ethical behavior?
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Part One Foundations of American Law
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
4-1
4-2
Appreciate the strengths and weaknesses of the
various ethical theories.
Apply the Guidelines for Ethical Decision
Making to business and personal decisions.
4-3
4-4
4-5
Why Study Business Ethics?
General Motors hiding that it sold cars with faulty ignitions.
Target failing to protect customers’ credit card information.
Enron maintaining its stock price by moving liabilities off
balance sheet. WorldCom using fraudulent accounting to
increase its stock price. ImClone executives and their family members trading on inside information. These business
names and acts from the past two decades conjure images
of unethical and socially irresponsible behavior by business executives. The U.S. Congress, employees, investors,
and other critics of the power held and abused by some
corporations and their management have demanded that
corporate wrongdoers be punished and that future wrongdoers be deterred. Consequently shareholders, creditors,
and state and federal attorneys general have brought several
civil and criminal actions against wrongdoing corporations
and their executives. Congress has also entered the fray,
passing the Sarbanes–Oxley Act of 2002, which increased
penalties for corporate wrongdoers and established rules
designed to deter and prevent future wrongdoing. The purpose of the statute is to encourage and enable corporate
executives to be ethical and socially responsible.
But statutes and civil and criminal actions can go only
so far in directing business managers down an ethical path.
And while avoiding liability by complying with the law is
one reason to be ethical and socially responsible, there are
noble and economic reasons that encourage current and
future business executives to study business ethics.
Although it is tempting to paint all businesses and all
managers with the same brush that colors unethical and irresponsible corporations and executives, in reality corporate executives are little different from you, your friends,
and your acquaintances. All of us from time to time fail to
do the right thing, and we know that people have varying
levels of commitment to acting ethically. The difference between most of us and corporate executives is that they are in
positions of power that allow them to do greater damage to
others when they act unethically or socially irresponsibly.
They also act under the microscope of public scrutiny.
Recognize critical thinking errors in your own
and others’ arguments.
Utilize a process to make ethical decisions in the
face of pressure from others.
Be an ethical leader.
It is also tempting to say that current business managers
are less ethical than managers historically. But as former
Federal Reserve chair Alan Greenspan said, “It is not that
humans have become any more greedy than in generations
past. It is that the avenues to express greed have grown
enormously.”
This brings us to the first and most important reason we
need to study business ethics: to make better decisions for
ourselves, the businesses we work for, and the society we
live in. As you read this chapter, you will not only study
the different theories that attempt to define ethical conduct
but, more importantly, learn to use a strategic framework
for making decisions. This framework provides a process
for systematic ethical analysis, which will increase the
likelihood you have considered all the facts affecting your
decision. By learning a methodology for ethical decision
making and studying common thinking errors, you will
improve your ability to make decisions that build trust and
solidify relationships with your business’s stakeholders.
Another reason we study ethics is to understand ourselves and others better. While studying the various ethical
theories, you will see concepts that reflect your own thinking and the thinking of others. This chapter, by exploring ethical theories systematically and pointing out the
strengths and weaknesses of each ethical theory, should
help you understand better why you think the way you do
and why others think the way they do. By studying ethical theories, learning a process for ethical decision making, and understanding common reasoning fallacies, you
should also be better equipped to decide how you should
think and whether you should be persuaded by the arguments of others. Along the way, by better understanding
where others are coming from and avoiding fallacious
reasoning, you should become a more rigorous, critical
thinker, as well as persuasive speaker and writer.
There are also pragmatic reasons for executives to
study business ethics. By learning how to act ethically and
by, in fact, doing so, businesses forestall public criticism,
reduce lawsuits against them, prevent Congress from passing onerous legislation, and make higher profits. For many
Chapter Four
Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
corporate actors, however, these are not reasons to act ethically, but instead the natural consequences of so acting.
While we are studying business ethics, we will also
examine the role of the law and regulations in defining
ethical conduct. Some argue that it is sufficient for corporations and executives to comply with the requirements
of the law; commonly, critics of the corporation point out
that because laws cannot and do not encompass all expressions of ethical behavior, compliance with the law is necessary but not sufficient to ensure ethical conduct. This
introduces us to one of the major issues in the corporate
social responsibility debate.
The Corporate Social
Responsibility Debate
Although interest in business ethics education has increased greatly in the last few decades, that interest is
only the latest stage in a long struggle to control corporate misbehavior. Ever since large corporations emerged
in the late 19th century, such firms have been heroes to
some and villains to others. Large corporations perform
essential national and global economic functions, including raw material extraction, energy production, transportation, and communication, as well as providing consumer
goods, professional services, and entertainment to millions of people.
Critics, however, claim that in their pursuit of profits,
corporations ruin the environment, mistreat employees,
sell shoddy and dangerous products, produce immoral
television shows and motion pictures, and corrupt the political process. Critics claim that even when corporations
provide vital and important services, business is not nearly
as accountable to the public as are organs of government.
For example, the public has little to say about the election of corporate directors or the appointment of corporate officers. This lack of accountability is aggravated by
the large amount of power that big corporations wield in
America and throughout much of the world.
These criticisms and perceptions have led to calls for
changes in how corporations and their executives make decisions. The main device for checking corporate misdeeds
has been the law. The perceived need to check abuses of
business power was a force behind the New Deal laws of
the 1930s and extensive federal regulations enacted in the
1960s and 1970s. Some critics, however, believe that legal
regulation, while an important element of any corporate
control scheme, is insufficient by itself. They argue that
businesses should adhere to a standard of ethical or socially responsible behavior that is higher than the law.
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One such standard is the stakeholder theory of corporate social responsibility. It holds that rather than merely
striving to maximize profits for its shareholders, a corporation should balance the interests of investors against
the interests of other corporate stakeholders, such as employees, suppliers, customers, and the community. To promote such behavior, some corporate critics have proposed
changes that increase the influence of the various stakeholders in the internal governance of a corporation. We
will study many of these proposals later in the chapter in
the subsection on shareholder theory and its emphasis on
profit maximization. You will also learn later that an ethical decision-making process requires a business executive
to anticipate the effects of a corporate decision on the various corporate stakeholders.
Despite concerns about abuses of power, big business
has contributed greatly to the unprecedented abundance in
America and elsewhere. Partly for this reason and partly
because many businesses attempt to be ethical actors, critics have not totally dominated the debate about control of
the modern corporation. Some defenders of business argue
that in a society founded on capitalism, profit maximization should be the main goal of businesses: The only ethical
norms firms must follow are those embodied in the law or
those impacting profits. In short, they argue that businesses
that maximize profits within the limits of the law are acting ethically. Otherwise, the marketplace would discipline
them for acting unethically by reducing their profits.
Former Fed chair Alan Greenspan wrote in 1963 that
moral values are the power behind capitalism. He wrote,
“Capitalism is based on self-interest and self-esteem; it
holds integrity and trustworthiness as cardinal virtues and
makes them pay off in the marketplace, thus demanding
that [business persons] survive by means of virtue, not
of vices.” Note that companies that are successful decade after decade, like Procter & Gamble and Johnson &
Johnson, adhere to society’s core values.
We will explore other arguments supporting and
criticizing shareholder theory and its emphasis on profit
maximization later in the chapter, where we will consider
proposals to improve corporate governance and accountability. For now, however, having set the stage for the
debate about business ethics and corporate social responsibility, we want to study the definitions of ethical behavior.
Ethical Theories
For centuries, religious and secular scholars have explored
the meaning of human existence and attempted to define
a “good life.” In this section, we will define and examine
some of the most important theories of ethical conduct.
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Ethics in Action
American physicist, mathematician, and futurist
Freeman Dyson provided insights into why we humans may have difficulty determining which ethical viewpoint to embrace. His research also helps explain why
different people have different ethical leanings.
The destiny of our species is shaped by the imperatives of
survival on six distinct time scales. To survive means to
compete successfully on all six time scales. But the unit
of survival is different for each of the six time scales. On
a time scale of years, the unit is the individual. On a time
scale of decades, the unit is the family. On a time scale of
centuries, the unit is the tribe or nation. On a time scale
of millennia, the unit is the culture. On a time scale of tens
of millennia, the unit is the species. On a time scale of eons,
the unit is the whole web of life on our planet. That is why
conflicting loyalties are deep in our nature. In order to survive, we need to be loyal to ourselves, to our families, to
our tribes, to our culture, to our species, to our planet. If our
psychological impulses are complicated, it is because they
were shaped by complicated and conflicting demands.1
LO4-1
Appreciate the strengths and weaknesses of the various
ethical theories.
As we cover these theories, much of what you read will
be familiar to you. The names may be new, but almost
certainly you have previously heard speeches and read
writings of politicians, religious leaders, and commentators that incorporate the values in these theories. You will
discover that your own thinking is consistent with one or
more of the theories. You can also recognize the thinking
of friends and antagonists in these theories.
None of these theories is necessarily invalid, and many
people believe strongly in any one of them. Whether you
believe your theory to be right and the others to be wrong,
it is unlikely that others will accept what you see as the
error of their ways and agree with all your values. Instead,
it is important for you to recognize that people’s ethical
values can be as diverse as human culture. Therefore, no
amount of argumentation appealing to theories you accept
is likely to influence someone who subscribes to a different ethical viewpoint. The key, therefore, is to understand
the complexity of ethical perspectives so that you can better understand both your viewpoint and the viewpoints of
others. Only then is it possible to pursue common ground
and provide a rational explanation for the decision that
must ultimately be made.
Dyson goes on to write, “Nature gave us greed, a robust
desire to maximize our personal winnings. Without greed we
would not have survived at the individual level.” Yet he points
out that Nature also gave us the connections and tools to survive at the family level (Dyson calls this tool love of family),
the tribal level (love of friends), the cultural level (love of conversation), the species level (love of people in general), and
the planetary level (love of nature).
If Dyson is correct, why are humans sometimes vastly
different from each other in some of their ethical values?
Why do some of us argue, for example, that universal
health care is a right for each citizen, while others believe
health care is a privilege? The answer lies in the degree to
which each of us embraces, innately or rationally, Dyson’s
six units of survival and the extent to which each of us
possesses the connections and tools to survive on each of
those levels.
Freeman Dyson, From Eros to Gaia (London: Penguin Books,
1993), pp. 341–42.
1
This means that if you want to be understood by and
to influence someone who has a different ethical underpinning than you do, you must first determine her ethical
viewpoint and then speak in an ethical language that will be
understood and accepted by her. Otherwise, you and your
opponent are like the talking heads on nighttime cable TV
news shows, whose debates often are reduced to shouting
matches void of any attempt to understand the other side.
LOG ON
Go to
www.iep.utm.edu
The Internet Encyclopedia of Philosophy gives you
background on all the world’s great philosophers from Abelard
to Zizek. You can also study the development of philosophy from
ancient times to the present. Many of the world’s great philosophers
addressed the question of ethical or moral conduct.
The five ethical theories we will highlight are rights
theory, justice theory, utilitarianism, shareholder theory, and virtue theory. Some of these theories focus on
results of our decisions or actions: Do our decisions or
actions produce the right results? Theories that focus on
the consequences of a decision are teleological ethical
theories. For example, a teleological theory may justify
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a manufacturing company laying off 5,000 employees
because the effect is to keep the price of manufactured
goods low for consumers and to increase profits for the
company’s shareholders.
Other theories focus on the inherent rightness or wrongness of a decision or action itself, irrespective of what results
it produces. This rightness or wrongness can be determined
by a rule or principle or flow from a duty or responsibility.
Theories that focus on decisions or actions alone are deontological ethical theories. For example, a deontological
theory may find unacceptable that any competent employee
loses his job, even if the layoff’s effect is to reduce prices to
consumers and increase profits. Or a deontological theory
emphasizing the principle that it is wrong to be dishonest
might require that one never tell a lie, regardless of the consequences. Deontological theories place great emphasis on
the duties and responsibilities that flow from rules, laws,
policies, or social norms governing our actions.
First, we will cover rights theory, which is a deontological theory. Next will be justice theory, which has concepts
common to rights theory but with a focus primarily on outcomes. Our study of ethical theories will then turn to two additional teleological theories, utilitarianism and shareholder
theory. Finally, we’ll consider virtue theory, which places
the issue of one’s character and core virtues at the fore, instead of focusing first on rules and responsibilities or the
consequences that inevitably flow from all of our actions.
Rights Theory
Rights theory encompasses a variety
of ethical philosophies holding that certain human rights
are fundamental and must be respected by other humans.
The focus is on each individual member of society and
her rights. As an ethically responsible individual, each of
us faces a moral compulsion not to harm the fundamental
rights of others, especially stakeholders impacted by our
business activity.
Kantianism Few rights theorists are strict deontologists,
and one of the few is 18th-century philosopher Immanuel
Kant. Kant viewed humans as moral actors who are free
to make choices. He believed humans are able to judge the
morality of any action by applying his famous categorical
imperative. One formulation of the categorical imperative
is, “Act only on that maxim whereby at the same time you
can will that it shall become a universal law.” This means
that we judge an action by applying it universally.
Suppose you want to borrow money even though you
know that you will never repay it. To justify this action
using the categorical imperative, you state the following maxim or rule: “When I want money, I will borrow
money and promise to repay it, even though I know I won’t
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repay.” According to Kant, you would not want this maxim
to become a universal law because no one would believe
in promises to repay debts and you would not be able to
borrow money when you want. The ability to trust others
in society would be completely impossible, and relationships would deteriorate. Thus, your maxim or rule fails
to satisfy the categorical imperative. You are compelled,
therefore, not to promise falsely that you will repay a loan.
Kant had a second formulation of the categorical imperative: “Always act to treat humanity, whether in yourself or in others, as an end in itself, never merely as a
means.” Thus arises a rule or principle creating a duty not
to use or manipulate others in order to achieve our own
happiness. In Kant’s eyes, if you falsely promise a lender
to repay a loan, you are manipulating that person’s trust in
you for your own ends, because she would not agree to the
loan if she knew all the facts.
Modern Rights Theories Strict deontological ethical theories like Kant’s face an obvious problem: The duties are
often viewed as absolute and universally applicable. A deontologist might argue that one must never lie or kill, even
though most of us find lying and killing acceptable in some
contexts, such as in self-defense. Responding to these difficulties, some modern philosophers have proposed mixed
deontological theories. There are many theories here, but
one popular theory requires us to abide by a moral rule unless a more important rule conflicts with it. In other words,
our moral compulsion is not to compromise a person’s
right unless a greater right takes priority over it.
For example, members of society have the right not
to be lied to. Therefore, in most contexts you are morally
compelled not to tell a falsehood. That is an important
right because it is critical in a community or marketplace
that one be able to rely on another’s word. If, however,
you could save someone’s life by telling a falsehood, such
as telling a lie to a criminal about where a witness who
will testify against him can be found, you probably will be
required to save that person’s life by lying about his whereabouts. In this context, the witness’s right to live is a more
important right than the criminal’s right to hear the truth.
In effect, one right “trumps” the other right.
What are these fundamental rights? How do we rank
them in importance? Seventeenth-century philosopher John
Locke argued for fundamental rights that we see embodied
in the constitutions of modern democratic states: the protection of life, liberty, and property. Libertarians and others
include the important rights of freedom of contract and freedom of expression. Modern liberals, like Bertolt Brecht, argued that all humans have basic rights to employment, food,
housing, and education. In much of the ongoing debate
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around health care policy in the United States, a key question is whether or not every citizen has a right to health care.
Strengths of Rights Theory The major strength of rights
theory is that it recognizes the moral worth of each individual and the importance of protecting fundamental
rights. This means that members of modern democratic
societies have extensive liberties and rights around which
a consensus has formed and citizens need not fear the
removal of these rights by their government or other
members of society. In the U.S. context, one need look
no further than the Declaration of Independence and its
emphasis on “life, liberty, and the pursuit of happiness”
as those “unalienable rights” that lie beyond the reach of
government interference. In the global context, the Universal Declaration of Human Rights was adopted by the
United Nations in 1948 as an expression of fundamental
rights to which many people believe all are entitled.
Criticisms of Rights Theory Most of the criticisms
of rights theory deal with the near absolute yet relative
value of the rights protected, sometimes making it difficult to articulate and administer a comprehensive rights
theory. First, it is difficult to achieve agreement about
which rights are protected. Rights fundamental to modern
countries like the United States (such as many women’s or
GLBT rights) are more limited in other countries around
the world. Even within one country, citizens disagree on
the existence and ranking of rights. For example, as noted
earlier, some Americans argue that the right to health care
is an important need that should be met by government
or a person’s employer. Other Americans believe funding
universal health care would interfere with the libertarian
right to limited government intervention in our lives. Balancing rights in conflict can be difficult.
In addition, rights theory does not concern itself with
the costs or benefits of requiring respect for another’s right.
For example, rights theory probably justifies the protection
of a neo-Nazi’s right to spout hateful speech, even though
the costs of such speech, including damage to relations
between ethnic groups, may far outweigh any benefits the
speaker, listeners, and society receive from the speech.
Moreover, in the context of discussions around public policy and political economy, some argue that rights
theory can be perverted to create a sense of entitlement reducing innovation, entrepreneurship, and production. For
The Global Business Environment
The Golden Rule in the World’s Religions
and Cultures
ISLAM: No one of you is a believer until he desires for his
brother that which he desires for himself.
Immanuel Kant’s categorical imperative, which
is one formulation of rights theory, has its foundations in the
Golden Rule. Note that the Golden Rule exists in all cultures
and in all countries of the world. Here is a sampling.
JAINISM: In happiness and suffering, in joy and grief, we
should regard all creatures as we regard our own self.
BUDDHISM: Hurt not others in ways that you would find
hurtful.
CHRISTIANITY: Do to others as you would have others
do to you.
CONFUCIANISM: Do not to others what you would not
like yourself.
GRECIAN: Do not that to a neighbor which you shall take
ill from him.
JUDAISM: Whatever is hateful to you, do not to another.
NATIVE AMERICAN SPIRITUALITY: Respect for all
life is the foundation.
PERSIAN: Do as you would be done by.
ROMAN: Treat your inferiors as you would be treated by
your superiors.
SHINTOISM: The heart of the person before you is a mirror. See there your own form.
SIKHISM: As you deem yourself, so deem others.
HINDUISM: This is the sum of duty: do nothing to others
which if done to you would cause you pain.
TAOISM: Regard your neighbor’s gain as your own gain,
and your neighbor’s loss as your own loss.
HUMANISM: Individual and social problems can only be
resolved by means of human reason, intelligent effort, and
critical thinking joined with compassion and a spirit of empathy for all living beings.
YORUBAN: One going to take a pointed stick to pinch a
baby bird should first try it on himself to feel how it hurts.
ZOROASTRIANISM: That nature alone is good which refrains from doing to another whatsoever is not good for itself.
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Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
example, if one is able to claim an entitlement to a job,
a place to live, food, and health care—regardless of how
hard he is expected to work—motivations to pull one’s
own weight and contribute to society and the greater good
may be compromised, resulting in a financially unsustainable culture of dependency. The overlap between theories
of ethics and their political policy implications is explored
further as we turn our attention to justice theory.
Justice Theory
In 1971, John Rawls published his
book A Theory of Justice, the philosophical underpinning
for the bureaucratic welfare state. Based upon the principle of justice, Rawls reasoned that it was right for governments to redistribute wealth in order to help the poor and
disadvantaged. He argued for a just distribution of society’s resources by which a society’s benefits and burdens
are allocated fairly among its members.
Rawls expressed this philosophy in his Greatest Equal
Liberty Principle: Each person has an equal right to basic
rights and liberties. He qualified or limited this principle
with the Difference Principle: Social inequalities are acceptable only if they cannot be eliminated without making
the worst-off class even worse off. The basic structure is
perfectly just, he wrote, when the prospects of the least
fortunate are as great as they can be.
Rawls’s justice theory has application in the business
context. Justice theory requires decision makers to be guided
by fairness and impartiality and to take seriously what outcomes these principles produce. In the business context,
justice theory prompts leadership to ask: Are our employees
getting what they deserve? It would mean, for example, that
a business deciding in which of two communities to build
a new manufacturing plant should consider which community has the greater need for economic development.
Chief among Rawls’s critics was his Harvard colleague
Robert Nozick. Nozick argued that the rights of the individual are primary and that nothing more was justified
than a minimal government that protected against violence and theft and ensured the enforcement of contracts.
Nozick espoused a libertarian view that unequal distribution of wealth is moral if there is equal opportunity. Applied to the business context, Nozick’s formulation of
justice would permit a business to choose between two
manufacturing plant sites after giving each community the
opportunity to make its best bid for the plant. Instead of
picking the community most in need, the business may
pick the one offering the best deal.
Strengths of Justice Theory The strength of Rawls’s
justice theory lies in its basic premise that society owes
a duty to protect those who are least advantaged—that
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is, positioned unfairly vis-à-vis the distribution of social
goods. Its motives are consistent with the religious and
secular philosophies that urge humans to help those in
need. Many religions and cultures hold basic to their faith
the assistance of those who are less fortunate.
Criticisms of Justice Theory Rawls’s justice theory
shares some of the criticisms of rights theory. It treats
equality as an absolute, without examining the potential
costs of producing equality, including reduced incentives
for innovation, entrepreneurship, and production. Moreover, any attempt to rearrange social benefits requires an
accurate measurement of current wealth. For example, if a
business is unable to measure accurately which employees
are in greater need of benefits due to their wealth level, application of justice theory may make the business a Robin
Hood in reverse: taking from the poor to give to the rich.
Utilitarianism Utilitarianism requires a decision
maker to maximize utility for society as a whole. Maximizing utility means achieving the highest level of satisfactions over dissatisfactions. This means that a person
must consider the benefits and costs of his actions to everyone in society.
A utilitarian will act only if the benefits of the action to
society outweigh the societal costs of the action. Note that
the focus is on society as a whole. This means a decision
maker may be required to do something that harms her
if society as a whole is benefited by her action. A teleological theory, utilitarianism judges our actions as good or
bad depending on their consequences. This is sometimes
expressed as “the ends justify the means.”
Utilitarianism is most identified with 19th-century
philosophers Jeremy Bentham and John Stuart Mill.
Bentham argued that maximizing utility meant achieving
the greatest overall balance of pleasure over pain. A critic
of utilitarianism, Thomas Carlyle, called utilitarianism
“pig philosophy” because it appeared to base the goal of
ethics on the swinish pleasures of the multitude.
Mill thought Bentham’s approach too narrow and
broadened the definition of utility to include satisfactions
such as health, knowledge, friendship, and aesthetic delights. Responding to Carlyle’s criticisms, Mill also wrote
that some satisfactions count more than others. For example, the pleasure of seeing wild animals free in the world
may be a greater satisfaction morally than shooting them
and seeing them stuffed in one’s den.
How does utilitarianism work in practice? It requires
that you consider not just the impact of decisions on yourself, your family, and your friends, but also the impact
on everyone in society. Before deciding whether to ride a
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bicycle to school or work rather than to drive a car, a utilitarian would consider the wear and tear on her clothes, the
time saved or lost by riding a bike, the displeasure of riding in bad weather, her improved physical condition, her
feeling of satisfaction for not using fossil fuels, the cost of
buying more food to fuel her body for the bike trips, the
dangers of riding near automobile traffic, and a host of
other factors that affect her satisfaction and dissatisfaction.
But her utilitarian analysis doesn’t stop there. She has
to consider her decision’s effect on the rest of society. Will
she interfere with automobile traffic flow and decrease the
driving pleasure of automobile drivers? Will commuters
be encouraged to ride as she does and benefit from doing
so? Will her lower use of gasoline for her car reduce demand and consumption of fossil fuels, saving money for
car drivers and reducing pollution? Will her and other bike
riders’ increased food consumption drive up food prices
and make it less affordable for poor families? This only
scratches the surface of her utilitarian analysis.
The process we used earlier, act utilitarianism, judges
each act separately, assessing a single act’s benefits and
costs to society’s members. Obviously, a person cannot make an act utilitarian analysis for every decision. It
would take too much time and many variables are difficult
to calculate.
Utilitarianism recognizes that human limitation. Rule
utilitarianism judges actions by a rule that over the long
run maximizes benefits over costs. For example, you may
find that taking a shower every morning before school or
work maximizes society’s satisfactions, as a rule. Most
days, people around you will be benefited by not having to
smell noisome odors, and your personal and professional
prospects will improve by practicing good hygiene. Therefore, you are likely to be a rule utilitarian and shower each
morning, even though some days you may not contact
other people.
Many of the habits we have are the result of rule utilitarian analysis. Likewise, many business practices, such
as a retailer’s regular starting and closing times, also are
based in rule utilitarianism.
Strengths of Utilitarianism What are the strengths of
utilitarianism as a guide for ethical conduct? It is easy to
articulate the standard of conduct: you merely need to do
what is best for society as a whole. Moreover, many find it
intuitive to employ an ethical reasoning that seeks to maximize human flourishing and eliminate harm or suffering.
Criticisms of Utilitarianism Those strengths also expose
some of the criticisms of utilitarianism as an ethical construct. It is difficult to measure one’s own pleasures and
pains and satisfactions and dissatisfactions, let alone those
of all of society’s members. In short, how does one adequately and accurately measure human flourishing? In addition, those benefits and costs are inevitably distributed
unequally across society’s members. It can foster a tyranny
of the majority that may result in morally monstrous behavior, such as a decision by a 100,000-person community to
use a lake as a dump for human waste because only one person otherwise uses or draws drinking water from the lake.
That example exhibits how utilitarianism differs from
rights theory. While rights theory may protect a person’s
right to clean drinking water regardless of its cost, utilitarianism considers the benefits and costs of that right as only
one factor in the total mix of society’s benefits and costs.
In some cases, the cost of interfering with someone’s right
may outweigh the benefits to society, resulting in the same
decision that rights theory produces. But where rights
theory is essentially a one-factor analysis, utilitarianism
requires a consideration of that factor and a host of others
as well, in an attempt to balance pleasure over pain.
A final criticism of utilitarianism is that it is not constrained by law. Certainly, the law is a factor in utilitarian
analysis. Utilitarian analysis must consider, for example,
the dissatisfactions fostered by not complying with the law
and by creating an environment of lawlessness in a society.
Yet the law is only one factor in utilitarian analysis. The
pains caused by violating the law may be offset by benefits
the violation produces. Rational actors may ultimately determine that the cost–benefit analysis justifies deviation
from a law or rule. Most people, however, are rule utilitarian when it comes to law, deciding that obeying the law in
the long run maximizes social utility.
Shareholder Theory Premised on the concept
that corporate leaders are agents who owe contractual
obligations to investors, shareholder theory argues that
ethical dilemmas should be resolved with a focus on maximizing the firm’s long-term profits within the limits of the
law. It is based in the laissez faire theory of capitalism first
expressed by Adam Smith in the 18th century and more
recently promoted by the Nobel Prize–winning economist
Milton Friedman. Laissez faire economists argue total social welfare is optimized if humans are permitted to work
toward their own selfish goals. The role of government,
law, and regulation is solely to ensure the workings of a
free market by not interfering with economic liberty, by
eliminating collusion among competitors, and by promoting accurate information in the marketplace.
By focusing on results—maximizing total social welfare through a corporate focus on profit maximization—
a shareholder theory approach to ethical decisions is a
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teleological- or consequences-oriented ethical theory. It is
closely related to utilitarianism, but it differs fundamentally in how ethical decisions are made. While utilitarianism considers all stakeholders as it seeks to maximize
social utility by focusing the actor on a broad-based creation of social value and reduction in social harm, a shareholder approach to profit maximization optimizes total
social utility by narrowing the actor’s focus, requiring the
decision maker to make a wealth-maximizing decision
that is focused on enhancing profits for those investors or
shareholders who can claim a direct financial interest in
the organization’s bottom line.
Strengths of Focusing on Profit Maximization By
working in our own interests, we compete for society’s
scarce resources (iron ore, labor, and land, to name a few),
which are allocated to those people and businesses that
can use them most productively. By allocating society’s
resources to their most efficient uses, as determined by a
free market, shareholder theory claims to maximize total
social utility or benefits. Thus, in theory, society as a whole
is bettered if all of us compete freely for its resources by
trying to increase our personal or organizational profits. If
we fail to maximize profits, some of society’s resources
will be allocated to less productive uses that reduce society’s total welfare.
In addition, shareholder theory emphasizes that a commitment first and foremost to profit maximization must
always be constrained by what is permitted under the law.
A profit maximizer theoretically acts ethically by complying with society’s mores as expressed in its laws.
Moreover, the emphasis on profit maximization requires
the decision maker and business to be disciplined according to the dictates of the marketplace. Consequently, an
analysis of the ethical issue pursuant to shareholder theory
probably requires a decision maker to consider the rights
protected by rights theory, especially the shareholder’s or
investor’s contractual rights to a return on investment, as
well as fairness dictates embedded in justice theory. Ignoring important rights of employees, customers, suppliers, communities, and other stakeholders may negatively
impact a corporation’s long-term profits. A business that
engages in behavior that is judged unethical by consumers and other members of society is subject to boycotts,
adverse publicity, demands for more restrictive laws, and
other reactions that damage its image, decrease its revenue, and increase its costs.
Consider, for example, the reduced sales of Martha
Stewart–branded goods at Kmart after Ms. Stewart was
accused of trading ImClone stock while possessing inside
information. Consider also the fewer number of college
121
graduates willing to work for Waste Management Inc. in
the wake of adverse publicity and indictments against its
executives for misstating its financial results. Note also the
higher cost of capital for firms like Dell as investors bid
down the stock price of companies accused of accounting
irregularities and other wrongdoing.
All these reactions to perceived unethical conduct impact the business’s profitability in the short and long run,
motivating that business to make decisions that comply
with ethical views that transcend legal requirements.
Criticisms of Focusing on Profit Maximization The
strengths of shareholder theory’s emphasis on profit maximization as a model for ethical behavior also suggest criticisms and weaknesses of the theory. Striking at the heart
of the theory is the criticism that corporate managers are
subject to human failings that make it impossible for them
to maximize corporate profits. The failure to discover and
process all relevant information and varying levels of aversion to risk can result in one manager making a different
decision than another manager. Group decision making in
the business context introduces other dynamics that interfere with rational decision making. Social psychologists
have found that groups often accept a higher level of risk
than they would as individuals. There is also the tendency
of a group to internalize the group’s values and suppress
critical thought.
Furthermore, even if an emphasis on profit maximization results in an efficient allocation of society’s resources
and maximization of total social welfare, it does not concern itself with how wealth is allocated within society. In
the United States, the top wealthiest 1 percent own more
than 40 percent of the nation’s wealth, and globally, it is
estimated that eight individuals control more wealth than
the combined wealth of 50 percent of the global population. To some people, those levels of wealth disparity are
unacceptable. To laissez faire economists, wealth disparity
is an inevitable component of a free market that rewards
hard work, acquired skills, innovation, and risk taking. Yet
critics of shareholder theory’s emphasis on profit maximization respond that market imperfections, structural barriers, and a person’s position in life at birth interfere with his
ability to compete.
Critics charge that the ability of laws and market forces
to control corporate behavior is limited because it requires
lawmakers, consumers, employees, and other constituents
to detect unethical corporate acts and take appropriate
steps. Even if consumers notice irresponsible behavior
and inform a corporation, a bureaucratic corporate structure may interfere with the information being received
by the proper person inside the corporation. If, instead,
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consumers are silent and refuse to buy corporate products
because of perceived unethical acts, corporate management may notice a decrease in sales, yet attribute it to
something other than the corporation’s unethical behavior.
Critics also argue that equating ethical behavior with legal
compliance is a tautology in countries like the United States
where businesses distort the lawmaking process by lobbying legislators and making political contributions. It cannot
be ethical, they argue, for businesses to merely comply with
laws reflecting the interests of businesses and over which
corporations have enormous influence post–Citizens United.
Proponents of the emphasis on profit maximization
respond that many laws restraining businesses are passed
despite businesses lobbying against those laws. The
Sarbanes–Oxley Act, which increases penalties for wrongdoing executives, requires CEOs to certify financial statements, and imposes internal governance rules on public
companies, is such an example. So are laws restricting
drug companies from selling a drug unless it is approved
by the Food and Drug Administration and requiring environmental impact studies before a business may construct
a new manufacturing plant. Moreover, businesses are
nothing other than a collection of individual stakeholders,
which includes employees, shareholders, and their communities. When they act to influence political policies or
lobby for legal or regulatory change, their advocacy is arguably in the best interests of all these stakeholders.
Critics respond that ethics transcends law, requiring, in
some situations, that businesses adhere to a higher standard
than required by law. We understand this in our personal
lives. For example, despite the absence of law dictating,
for the most part, how we treat friends, we know that ethical behavior requires us to be loyal to friends and to spend
time with them when they need our help. In the business
context, a firm may be permitted to release employees for
nearly any reason, except the few legally banned bases of
discrimination (such as race, age, and gender), yet some
critics will argue businesses should not terminate an employee for other reasons currently not banned by most
laws (such as sexual orientation or appearance). Moreover,
these critics further argue that businesses—due to their influential role in a modern society—should be leaders in
setting a standard for ethical conduct.
Those who emphasize profit maximization respond
that such an ethical standard is difficult to define and
hampers efficient decision making. Moreover, they argue
that experience shows the law has been a particularly relevant definition of ethical conduct. Consider that many
corporate scandals would have been prevented had the
executives merely complied with the law and had existing
regulations been enforced. For example, Enron executives
illegally kept some liabilities off the firm’s financial statements, while regulatory oversight also failed. Tyco and
Adelphia executives illegally looted corporate assets. Had
Ethics in Action
Minimum Wage Laws
In recent years, debate has raged over whether governments in the United States should increase dramatically
the federal or state minimum wage that most employers must
pay employees, from about $7 per hour to as much as $15 per
hour. Some states, like Arizona, Colorado, and Maine, are on
pace to incrementally increase their minimum wage to $12
over the next few years. In 2015, the City of Seattle increased
its minimum wage of city workers to $15 per hour, and New
York City and Washington, D.C., are on pace to follow suit.
The efforts to increase the minimum wage are directed
mostly against McDonald’s, Walmart, and other employers who
employ large numbers of low-skilled or inexperienced workers.
For example, one 26-year-old woman who worked at a Chicago
McDonald’s as a cashier for 10 years claimed she could not
support her two children on the wage paid by McDonald’s.
Should a government protect employees by increasing the
minimum wage? If a minimum wage is imposed by government, what is the right wage? A $15-per-hour wage translates
into annual compensation of $30,000, hardly enough to support
a family. Should the minimum wage be $25 per hour? Why
not make it $50 per hour, which would be $100,000 annual
income, enough to permit most families to survive quite well?
Why should government impose a minimum wage on private employers? Are employees without power to demand
higher wages? Will a minimum wage distort the employment
market? Do employees deserve higher wages than the amount
they and their employers agree on? Does a high minimum
wage encourage workers to remain in low-skill jobs rather
than improving their skills and qualifying for higher-wage
jobs? Should a 42-year-old woman be required to improve her
lot in life by increasing her education rather than continuing
to do a job that any 16-year-old can do? What social barriers
or structural inequities might exist to hinder some in society
from gaining necessary skills and improving access to better
employment options?
Do the answers to those questions depend on the ethical
theory to which one subscribes?
Chapter Four
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these executives simply complied with the law and maximized their firms’ long-run profits, none of those ethical
debacles would have occurred.
Critics of profit maximization respond that the corporate crises at companies like Enron and WorldCom prove
that flaws in corporate governance encourage executives
to act unethically. These examples, critics say, show that
many executives do not maximize profits for their firms.
Instead, driven by short-term, quarterly financial expectations, they maximize their own profits at the expense of
the firm and its shareholders. They claim that stock options and other incentives intended to align the interests of
executives with those of shareholders promote decisions
that raise short-term profits to the long-run detriment of
the firms. They point out that many CEOs and other top
executives negotiate compensation plans that do not require them to stay with the firm long term and that allow
them to benefit enormously from short-term profit taking.
Executive greed, encouraged by these perverse executive
compensation plans, also encourage CEOs and other executives to violate the law.
Defenders of business, profit maximization, and capitalist economics point out that it is nearly impossible to
stop someone who is bent on fraud. A dishonest executive
will lie to shareholders, creditors, board members, and the
public and also treat the law as optional. Yet enlightened
proponents of the modern corporation accept that there are
problems with corporate management culture that require
changes. They know that an unconstrained CEO; ethically
uneducated executives; perverse compensation incentives;
and inadequate supervision of executives by the firm’s
CEOs, board of directors, and shareholders present golden
opportunities to the unscrupulous person and make unwitting accomplices of the ignorant and the powerless. Such
an awareness highlights the role of corporate culture—for
example, an ethical climate—in fostering an environment
in which individuals are supported in their desire to act
and live according to their moral compass.
Finally, divining the shareholders’ ethical viewpoint
may be difficult. While nearly all shareholders are mostly
profit driven, a small minority of shareholders have other
agendas, such as protecting the environment or workers’
rights, regardless of the cost to the corporation. It is often
not possible to please all shareholders.
Nonetheless, increasing shareholder democracy by
enhancing the shareholders’ role in the nomination and
election of board members is essential to uniting the interests of shareholders and management. So is facilitating
the ability of shareholders to bring proposals for ethical
policy to a vote of shareholders. In the past several years,
for public companies at least, the Securities and Exchange
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Commission has taken several steps to increase shareholder democracy. These steps, which are covered fully in
Chapter 45, are having their intended effect. For example,
during the 2014 shareholder meeting season, shareholder
proposals included requiring annual election of directors and limiting corporate political lobbying and contributions. Moreover, the New York Stock Exchange and
NASDAQ require companies listed on those exchanges to
submit for shareholder approval certain actions, such as
approval of stock option plans.
Virtue Theory Differing from both the deontological emphasis on rights and justice flowing from duties and
responsibilities, as well as the teleological focus on consequences and outcomes (measured according to either a
utilitarian or profit maximization calculus), is a third approach to ethical analysis that highlights the importance
of character—both for individuals and an organization.
Virtue theory demands that an individual know his values
and how they correlate to his identity, habits, and ways of
engaging with others. Focusing on an intentional pursuit
of virtues, the theory emphasizes questions such as: Who
are you? What values are most important to you? Are my
stated values and the actions I take aligned? For an organization, the theory inquires: What is your corporate purpose? What are your corporate values? Are our corporate
actions and our values integrated?
Virtue theory, therefore, approaches ethical dilemmas
from a commitment to integrity and an emphasis on character development. Deontological and teleological considerations are still important components of the ethical analysis,
but the starting point is different. Instead of focusing on
what action is right, virtue theory focuses on whether the
individual (or the corporation) is acting consistently with
those virtues or values that will result in a life well lived.
As developed in the West, a virtue-oriented approach
owes much to Aristotle and other Greek philosophers, who
explored practical notions of the good life and how best to
achieve it. In the East, virtue theory was largely cultivated
by Confucius, who focused on the centrality of benevolence and righteousness as hallmarks in the development
of character. In short, a virtue theory approach emphasizes
the person and the daily struggle to become a better person
through identification and cultivation—or habituation—of
virtues, such as wisdom or courage or benevolence.
As an example, consider a person in need of help. A
deontologist might offer assistance out of a sense of duty or
responsibility or allegiance to the Golden Rule. A utilitarian
might offer aid because the consequences would result in a
maximization of overall well-being. One acting according
to virtue theory, however, would be helping out of desire to
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become a more charitable or benevolent person. The giving
of aid would flow from a commitment to becoming a person who gives aid. In this instance, one might imagine that
a virtue theorist would have predetermined that she values
the virtues of charity and benevolence. Upon confronting
an opportunity to help someone in need, she would simply
have acted in a way that promoted these virtues and made
them more habitual in the person’s daily activity.
Strengths of Virtue Theory As noted in the previous
discussion, acting with regard to one’s self-interest is a
hallmark of the human condition. Virtue theory offers an
opportunity to convert impulses at the heart of selfishness
and greed into opportunities to act with a self-interested
focus to become more personally virtuous and integrated
with regard to one’s values, actions, and the habits we
wish to cultivate. In organizations, virtue theory can create
an aspirational climate and an additional way of emphasizing the importance of manifesting those corporate values
that may otherwise be seen as mere words on a website or
posters in the break room. Moreover, virtue theory’s focus
on the development of practical wisdom—that is, moral
imagination and sound judgment honed by experience—
creates space and structure to encourage personal growth
and continuous teaching and training of employees.
Additional value brought by a virtue approach to ethics
is its appreciation for the ambiguity of dilemmas where
simple maxims or principles are not adequate to the maintenance of human relationships nor accommodating to the
complexity of human emotions.
Criticisms of Virtue Theory Some critics argue that virtue
theory is ultimately too subjective, too limited in scope, and
too difficult to codify to be useful, especially in the corporate
context. Certainly, those deontologists or teleologists seeking a universally applicable code of ethics may be unsatisfied, but then any such a code is probably unrealistic given
the complexities of the 21st-century global business environment. Other concerns have been raised about the inability
of virtue theory to apply in a diverse global business environment because virtues that might be recognized and celebrated in one part of the world might be different from those
virtues recognized elsewhere. Indeed, cultural relativity is
an important issue to be considered when conducting ethical
analysis using any theory or framework, as notions of what
constitutes “right” and “wrong” are frequently contested.
Improving Corporate Governance and
Corporate Social Responsibility Even if we
cannot stop all fraudulent executives, we can modify the
corporate governance model to educate, motivate, and supervise executives and thereby improve corporate social
responsibility. Corporate critics have proposed a wide
variety of cures, all of which have been implemented to
some degree and with varying degrees of success.
Ethics Codes Many large corporations and several industries have adopted codes of ethics or codes of conduct
to guide executives and other employees. The Sarbanes–
Oxley Act requires a public company to disclose whether
it has adopted a code of ethics for senior financial officers
and to disclose any change in the code or waiver of the
code’s application.
There are two popular views of such codes. One sees
the codes as genuine efforts to foster ethical behavior
within a firm or an industry. The other view regards them
as thinly disguised attempts to make the firm function better, to mislead the public into believing the firm behaves
ethically, to prevent the passage of legislation that would
impose stricter constraints on business, or to limit competition under the veil of ethical standards. Even where the
first view is correct, ethical codes fail to address concretely
all possible forms of corporate misbehavior. Instead, they
often emphasize either the behavior required for the firm’s
effective internal function, such as not accepting gifts from
customers, or the relations between competitors within a
particular industry, such as prohibitions on some types of
advertising.
Better corporate ethics codes make clear that the corporation expects employees not to violate the law in a mistaken belief that loyalty to the corporation or corporate
profitability requires it. Such codes work best, however,
when a corporation also gives its employees an outlet
for dealing with a superior’s request to do an unethical
act. That outlet may be the corporate legal department,
a corporate compliance/ethics officer, or even an anonymous reporting procedure. One example is Google’s Code
of Ethics, which appears in the accompanying Ethics in
Action box.
Ethical Instruction Some corporations require their employees to enroll in classes that teach ethical decision making. The idea is that a manager trained in ethical conduct
will recognize unethical actions before they are taken and
deter herself and the corporation from the unethical acts.
While promising in theory, in practice, many managers
are resistant to ethical training that requires them to examine
their principles. They are reluctant to question a set of longheld principles with which they are comfortable. Therefore,
there are some doubts whether managers are receptive to
ethical instruction. Even if the training is accepted, will
managers retain the ethical lessons of their training and use
it, or will time and other job-related pressures force a manager to think only of completing the job at hand?
Chapter Four
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Ethics in Action
Google Code of Conduct
Internet giant Google Inc. is one of many international corporations to adopt an ethics code. Here are excerpts
from Google’s Code of Conduct. For the full code of behavior, go
to http://investor.google.com/corporate/code-of-conduct.html.
Preface “Don’t be evil.” Googlers generally apply those
words to how we serve our users. But “Don’t be evil” is much
more than that. Yes, it’s about providing our users unbiased
access to information, focusing on their needs and giving
them the best products and services that we can. But it’s also
about doing the right thing more generally—following the
law, acting honorably and treating each other with respect.
The Google Code of Conduct is one of the ways we put
“Don’t be evil” into practice. It’s built around the recognition
that everything we do in connection with our work at Google
will be, and should be, measured against the highest possible
standards of ethical business conduct. We set the bar that high
for practical as well as aspirational reasons: Our commitment
to the highest standards helps us hire great people, build great
products, and attract loyal users. Trust and mutual respect
among employees and users are the foundation of our success,
and they are something we need to earn every day.
So please do read the Code, and follow both its spirit and
letter, always bearing in mind that each of us has a personal
responsibility to incorporate, and to encourage other Googlers
to incorporate, the principles of the Code into our work.
I. Serve Our Users Our users value Google not only because
we deliver great products and services, but because we hold
ourselves to a higher standard in how we treat users and operate more generally. Keeping the following principles in mind
will help us to maintain that high standard:
1. Integrity Our reputation as a company that our users can
trust is our most valuable asset, and it is up to all of us to
make sure that we continually earn that trust. All of our
communications and other interactions with our users
should increase their trust in us.
...
2. Privacy and Freedom of Expression Always remember that we are asking users to trust us with their personal
information. Preserving that trust requires that each of us
respect and protect the privacy of that information. Our security procedures strictly limit access to and use of users’
personal information, and require that each of us take measures to protect user data from unauthorized access. Know
your responsibilities under these procedures, and access
data only as authorized by them, our Privacy Policy and
applicable local data protection laws.
II. Respect Each Other We are committed to a supportive work
environment, where employees have the opportunity to reach their
fullest potential. Each Googler is expected to do his or her utmost
to create a respectful workplace culture that is free of harassment,
intimidation, bias and unlawful discrimination of any kind.
III. Avoid Conflicts of Interest In working at Google, we have an
obligation to always do what’s best for the company and our users.
When you are in a situation where competing loyalties could cause
you to pursue a personal benefit for you or your friends or family
at the expense of Google or our users, you may be faced with a
conflict of interest. All of us should avoid conflicts of interest and
circumstances that reasonably present the appearance of a conflict.
When faced with a potential conflict of interest, ask yourself:
∙∙ Would this activity create an incentive for me, or be perceived by others to create an incentive for me, to benefit
myself, my friends or my family, or an associated business
at the expense of Google?
∙∙ Would this activity harm my reputation, negatively impact my
ability to do my job at Google, or potentially harm Google?
∙∙ Would this activity embarrass Google or me if it showed up
on the front page of a newspaper or a blog?
If the answer to any of these questions is “yes,” the relationship or situation is likely to create a conflict of interest, and
you should avoid it.
...
VI. Ensure Financial Integrity and Responsibility Financial
integrity and fiscal responsibility are core aspects of corporate
professionalism. This is more than accurate reporting of our
financials, though that’s certainly important. The money we
spend on behalf of Google is not ours; it’s the company’s and,
ultimately, our shareholders’. Each person at Google—not just
those in Finance—has a role in making sure that money is appropriately spent, our financial records are complete and accurate and internal controls are honored.
VII. Obey the Law Google takes its responsibilities to comply with laws and regulations very seriously and each of us
is expected to comply with applicable legal requirements and
prohibitions. While it’s impossible for anyone to know all
aspects of every applicable law, you should understand the
major laws and regulations that apply to your work. Take advantage of Legal and Ethics & Compliance to assist you here.
VIII. Conclusion Google aspires to be a different kind of company. It’s impossible to spell out every possible ethical scenario
we might face. Instead, we rely on one another’s good judgment
to uphold a high standard of integrity for ourselves and our
company. We expect all Googlers to be guided by both the letter and the spirit of this Code. Sometimes, identifying the right
thing to do isn’t an easy call. If you aren’t sure, don’t be afraid to
ask questions of your manager, Legal or Ethics & Compliance.
And remember . . . don’t be evil, and if you see something
that you think isn’t right—speak up!
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Moreover, what ethical values should be emphasized?
Is it enough to teach only one, a few, or all the theories
of ethical conduct? Corporations may favor the simplicity of a shareholder orientation that focuses on maximization of profits. But should a corporation also teach rights
theory and expect its employees to follow it? How should
concerns over justice and fair distribution of benefits and
burdens be addressed?
Most major corporations today express their dedication
to ethical decision making by having an ethics officer who
is not only responsible for ethical instruction, but also in
charge of ethical supervision. The ethics officer may attempt
to instill ethical decision making as a component of daily
corporate life by sensitizing employees to the perils of ignoring ethical issues. The ethics officer may also be a mentor
or sounding board for all employees who face ethical issues.
Whether an ethics officer is effective, however, is determined by the level of commitment top executives make
to ethical behavior and the position and power granted to
the ethics officer. For example, will top executives and the
board of directors allow an ethics officer to nix an important deal on ethical grounds, or will they replace the ethics
officer with another executive whose ethical views permit
the deal? Therefore, probably more important than an ethics officer is a CEO with the character to do the right thing.
Consider All Stakeholders’ Interests Utilitarianism
analysis clearly requires an executive to consider a decision’s impact on all stakeholders. How else can one determine all the benefits and costs of the decision? Likewise,
modern rights theory also dictates considering all stakeholders’ rights, including not compromising an important
right unless trumped by another. Kant’s categorical imperative also mandates a concern for others by requiring
one to act as one would require others to act.
For those seeking to maximize profits, the wisdom of
considering all stakeholders is apparent because ignoring
the interests of any stakeholder may negatively affect profits.
For example, a decision may affect a firm’s ability to attract
high-quality employees, antagonize consumers, alienate
suppliers, and motivate the public to lobby lawmakers to
pass laws that increase a firm’s cost of doing business. This
wisdom is reflected in the Guidelines for Ethical Decision
Making, which you will learn in the next section.
Nonetheless, there are challenges when a corporate
manager considers the interests of all stakeholders. Beyond the enormity of identifying all stakeholders, stakeholders’ interests may conflict, requiring a compromise
that harms some stakeholders and benefits others. In addition, the impact on each stakeholder group may be difficult to assess accurately.
For example, if a manager is considering whether to
terminate the 500 least productive employees during an
economic downturn, the manager will note that shareholders will benefit from lower labor costs and consumers may
find lower prices for goods, but the manager also knows
that the terminated employees, their families, and their
communities will likely suffer from the loss of income.
Yet if the employees terminated are near retirement and
have sizable retirement savings or if the termination motivates employees to return to college and seek better jobs,
the impact on them, their families, and their communities
may be minimal or even positive. On the other hand, if
the manager makes the decision to retain the employees,
shareholder wealth may decrease and economic inefficiency may result, which harms all society.
Independent Boards of Directors In some
of the instances in which corporate executives have acted
unethically and violated the law, the board of directors was
little more than a rubber stamp or a sounding board for
the CEO and other top executives. The CEO handpicked a
board that largely allowed the CEO to run the corporation
with little board supervision.
CEO domination of the board is a reality in most
large corporations because the market for CEO talent has
skewed the system in favor of CEOs. Few CEOs are willing to accept positions in which the board exercises real
control. Often, therefore, a CEO determines which board
members serve on the independent board nominating
committee and selects who is nominated by the committee. Owing their positions to the CEO and earning handsome fees sometimes exceeding $100,000, many directors
are reluctant to oppose the CEO’s plans.
For more than four decades, corporate critics have demanded that corporate boards be made more independent of
the CEO. The corporate ethical crises of recent years have
increased those calls for independence. The New York Stock
Exchange and NASDAQ require companies with securities
listed on the exchanges to have a majority of directors independent of the company and top management. Their rules
also require independent management compensation, board
nomination, and audit committees. The Sarbanes–Oxley
Act requires public companies to have board audit committees comprising only independent directors.
One criticism of director independence rules is the belief that no director can remain independent after joining
the board because every director receives compensation
from the corporation. There is a concern that an independent director, whose compensation is high, will side with
management to ensure his continuing nomination, election, and receipt of high fees.
Chapter Four
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More extreme proposals of corporate critics include
recommendations that all corporate stakeholders—such as
labor, government, environmentalists, and communities—
have representation on the board or that special directors
or committees be given responsibility over special areas,
such as consumer protection and workers’ rights. Other
critics argue for contested elections for each board vacancy.
Few corporations have adopted these recommendations.
While honestly motivated, these laws and recommendations often fail to produce greater corporate social responsibility because they ignore the main reason for management’s
domination of the board: the limited time, information, and
resources that directors have. One solution is to give outside
directors a full-time staff with power to acquire information within the corporation. This solution, while providing
a check on management, also may produce inefficiency by
creating another layer of management in the firm.
In addition, some of the recommendations complicate
management by making the board less cohesive. Conflicts
between stakeholder representatives or between inside and
outside directors may be difficult to resolve. For example,
the board could be divided by disputes among shareholders who want more dividends, consumers who want lower
prices, and employees who want higher wages.
Changing the Internal Management Structure Some
corporate critics argue that the historic shift of corporate
powers away from a public corporation’s board and shareholders to its managers is irreversible. They recommend,
therefore, that the best way to produce responsible corporate behavior is to change the corporation’s management
structure.
The main proponent of this view, Christopher Stone,
recommended the creation of offices dedicated to areas
such as environmental affairs and workers’ rights, higher
educational requirements for officers in positions like occupational safety, and procedures to ensure that important
information inside and outside the corporation is directed
to the proper person within the corporation. He also recommended that corporations study certain important issues
and create reports of the study before making decisions.
These requirements aim to change the process by which
corporations make decisions. The objective is to improve
decision making by raising the competency of decision
makers, increasing the amount of relevant information
they hold, and enhancing the methodology by which decisions are made.
More information held by more competent managers
using better tools should produce better decisions. Two of
the later sections in this chapter in part reflect these recommendations. The Guidelines for Ethical Decision Making
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require a decision maker to study a decision carefully before making a decision. This includes acquiring all relevant
facts, assessing a decision’s impact on each stakeholder,
and considering the ethics of one’s decision from each
ethical perspective. In addition, the Thinking Critically
section will help you understand when fallacious thinking
interferes with a manager’s ability to make good decisions.
Eliminating Perverse Incentives and Supervising
Management Even if a corporation modifies its internal
management structure by improving the decision-making
process, there are no guarantees more responsible decisions
will result. To the extent unethical corporate behavior results from faulty perception and inadequate facts, a better
decision-making process helps. But if a decision maker is
motivated solely to increase short-term profits, irresponsible decisions may follow. When one examines closely
recent corporate debacles three things are clear: The corporate wrongdoers acted in their selfish interests; the corporate reward system encouraged them to act selfishly,
illegally, and unethically; and the wrongdoers acted without effective supervision. These facts suggest other changes
that should be made in the internal management structure.
During the high-flying stock market of the 1990s, stock
options were the compensation package preferred by highlevel corporate executives. Shareholders and boards of
directors were more than willing to accommodate them.
On one level, stock options seem to align the interests of
executives with those of the corporation and its shareholders. Issued at an exercise price usually far above the current market price of the stock, stock options have no value
until the corporation’s stock price exceeds the exercise
price of the stock options. Thus, executives are motivated
to increase the corporation’s profits, which should result
in an increase in the stock’s market price. In the 1990s
stock market, in which some stock prices were doubling
yearly, the exercise price of executives’ stock options was
quickly dwarfed by the market price. Executives exercised
the stock options, buying and then selling stock and, in the
process, generating profits for a single executive in the tens
and hundreds of millions of dollars. Shareholders also benefited from the dramatic increase in the value of their stock.
So what is the problem with stock options? As executives accepted more of their compensation in the form of
stock options and became addicted to the lifestyle financed
by them, some executives felt pressure to keep profits soaring to ever-higher levels. In companies like Enron and
WorldCom, which had flawed business models and suspect
accounting practices, some executives were encouraged
to create business deals that had little, if any, economic
justification and could be accounted for in ways that kept
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profits growing. In what were essentially pyramid schemes,
once the faulty economics of the deals were understood by
prospective partners, no new deals were possible, and the
schemes crashed like houses of cards. But until the schemes
were discovered, many executives, including some who
were part of the fraudulent schemes, pocketed tens and
hundreds of millions of dollars in stock option profits.
The Sarbanes–Oxley Act, as amended by the
Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010, addressed this issue by requiring executive
officers to disgorge any bonus and incentive-based or
equity-based compensation received during the three-year
period prior to which the corporation was required to restate its financial statements.
It is easy to see how fraudulent actions subvert the objective of stock options to motivate executives to act in the
best interests of shareholders. Adolph Berle, however, has
argued for more than 50 years that stock options are flawed
compensation devices that allow executives to profit when
stock market prices rise in general, even when executives
have no positive effect on profitability. He proposed that the
best way to compensate executives is to allow them to trade
on inside information they possess about a corporation’s
prospects, information they possess because they helped
produce those prospects. His proposal, however, is not likely
ever to be legal compensation because insider trading creates the appearance that the securities markets are rigged.
Even with incentives in place to encourage executives to
inflate profits artificially, it is unlikely that the recent fraudulent schemes at Enron, WorldCom, and other companies
would have occurred had there been better scrutiny of upper
management and its actions by the CEO and the board of
directors. At Enron, executives were given great freedom to
create partnerships that allowed Enron to keep liabilities off
the balance sheet yet generate income that arguably could
be recognized in the current period. It is not surprising that
this freedom from scrutiny, when combined with financial
incentives to create the partnerships, resulted in executives
creating partnerships that had little economic value to Enron.
Better supervision of management is mostly the responsibility of the CEO, but the board of directors bears
this duty also. We addressed earlier proposals to create
boards of directors that are more nearly independent of the
CEO and, therefore, better able to supervise the CEO and
other top managers. Primarily, however, better supervision
is a matter of attitude, or a willingness to devote time and
effort to discover the actions of those under your charge
and to challenge them to justify their actions. It is not unlike the responsibility a parent owes to a teenage child to
scrutinize her actions and her friends to make sure that she
is acting consistent with the values of the family. So, too,
boards must make the effort to scrutinize their CEOs and
hire CEOs who are able and willing to scrutinize the work
of the managers below them.
Yet directors must also be educated and experienced.
Poor supervision of management has also been shown to
be partly due to some directors’ ignorance of business disciplines like finance and accounting. Unless board members are able to understand accounting numbers and other
information that suggests management wrongdoing, board
scrutiny of management is a process with no substance.
The Law
The law has been the primary means of
controlling corporate misdeeds. Lawmakers usually assume that corporations and executives are rational actors
that can be deterred from unethical and socially irresponsible behavior by the threats law presents. Those threats
are fines and civil damages, such as those imposed and
increased by the Sarbanes–Oxley Act. For deterrence to
work, however, corporate decision makers must know
when the law’s penalties will be imposed, fear those penalties, and act rationally to avoid them.
To some extent, the law’s ability to control executive
misbehavior is limited. As we discussed earlier in this
chapter, corporate lobbying may result in laws reflecting
the views of corporations, not society as a whole. Some
corporate executives may not know the law exists. Others
may view the penalties merely as a cost of doing business.
Some may think the risk of detection is so low that the
corporation can avoid detection. Other executives believe
they are above the law, that it does not apply to them out
of arrogance or a belief that they know better than lawmakers. Some rationalize their violation of the law on the
grounds that “everybody does it.”
Nonetheless, for all its flaws, the law is an important
means by which society controls business misconduct. Of
all the devices for corporate control we have considered,
only market forces and the law impose direct penalties for
corporate misbehavior. Although legal rules have no special
claim to moral correctness, at least they are knowable. Laws
also are the result of an open political process in which competing arguments are made and evaluated. This cannot be
said about the intuitions of a corporate ethics officer, edicts
from public interest groups, or the theories of economists or
philosophers, except to the extent they are reflected in law.
Moreover, in mature political systems like the United States,
respect for and adherence to law is a well-entrenched value.
Where markets fail to promote socially responsible conduct, the law can do the job. For example, the antitrust laws
discussed in Chapter 49, while still controversial, have eliminated the worst anticompetitive business practices. The federal securities laws examined in Chapters 45 and 46 arguably
restored investor confidence in the securities markets after
the stock market crash of 1929. Although environmentalists
Chapter Four
Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
often demand more regulation, the environmental laws
treated in Chapter 52 have improved the quality of water
and reduced our exposure to toxic substances. Employment
regulations discussed in Chapter 51—especially those banning employment discrimination—have forced significant
changes in the American workplace. Thus, the law has an
accomplished record as a corporate control device.
Indeed, sometimes the law does the job too well, often
imposing a maze of regulations that deter socially valuable profit seeking without producing comparable benefits.
Former Fed chair Greenspan once wrote, “Government
regulation is not an alternative means of protecting the consumer. It does not build quality into goods, or accuracy into
information. Its sole ‘contribution’ is to substitute force and
fear for incentive as the ‘protector’ of the consumer.”
The hope was that the Sarbanes–Oxley Act would restore investor confidence in audited financial statements
and corporate governance. A 2007 survey by Financial
Executives International found that 69 percent of financial executives agreed that compliance with SOX section
404 resulted in more investor confidence in their companies’ financial reports. Fifty percent agreed that financial reports were more accurate. As for the cost of SOX
compliance, a 2014 Protiviti report found that more than
one-third of large companies (at least $10 billion in annual
revenue) spent less than $500,000, while 30 percent spent
more than $2 million.
Guidelines for Ethical
Decision Making
Now that you understand the basics of ethical theories and
the issues in the corporate governance debate, how do you
use this information to make decisions for your business
that are ethical and socially responsible? That is, what
Figure 1
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process will ensure that you have considered all the ethical ramifications and arrived at a decision that is good for
your business, good for your community, good for society
as a whole, and good for you.
LO4-2
Apply the Guidelines for Ethical Decision Making to
business and personal decisions.
Figure 1 lists nine factors in the Guidelines for Ethical
Decision Making. Let’s consider each Guideline and explain how each helps you make better decisions.
What Facts Impact My Decision?
This is
such an obvious component of any good decision that it
hardly seems necessary to mention. Yet it is common that
people make only a feeble attempt to acquire all the facts
necessary to a good decision.
Many people enter a decision-making process biased in
favor of a particular option. As a result, they look only for
facts that support that option. You have seen this done many
times by your friends and opponents, and because you are an
honest person, you have seen yourself do this as well from
time to time. In addition, demands on our time, fatigue, laziness, ignorance of where to look for facts, and aversion to
inconvenience someone who has information contribute to
a reluctance or inability to dig deep for relevant facts.
Because good decisions cannot be made in a partial vacuum of information, it is important to recognize when you
need to acquire more facts. That is primarily the function
of your other classes, which may teach you how to make
stock market investment decisions, how to audit a company’s financial records, and how to do marketing research.
For our purposes, let’s consider this example. Suppose
we work for a television manufacturing company that has a
factory in Sacramento, California. Our company has placed
Guidelines for Ethical Decision Making
1. What FACTS impact my decision?
2. What are the ALTERNATIVES?
3. Who are the STAKEHOLDERS?
4. How do the alternatives impact SOCIETY AS A WHOLE?
5. How do the alternatives impact MY BUSINESS FIRM?
6. How do the alternatives impact ME, THE DECISION MAKER?
7. What are the ETHICS of each alternative?
8. What are the PRACTICAL CONSTRAINTS of each alternative?
9. What COURSE OF ACTION should be taken and how do we IMPLEMENT it?
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you in charge of investigating the firm’s decision whether to
move the factory to Juarez, Mexico. What facts are needed
to make this decision, and where do you find those facts?
Among the facts you need are: What are the firm’s
labor costs in Sacramento, and what will those costs be in
Juarez? How much will labor costs increase in subsequent
years? What is the likelihood of good labor relations in
each location? What is and will be the productivity level
of employees in each city? What are and will be the transportation costs of moving the firm’s inventory to market?
What impact will the move have on employees, their families, the communities, the schools, and other stakeholders in each community? Will Sacramento employees find
other jobs in Sacramento or elsewhere? How much will
we have to pay in severance pay?
How will our customers and suppliers be affected by
our decision? If we move to Juarez, will our customers
boycott our products even if our televisions are better and
cheaper than before? If we move, will our suppliers’ costs
increase or decrease? How will our profitability be affected? How will shareholders view the decision? Who are
our shareholders? Do we have a lot of Mexican shareholders, or do Americans dominate our shareholder list? What
tax concessions and other benefits will the City of Sacramento give our firm if we promise to stay in Sacramento?
What will Ciudad Juarez and the government of Mexico
give us if we move to Juarez? How will our decision impact U.S.–Mexican economic and political relations?
This looks like a lot of facts, but we have only scratched
the surface. You can probably come up with another 100
facts that should be researched. To give you another example of how thorough managers must be to make prudent
decisions, consider that the organizers for the Olympics
and Boston Marathon must attempt to predict and prevent terrorist attacks. For the 2000 Summer Olympics in
Sydney, Australia, organizers created 800 different terrorist scenarios before developing an antiterrorism plan.
You can see that, to some extent, we are discussing other
factors in the Guidelines as we garner facts. The factors do
overlap to some degree. Note also that some of the facts
you want to find are not facts at all, but estimates, such
as cost and sales projections. We’ll discuss in the Eighth
Guideline the practical problems with the facts we find.
What Are the Alternatives? A decision maker
must be thorough in listing the alternative courses of actions.
For many of us, the temptation is to conclude that there are
only two options: to do something or not to do something.
Let’s take our decision whether to move our factory to
Juarez, Mexico. You might think that the only choices are
to stay in Sacramento or to move to Juarez. Yet there are
several combinations that fall in between those extremes.
For example, we could consider maintaining the factory in Sacramento temporarily, opening a smaller factory
in Juarez, and gradually moving production to Mexico
as employees in Sacramento retire. Another alternative
is to offer jobs in the Juarez factory to all Sacramento
employees who want to move. If per-unit labor costs in
Sacramento are our concern, we could ask employees in
Sacramento to accept lower wages and fringe benefits or
to increase their productivity.
There are many other alternatives that you can imagine.
It is important to consider all reasonable alternatives. If
you do not, you increase the risk that the best course of
action was not chosen only because it was not considered.
Who Are the Stakeholders? In modern societies, where diversity is valued as an independent virtue,
considering the impacts of your decision on the full range
of society’s stakeholders has taken on great significance in
prudent and ethical decision making. While a public corporation with thousands of shareholders obviously owes a
duty to its shareholders to maximize shareholder wealth,
corporate managers must also consider the interests of
other important stakeholders, including employees, suppliers, customers, and the communities in which they live.
Stakeholders also include society as a whole, which can be
defined as narrowly as your country or more expansively
as an economic union of countries, such as the European
Union of 28 countries, or even the world as a whole.
Not to be omitted from stakeholders is you, the decision maker who is also impacted by your decisions for
your firm. The legitimacy of considering your own selfish
interests will be considered fully in the Sixth Guideline.
Listing all the stakeholders is not a goal by itself, but
helps the decision maker apply more completely other factors in the ethical Guidelines. Knowing whom your decision affects will help you find the facts you need. It also
helps you evaluate the alternatives using the next three
Guidelines: how the alternatives we have proposed impact
society as a whole, your firm, and the decision maker.
How Do the Alternatives Impact Society
as a Whole? We covered some aspects of this
Guideline earlier when we made an effort to discover all
the facts that impact our decision. We can do a better job
discovering the facts if we try to determine how our decision impacts society as a whole.
For example, if the alternative we evaluate is keeping the
factory in Sacramento after getting property tax and road
building concessions from the City of Sacramento, how
is society as a whole impacted? What effect will tax concessions have on the quality of Sacramento schools (most
schools are funded with property taxes)? Will lower taxes
Chapter Four
Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
cause the Sacramento infrastructure (roads and governmental services) to decline to the detriment of the ordinary citizen? Will the economic benefits to workers in Sacramento
offset the harm to the economy and workers in Juarez?
Will our firm’s receiving preferential concessions from
the Sacramento government undermine the ordinary citizen’s faith in our political and economic institutions? Will
we contribute to the feelings of some citizens that government grants privileges only to the powerful? Will our
staying in Sacramento foster further economic growth in
Sacramento? Will staying in Sacramento allow our suppliers to stay in business and continue to hire employees who
will buy goods from groceries and malls in Sacramento?
What impact will our decision have on efforts to create a global economy in which labor and goods can freely
travel between countries? Will our decision increase international tension between the United States and Mexico?
Note that the impact of our decision on society as a
whole fits neatly with one of the ethical theories we discussed earlier: utilitarianism. Yet profit maximization,
rights theory, and justice theory also require a consideration of societal impacts.
How Do the Alternatives Impact My
Business Firm? The most obvious impact any al-
ternative has on your firm is its effect on the firm’s bottom
line profitability. Yet that answer requires explaining because what you really want to know is what smaller things
leading to profitability are impacted by an alternative.
For example, if our decision is to keep the factory in
Sacramento open temporarily and gradually move the
plant to Juarez as retirements occur, what will happen to
employee moral and productivity in Sacramento? Will our
suppliers in Sacramento abandon us to serve more permanent clients instead? Will consumers in Sacramento and the
rest of California boycott our televisions? Will they be able
to convince other American laborers to boycott our TVs?
Will a boycott generate adverse publicity and media coverage that will damage our brand name? Will investors view
our firm as a riskier business, raising our cost of capital?
Again, you can see some redundancy here as we work
through the Guidelines, but that redundancy is all right
because it ensures that we are examining all factors important to our decision.
How Do the Alternatives Impact Me,
the Decision Maker? At first look, considering
how a decision you make for your firm impacts you hardly
seems to be a component of ethical and responsible decision making. The term selfish probably comes to mind.
Many of the corporate ethical debacles of the last few
years comprised unethical and imprudent decisions that
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probably were motivated by the decision makers’ selfish
interests. Mortgage brokers’ desires to earn large fees encouraged them to falsify borrowers’ financial status and
to make imprudent loans to high-risk clients. Several of
Enron’s off-balance-sheet partnerships, while apparently
helping Enron’s financial position, lined the pockets of
conflicted Enron executives holding stock options and receiving management fees from the partnerships.
Despite these examples, merely because a decision
benefits you, the decision maker, does not always mean it
is imprudent or unethical. Even decisions by some Enron
executives in the late 1990s, while motivated in part by
the desire to increase the value of the executives’ stock
options, could have been prudent and ethical if the offbalance-sheet partnerships had real economic value to
Enron (as they did when Enron first created off-balancesheet partnerships in the 1980s) and accounting for them
complied with the law.
At least two reasons explain why you can and should
consider your own interest yet act ethically for your firm.
First, as the decision maker, you are impacted by the decision. Whether deservedly or not, the decision maker is
often credited or blamed for the success or failure of the
course of action chosen. You may also be a stakeholder
in other ways. For example, if you are an executive in the
factory in Sacramento, you and your family may be required to move to Juarez (or El Paso, Texas, which borders
Juarez) if the factory relocates. It is valid to consider a decision’s impact on you and your family, although it should
not be given undue weight.
A second, and more important, reason to consider your
own interest is that your decision may be better for your
firm and other stakeholders if you also consider your selfish interest. For example, suppose when you were charged
to lead the inquiry into the firm’s decision whether to move
to Juarez, it was made clear that the CEO preferred to close
the Sacramento factory and move operations to Juarez.
Suppose also that you would be required to move to
Juarez. Your spouse has a well-paying job in Sacramento,
and your teenage children are in a good school system and
have very supportive friends. You have a strong relationship with your parents and siblings, who also live within
50 miles of your family in Sacramento. You believe that
you and your family could find new friends and good
schools in El Paso or Juarez, and the move would enhance
your position in the firm and increase your chances of
a promotion. Nonetheless, overall you and your spouse
have determined that staying in the Sacramento area is
best for your family. So you are considering quitting your
job with the firm and finding another job in the Sacramento area rather than make an attempt to oppose the
CEO’s preference.
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If you quit your job, even in protest, you will have no
role in the decision and your resignation will likely have
no impact on the firm’s Sacramento–Juarez decision. Had
you stayed with the firm, you could have led a diligent
inquiry into all the facts that may have concluded that the
prudent and ethical decision for the firm was to stay in
Sacramento. Without your input and guidance, the firm
may make a less prudent and ethical decision.
You can think of other examples where acting selfishly
also results in better decisions. Suppose a top-level accounting executive, to whom you are directly responsible,
has violated accounting standards and the law by pressuring the firm’s auditors to book as income in the current year
a contract that will not be performed for two years. You
could quit your job and blow the whistle, but you may be
viewed as a disgruntled employee and your story given no
credibility. You could confront the executive, but you may
lose your job or at least jeopardize your chances for a promotion while tipping off the executive, who will cover her
tracks. As an alternative, the more effective solution may
be to consider how you can keep your job and prospects for
promotion while achieving your objective to blow the whistle on the executive. One alternative may be to go through
appropriate channels in the firm, such as discussing the
matter with the firm’s audit committee or legal counsel.
Finding a way to keep your job will allow you to make
an ethical decision that benefits your firm, whereas your
quitting may leave the decision to someone else who
would not act as prudently. The bottom line is this: While,
sometimes, ethical conduct requires acting unselfishly, in
other contexts, consideration of your self-interest is not
only consistent with ethical conduct, but also necessary to
produce a moral result.
What Are the Ethics of Each Alternative?
Because our goal is to make a decision that is not only
prudent for the firm, but also ethical and defensible in the
event we are required to give an accounting for our actions,
we must consider the ethics of each alternative, not from
one but a variety of ethical viewpoints. Our stakeholders’
values comprise many ethical theories; ignoring any one
theory will likely cause an incomplete consideration of the
issues and may result in unforeseen, regrettable outcomes.
What Would a Utilitarian Do? A utilitarian would choose
the alternative that promises the highest net welfare to society as a whole. If we define our society as the United States,
moving to Juarez may nonetheless produce the highest net
benefit because the benefits to American citizens from
a lower cost of televisions and to American shareholders from higher profits may more than offset the harm to
our employees and other citizens of Sacramento. Another
benefit of the move may be the reduced cost of the U.S.
government dealing with illegal immigration as Mexican
workers decide to work at our plant in Juarez. Another cost
may be the increased labor cost for a Texas business that
would have hired Mexican workers had we not hired them.
If we define society as all countries in the North
American Free Trade Agreement (NAFTA was signed
by the United States, Mexico, and Canada), the benefit to
workers in Juarez may completely offset the harm to workers in Sacramento. For example, the benefit to Juarez workers may be greater than the harm to Sacramento employees
if many Juarez employees would otherwise be underemployed and Sacramento employees can find other work or
are protected by a severance package or retirement plan.
As we discussed earlier in the discussion of ethical theories, finding and weighing all the benefits and costs of an
alternative are difficult tasks. Even if we reject this theory
as the final determinant, it is a good exercise for ensuring
that we maximize the number of facts we consider when
making a decision.
What Would Someone Focused on Maximizing Profits Do? One following traditional shareholder theory and
its emphasis on profit maximization would choose the alternative that produces the most long-run profits for the
company, within the limits of the law. This may mean, for
example, that the firm should keep the factory in Sacramento if that will produce the most profits for the next
10 to 15 years.
This does not mean that the firm may ignore the impact of the decision on Juarez’s community and workers.
It may be that moving to Juarez will create a more affluent
population in Juarez and consequently increase the firm’s
television sales in Juarez. But that impact is judged not by
whether society as a whole is bettered (as with utilitarian
analysis) or whether Juarez workers are more deserving of
jobs (as with justice theory analysis), but is solely judged
by how it impacts the firm’s bottom line.
Nonetheless, profit maximization may compel a decision maker to consider stakeholders other than the
corporation and its shareholders. A decision to move to
Juarez may mobilize American consumers to boycott our
TVs, for example, or cause a public relations backlash if
our Juarez employees receive wages far below our Sacramento workers. These and other impacts on corporate
stakeholders may negatively impact the firm’s profits.
Although projecting profits is not a precise science,
tools you learned in finance classes should enhance your
ability to select an alternative that maximizes your firm’s
profits within the limits of the law.
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Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
What Would a Rights Theorist Do? A follower of modern rights theory will determine whether anyone’s rights
are negatively affected by an alternative. If several rights
are affected, the rights theorist will determine which right
is more important or trumps the other rights, and choose
the alternative that respects the most important right.
For example, if the alternative is to move to Juarez,
the Sacramento employees, among others, are negatively
affected. Yet if we do not move, potential employees in
Juarez are harmed. Are these equal rights a mere wash, or
is it more important to retain a job one already has than to
be deprived of a job one has never had?
Are other rights at work here, and how are they ranked?
Is it more important to maintain manufacturing production
in the firm’s home country for national security and trade
balance reasons than to provide cheaper televisions for the
firm’s customers? Does the right of all citizens to live in
a global economy that spreads wealth worldwide and promotes international harmony trump all other rights?
While apparently difficult to identify and rank valid
rights, this theory has value even to a utilitarian and a
profit maximizer. By examining rights that are espoused
by various stakeholders, we are more likely to consider
all the costs and benefits of our decision and know which
rights can adversely affect the firm’s profitability if we fail
to take them into account.
What Would a Justice Theorist Do? A justice theorist
would choose the alternative that allocates society’s benefits and burden most fairly. This requires the decision
maker to consider whether everyone is getting what he deserves. If we follow the preaching of John Rawls, the firm
should move to Juarez if the workers there are less advantaged than those in Sacramento, who may be protected by
savings, severance packages, and retirement plans.
If we follow Nozick’s libertarian approach, it is sufficient that the firm gives Sacramento workers an opportunity to compete for the plant by matching the offer the
firm has received from Juarez workers. Under this analysis, if Sacramento workers fail to match the Juarez workers’ offer of lower wages, for example, it would be fair to
move the factory to Juarez, even if Sacramento workers
are denied their right to jobs.
Even if the firm has difficulty determining who most
deserves jobs with our firm, justice theory, like rights theory, helps the firm identify constituents who suffer from
our decision and who can create problems impacting the
firm’s profitability if the firm ignores their claims.
What Does Virtue Theory Require? Virtue theory
requires the decision maker to review those personal or
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corporate virtues and values that are essential to the individual’s or organization’s flourishing. This approach
acknowledges the fact that all business is communal and
requires individuals working together in an effort to realize the good life. Virtue theory, therefore, would prompt
decision makers to ask what decision is consistent with
the corporate identity or character they wish to cultivate.
Practically speaking, this would involve revisiting the
corporate statement of values and considering seriously
what impact closing the Sacramento facility would have on
the corporate culture internally and externally—that is, in
terms of reputation in the market—and whether this impact
is consistent with the pursuit of excellence in terms of those
predetermined corporate values. Again, as noted earlier,
this analysis is potentially more ambiguous than a mere determination of what maximizes profits or what produces an
overall most efficient allocation of utility, but it does ensure
reflection on the implications for a corporation or individual who wants to take seriously a commitment to integrity.
What Are the Practical Constraints of
Each Alternative? As we evaluate alternatives, it
is important to consider each alternative’s practical problems before we implement it. For example, is it feasible for
us to implement an alternative? Do we have the necessary
money, labor, and other resources?
Suppose one alternative is to maintain our manufacturing plant in Sacramento as we open a new plant in Juarez,
gradually shutting down the Sacramento plant as employees retire and quit. That alternative sounds like an ethical
way to protect the jobs of all existing and prospective employees, but what are the costs of having two plants? Will
the expense make that alternative infeasible? Will the additional expense make it difficult for the firm to compete
with other TV manufacturers? Is it practicable to have a
plant in Sacramento operating with only five employees
who are 40 years old and will not retire for 15 years?
It is also necessary to consider potential problems with
the facts that have led us to each alternative. Did we find
all the facts relevant to our decision? How certain are we
of some facts? For example, are we confident about our
projections of labor and transportation costs if we move
to Juarez? Are we sure that sales of our products will drop
insubstantially due to consumer boycotts?
What Course of Action Should Be Taken
and How Do We Implement It? Ultimately, we
have to stop our analysis and make a decision by choosing
one alternative. Yet even then our planning is not over.
We must determine how to put the alternative into
action. How do we implement it? Who announces the
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decision? Who is told of the decision and when? Do some
people, like our employee’s labor union, receive advance
notice of our plans and have an opportunity to negotiate a
better deal for our Sacramento employees? When do we
tell shareholders, government officials, lenders, suppliers,
investments analysts, and the media and in what order? Do
we antagonize a friend or an enemy and risk killing a deal
if we inform someone too soon or too late?
Finally, we have to prepare for the worst-case scenario.
What do we do if, despite careful investigation, analysis, and planning, our course of action fails? Do we have
backup plans? Have we anticipated all the possible ways
our plan may fail and readied responses to those failures?
In 1985, the Coca-Cola Company decided to change the
flavor of Coke in response to Coke’s shrinking share of the
cola market. Despite careful market research, Coca-Cola
failed to anticipate Coke drinkers’ negative response to
the new Coke formula and was caught without a response
to the outcry. Within three months, Coca-Cola realized it
had to revive the old Coke formula under the brand name
Coca-Cola Classic. In the meantime, Coke lost significant
market share to rival Pepsi. Today, one would expect Coke
executives introducing a reformulated drink to predict
more consumers’ reactions to the drink and to prepare a
response to each reaction.
Knowing When to Use the Guidelines
You can probably see that following these factors will result in better decisions in a variety of contexts, including
some that appear to have no ethical concerns. For example,
in the next few years, most of you will consider what major
course of study to select at college or what job to take with
which firm in which industry. This framework can help you
make a better analysis that should result in a better decision.
The Guidelines can be used also to decide mundane
matters in your personal life, such as whether to eat a highfat hamburger or a healthful salad for lunch, whether to
spend the next hour exercising at the gym or visiting a
friend in the hospital, and whether or not to brush your
teeth every day after lunch. But for most of us, using the
Guidelines every day for every decision would occupy so
much of our time that little could be accomplished, what
is sometimes called “paralysis by analysis.”
Practicality, therefore, requires us to use the Guidelines
only for important decisions and those that create a potential
for ethical problems. We can identify decisions requiring
application of the Guidelines if we carefully reflect from
time to time about what we have done and are doing. This
requires us to examine our past, current, and future actions.
It may not surprise you how seldom people, including business executives, carefully preview and review
their actions. The pressures and pace of daily living give
us little time to examine our lives critically. Most people
are reluctant to look at themselves in the mirror and ask
themselves whether they are doing the right thing for
themselves, their families, their businesses, and their communities. Few know or follow the words of Socrates, “The
unexamined life is not worth living.”
Ask yourself whether you believe that mortgage brokers used anything like the Guidelines for Ethical Decision Making before signing low-income borrowers to
loans exceeding $500,000. Did executives at bankrupt
energy trader Enron consider any ethical issues before
creating off-balance-sheet partnerships with no economic
value to Enron? Do you think the employees at accounting firm Arthur Andersen carefully examined their decision to accept Enron’s accounting for off-balance-sheet
partnerships?
Merely by examining our past and prospective actions,
we can better know when to apply the Guidelines. In the
next to last section of this chapter, Resisting Requests to
Act Unethically, you will learn additional tools to help you
identify when to apply the Guidelines.
LOG ON
Go to
www.scu.edu/ethics
This website maintained by the Markkula Center for Applied
Ethics at the University of Santa Clara has links to business ethics
resources and guides for ethical/moral decision making.
Thinking Critically
Legal reasoning and ethical decision making both require
one to think critically—that is, to evaluate arguments logically, honestly, and without bias in favor of your own arguments and against those of others. Thinking critically is
a skill, and like with any skill, one can improve through
greater awareness of common mistakes and intentional
practice of those methods that will lead to improvement.
LO4-3
Recognize critical thinking errors in your own and others’
arguments.
Even if someone uses the Guidelines for Ethical Decision Making, there is a risk that they have been misapplied if a person makes errors of logic or uses fallacious
arguments. In this section, we want to help you identify
when your arguments and thinking may be flawed and
how to correct them. Equally important, we want to help
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Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
you identify flaws in others’ thinking. The purpose is to
help you think critically and not to accept at face value
everything you read or hear and to be careful before you
commit your arguments to paper or voice them.
This chapter’s short coverage of critical thinking covers
only a few of the errors of logic and argument that are covered
in a college course or book devoted to the subject. Here are
15 common fallacies and errors in reasoning that, if learned,
can help you become a more rigorous and careful thinker.
Non Sequiturs
A non sequitur is a conclusion that
does not follow from the facts or premises one sets out.
The speaker is missing the point or coming to an irrelevant conclusion. For example, suppose a consumer uses
a corporation’s product and becomes ill. The consumer
argues that because the corporation has lots of money, the
corporation should pay for his medical expenses. Clearly,
the consumer is missing the point. The issue is whether
the corporation’s product caused his injuries, not whether
money should be transferred from a wealthy corporation
to a poor consumer.
You see this also used when employees attempt to
justify stealing pens, staplers, and paper from their employers. The typical non sequitur goes like this: “I don’t
get paid enough, so I’ll take a few supplies. My employer
won’t even miss them.”
Business executives fall prey to this fallacy also. Our
firm may consider which employees to let go during
a downturn. Company policy may call for retaining the
best employees in each department, yet instead we release
those employees making the highest salary in each position in order to save more money. Our decision does not
match the standards the company set for downsizing decisions and is a non sequitur, unless we admit that we have
changed company policy.
Appeals to Pity A common fallacy seen in the
American press is the appeal to pity or compassion. This
argument generates support for a proposition by focusing
on a victim’s predicament. It usually is also a non sequitur. Examples are news stories about elderly, retired people who find it hard to afford expensive, life-prolonging
drugs. None of these stories point out that many of these
people squandered their incomes when working rather
than saving for retirement.
Appeals to pity are effective because humans are compassionate. We have to be careful, however, not to be distracted from the real issues at hand. For example, in the trial
against accused 9/11 co-conspirator Zacarias Moussaoui,
federal prosecutors wanted to introduce testimony by
the families of the victims. While what the families of
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9/11 suffered is terrible, the victims’ families hold no evidence of Moussaoui’s role in 9/11. Instead, their testimonies are appeals to pity likely to distract the jury from its
main task of determining whether Moussaoui was a part of
the 9/11 conspiracy.
American presidents and other politicians often use
appeals to pity, such as having a press conference with
children behind the president while he opines about income inequality. Moreover, you see many appeals to pity
used against corporations. Here is a typical argument: A
corporation has a chemical plant near a neighborhood;
children are getting sick and dying in the neighborhood;
someone should pay for this suffering; the corporation
should pay. You can also see that this reasoning is a non
sequitur. Better reasoning requires one to determine not
whether two events are coincidental or correlated, but
whether one (the chemical plant) caused the other (the
children’s illnesses).
False Analogies
An analogy essentially argues
that because something is like something else in one or
more ways, it is also like it in another respect. Arguers
often use analogies to make a point vividly, and therefore
analogies have strong appeal. Nonetheless, while some
analogies are apt, we should make sure that the two situations are sufficiently similar to make the analogy valid.
Suppose an executive argues that our bank should not
make loans to lower-income borrowers because the bank
will suffer huge losses like Countrywide Financial. This
analogy may be invalid because we may do a better job
verifying a borrower’s income and ability to repay a loan
than did Countrywide.
Analogies can also be used to generate support for a proposal, such as arguing that because Six Sigma worked for
General Electric, it will work for our firm also. It is probable that factors other than Six Sigma contributed to GE’s
success, factors our firm may or may not share with GE.
Nonetheless, analogies can identify potential opportunities, which we should evaluate prudently to determine
whether the analogy is valid. Analogies can also suggest
potential problems that require us to examine a decision
more carefully before committing to it.
Begging the Question An arguer begs the question when she takes for granted or assumes the thing that
she is setting out to prove. For example, you might say that
we should tell the truth because lying is wrong. That is
circular reasoning and makes no sense because telling the
truth and not lying are the same things. Another example
is arguing that democracy is the best form of government
because the majority is always right.
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Examples of begging the question are difficult to identify sometimes because they are hidden in the language of
the speaker. It is best identified by looking for arguments
that merely restate what the speaker or questioner has already stated, but in different words. For an example in the
business context, consider this interchange between you
and someone working under you.
You: Can I trust these numbers you gave to me?
Coworker: Yes, you can trust them.
You: Why can I trust them?
Coworker: Because I’m an honest person.
The coworker used circular reasoning because whether
the numbers can be trusted is determined by whether he is
honest, yet he provided no proof of his honesty, such as his
numbers being backed by facts.
Argumentum ad Populum Argumentum ad
populum means argument to the people. It is an emotional
appeal to popular beliefs, values, or wants. The fallacy is
that merely because many or all people believe something
does not mean it is true. It is common for newspapers to
poll its readers about current issues, such as support for a
presidential decision. For example, a newspaper poll may
show that 60 percent of Americans support the president.
The people may be right, but it is also possible that the
president’s supporters are wrong: They may be uninformed
or base their support of the president on invalid reasoning.
Arguments to the people are commonly used by corporations in advertisements, such as beer company ads
showing friends having a good time while drinking beer.
The point of such ads is that if you want to have a good
time with friends, you should drink beer. While some beer
drinkers do have fun with friends, you probably can also
point to other people who drink beer alone.
Bandwagon Fallacy
The bandwagon fallacy is
similar to argumentum ad populum. A bandwagon argument states that we should or should not do something
merely because one or more other people or firms do or do
not do it. Sports Illustrated quoted basketball player Diana
Taurasi’s objection to being arrested for driving drunk:
“Why me? Everyone drives drunk!” Some people justify
cheating on their taxes for the same reason.
This reasoning can be fallacious because probably not
everyone is doing it, and even if many or all people do something, it is not necessarily right. For example, while some
baseball players do use steroids, there are serious negative
side effects including impotency and acute psychosis, which
make its use risky. Cheating on taxes may be common, but
it is still illegal and can result in the cheater’s imprisonment.
Bandwagon thinking played a large part in the current
credit crunch as many loan buyers like Bear Stearns bought
high-risk loans only because their competitors were buying the loans, thereby encouraging lenders to continue to
make high-risk loans.
Argumentum ad Baculum Argumentum ad
baculum means argument to club. The arguer uses threats
or fear to bolster his position. This is a common argument
in business and family settings. For example, when a parent asks a child to take out the garbage, the child may ask,
“Why?” Some parents respond, “Because if you don’t,
you’ll spend the rest of the afternoon in your room.” Such
an argument is a non sequitur as well.
In the business context, bosses explicitly and implicitly
use the club, often generating support for their ideas from
subordinates who fear they will not be promoted unless
they support the boss’s plans. An executive who values
input from subordinates will ensure that they do not perceive that the executive is wielding a club over them.
Enron’s CFO Andrew Fastow used this argument
against investment firm Goldman Sachs when it balked at
lending money to Enron. He told Goldman that he would
not do anything with a presentation Goldman had prepared unless it made the loan.
By threatening to boycott a company’s products, consumers and other interest groups use this argument against
corporations perceived to act unethically. It is one reason
that profit maximization requires decision makers to consider a decision’s impact on all stakeholders.
Argumentum ad Hominem Argumentum ad hominem means “argument against the man.” This tactic attacks
the speaker, not his reasoning. For example, a Republican
senator criticizes a Democratic senator who supports the
withdrawal of American troops from a war zone by saying,
“You can’t trust him. He never served in the armed forces.”
Such an argument attacks the Democratic senator’s character, not the validity of his reasons for withdrawing troops.
When a CEO proposes a new compensation plan for
corporate executives, an opponent may argue, “Of course
he wants the new plan. He’ll make a lot of money from it.”
Again, this argument doesn’t address whether the plan is a
good one or not; it only attacks the CEO’s motives. While
the obvious conflict of interest the CEO has may cause us
to doubt the sincerity of the reasons he presents for the plan
(such as to attract and retain better management talent),
merely pointing out this conflict does not rebut his reasons.
One form of ad hominem argument is attacking a speaker’s consistency, such as, “Last year you argued for something different.” Another common form is appealing to
personal circumstances. One woman may say to another,
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Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
“As a woman, how can you be against corporate policies
that set aside executive positions for women?” By personalizing the argument, the speaker is trying to distract the listener from the real issue. A proper response to the personal
attack may be, “As a woman and a human, I believe in equal
opportunity for all people. I see no need for any woman or
me to have special privileges to compete with men. I can
compete on my own. By having quotas, the corporation
cheapens my accomplishments by suggesting that I need the
quota. Why do you, as a woman, think you need a quota?”
Guilt by association is the last ad hominem argument we
will consider. This argument attacks the speaker by linking
her to someone unpopular. For example, if you make the
libertarian argument that government should not restrict
or tax the consumption of marijuana, someone may attack
you by saying, “Mass murderer Charles Manson also believed that.” Your attacker suggests that by believing as
you do, you are as evil as Charles Manson. Some corporate critics use guilt by association to paint all executives
as unethical people motivated to cheat their corporations.
For example, if a CEO asks for stock options as part of her
compensation package, someone may say, “Enron’s executives wanted stock options also.” The implication is that
the CEO should not be trusted because some Enron executives who were corrupt also wanted stock options.
No ad hominem argument is necessarily fallacious because a person’s character, motives, consistency, personal
characteristics, and associations may suggest further scrutiny
of a speaker’s arguments is necessary. However, merely attacking the speaker does not expose flaws in her arguments.
Argument from Authority Arguments from authority rely on the quality of an expert or person in a position
of authority, not the quality of the expert’s or authority’s argument. For example, if someone says, “The president says
we need to stop drug trafficking in the United States, and
that is good enough for me,” he has argued from authority.
He and the president may have good reasons to stop drug
trafficking, but we cannot know that from his statement.
Another example is “Studies show that humans need to
drink 10 glasses of water a day.” What studies? What were
their methodologies? Did the sample sizes permit valid
conclusions? A form of argument to authority is argument
to reverence or respect, such as “Who are you to disagree
with the CEO’s decision to terminate 5,000 employees?”
The arguer is trying to get you to abandon your arguments,
not because they are invalid, but because they conflict
with the views of an authority. Your response to this question should not attack the CEO (to call the CEO an idiot
would be ad hominem and also damage your prospects in
the firm), but state the reasons you believe the company
would be better off not terminating 5,000 employees.
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It is natural to rely on authorities who have expertise
in the area on which they speak. But should we give credibility to authorities speaking on matters outside the scope
of their competency? For example, does the fact that Julia
Roberts is an Academy Award–winning actress have any
relevance when she is testifying before Congress about
Rett Syndrome, a neurological disorder that leaves infants
unable to communicate and control body functions? Is she
any more credible as a Rett Syndrome authority because
she narrated a film on the Discovery Health Channel about
children afflicted with the disease?
This chapter includes several examples of arguments
from authority when we cite Kant, Bentham, Aristotle, and
others who have formulated ethical theories. What makes
their theories valid, however, is not whether they are recognized as experts, but whether their reasoning is sound.
False Cause This fallacy results from observing two
events and concluding that there is a causal link between
them when there is no such link. Often we commit this fallacy because we do not attempt to find all the evidence proving or disproving the causal connection. For example, if as
a store manager you change the opening hour for your store
to 6 a.m. from 8 a.m., records for the first month of operation under the new hours may show an increase in revenue.
While you may be tempted to infer that the revenue increase
is due to the earlier opening hour, you should not make that
conclusion until at the very least you examine store receipts
showing the amount of revenue generated between 6 a.m.
and 8 a.m. The increase in revenue could have resulted from
improved general economic conditions unconnected to the
new hours: people just had more money to spend.
The fallacy of false cause is important to businesses,
which need to make valid connections between events in
order to judge the effectiveness of decisions. Whether, for
example, new products and an improved customer relations program increase revenues and profits should be
subjected to rigorous testing, not some superficial causal
analysis. Measurement tools you learn in other business
classes help you eliminate false causes.
The Gambler’s Fallacy
This fallacy results from
the mistaken belief that independent prior outcomes affect
future outcomes. Consider this example. Suppose you flip a
coin five times and each time it comes up heads. What is the
probability that the next coin flip will be heads? If you did
not answer 50 percent, you committed the gambler’s fallacy.
Each coin flip is an independent event, so no number of consecutive flips producing heads will reduce the likelihood that
the next flip will also be heads. That individual probability is
true even though the probability of flipping six consecutive
heads is 0.5 to the sixth power, or only 1.5625 percent.
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What is the relevance of the gambler’s fallacy to business? We believe and are taught that business managers and
professionals with higher skills and better decision-making
methods are more likely to be successful than those with
lesser skills and worse methods. Yet we have not discussed
the importance of luck or circumstance to success. When a
corporation has five years of profits rising by 30 percent, is
it due to good management or because of expanding consumer demand or any number of other reasons? If a mutual
fund has seven years of annual returns of at least 15 percent, is the fund’s manager an investment genius or is she
lucky? If it is just luck, one should not expect the luck to
continue. The point is that you should not be seduced by a
firm’s, manager’s, or even your own string of successes and
immediately jump to the conclusion that the successes were
the result of managerial excellence. Instead, you should use
measurement tools taught in your finance, marketing, and
other courses to determine the real reasons for success.
Reductio ad Absurdum
Reductio ad absurdum
carries an argument to its logical end, without considering
whether it is an inevitable or probable result. This is often
called the slippery slope fallacy.
For example, if I want to convince someone not to eat
fast food, I might argue, “Eating fast food will cause you
to put on weight. Putting on weight will make you overweight. Soon you will weigh 400 pounds and die of heart
disease. Therefore, eating fast food leads to death. Don’t eat
fast food.” In other words, if you started eating fast food,
you are on a slippery slope and will not be able to stop until
you die. Although you can see that this argument makes
some sense, it is absurd for most people who eat fast food.
Scientist Carl Sagan noted that the slippery slope argument is used by both sides of the abortion debate. One side
says, “If we allow abortion in the first weeks of pregnancy,
it will be impossible to prevent the killing of a full-term
infant.” The other replies, “If the state prohibits abortion
even in the ninth month, it will soon be telling us what to
do with our bodies around the time of conception.”
Business executives face this argument frequently. Human
resource managers use it to justify not making exceptions to
rules, such as saying, “If we allow you time off to go to your
aunt’s funeral, we have to let anyone off any time they want.”
Well, no, that was not what you were asking for. Executives
who reason this way often are looking for administratively
simple rules that do not require them to make distinctions.
That is, they do not want to think hard or critically.
Pushing an argument to its limits is a useful exercise in
critical thinking, often helping us discover whether a claim
has validity. The fallacy is carrying the argument to its
extreme without recognizing and admitting that there are
many steps along the way that are more likely consequences.
Appeals to Tradition
Appeals to tradition infer
that because something has been done a certain way in the
past, it should be done the same way in the future. You
probably have heard people say, “I don’t know why we
do it, but we’ve always done it that way, and it’s always
worked, so we’ll continue to do it that way.” Although there
is some validity to continuing to do what has stood the
test of time, the reasons a business strategy has succeeded
in the past may be independent of the strategy itself. The
gambler’s fallacy would suggest that perhaps we have just
been lucky in the past. Also, changed circumstances may
justify departing from previous ways of doing business.
In November 2013, many retailers like Kmart, Walmart,
Sears, and The Gap were criticized for opening their retail
stores on Thanksgiving Day. Arguments against the openings were mostly appeals to tradition and to pity, that is, that
workers in the past have been and should in the future be able
to enjoy Thanksgiving Day with family instead of working.
The arguments were also non sequiturs because critics of
the openings continued to consume sports programming,
TV shows, electricity, heat, gasoline, and other services provided by employees working on Thanksgiving Day.
The Lure of the New
The opposite of an appeal
to tradition is the lure of the new, the idea that we should
do or buy something merely because it is “just released” or
“improved.” You see this common theme in advertising that
promotes “new and improved” Tide or iPhone 7. Experience
tells us that sometimes new products are better. But we can
also recount examples of new car models with defects and
new software with bugs that were fixed in a later version.
The lure of the new is also a common theme in management theories as some managers have raced to embrace
one new craze after another, depending on which is the
hottest fad, be it Strategic Planning, Total Quality Management, Reengineering the Corporation, or Customer
Relationship Management. The point here is the same.
Avoid being dazzled by claims of newness. Evaluations of
ideas should be based on substance.
Sunk Cost Fallacy
The sunk cost fallacy is an attempt to recover invested time, money, and other resources
by spending still more time, money, or other resources. It is
sometimes expressed as “throwing good money after bad.”
Stock market investors do this often. They invest $30,000
in the latest tech stock. When the investment declines to
$2,000, rather than evaluate whether it is better to withdraw
that $2,000 and invest it elsewhere, an investor who falls for
the sunk cost fallacy might say, “I can’t stop investing now,
otherwise what I’ve invested so far will be lost.” While the
latter part of the statement is true, the fallacy is in the first
part. Of the money already invested, $28,000 is lost whether
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or not the investor continues to invest. If the tech stock is
not a good investment at this time, the rational decision is to
withdraw the remaining $2,000 and not invest more money.
There are other statements that indicate business executives may fall victim to the sunk cost fallacy: “It’s too late
for us to change plans now.” Or “If we could go back to
square one, then we could make a different decision.” The
best way to spend the firm’s remaining labor and money
may be to continue a project. But that decision should be
unaffected by a consideration of the labor and money already expended. The proper question is this: What project will give the firm the best return on its investment of
money and other resources from this point forward? To
continue to invest in a hopeless project is irrational and
may be a pathetic attempt to delay having to face the consequences of a poor decision.
A decision maker acts irrationally when he attempts to
save face by throwing good money after bad. If you want
a real-world example of ego falling prey to the sunk cost
fallacy, consider that President Lyndon Johnson committed American soldiers to the Vietnam Conflict after he
had determined that America and South Vietnam could
never defeat the Viet Cong. By falling for the sunk cost
fallacy, the United States lost billions of dollars and tens
of thousands of soldiers in the pursuit of a hopeless cause.
LOG ON
Go to
www.fallacyfiles.org
Maintained by Gary Curtis, The Fallacy Files cover more
than 150 fallacies with links to explanations and valuable resources.
Go to
www.austhink.org/critical
Tim van Gelder’s Critical Thinking on the Web lists some of the best
websites with information about reasoning and critical thinking.
Common Characteristics
of Poor Decision Making
Most business managers during the course of their formal
education in school or informal education on the job have
learned most of the techniques we have discussed in this
chapter for making ethical and well-reasoned decisions.
Yet business managers continue to make unethical and
poor decisions, most often in disregard of the very principles that they otherwise view as essential to good decision
making. Each of us can also point to examples when we
have failed to analyze a situation properly before making a
decision, even though, at the time, we possessed the ability to make better decisions.
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Why do we and other well-intentioned people make
bad decisions? What is it that interferes with our ability to
use all the decision-making tools at our disposal, resulting
sometimes in unethical and even catastrophic decisions?
What causes a basically honest accountant to agree to
cook the books for his corporation? What causes a drug
company to continue to market a drug when internal tests
and user experience show a high incidence of harmful side
effects? What causes a corporation to continue to operate
a chemical plant when its safety systems have been shut
down? While business scholars and other writers have suggested several attributes that commonly interfere with good
decision making, we believe they can be distilled into three
essential traits that are useful to you, a decision maker who
has already learned the Guidelines for Ethical Decision
Making and the most common critical thinking errors.
Failing to Remember Goals
Friedrich Nietzsche
wrote, “Man’s most enduring stupidity is forgetting what he is
trying to do.” If, for example, our company’s goal as a retailer
is to garner a 30 percent market share in the retail market
in five years, you may think that would translate into being
dominant in each segment of our business, from housewares
to video games. But should our retailer strive to dominate a
market segment that is declining, such as portable cassette
players, when the consumer market has clearly moved to
smartphones and other digital recorders? If we focus on the
wrong goal—dominating the cassette player market, which
may not exist in five years—we have failed to remember our
goal of acquiring a 30 percent overall market share.
In another example, suppose we are a luxury homebuilder with two goals that go hand-in-hand: producing
high-quality housing and maintaining an annual 15 percent return on equity. The first goal supports the second
goal: by having a reputation for producing high quality
housing, we can charge more for our houses. Suppose,
however, one of our project managers is under pressure to
bring her development in line with cost projections. She
decides, therefore, to use lower-quality, lower-cost materials. The consequence is we meet our profit target in the
short run, but in the long run, when the shoddy materials
are detected and our reputation is sullied, both of our goals
of building high-quality housing and achieving a 15 percent return on equity will be compromised. Again, we have
failed to remember the most important goal, maintaining
high quality, which allowed us to achieve our ROE goal.
Overconfidence
The phenomenon known as
overconfidence bias leads us to be more confident than
we should be about the extent of our knowledge and our
problem-solving skills. To the extent that this “been there,
done that” mindset takes hold in a leader, her ability to
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learn helpful lessons from the experiences of others may be
compromised. In the realm of ethical decision making, the
leader who thinks she has mastered everything important
and has nothing more to learn may end up teaching those in
the organization unfortunate lessons and may unknowingly
influence the organization’s culture in an undesirable way.
While confidence is a personal trait essential to success, overoptimism is one of the most common reasons
for bad decisions. We all have heard ourselves and others
say, “Don’t worry. Everything will work out OK.” That
statement is likely a consequence of overconfidence, not
careful analysis that is necessary to make sure everything
will work out as we hope.
There are several corollaries or other ways to express
this overoptimism. Sometimes, business executives will do
something that they know to be wrong with the belief that
it is only a small or temporary wrong that will be fixed next
year. They may rationalize that no one will notice the wrongdoing and that only big companies and big executives get
caught, not small companies and little managers like them.
Many major accounting scandals started small, rationalized as temporary attempts to cook the books that would
be corrected in the following years when business turned
around. As we now know, finance managers and accountants who thought things would turn around were being
overconfident about the economy and their companies.
Another aspect of overconfidence is confirmation bias;
that is, we must be doing things the right way because all
has gone well in the past. Or at least we have not been
caught doing something wrong in the past, so we will not
be caught in the future. In part, this reveals a thinking error
we have studied: appeal to tradition. In the earlier homebuilder example, the project manager’s cutting quality in
years past may not have been detected by homeowners who
knew nothing about construction quality. And none of the
project manager’s workers may have told top management
about the project manager’s actions. That past, however,
does not guarantee the future. New homeowners may be
more knowledgeable, and future workers may inform management of the project manager’s quality-cutting actions.
If we are not careful, confirmation bias can also cause us
to see what we want to see in a given situation and to engage
in subconscious favorable spinning of potentially relevant
facts even if those facts might fairly be treated as pointing
in the other direction. Confirmation bias can cause us to
miss the real lessons from an example that we think we are
viewing objectively. To guard against the negative effects
of confirmation bias and to learn as much as we can from
an example or situation, we need to seek out and pay attention to possible disconfirming evidence: evidence indicating that our preferred position or view may not be correct.
Another consequence of overoptimism is believing that
complex problems have simple solutions. That leads to the
next common trait of bad decision making.
Complexity of the Issues Closely aligned to
and aggravated by overconfidence is the failure of decision makers to understand the complexity of an issue. A
manager may perceive that the facts are simpler than reality and, therefore, not see that there is little margin for
error. Consequently, the executive has not considered the
full range of possible solutions and has failed to find the
one solution that best matches the facts.
Restated, the decision maker has not done all the investigation and thinking required by the Guidelines for
Ethical Decision Making and, therefore, has not discovered all the facts and considered all the reasonable courses
of action necessary to making a prudent decision.
The impediments to knowing all the facts, understanding the complexity of a problem, and doing the hard work
to create and evaluate all possible solutions to a problem
are known to all of us. Fatigue, laziness, overconfidence,
and forgetting goals play roles in promoting ignorance of
critical facts. We may also want to be team players, by following the lead of a colleague or the order of a boss. These
human tendencies deter us from making the effort to find
the facts and to consider all options.
Resisting Requests
to Act Unethically
Even if we follow the Guidelines for Ethical Decision
Making and avoid the pitfalls of fallacious reasoning, not
everyone is a CEO or his own boss and able to make decisions that others are expected to follow. Sure, if you control
a firm, you will do the right thing. But the reality is that for
most people in the business world, other people make many
decisions that you are asked to carry out. What do you do
when asked to do something unethical? How can you resist
a boss’s request to act unethically? What could employees
at WorldCom have done when its CFO instructed them to
falsify the firm’s books or mortgage brokers when their
bosses asked them to falsify borrowers’ incomes?
LO4-4
Utilize a process to make ethical decisions in the face
of pressure from others.
Recognizing Unethical Requests and
Bosses A person must recognize whether he has been
asked to do something unethical. While this sounds simple
considering we have spent most of this chapter helping you
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Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
make just that kind of decision, there are structural problems that interfere with your ability to perform an ethical
analysis when a boss or colleague asks you to do something. Many of us are inclined to be team players and “do
as we are told” by a superior. Therefore, it is important to
recognize any tendency to accept appeals to authority and
to resist the temptation to follow orders blindly. We do not
want to be like the Enron accounting employee who returned to his alma mater and was asked by a student, “What
do you do at Enron?” When considering that question, a
question he never posed to himself, he realized that his only
job was to remove liabilities from Enron’s balance sheet.
For most bosses’ orders, such an analysis will be unnecessary. Most of the time, a boss is herself ethical and
will not ask us to do something wrong. But there are exceptions that require us to be on the lookout. Moreover,
some bosses have questionable integrity, and they are
more likely to give us unethical orders. Therefore, it will
be helpful if we can identify bosses who have shaky ethics, for whom we should put up our ethical antennae when
they come to us with a task.
Business ethicists have attempted to identify executives
with questionable integrity by their actions. Ethical bosses
have the ability to “tell it like it is,” while those with less
integrity say one thing and do another. Ethical bosses have
the ability to acknowledge that they have failed, whereas
those with low integrity often insist on being right all the
time. Ethical bosses try to build a consensus before making
an important decision; unethical bosses may generate support for their decisions with intimidation through anger and
threats. Ethical bosses can think about the needs of others
beside themselves. Bosses with low integrity who misuse
their workers by asking them to act unethically often mistreat other people also, like secretaries and servers.
If we pay attention to these details, we will be better
able to consider the “source” when we are asked to do
something by a boss and, therefore, more sensitive to the
need to scrutinize the ethics of a boss’s request.
Buying Time If we think a requested action is or
might be unethical, what is done next? How can we refuse
to do something a boss has ordered us to do? One key is to
buy some time before you have to execute the boss’s order.
Buying time allows you to find more facts, understand an
act’s impact on the firm’s stakeholders, and evaluate the
ethics of the action. It also lets you find other alternatives
that achieve the boss’s objectives without compromising
your values. Delay also gives you time to speak with the
firm’s ethics officer and other confidants.
How do you buy time? If the request is in an e-mail,
you might delay responding to it. Or you could answer that
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you have received the e-mail and will give your attention
to it when you finish with the task you are working on.
Similar tactics can be used with phone calls and other direct orders. Even a few hours can help your decision. Depending on the order and your ability to stack delay on top
of delay, you may be able to give yourself days or weeks
to find a solution to your dilemma.
The most important reason for buying time is it allows
you to seek advice and assistance from other people, especially those in the firm. That brings us to the next tactic
for dealing with unethical requests.
Find a Mentor and a Peer Support Group
Having a support system is one of the most important keys
to survival in any organization, and it is best to put a system in place when you start working at the firm. Your support system can improve and help defend your decisions.
It can also give you access to executives who hold the
power to overrule your boss. Your support system should
include a mentor and a network of other employees with
circumstances similar to your own.
A mentor who is well established, well respected, and
highly placed in the firm will help you negotiate the pitfalls that destroy employees who are ignorant of a firm’s
culture. A mentor can be a sounding board for your decisions; she can provide information on those who can be
expected to help you and those who could hurt you; she
can advise you of the procedures you should follow to
avoid antagonizing potential allies. A mentor can also defend you and provide protection when you oppose a boss’s
decision. Many firms have a mentorship program, but if
not or if your assigned mentor is deficient, you should
find an appropriate mentor soon after you join the firm.
Be sure to keep her updated regularly on what you are
doing. By letting a mentor know that you care to keep her
informed, she becomes invested in you and your career.
You should also build a community of your peers by creating a network of other workers who share your values and
interests. You may want to find others who joined the firm
at about the same time you did, who are about the same
age, who share your passion for the firm’s products and
services, and who have strong ethical values. To cement
the relationship, your peer support group should meet regularly, such as twice a week at work during 15-minute coffee
breaks. This group can give you advice, help with difficult
decisions, and unite to back up your ethical decisions.
Find Win–Win Solutions
As we learned from
the Guidelines for Ethical Decision Making, many times
there are more than the two options of doing and not doing
something. There are a number of choices in between those
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Part One Foundations of American Law
extremes, and the best solution may be one unconnected
to them. For example, suppose your boss has ordered you
to fire someone who works under you. The worker’s productivity may be lagging, and perhaps he has made a few
costly mistakes. Yet you think it would be wrong to fire
the worker at this time. What do you do?
Find a win–win solution—that is, a compromise that
works for you and your boss. First, discover your boss’s
wants. Probably you will find that your boss wants an employee who makes no or few mistakes and has a certain
level of productivity. Next determine what is needed for the
affected employee to reach that level. If you find the employee is having emotional problems that interfere with his
work, are they temporary or can we help him handle them?
Can we make him more productive by giving him more
training? Is the employee unmotivated or is he unaware
that he lags behind other workers? Should we give him a
warning and place him on probationary status for a month,
releasing him if there is no satisfactory improvement?
These alternatives may address your boss’s concerns about
the employee without compromising your ethical values.
In other contexts, you may need to approach your boss
directly and show that her order is not right for the firm.
Using the Guidelines for Ethical Decision Making and
valid arguments, you may be able to persuade your boss
to accept your perspective and avoid an otherwise unethical decision. Finding a win–win solution is possible only
when there is room for compromise. The Ethical Guidelines and logical arguments are effective when your boss
respects reason and wants to act ethically. However, when
you face an intractable executive demanding you do something illegal, a different response is needed.
Work within the Firm to Stop the Unethical
Act Suppose you receive an order from an executive you
know or suspect to be corrupt. For example, a CFO is motivated to increase the price of the firm’s stock in order to
make her stock options more valuable. She orders you to
book in the current year revenue that, in fact, will not be
received for at least two years, if ever. Booking that revenue
would be fraudulent, unethical, and illegal. You are convinced the CFO knows of the illegality and will find someone else to book the revenue if you refuse. You probably
will lose your job if you do not cooperate. What do you do?
This is when your mentor, peer support group, and corporate ethics officer can help you. Your mentor may have
access to the CEO or audit committee, who if honest, should
back you and fire the CFO. Your peer support group might
Concept Review
Resisting Requests to Do Unethical Acts
Buy
Time
Have a
Mentor
Recognize
Unethical
Requests
Find
Win–Win
Solutions
Create
a Peer
Support
Group
YOU
Work within
the Firm to
Stop Unethical
Acts
Consult
the Firm's
Ethics
Officer
Be Willing
to Lose
Your Job
Chapter Four
Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
have similar access. The corporate ethics officer, especially
if she is a lawyer in the firm’s legal department, can also
provide her backing and that of the legal department.
There is one large caveat, however. While the situation
just described should and probably will result in your support system rallying to your support, in other situations
that are ethically ambiguous, you, your mentor, and your
support group may find that fighting a battle against a top
corporate executive ineffectively expends your and your
colleagues’ political capital. In other words, you need to
pick your battles carefully lest you and your colleagues at
the firm be labeled whiners and troublemakers who unnecessarily seek intervention from higher-level corporate
executives. This is why we have listed this alternative near
the end of our discussion. In most situations, it is better to
rely on your colleagues as advisors and to execute win–
win solutions in cooperation with your boss.
But if neither compromise nor other intrafirm tactics protect you from unethical requests, you are left with a final tactic.
Prepare to Lose Your Job This is the last tactic,
because by quitting or losing your job, you are deprived of
your ability to help the firm make ethical decisions. Only
as an employee can you craft win–win solutions or work
within the firm to do the right thing.
But if a firm’s executives and its internal governance are
so corrupted that neither compromise nor reason can steer
the firm away from an unethical and illegal course, you
must be willing to walk away from your job or be fired for
standing up for your values. Do not want your job and the
status it brings so much that you are willing to compromise
more important values. It is tough losing a job when one
has obligations to family, banks, and other creditors as well
as aspirations for a better life. But if you prepare yourself
financially from day one, putting away money for an ethical rainy day, you will protect more important values.
Leading Ethically
The examples set by an organization’s leaders have a profound effect on the culture of an organization. If the examples are good, a healthy culture can result. But if the
examples reflect little seriousness about ethics, a cornercutting culture may follow.
Someday, perhaps today, you will be in charge of other
people in your business organization. You may be managing a four-person team, you may be a vice president of marketing in charge of a department, or you may eventually be
a CEO directing an entire company. You give the people
under your charge tasks to complete, supervise their work,
help them complete the tasks, and provide motivation and
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feedback to ensure that the current job will be done well
and that future work will be done better. So how do you
also ensure that all those people under your charge act
ethically? This is the daily challenge of ethical business
leaders, who must not only act ethically themselves, but
also promote ethical behavior of their workers.
Be Ethical
LO4-5 Be an ethical leader.
No one can lead ethically who does not attempt—and
mostly succeed—in behaving ethically in her business and
personal life. Few underlings respect an unethical leader,
and many will be tempted to rationalize their own unethical conduct when they see their leaders acting unethically.
They fall prey to the bandwagon fallacy, arguing, for example, that because the CFO is doing something wrong,
so may they. For the same reason, ethical behavior by
good managers encourages ethical behavior by underlings,
who often view their bosses as role models and guides for
advancing in the corporation. If they see an ethical boss
moving up in the business, they will believe that the system is fair and that they, too, by acting ethically, can advance at the firm. As Harvard business ethics professor
Lynn Sharp Paine has noted, “Managers who fail to provide leadership and to institute systems that facilitate ethical conduct share responsibility with those who conceive,
execute, and knowingly benefit from corporate misdeeds.”
Communicate the Firm’s Core Ethical
Values For CEOs, creating, communicating, and em-
phasizing the firm’s core values are essential to creating
an ethical environment that rubs off on all employees. For
other managers, recommunicating and reemphasizing the
firm’s value are also important.
All public companies today have ethics codes, as do
many smaller companies. Yet the CEO who leads ethically must continually emphasize in written messages and
speeches the importance and necessity that everyone comply with the code. Other top-level managers, such as the
vice president of finance, should ensure that their staffs
understand the ethics code’s application to their corporate tasks and make ethical reviews part of the staffs’ annual evaluations. A lower-level manager who supervises
a small staff for a single project should also do his part
to encourage compliance with the ethics code by pointing
out how the code relates to the project assignment and including ethics in the project team’s progress reports.
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Part One Foundations of American Law
Connect Ethical Behavior with the Firm’s
and Workers’ Best Interests It is one thing
to educate your staff about ethical behavior and another
to obtain compliance. One good way to increase compliance with the firm’s core ethical values is to convince the
staff that their best interests—and the firm’s—are met
by acting ethically. Management should help employees understand that the firm’s profitability and the employee’s advancement in the firm are optimized by each
employee taking responsibility for acting ethically. Staff
must understand that adverse publicity caused by unethical conduct harms a firm’s ability to promote itself and its
products and services. The ethical manager also clearly
establishes ethical behavior as a prerequisite for salary increases and promotions, or at least that unethical behavior
is a disqualifier.
Reinforce Ethical Behavior
When a manager
knows a staff member has acted ethically in a situation in
which employees in less ethical firms would be tempted
to act unethically, the manager should congratulate and
find other ways to reinforce the staff member’s behavior.
For example, if a staff member reports that a supplier has
attempted to bribe him in order to do business with the
firm, the ethical manager will praise the staff member
and may include a letter commending him in his employment file.
In addition, management should set up a mechanism for
its employees to report instances of unethical behavior by
the staff. While some employees will view whistle-blowing
as an act of disloyalty, management should recharacterize
whistleblowing as necessary to the protection of the firm’s
decision-making processes and reputation. Undetected
ethical decisions often lead to poor decisions and harm
corporate profits. While management does not want witch
hunts, good managers must garner evidence of alleged
Problems and Problem Cases
1. You are a middle manager with responsibility over a
staff of 16 workers. One of your workers is six months
pregnant. Over the last month, she has missed work
an average of two days a week and seems to be frequently distracted at work. You are concerned about
her welfare and about her work performance, but are
unsure what to do. What do the Guidelines for Ethical
Decision Making suggest you do first?
2. You are an outside director of Crowler Inc., a manufacturer of kitchen and bathroom fixtures such as faucets,
shower heads, and shower doors. Crowler has 29,000
employees worldwide, including 18,000 manufacturing
unethical behavior so they may investigate and stop conduct that is harmful to the firm.
A necessary corollary is not reinforcing unethical behavior, including behavior that may lead to an unethical
act or foster an environment that appears tolerant of ethical
missteps. It is usually not acceptable to ignore bad behavior. The ethical leader must reprimand staff for unethical
actions and must not tolerate statements that suggest the
firm should engage in unethical conduct. For example, if
during discussions about how to increase revenue for a
product line, one staff member suggests obtaining competitors’ agreements to fix prices, a manager running the
meeting should make clear that the firm will not engage in
that or any other conduct that is illegal. To let the pricefixing comment pass without comment may send the
message that the manager and the firm condone illegal or
unethical acts.
Additionally, managers should work to create a culture
in which employees feel a sense of “ownership” in the organization. Employees who invest themselves in the organization are more likely to be employees with both a greater
sense of satisfaction and higher commitment to the overall
mission of the firm. Consider the difference between how
most people treat an owned car versus a rental car. No one
changes the oil, rotates the tires, or washes and waxes a
rental car. A rental car serves a short-term, instrumental
purpose and carries with it no long-term commitment or
investment. Ownership of a vehicle, on the other hand, is
accompanied by routine maintenance and proactive attention to any unusual sounds or dashboard indicators. Leaders
who can inspire an ownership mentality among their employees are less likely to confront employees content to perform at the bare minimum level or tempted to cut corners.
Collectively, these reinforcing mechanisms should create a culture in which ethical practices define the firm and
its employees rather than being imposed on them.
employees in the United States, Canada, and Mexico. Its
headquarters is in Eden Prairie, Minnesota. The CEO
has proposed that Crowler increase its manufacturing capacity by adding a large facility to manufacture kitchen
faucets, thereby increasing manufacturing employment
by 3,000 workers. The board of directors is considering whether Crowler should expand its manufacturing
facility in Brownsville, Texas; open a new factory in Indonesia; or close the Brownsville facility and move its
current operations and the new operations to Indonesia.
Using the Guidelines for Ethical Decision Making, what
do you want to know before you make a decision?
3. You are a debt collections officer for a credit card issuer, NationalOne Corporation. NationalOne generates
Chapter Four
Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
145
73 percent of its profits from credit card fees and interest charged to consumers with annual incomes between
$15,000 and $125,000. NationalOne’s business model
is to charge its credit card customers a low initial interest
rate of 10 percent and a nominal annual fee of $10. If a
customer defaults on one payment, however, the interest
rate jumps to 22 percent, and the annual fee to $100. In
the course of collecting debts for NationalOne, you have
noticed that once the typical customer defaults, she is
able to pay about 50 percent of the original debt had the
interest rate and annual fee not changed. NationalOne’s
policy is not to accept anything less than 100 percent
of the amount of the debt until the debtor has been in
default for at least two years, by which time you find the
customers typically can pay only about 10 percent of the
now much larger debt. Many customers threaten to file
and do file for bankruptcy protection. Would a rights
theorist suggest any changes in NationalOne’s policies?
Would a profit maximizer suggest changes?
5. Marigold Dairy Corporation sells milk products, including powdered milk formula for infants. Marigold
hopes to increase sales of its powdered milk formula
in Liberia and other African nations where mothers
are often malnourished due to drought and civil war.
Marigold’s marketing department has created a marketing plan to convince mothers and expectant mothers not
to breastfeed their babies and to, instead, use Marigold
formula. Doctors generally favor breastfeeding as beneficial to mothers (it helps the uterus return to normal
size), to babies (it is nutritious and strengthens the bonds
between the infant and the mother), and to families (it
is inexpensive). Marigold’s marketing plan stresses the
good nutrition of its formula and the convenience to
parents of using it, including not having to breastfeed.
You are the senior vice president of marketing for
Marigold. Do you approve this marketing plan? What
would a rights theorist do? What would a utilitarian
do? What would a profit maximizer do?
4. When is it appropriate to give a job applicant, employee,
associate, colleague, or partner a second chance? Consider the following situations:
6. During World War II, the insecticide DDT was used
successfully to halt a typhus epidemic spread by lice and
to control mosquitoes and flies. After World War II, it
was used extensively to control agricultural and household pests. Today, DDT may not be used legally in the
United States and most other countries. Although DDT
has a rather low immediate toxicity to humans and other
vertebrates, it becomes concentrated in fatty tissues of
the body. In addition, it degrades slowly, remaining
toxic in the soil for years after its application. But there
has never been any credible evidence that this residue
has caused any harm. Even so, DDT has been blamed
for the near extinction of bald eagles, whose population
has increased greatly since DDT was banned, although
evidence tends to point to oil, lead, mercury, stress from
noise, and other factors as the likely causes.
In 2013, more than 2,469 people in the United States
were infected by and 119 people killed after contracting
West Nile virus, which is carried to humans by mosquitoes. CDC director Julie Gerberding called West
Nile virus an “emerging, infectious disease epidemic”
that could be spread all the way to the Pacific Coast
by birds and mosquitoes. Pesticides such as malathion,
resmethrin, and sumithrin can be effective in killing
mosquitoes but are significantly limited because they
do not stay in the environment after spraying. In Mozambique, indoor spraying of DDT has caused malaria
rates to drop 88 percent among children.
As an executive for Eartho Chemical Company, you
have been asked by Eartho’s CEO to study whether
Eartho should resume the manufacture of DDT. What
would a utilitarian decide? What would a profit maximizer do?
a. A manager is very effective in getting maximum efforts and results from her staff. However, the staff
complains about suffering continual verbal abuse
from the manager, including receiving belittling
comments both privately and in public. Should her
employer fire the manager or seek to rehabilitate her?
b. An employee is a recovering cocaine addict. Since
successfully completing rehabilitation, he has received a college degree and been drug-free for
three years. Would you hire him?
c. Donald Sterling, co-owner of the Los Angeles
Clippers, a team in the National Basketball Association, made racist remarks in a private conversation that was recorded secretly by his girlfriend.
Should the other NBA owners have attempted to
oust him from team ownership?
d. Jerry Sandusky, a coach for the Penn State football
program, was observed engaging in same-sex relations with a youth attending his program for underprivileged youths. In 2012, he was convicted of 52
counts of sexual abuse of young boys over a 15-year
period. Should Penn State have fired him as a coach
when it had first notice of one instance of abuse, or
should it have attempted to rehabilitate him? After
the full extent of his crimes have become known,
would it be appropriate for Penn State or any other
employer to hire him for a position in which he has
contact with young boys? Are there jobs for which
you would hire him? Why or why not?
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Part One Foundations of American Law
7. This American Life is a American Public Media radio
program conceived, produced, written, and performed
by Ira Glass. In 2012, Episode 454, “Mr. Daisey and the
Apple Factory,” chronicled the investigation of Apple’s
Foxconn factory in China by author and monologist
Mike Daisey. The episode ran portions of Daisey’s
monologue that detailed Apple’s exploitation of Chinese
workers. The episode was the most downloaded episode
in the show’s history. Less than two months later, Ira
Glass and his staff discovered that Daisey had fabricated
the claim that the plant guards had guns and exaggerated the number of underage workers with whom he
met. Daisey also falsely represented that a man with a
mangled hand was injured at Foxconn making iPads and
that Daisey’s iPad was the first one the man ever saw in
operation. What did Ira Glass do with the new information? What would you have done?
8. Jordan Belfort founded Stratton Oakmont, a brokerage
firm that focused on selling very risky penny stocks—
stocks selling at very low prices—to investors. Belfort
encouraged his brokers to use high-pressure tactics to
sell the stocks. Belfort paid his brokers handsomely, with
commissions reaching 25 percent of the purchase price.
As a result, many Stratton Oakmont brokers were able
to improve their lives and support their families. Many
of the stocks peddled by the brokers were investments in
small companies with little chance of becoming profitable. Some of the investors were pressured into buying
more stock than they should have purchased, considering
their levels of wealth and other security holdings. The investors could have insisted on receiving more information
about the stocks before purchasing them. However, the
investors’ desires to make a large, quick profit deterred
them from taking steps to protect themselves. Assess the
ethical behavior of both the brokers and the investors.
9. In 2007, NFL commissioner Roger Goodell determined that the New England Patriots and its head
coach, Bill Belichick, had violated NFL rules by videotaping opposing teams’ sideline signals during games.
Goodell docked the Patriots a 2008 first-round draft
pick, and he fined Belichick $500,000 and the team
$250,000. In 2008, Goodell interviewed the Patriots’
employee who had done the videotaping and concluded
that the employee’s information was consistent with the
behavior for which the Patriots and Belichick had been
disciplined in 2007. Therefore, Goodell termed the
matter over and said it was not necessary to discipline
further the Patriots or Belichick. Immediately thereafter, Arlen Specter, a U.S. senator from Pennsylvania,
called the NFL investigation “neither objective nor adequate.” Specter stated, “If the commissioner doesn’t
move for an independent investigation, . . . depending
on the public reaction, I may ask the Senate Judiciary
Committee to hold hearings on the NFL antitrust exemption.” Specter further stated that Goodell has made
“ridiculous” assertions that wouldn’t fly “in kindergarten.” The senator said Goodell was caught in an “apparent conflict of interest” because the NFL doesn’t want
the public to lose confidence in the league’s integrity.
Terming the videotaping of opposing teams’ signals
a form of cheating equivalent to steroid use, Specter
called for an independent investigation similar to the
2007 Mitchell Report on performance-enhancing drugs
in baseball.
Can you identify the fallacies in Senator Specter’s
arguments?
10. You are hired as a corporate accountant for Ryco Industries, a public company with shares traded on the New
York Stock Exchange. The company has enjoyed consistently higher earnings each quarter, meeting or exceeding
the expectations of Wall Street analysts every quarter for
the past seven years. Soon after being hired, you discover
a “reserve” account in the accounting records. Your inquiry shows that the account is designed to accumulate
earnings deficiencies or excesses, that is, to permit Ryco
to adjust its earnings each quarter such that earnings not
increase too little or too much. You bring your findings
to the attention of Ryco’s chief accounting officer, who
tells you that the account merely allows Ryco to smooth
or manage its earnings, something that Wall Street analysts want to see. If earnings fluctuated, she explains,
analysts would make less optimistic estimates about the
prospects of Ryco, and its stock price would take a hit.
The CAO tells you, “Look, we’re just doing this to avoid
getting hammered in the stock market. Every company
does this. And we’re not making up earnings. When actual earnings are too high, we just withhold recognizing
some of those earnings until we need them in the future.
When actual earnings are too low, we know we’ll have
better quarters in the future from which we can borrow
earnings now. It all evens out.”
Can you identify the critical thinking errors and
the characteristics of poor decision making that the
CAO is exhibiting? Create a plan that will help you
resist the CAO’s request for you to continue to manage earnings as Ryco has done in the past.
11. You have been a director of sales at Privation Insurance
Company for the last five years. Next week, you will
be promoted to the position of vice president of sales,
leading a staff of 35 sales professionals. Your immediate superior is the senior vice president of marketing
and sales. What plan do you adopt for ethically leading your 35-person staff in your new position? List five
things you’ll do to lead your staff ethically.
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CHAPTER 5
CRIMINAL LAW AND PROCEDURE
N
icolai Caymen worked as a desk clerk at a hotel in Ketchikan, Alaska. After a woman called a Ketchikan
business supply store and complained that the store had charged her credit card for a laptop computer she
did not purchase, the store discovered that Caymen had used a credit card in placing a telephone order for
the laptop and that when he picked up the computer, the store clerk had not asked for identification. Store personnel
then contacted the Ketchikan police department to report the incident and to pass along information, acquired from
other stores, indicating that Caymen may have attempted similar credit card trickery elsewhere.
In order to look for the laptop and other evidence of credit card fraud, the police obtained a search warrant for
the house where Caymen rented a room. Caymen, who was present while his room was searched, denied the allegation that he had used someone else’s credit card to acquire the laptop. Instead, he stated that he had bought it with
his own credit card. During the search, the police found the laptop and a tower computer. It was later determined that
Caymen had rented the tower computer from a store but had never made any of the required payments. In Caymen’s
wallet, which the police examined in connection with the search of his room, the officers found receipts containing
the names and credit card information of guests who had stayed at the hotel where Caymen was employed.
The police seized the laptop and contacted the store where Caymen had acquired it to ask whether officers
could examine the laptop’s hard drive before they returned the computer to the store. The store’s owner consented. In examining the laptop’s hard drive for evidence of credit card fraud, the police found evidence indicating Caymen’s probable commission of federal crimes unrelated to credit card fraud. The police then temporarily
suspended their search of the hard drive and obtained another search warrant because they had probable cause to
believe that Caymen had committed federal offenses. Under that search warrant, officers checked the hard drives
and storage media from the laptop and tower computers and found further evidence pertaining to the federal crimes.
Caymen was prosecuted in state court for credit card fraud and was indicted in federal court for the separate
federal offenses. In the federal proceeding, he asked the court to suppress (i.e., rule inadmissible) the evidence obtained by the police in their examinations of the hard drives of the laptop and tower computers. Caymen based his
suppression request on this multipart theory: that the police had no valid warrant for their initial look at the laptop’s
hard drive; that in the absence of a valid warrant, his consent (rather than the store owner’s) was needed to justify
a search of the laptop’s hard drive; that the evidence obtained during the initial examination of the laptop’s hard
drive was the result of an unconstitutional search and was therefore inadmissible; and that the evidence obtained
in the later examinations of the hard drives of the laptop and tower computers amounted to inadmissible “fruit of
the poisonous tree.”
As you read Chapter 5, consider these questions:
∙∙ On what constitutional provision was Caymen basing his challenge to the validity of the searches conducted by
the police?
∙∙ Must law enforcement officers always have a warrant before they conduct a search, or are warrantless searches
sometimes permissible? If warrantless searches are sometimes permissible, when?
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Part Two Crimes and Torts
∙∙ What is the usual remedy when law enforcement officers conduct an unconstitutional search?
∙∙ Did Caymen succeed with his challenge to the validity of the searches conducted by the police? Why or why not?
∙∙ What if a guilty person goes free as a result of a court’s ruling that he was subjected to an unconstitutional
search by law enforcement officers? From an ethical perspective, how would utilitarians view that outcome?
What about rights theorists?
LO
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
5-1
5-2
5-3
5-4
5-5
5-6
Describe the difference between a felony and a
misdemeanor.
Explain why the First Amendment may
sometimes serve as a defense to criminal liability.
Identify the constitutional provisions at issue
when a criminal law is challenged as being
excessively vague.
Identify the standard of proof that the
government must meet in a criminal
prosecution, as well as the constitutional sources
of that requirement.
Identify the major steps in a criminal prosecution.
Describe the basic protections afforded by the
Fourth, Fifth, and Sixth Amendments.
THE LIST FEATURES FAMILIAR corporate names:
Enron, Arthur Andersen, WorldCom, Adelphia, ImClone,
Global Crossing, and Tyco. Individuals such as Bernard
Ebbers, John and Timothy Rigas, and Dennis Kozlowski
also make the list. Don’t forget about Bernie Madoff.
These names sometimes dominated the business headlines
during recent years, but not for reasons any corporation
or executive would find desirable. Instead, they acquired
the notoriety associated with widely publicized financial
scandals, related civil litigation, and criminal prosecutions
that were actually pursued by the government, seriously
contemplated by prosecutors, or argued for by the public
and political figures of varying stripes.
For instance, former WorldCom CEO Ebbers was
sentenced to 25 years in prison for his role in an $11 billion accounting and securities fraud. The Rigases were
sentenced to substantial prison terms because of their involvement in bank and securities fraud while serving as
high-level executives at Adelphia. Kozlowski, convicted
of financial wrongdoing in connection with his former
Describe major exceptions to the Fourth
Amendment’s usual preference that the
government have a warrant before conducting a
search.
5-8 Explain what the exclusionary rule is.
5-9 List the components of the Miranda warnings
and state when law enforcement officers must
give those warnings.
5-10 Identify the elements that the government must
prove in a criminal RICO case and that a private
plaintiff must prove in a civil RICO case.
5-11 Describe the major elements that must be
proven in order to establish a violation of the
Computer Fraud and Abuse Act.
5-7
position as Tyco’s CEO, also faced incarceration. Madoff
received a lengthy prison sentence and extensive public
scorn after being convicted of crimes associated with the
Ponzi scheme through which he defrauded investors.
Criminal convictions because of financial shenanigans
led to the above-mentioned notoriety of certain individuals and the corporations with which they were affiliated,
but other sorts of business-related activity may also result
in criminal charges. In 2012, for instance, the oil company
BP pleaded guilty to offenses connected with the Deepwater Horizon oil-drilling disaster that occurred off the
Gulf Coast and caused the deaths of 11 persons as well as
extensive environmental damage. A criminal fine of approximately $1.3 billion was imposed on BP, along with
even more in civil penalties.
In 2014, Toyota and the federal government entered into
a deferred prosecution agreement that headed off criminal charges against the automaker for allegedly concealing material information from federal regulators about
component parts that may have caused certain vehicles to
Chapter Five Criminal Law and Procedure
accelerate suddenly and excessively, with serious accidents
sometimes then occurring. Under the deferred prosecution
agreement, Toyota became obligated to pay $1.2 billion.
During recent years, the U.S. Justice Department considered whether to file criminal charges against General
Motors for allegedly misleading federal regulators, or allegedly failing to make adequate required disclosures to them,
regarding an ignition switch problem that led to crashes in
which persons were injured or killed. Volkswagen pleaded
guilty in 2017 to criminal charges in connection with its
employees’ scheme to install devices in Volkswagen vehicles so that the cars would receive false and deceptively
positive results on government-required emissions tests.
The BP, Toyota, GM, and Volkswagen sagas also featured
civil consequences because of regulatory penalties and
lawsuits, but there seems little doubt that criminal charges
or the possibility of them weighed especially heavily on
the minds of those companies’ executives and employees.
In an earlier edition of this text, the first paragraph of
Chapter 5 noted the importance of studying criminal law as
part of a business manager’s education but conceded that
“[w]hen one lists legal topics relevant to business, criminal law comes to mind less readily than contracts, torts,
agency, corporations, and various other subjects dealt with
in this text.” That statement, of course, was written approximately 25 years ago. Given the media, public, and
governmental attention devoted to recent corporate scandals, it might be argued that criminal law now comes to
mind more readily than certain other subjects on the list of
legal topics relevant to business. At the very least, recent
events involving high-profile firms and executives have
demonstrated that business managers create considerable
risk for themselves and their firms if they ignore the criminal law or lack a working understanding of it.
Role of the Criminal Law
This century has witnessed society’s increasing tendency
to use the criminal law as a major device for controlling
corporate behavior. Many regulatory statutes establish criminal and civil penalties for statutory violations. The criminal penalties often apply to individual employees as well
as to their employers.
Advocates of using the criminal law in this way typically
argue that doing so achieves a deterrence level superior to
that produced by damage awards and other civil remedies.
Corporations may be inclined to treat damage awards as
simply a business cost and to violate regulatory provisions
when doing so makes economic sense. Criminal prosecutions, however, threaten corporations with the reputationharming effect of a criminal conviction. In some cases, the
151
criminal law allows society to penalize wrongdoing employees who would not be directly affected by a civil judgment
against their employer. Moreover, by alerting private parties
to a violation that could also give rise to a civil lawsuit for
damages, criminal prosecutions may increase the likelihood
that a corporation will bear the full costs of its actions.
Our examination of the criminal law’s role in today’s
business environment begins with consideration of the nature and essential components of the criminal law. Next, the
chapter discusses procedural issues in criminal prosecutions
and explains constitutional issues that may arise in such
cases. The chapter then explores various problems encountered in applying the criminal law to the corporate setting.
Nature of Crimes
LO5-1
Describe the difference between a felony and a
misdemeanor.
Crimes are public wrongs—acts prohibited by the state
or federal government. Criminal prosecutions are initiated by a prosecutor (an elected or appointed government
employee) in the name of the state or the United States,
whichever is appropriate. Persons convicted of crimes
bear the stigma of a criminal conviction and face the punitive force of the criminal sanction.
Our legal system also contemplates noncriminal consequences for violations of legal duties. The next two
chapters deal with torts, private wrongs for which the
wrongdoer must pay money damages to compensate the
harmed victim. In some tort cases, the court may also assess punitive damages in order to punish the wrongdoer.
Only the criminal sanction, however, combines the threat
to life or liberty with the stigma of conviction.
Crimes are typically classified as felonies or misdemeanors. A felony is a serious crime such as murder, sexual
assault, arson, drug-dealing, or a theft or fraud offense of
sufficient magnitude. Most felonies involve significant
moral culpability on the offender’s part. Felonies are punishable by lengthy confinement of the convicted offender to
a penitentiary, as well as by a fine. A person convicted of
a felony may experience other adverse consequences, such
as disenfranchisement (loss of voting rights) and disqualification from the practice of certain professions (e.g., law
or medicine). A misdemeanor is a lesser offense such as
disorderly conduct or battery resulting in minor physical
harm to the victim. Misdemeanor offenses usually involve
less—sometimes much less—moral culpability than felony
offenses. As such, misdemeanors are punishable by lesser
fines and/or limited confinement in jail. Depending on their
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Part Two Crimes and Torts
seriousness and potential for harm to the public, traffic violations are classified either as misdemeanors or as less serious
infractions. Really only quasi-criminal, infractions usually
are punishable by fines but not by confinement in jail.
Purpose of the Criminal Sanction
Disagreements about when the criminal sanction should be employed
sometimes stem from a dispute over its purpose. Persons accepting the utilitarian view believe that prevention of socially undesirable behavior is the only proper purpose of
criminal penalties. This prevention goal includes three major
components: deterrence, rehabilitation, and incapacitation.
Deterrence theorists maintain that the threat or imposition of punishment deters the commission of crimes
in two ways. The first, special deterrence, occurs when
punishment of an offender deters him from committing
further crimes. The second, general deterrence, results
when punishment of a wrongdoer deters other persons
from committing similar offenses. Factors influencing the
probable effectiveness of deterrence include the respective
likelihoods that the crime will be detected, that detection
will be followed by prosecution, and that prosecution will
result in a conviction. The severity of the probable punishment also serves as a key factor.
A fundamental problem attending deterrence theories
is that we cannot be certain whether deterrence works
because we cannot determine reliably what the crime
rate would be in the absence of punishment. Similarly,
high levels of crime and recidivism (repeat offenses by
previously punished offenders) may indicate only that
sufficiently severe and certain criminal sanctions have
not been employed, not that criminal sanctions in general cannot effectively deter. Deterrence theory’s other
major problem is its assumption that potential offenders
are rational beings who consciously weigh the threat of
punishment against the benefits derived from an offense.
The threat of punishment, however, may not deter the
commission of criminal offenses produced by irrational
or unconscious drives.
Rehabilitation of convicted offenders—changing their
attitudes or values so that they are not inclined to commit
future offenses—serves as another way to prevent undesirable behavior. Critics of rehabilitation commonly point to
high rates of recidivism as evidence of the general failure
of rehabilitation efforts to date. Even if rehabilitation efforts fail, however, incapacitation of convicted offenders
contributes to the goal of prevention. While incarcerated,
offenders have much less ability to commit other crimes.
Prevention is not the only asserted goal of the criminal
sanction. Some persons see retribution—the infliction of deserved suffering on violators of society’s most fundamental
rules—as the central focus of criminal punishment. Under
this theory, punishment satisfies community and individual
desires for revenge and reinforces important social values.
As a general rule, state laws on criminal punishments
seek to further the deterrence, rehabilitation, and incapacitation purposes just discussed. State statutes usually set
forth ranges of sentences (e.g., minimum and maximum
amounts of fines and imprisonment) for each crime established by law. The court sets the convicted offender’s sentence within the appropriate range unless the court places
the defendant on probation.
Probation is effectively a conditional sentence that suspends the usual imprisonment and/or fine if the offender
“toes the line” and meets other judicially imposed conditions for the period specified by the court. It is sometimes
granted to first-time offenders and other convicted defendants deemed suitable candidates by the court. In deciding whether to order probation or an appropriate sentence
within the statutory range, the court normally places considerable reliance on information contained in a presentence investigation conducted by the state probation office.
Figure 1 explains how federal law approaches the proper
determination of a convicted offender’s punishment.
Figure 1 The Federal Sentencing Guidelines and the Booker Decision
The federal approach to sentencing closely resembled the
typical state approach discussed in the text until the Federal
Sentencing Guidelines took effect in the mid-1980s. The
significantly different sentencing model contemplated by the
Sentencing Guidelines was largely upended, however, by the
U.S. Supreme Court’s decision in United States v. Booker,
543 U.S. 220 (2005), and decisions that followed it. To understand Booker, one must first know how the Sentencing
Guidelines operated for the approximately 20 years preceding
the Supreme Court’s decision.
In the Sentencing Reform Act of 1984, Congress created the U.S. Sentencing Commission and authorized it to
develop the Sentencing Guidelines. Congress took this action
to reduce judicial discretion in sentencing and to minimize
disparities among sentences imposed on defendants who
committed the same offenses. Although pre–Sentencing
Guidelines statutes setting forth sentencing ranges for particular crimes generally remained on the books, the Sentencing Guidelines developed by the Sentencing Commission
assumed a legally controlling status under provisions of the
Chapter Five Criminal Law and Procedure
Sentencing Reform Act. The Guidelines contain a table with
more than 40 levels of seriousness of offense. Where an offender’s crime and corresponding sentence range are listed
on the table depends on the offender’s prior criminal history and on various factors associated with the offense. The
Sentencing Reform Act established that federal courts were
bound by the table and usually were required to sentence
convicted defendants in accordance with the range set in the
table for the crime at issue. However, if the court found the
existence of certain additional circumstances to be present
(such as a leadership role in a crime committed by more than
one person or similar facts seeming to enhance the defendant’s level of culpability), the Guidelines required the court
to sentence the defendant to a harsher penalty than would
otherwise have been the maximum under the Guidelines.
Many federal judges voiced displeasure with the Guidelines because their mandatory nature deprived judges of the
sentencing discretion they believed they needed in order
to do justice in individual cases. In another key effect, the
Guidelines led to the imposition of more severe sentences
than had previously been imposed. Although the prospect of
probation for certain offenses was not eliminated, the Guidelines led to an increased use of incarceration of individuals
convicted of serious crimes. (A special subset of rules known
as the Corporate Sentencing Guidelines, discussed later in
the chapter, pertains to the sentencing of organizations convicted of federal crimes.)
Approximately 20 years ago, questions arose concerning
the constitutionality of the Sentencing Guidelines. The questions focused on the cases in which the Guidelines effectively
required—if the requisite additional circumstances were
present—a sentence going beyond what would otherwise
have been the maximum called for by the Guidelines. These
cases were troublesome because nearly always the additional
circumstances triggering the enhanced sentence were identified by the trial judge on the basis of evidence submitted to
him or her at a post-trial sentencing hearing. The jury, on
the other hand, would have heard and seen only the evidence
produced at the trial—evidence that went toward guilt and
presumably the standard range of punishment, but not toward
an enhanced punishment harsher than the usual maximum.
All of this was problematic, critics contended, in view of
criminal defendants’ Sixth Amendment right to a jury trial.
United States v. Booker provided the Supreme Court an
opportunity to address the concerns raised by critics of the
Guidelines. A jury had convicted Booker of the offense of
possessing, with intent to distribute, at least 50 grams of
crack cocaine. The evidence the jury heard at trial was to
the effect that Booker possessed approximately 90 grams
of crack. The Sentencing Guidelines called for a sentence
of 20 to 22 years in prison for possessing at least 50 grams.
However, evidence presented to the judge at the post-trial
sentencing hearing indicated that Booker possessed some
650 grams. Possession of a much larger amount of crack than
the amount for which he was convicted was a special circumstance that, under the Guidelines, necessitated a harsher
sentence. Upon finding by a preponderance of the evidence
that Booker possessed 650 grams (rather than the smaller
quantity about which the jury heard evidence), the judge was
required by the Guidelines to sentence Booker to at least
30 years in prison—even though the evidence presented to the
jury would have justified a lesser sentence of 20 to 22 years.
The judge imposed a 30-year sentence on Booker, who contended on appeal that the enhanced sentence required by the
Guidelines violated his Sixth Amendment jury trial right.
In the 2005 Booker decision, the Supreme Court held that
in view of the Sixth Amendment, any facts calling for the
imposition of a sentence harsher than the usual maximum
must be facts found by a jury rather than merely a judge (unless a jury has been validly waived by the defendant). The
Federal Sentencing Guidelines and the statute contemplating their creation were thus unconstitutional insofar as they
mandated a sentence going beyond the usual maximum if
a judge’s factual findings supporting such a sentence were
made on the basis of evidence that the jury had not heard and
seen. To remedy the constitutional defect, the Court determined it was necessary to excise certain Sentencing Reform
Act sections that made the Sentencing Guidelines mandatory. The elimination of those statutory sections caused the
Sentencing Guidelines to become advisory to judges as they
make sentencing decisions. Judges must still consider what
the Guidelines call for in regard to sentencing, but they are
not required to impose the particular sentences specified in
the Guidelines. The Court also stated in Booker that when a
judge’s sentencing decision is challenged on appeal, the governing standard will be one of reasonableness.
After Booker, lower courts were faced with determining
what the “reasonableness” standard of review meant, as well
as how far trial courts’ discretion regarding the Guidelines
really extended. In Rita v. United States, 551 U.S. 338 (2007),
the Supreme Court held that it was permissible for courts
of appeal to adopt and apply a presumption of reasonableness if the sentence imposed by the trial court fell within
the range set by the Guidelines. Gall v. United States, 552
U.S. 38 (2007), made clear, however, that the converse was
not true. The Court held there that courts of appeals cannot
apply a presumption of unreasonableness to a sentence that
departed from the range set by the Guidelines. Instead, according to Gall, consideration of the Guidelines is only “the
starting point and the initial benchmark” for the trial judge
as he or she makes an “individualized assessment” based on
the facts and circumstances. Appellate courts are to give “due
deference” to the trial judge’s sentencing determinations,
regardless of whether the sentence fell within or outside the
Guidelines’s range. In Kimbrough v. United States, 552 U.S.
85 (2007), a companion case to Gall, the Court underscored
this standard of review and expressed disapproval of appellate
court micromanagement of trial judges’ sentencing decisions.
153
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Part Two Crimes and Torts
The Court also suggested in Kimbrough—and made explicit
in Spears v. United States, 555 U.S. 261 (2009)—that considerable deference to the trial judge’s sentencing determinations remains appropriate even if it appears that the sentence
departed from the Guidelines because of the judge’s policy
disagreement with the Guidelines.
Essentials of Crime
To convict a defendant of a
crime, the government ordinarily must (1) demonstrate that
his alleged acts violated a criminal statute; (2) prove beyond a
reasonable doubt that he committed those acts; and (3) prove
that he had the capacity to form a criminal intent. Crimes are
statutory offenses. A given behavior is not a crime unless
Congress or a state legislature has criminalized it.1
Courts also carefully scrutinize, and narrowly construe,
criminal statutes in an effort to make certain that they sweep
Sekhar v. United States Booker and its progeny have restored to trial judges most of
the sentencing latitude they had prior to the Guidelines. This
latitude is subject to two constraints: First, the sentence must be
consistent with relevant statutes (as opposed to the now-advisory
Guidelines), and second, the sentence must be based upon facts
found by the jury (or by the judge, if a jury was waived).
in only those behaviors specifically prohibited by the relevant legislature. In Sekhar v. United States, which follows,
the U.S. Supreme Court conducts such an examination of the
Hobbs Act in order to determine whether the defendant’s actions constituted extortion in violation of that federal statute.
Infractions of a minor criminal or quasi-criminal nature (such as traffic
offenses) are often established by city or county ordinances but will not
be considered here. For discussion of ordinances as a type of law, see
Chapter 1.
1
133 S. Ct. 2720 (U.S. Sup. Ct. 2013)
New York’s Common Retirement Fund is an employee pension fund for the State of New York and its local governments. The
State Comptroller chooses Common Retirement Fund investments. When the Comptroller decides to approve an investment, he
issues a “Commitment.”
Giridhar Sekhar was a managing partner of FA Technology Ventures (FATV). In 2009, the Comptroller’s office was considering whether to invest in a fund managed by that firm. The office’s general counsel recommended that the Comptroller decide
not to invest in the FATV-managed fund. The Comptroller followed the recommendation, decided not to issue a Commitment,
and notified an FATV partner about the decision. This partner had previously heard rumors that the general counsel was having
an extramarital affair.
The general counsel then received a series of anonymous e-mails demanding that he recommend moving forward with the
investment in the FATV-managed fund. The e-mails also threatened that if the general counsel did not so recommend, the sender
would disclose information about his alleged affair to his wife, government officials, and the media. The general counsel contacted law enforcement, which traced some of the e-mails to Sekhar’s home computer and other e-mails to FATV offices.
Sekhar was later indicted for attempted extortion in violation of the Hobbs Act, which subjects a person to criminal liability
if he “in any way or degree obstructs, delays, or affects commerce or the movement of any article or commodity in commerce, by
robbery or extortion or attempts or conspires so to do.”18 U.S.C. § 1951(a). The act defines extortion to mean “the obtaining of
property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color
of official right.” § 1951(b)(2). On the verdict form used at Sekhar’s trial, the jury was asked to specify the property that Sekhar
attempted to extort (1) “the Commitment,” (2) “the Comptroller’s approval of the Commitment,” or (3) “the General Counsel’s
recommendation to approve the Commitment.” The jury chose only the third option in convicting Sekhar of attempted extortion.
The U.S. Court of Appeals for the Second Circuit affirmed Sekhar’s conviction. The Second Circuit held that the general
counsel “had a property right in rendering sound legal advice to the Comptroller and, specifically, to recommend—free from
threats—whether the Comptroller should issue a Commitment.” In addition, the Second Circuit concluded that Sekhar not only
attempted to deprive the general counsel of his “property right” but also “attempted to exercise that right by forcing the general
counsel to make a recommendation determined by [Sekhar].” The U.S. Supreme Court agreed to decide the case.
Scalia, Justice
We consider whether attempting to compel a person to recommend that his employer approve an investment constitutes “the
obtaining of property from another” under 18 U.S.C. §1951(b)(2).
Whether viewed from the standpoint of the common law, the text
and genesis of the statute at issue here, or the jurisprudence of
this Court’s prior cases, what was charged in this case was not
extortion.
Chapter Five Criminal Law and Procedure
It is a settled principle of interpretation that, absent other indication, “Congress intends to incorporate the well-settled meaning of the common-law terms it uses.” [Citation omitted.] Or as
Justice Frankfurter colorfully put it [in a 1947 law journal article],
“if a word is obviously transplanted from another legal source,
whether the common law or other legislation, it brings the old
soil with it.”
The Hobbs Act punishes “extortion,” one of the oldest crimes
in our legal tradition. As far as is known, no case predating the
Hobbs Act—English, federal, or state—ever identified conduct
such as that charged here as extortionate. Extortion required the
obtaining of items of value, typically cash, from the victim. It did
not cover mere coercion to act, or to refrain from acting.
The text of the statute confirms that the alleged property here
cannot be extorted. Enacted in 1946, the Hobbs Act defines its
crime of “extortion” as “the obtaining of property from another,
with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right.” Obtaining property requires “not only the deprivation but also the
acquisition of property.” Scheidler v. National Organization for
Women, Inc., 537 U.S. 393, 404 (2003). That is, it requires that
the victim part with his property, and that the extortionist “gain
possession” of it. Id. at 403 n.8. The property extorted must therefore be transferable—that is, capable of passing from one person
to another. The alleged property here lacks that defining feature.
The genesis of the Hobbs Act reinforces that conclusion. The
Act was modeled after §850 of the New York Penal Law (1909).
Congress borrowed, nearly verbatim, the New York statute’s definition of extortion. The New York statute contained, in addition to
the felony crime of extortion, a . . . misdemeanor crime of coercion.
Whereas the former required the criminal acquisition of property,
the latter required merely the use of threats “to compel another
person to do or to abstain from doing an act which such other such
person has a legal right to do or to abstain from doing” [quoting the
New York statute]. Congress did not copy the coercion provision.
The omission must have been deliberate, since it was perfectly
clear that extortion did not include coercion. At the time of the
borrowing (1946), New York courts had consistently held that the
sort of interference with rights that occurred here was coercion.
And finally, this Court’s own precedent similarly demands reversal of Sekhar’s conviction. In Scheidler, we held that protesters
did not commit extortion under the Hobbs Act, even though they
“interfered with, disrupted, and in some instances completely deprived” abortion clinics of their ability to run their business. 537
U.S. at 404–05. We reasoned that the protesters may have deprived
the clinics of an “alleged property right,” but they did not pursue
or receive “something of value from” the clinics that they could
then “exercise, transfer, or sell” themselves. Id. at 405. This case is
easier than Scheidler, where one might at least have said that physical occupation of property amounted to obtaining that property.
155
The deprivation alleged here is far more abstract. Scheidler rested
its decision, as we do, on the term “obtaining.” The principle
announced there—that a defendant must pursue something of
value from the victim that can be exercised, transferred, or sold—
applies with equal force here. Whether one considers the personal
right at issue to be “property” in a broad sense or not, it certainly
was not obtainable property under the Hobbs Act.
The government’s shifting and imprecise characterization of
the alleged property at issue betrays the weakness of its case.
According to the jury’s verdict form, the “property” that Sekhar
attempted to extort was “the General Counsel’s recommendation
to approve the Commitment.” But the government expends minuscule effort in defending that theory of conviction. And for
good reason—to wit, our decision in Cleveland v. United States,
531 U.S. 12 (2000), which reversed a business owner’s mailfraud conviction for “obtaining money or property” through misrepresentations made in an application for a video-poker license
issued by the State. We held that a “license” is not “property”
while in a state’s hands and so cannot be “obtained” from the
state. Even less so can an employee’s yet-to-be-issued recommendation be called obtainable property, and less so still a yetto-be-issued recommendation that would merely approve (but
not effect) a particular investment.
Hence the government’s reliance on an alternative . . .
description of the property. Instead of defending the jury’s description, the government hinges its case on the general counsel’s
“intangible property right to give his disinterested legal opinion
to his client free of improper outside interference” [quoting the
government’s brief]. But what, exactly, would Sekhar have obtained for himself? A right to give his own disinterested legal
opinion to his own client free of improper interference? Or perhaps, a right to give the general counsel’s disinterested legal
opinion to the general counsel’s client?
Either formulation sounds absurd, because it is. Clearly,
Sekhar’s goal was not to acquire the general counsel’s “intangible
property right to give disinterested legal advice.” It was to force
the general counsel to offer advice that accorded with Sekhar’s
wishes. But again, that is coercion, not extortion. No fluent
speaker of English would say that Sekhar “obtained and exercised
the general counsel’s right to make a recommendation,” any more
than he would say that a person “obtained and exercised another’s
right to free speech.” He would say that Sekhar “forced the general
counsel to make a particular recommendation,” just as he would
say that a person “forced another to make a statement.” Adopting the government’s theory here would not only make nonsense
of words, it would collapse the longstanding distinction between
extortion and coercion and ignore Congress’s choice to penalize
one but not the other. That we cannot do.
Second Circuit decision reversed in favor of Sekhar.
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Part Two Crimes and Torts
Constitutional Limitations on Power to
Criminalize Behavior The U.S. Constitution pro-
hibits ex post facto criminal laws. This means that a defendant’s act must have been prohibited by statute at the time
she committed it and that the penalty imposed must be the
one provided for at the time of her offense. In Peugh v.
United States, 133 S. Ct. 2072 (2013), for example, the
U.S. Supreme Court held that a defendant convicted of
bank fraud should have been sentenced under the version
of the Federal Sentencing Guidelines in effect when he
committed the crime rather than under a later version that
the lower courts used as the basis for imposing a more
severe punishment than the earlier version would have
permitted.
The Constitution places other limits on legislative power
to criminalize behavior. If behavior is constitutionally protected, it cannot be deemed criminal. For example, the
right of privacy held implicit in the Constitution caused
the Supreme Court, in Griswold v. Connecticut (1965), to
strike down state statutes that prohibited the use of contraceptive devices and the counseling or assisting of others in the
use of such devices. This decision provided the constitutional
basis for the Court’s historic Roe v. Wade (1973) decision,
which limited the states’ power to criminalize abortions.
First Amendment
LO5-2
Explain why the First Amendment may sometimes serve
as a defense to criminal liability.
By prohibiting laws that unreasonably restrict freedom of
speech, the First Amendment plays a major role in limiting
governmental power to enact and enforce criminal laws.
As explained in Chapter 3, the First Amendment protects
a broad range of noncommercial speech, including expression of a political, literary, or artistic nature as well
as speech that deals with economic, scientific, or ethical
issues or with other matters of public interest or concern.
The First Amendment protection for noncommercial
speech is so substantial that it is called “full” protection.
The First Amendment may operate as a defense to a
criminal prosecution concerning speech many persons
would find offensive. For instance, in United States v.
Stevens, 559 U.S. 460 (2010), the Supreme Court held
that the First Amendment protected the defendant against
criminal responsibility for having violated a statute that
barred distribution of videos in which a cruel killing or
maiming of an actual animal was depicted. (The First
Amendment safeguarded the speech present in such videos notwithstanding its offensive character, but would
not protect any defendant against criminal responsibility for violating a statute prohibiting the conduct of
engaging in cruelty to animals.) But First Amendment
protection, despite being very substantial, is not absolute. Consider Holder v. Humanitarian Law Project, 561
U.S. 1 (2010), in which the Supreme Court rejected a
multipronged attack on the constitutionality of a federal
statute that criminalized the furnishing of support to foreign groups the government has labeled as terrorist organizations. In upholding the statute, the Court held that
it did not violate the First Amendment even as applied
to persons who wished to donate money to support and
encourage the humanitarian, lawful, and nonviolent activities of those organizations (as opposed to their activities amounting to terrorism). Although donating money
in support of social causes may be viewed as speech, the
Court concluded that the statute did not violate the First
Amendment rights of supporters of the organizations’
nonterrorist activities because the prohibition of even
those supporters’ donations was suitably tailored to the
furtherance of the vital government interest in combating
terrorism.
Commercial speech, on the other hand, receives a less
substantial First Amendment shield known as “intermediate” protection. Does a speaker or writer with a profit
motive (e.g., the author who hopes to make money on her
book) therefore receive only intermediate First Amendment protection? No, as a general rule, because the mere
presence of a profit motive does not keep expression from
being fully protected noncommercial speech. Moreover,
the commercial speech designation is usually reserved for
what the Supreme Court has termed “speech that does no
more than propose a commercial transaction.” The best
example of commercial speech is an advertisement for a
product, service, or business.
Despite receiving less-than-full protection, commercial speech is far from a First Amendment outcast.
Recent Supreme Court decisions, as noted in Chapter 3,
have effectively raised commercial speech’s intermediate
protection to a level near that of full protection. Therefore,
regardless of whether it is full or intermediate in strength,
the First Amendment protection extended to expression
means that governmental attempts to hold persons criminally liable for the content of their written or spoken statements are often unconstitutional.
Some speech falls outside the First Amendment umbrella, however. In a long line of cases, the Supreme
Court has established that obscene expression receives
no First Amendment protection. Purveyors of obscene
books, movies, and other similar works may therefore be
criminally convicted of violating an obscenity statute even
Chapter Five Criminal Law and Procedure
though it is the works’ content (i.e., the speech) that furnishes the basis for the conviction. Expression is obscene
only if the government proves each element of the controlling obscenity test, which the Supreme Court established
in Miller v. California (1973):
(a) [That] the average person, applying contemporary community standards, would find that the work, taken as a whole,
appeals to the prurient interest; (b) [that] the work depicts
or describes, in a patently offensive way, [explicit] sexual
conduct specifically defined by the applicable state law; and
(c) [that] the work, taken as a whole, lacks serious literary,
artistic, political, or scientific value.
If any of the three elements is not proven, the work
is not obscene; instead, it receives First Amendment
protection.
The Miller test’s final element is the one most likely
to derail the government’s obscenity case against a defendant. Books, movies, and other materials that contain explicit sexual content are not obscene if they have serious
literary, artistic, political, or scientific value—and they
generally do. In view of the Miller test’s final element,
moreover, certain publications that might fairly be regarded as “pornographic” are likely to escape being classified as obscene.
Although nonobscene expression carries First Amendment protection, Supreme Court decisions have allowed
the government limited latitude to regulate indecent
speech in order to protect minors from being exposed to
such material. Indecent expression contains considerable
sexual content but stops short of being obscene, often because of the presence of serious literary, artistic, political, or scientific value (for adults, at least). Assume that
a state statute requires magazines available for sale at a
store to be located behind a store counter, rather than on
an unattended display rack, if the magazines feature nudity
and sexual content and the store is open to minors. This
statute primarily restricts indecent expression because
most magazines contemplated by the law are unlikely to
be obscene. If the statute is challenged on First Amendment grounds and the court concludes that it is narrowly
tailored to further the protection-of-minors purpose, it will
survive First Amendment scrutiny. A law that restricts too
much expression suitable for adults, however, will violate
the First Amendment even if the government’s aim was to
safeguard minors.
Recent years have witnessed decisions in which the
Supreme Court determined the First Amendment fate
of statutes designed to protect minors against online
exposure to material that is indecent though not obscene. In Reno v. American Civil Liberties Union, 521
U.S. 844 (1997), the Court struck down most of the
157
Communications Decency Act of 1996 (CDA), which
sought to ban Internet distribution of indecent material
in a manner that would make the material accessible by
minors. The Court reasoned that notwithstanding the statute’s protection-of-minors purpose, the sweeping nature
of the ban on indecent material extended too far into the
realm of expression that adults were entitled to receive.
In Ashcroft v. American Civil Liberties Union, 542 U.S.
665 (2004), the Court considered the constitutionality of
the Child Online Protection Act (COPA), the next congressional attempt to restrict minors’ exposure to indecent material in online contexts. According to the Court,
the same problem that plagued the CDA—restricting too
much expression that adults were entitled to communicate and receive—doomed the COPA to a determination
of unconstitutionality.
As noted above, much of the material often referred
to as pornography would not be considered obscene
under the Miller test and thus would normally carry First
Amendment protection. Safeguarding-of-minors concerns
have proven critical, however, to the very different legal
treatment extended to child pornography—sexually explicit visual depictions of actual minors (as opposed to
similar depictions of adults). Because of the obvious dangers and harms that child pornography poses for minors,
child pornography has long been held to fall outside the
First Amendment’s protective umbrella. Therefore, the
Supreme Court has held that there is no First Amendment
bar to criminal prosecutions for purveying or possessing
child pornography.
Identify the constitutional provisions at issue when a
LO2-3 criminal law is challenged as being excessively vague.
Due Process Clauses In addition to limiting the sorts of
behavior that may be made criminal, the Constitution limits
the manner in which behavior may be criminalized. The Due
Process Clauses of the Fifth and Fourteenth Amendments
(discussed in Chapter 3) require that criminal statutes define the prohibited behavior precisely enough to enable law
enforcement officers and ordinary members of the public
to understand which behavior violates the law. Statutes that
fail to provide such fair notice may be challenged as unconstitutionally vague.
For example, in Skilling v. United States, 561 U.S.
358 (2010), a defendant brought a vagueness challenge
to a federal statute he was convicted of violating. The
statute made it a crime to deprive another person of the
intangible right to the defendant’s “honest services.”
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Part Two Crimes and Torts
To avoid the potential vagueness problem suggested by
the statute’s “honest services” language, the Supreme
Court adopted a limiting construction of the statute. The
Court ruled that for a violation of the honest services
law to have occurred, the defendant’s actions must have
involved the offering, payment, or receipt of bribes or
kickbacks. Whatever other misdeeds Skilling—an Enron
executive—committed or may have committed, none of
them involved bribes or kickbacks. For further discussion of the importance of clarity in criminal statutes, see
Shaw v. United States, which appears later in the chapter.
Equal Protection Clause The Fourteenth Amendment’s
Equal Protection Clause (also discussed in Chapter 3) prohibits criminal statutes that discriminatorily treat certain
persons of the same class or arbitrarily discriminate among
different classes of persons. Legislatures usually are extended considerable latitude in making statutory classifications if the classifications have a rational basis. “Suspect”
classifications, such as those based on race, are subjected
to much closer judicial scrutiny, however.
Eighth Amendment Finally, the Constitution limits
the type of punishment imposed on convicted offenders. The Eighth Amendment forbids cruel and unusual
punishments. This prohibition furnishes, for example,
the constitutional basis for judicial decisions establishing limits on imposition of the death penalty. Although
various Supreme Court cases indicate that the Eighth
Amendment may bar a sentence whose harshness is
disproportionate to the seriousness of the defendant’s
offense, the Court has signaled that any Eighth Amendment concerns along these lines are unlikely to be triggered unless the sentence–crime disproportionality is
exceedingly gross.
Proof beyond a Reasonable Doubt
Identify the standard of proof that the government must
LO5-4 meet in a criminal prosecution, as well as the constitutional
sources of that requirement.
The serious matters at stake in a criminal case—the life
and liberty of the accused—justify our legal system’s
placement of significant limits on the government’s power
to convict a person of a crime. A fundamental safeguard
is the presumption of innocence; defendants in criminal
cases are presumed innocent until proven guilty. The Due
Process Clauses require the government to overcome this
presumption by proving beyond a reasonable doubt every
element of the offense charged against the defendant.2 Requiring the government to meet this stern burden of proof
minimizes the risk of erroneous criminal convictions.
Defendant’s Criminal Intent and Capacity Most serious
crimes require mens rea, or criminal intent, as an element.
The level of fault required for a criminal violation depends
on the wording of the relevant statute. Many criminal
statutes require proof of intentional wrongdoing. Others
impose liability for reckless conduct or, in rare instances,
mere negligence. In the criminal context, recklessness
generally means that the accused consciously disregarded
a substantial risk that the harm prohibited by the statute
would result from her actions. Negligence means that the
accused failed to perceive a substantial risk of harm that a
reasonable person would have perceived. As a general rule,
negligent behavior is left to the civil justice system rather
than being criminalized. Shaw v. United States, which follows shortly, addresses criminal intent and related issues.
In Arthur Andersen LLP v. United States, 544 U.S.
696 (2005), the Supreme Court issued a reminder regarding the importance of the element of criminal intent. The
Andersen firm, which provided auditing and consulting
services to Enron prior to its collapse in 2001, had been
convicted on obstruction-of-justice charges dealing with
destruction of Enron-related documents. The Supreme
Court overturned the conviction because the trial judge’s
instructions to the jury had not sufficiently required the
jury to determine whether criminal intent was present
when Andersen employees, acting at least in part under
the firm’s preexisting document-retention policy, destroyed documents that would have been relevant to legal
proceedings connected with the Enron debacle.
Criminal intent may be inferred from an accused’s behavior because a person is normally held to have intended
the natural and probable consequences of her acts. The intent requirement furthers the criminal law’s general goal
of punishing conscious wrongdoers. Accordingly, proof
that the defendant had the capacity to form the required
intent is a traditional prerequisite of criminal responsibility. The criminal law recognizes three general types of incapacity: intoxication, infancy, and insanity.
Although it is not a complete defense to criminal liability, voluntary intoxication may sometimes diminish the
degree of a defendant’s responsibility. For example, many
The beyond-a-reasonable-doubt standard required of the government
in criminal cases contemplates a stronger and more convincing showing
than that required of plaintiffs in civil cases. As explained in Chapter 2 ,
plaintiffs in civil cases need only prove the elements of their claims by a
preponderance of the evidence.
2
Chapter Five Criminal Law and Procedure
first-degree murder statutes require proof of premeditation, a conscious decision to kill. One who kills while
highly intoxicated may be incapable of premeditation—
meaning that he would not be guilty of first-degree murder. He may be convicted, however, of another homicide
offense that does not require proof of premeditation.
The criminal law historically presumed that children
younger than 14 years of age (“infants,” for legal purposes)
could not form a criminal intent. Today, most states treat
juvenile offenders below a certain statutory age—usually
16 or 17—differently from adult offenders, with special
juvenile court systems and separate detention facilities.
Current juvenile law emphasizes rehabilitation rather than
capacity issues. Repeat offenders or offenders charged
Shaw v. United States 159
with very serious offenses, however, may sometimes be
treated as adults.
An accused’s insanity at the time the charged act was
committed may constitute a complete defense. This possible effect of insanity has generated public dissatisfaction.
The controlling legal test for whether a defendant was insane varies among court systems. The details of the possible tests are beyond the scope of this text. Suffice it to
say that as applied by courts, the tests make it a rare case
in which the defendant succeeds with an insanity defense.
Shaw v. United States, which follows, deals with criminal intent issues and illustrates the careful attention courts
pay to the particular elements required by a criminal
statute.
137 S. Ct. 462 (U.S. Sup. Ct. 2017)
Lawrence Shaw obtained the identifying numbers of a Bank of America account belonging to a bank customer, Stanley Hsu.
Shaw used those numbers, as well as other related information, to transfer funds from Hsu’s account to other accounts at different financial institutions. Shaw then obtained, from those other accounts, the funds he had transferred from Hsu’s Bank of
America account.
A federal statute makes it a crime “knowingly [to] execut[e] a scheme . . . to defraud a financial institution.” 18 U.S.C.
§ 1344(1). A federally insured bank such as Bank of America would be an example of a financial institution contemplated by this
statute. A federal district court convicted Shaw of violating § 1344(1). The U.S. Court of Appeals for the Ninth Circuit affirmed
his conviction. In his petition for certiorari, Shaw argued that the words “scheme . . . to defraud a financial institution” require
the government to prove that the defendant had “a specific intent not only to deceive, but also to cheat, a bank,” rather than “a
non-bank third party.” The U.S. Supreme Court granted review.
Breyer, Justice
Shaw argues that § 1344 does not apply to him because he intended to cheat only a bank depositor, not a bank. We do not
accept his arguments.
Section 1344 makes it a crime:
knowingly [to] execut[e] a scheme . . .
(1) to defraud a financial institution; or
(2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody
or control of, a financial institution, by means of false or
fraudulent pretenses, representations, or promises.
Shaw makes several related arguments in favor of his basic
claim, namely, that the statute does not cover schemes to deprive
a bank of customer deposits.
First, he [argues in his brief] that subsection (1) requires
“an intent to wrong a victim bank [a ‘financial institution’] in
its property rights.” He adds that the property he took, money
in Hsu’s bank account, belonged to Hsu, the bank’s customer,
and that Hsu is not a “financial institution.” Hence, [according to this argument,] Shaw’s scheme was one “designed” to
obtain only “a bank customer’s property,” not “a bank’s own
property.”
The basic flaw in this argument lies in the fact that the bank,
too, had property rights in Hsu’s bank account. When a customer
deposits funds, the bank ordinarily becomes the owner of the
funds and consequently has the right to use the funds as a source
of loans that help the bank earn profits (though the customer
retains the right to withdraw funds). Sometimes, the contract
between the customer and the bank provides that the customer
retains ownership of the funds and the bank merely assumes
possession. But even then the bank is entitled to possess the deposited funds against all the world [except for the customer with
which the bank contracted]. This right, too, is a property right.
Thus, Shaw’s scheme to cheat Hsu was also a scheme to deprive the bank of certain bank property rights. Hence, for purposes of the bank fraud statute, a scheme fraudulently to obtain
funds from a bank depositor’s account normally is also a scheme
fraudulently to obtain property from a “financial institution,” at
least where, as here, the defendant knew that the bank held the
deposits, the funds obtained came from the deposit account, and
the defendant misled the bank in order to obtain those funds.
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Part Two Crimes and Torts
Second, Shaw says he did not intend to cause the bank financial harm. Indeed, the parties appear to agree that, due to standard banking practices in place at the time of the fraud, no bank
involved in the scheme ultimately suffered any monetary loss.
But the statute, while insisting upon “a scheme to defraud,” demands neither a showing of ultimate financial loss nor a showing
of intent to cause financial loss. Many years ago Judge Learned
Hand pointed out that “[a] man is none the less cheated out of
his property, when he is induced to part with it by fraud,” even
if “he gets a quid pro quo of equal value.” United States v. Rowe,
56 F. 2d 747, 749 (2d Cir. 1932). That is because “[i]t may be
impossible to measure his loss by the gross scales available to a
court, but he has suffered a wrong; he has lost,” for example, “his
chance to bargain with the facts before him.” Id. See O. Holmes,
The Common Law 132 (1881) (“[A] man is liable to an action
for deceit if he makes a false representation to another, knowing
it to be false, but intending that the other should believe and act
upon it”); Neder v. United States, 527 U.S. 1 (1999) (bank fraud
statute’s definition of fraud reflects the common law).
It is consequently not surprising that, when interpreting the
analogous mail fraud statute, we have held it “sufficient” that
the victim (here, the bank) be “deprived of its right” to use of
the property, even if it ultimately did not suffer unreimbursed
loss. [Citation omitted.] Lower courts have explained that, where
cash is taken from a bank “but the bank [is] fully insured[,] [t]he
theft [is] complete when the cash [i]s taken; the fact that the bank
ha[s] a contract with an insurance company enabling it to shift
the loss to that company [is] immaterial.” [Citation omitted.] We
have found no case from this Court interpreting the bank fraud
statute as requiring that the victim bank ultimately suffer financial harm, or that the defendant intend that the victim bank suffer
such harm.
Third, Shaw appears to argue that, whatever the true state of
property law, he did not know that the bank had a property interest in Hsu’s account; hence he could not have intended to cheat
the bank of its property. Shaw did know, however, that the bank
possessed Hsu’s account. He did make false statements to the
bank. He did correctly believe that those false statements would
lead the bank to release from that account funds that ultimately
and wrongfully ended up in Shaw’s pocket. And the bank did in
fact possess a property interest in the account. These facts are
sufficient to show that Shaw knew he was entering into a scheme
to defraud the bank even if he was not aware of the niceties of
bank-related property law. To require more, i.e., to require actual
knowledge of those bank-related property-law niceties, would
free (or convict) equally culpable defendants depending upon
their property-law expertise—an arbitrary result.
We have found no case from this Court requiring legal
knowledge of the kind Shaw suggests he lacked. But we have
found cases in roughly similar fraud-related contexts where this
Court has asked only whether the targeted property was in fact
property in the hands of the victim, not whether the defendant
knew that the law would characterize the items at issue as “property.” See Pasquantino v. United States, 544 U.S. 544 (2005)
(Canada’s right to uncollected excise taxes on imported liquor
counted as “property” for purposes of the wire fraud statute);
Carpenter v. United States, 484 U.S. 19 (1987) (a newspaper’s
interest in the confidentiality of the contents and timing of a
news column counted as property for the purposes of the mail
and wire fraud statutes). We conclude that the legal ignorance
that Shaw claims here is no defense to criminal prosecution for
bank fraud.
Fourth, Shaw argues that the bank fraud statute requires the
Government to prove more than his simple knowledge that he
would likely harm the bank’s property interest; in his view, the
government must prove that such was his purpose. Shaw adds
that his purpose was to take money from Hsu; taking property
from the bank was not his purpose.
But the statute itself makes criminal the “knowin[g]
execut[ion of] a scheme . . . to defraud.” To hold that something
other than knowledge is required would assume that Congress intended to distinguish, in respect to states of mind, between (1) the
fraudulent scheme, and (2) its fraudulent elements. Why would
Congress wish to do so? Shaw refers us to a number of cases
involving fraud against the government and points to language in
those cases suggesting that the relevant statutes required that the
defendant’s purpose be to harm the statutorily protected target
and not a third party. [However,] crimes of fraud targeting the
government [fall within] an area of the law with its own special
rules and protections. We have found no relevant authority in the
area of mail fraud, wire fraud, financial frauds, or the like supporting Shaw’s view.
[Fifth], Shaw asks us to apply the rule of lenity. We have said
that the rule applies if “at the end of the process of construing
what Congress has expressed,” there is “a grievous ambiguity
or uncertainty in the statute.” [Citations omitted.] The statute is
clear enough that we need not rely on the rule of lenity. As we
have said, a deposit account at a bank counts as bank property
for purposes of subsection (1). The defendant, in circumstances
such as those present here, need not know that the deposit account is, as a legal matter, characterized as bank property. Moreover, in those circumstances, the government need not prove that
the defendant intended that the bank ultimately suffer monetary
loss. Finally, the statute as applied here requires a state of mind
equivalent to knowledge, not purpose.
Shaw further argues that the instructions the district court gave
the jury were erroneous. He points out that the district court told
the jury that the “phrase ‘scheme to defraud’ means any deliberate plan of action or course of conduct by which someone intends
to deceive, cheat, or deprive a financial institution of something
Chapter Five Criminal Law and Procedure
161
of value.” This instruction, Shaw says, could be understood as
permitting the jury to find him guilty if it found no more than that
his scheme was one to deceive the bank but not to “deprive” the
bank of anything of value. The parties agree, as do we, that the
scheme must be one to deceive the bank and deprive it of something of value.
For reasons previously pointed out, we have held that a plan
to deprive a bank of money in a customer’s deposit account is
a plan to deprive the bank of “something of value” within the
meaning of the bank fraud statute. The parties dispute whether
the jury instruction is nonetheless ambiguous or otherwise improper. We leave to the Ninth Circuit to determine whether that
question was fairly presented to that court and, if so, whether the
instruction is lawful, and, if not, whether any error was harmless
in this case.
Criminal Procedure
cause exists, the magistrate binds over the defendant for
trial in the appropriate court.
After a bindover, the formal charge against the defendant is filed with the trial court. The formal charge consists of either an information filed by the prosecutor or
an indictment returned by a grand jury. Roughly half of
the states require that a grand jury approve the decision
to prosecute a person for a felony. Grand juries are bodies
of citizens selected in the same manner as the members
of a trial (petit) jury; often, they are chosen through random drawings from a list of registered voters. Indictment
of an accused prior to a preliminary hearing normally
eliminates the need for a preliminary hearing because the
indictment serves essentially the same function as a magistrate’s probable cause determination.
The remainder of the states allow felony defendants to be
charged by either indictment or information, at the prosecutor’s discretion. An information is a formal charge signed
by the prosecutor outlining the facts supporting the charges
against the defendant. In states allowing felony prosecution
by information, prosecutors elect the information method
in the vast majority of felony cases. Misdemeanor cases are
prosecuted by information in nearly all states.4
Once an information or indictment has been filed
with a trial court, an arraignment occurs. The defendant
is brought before the court, informed of the charges, and
asked to enter a plea. The defendant may plead guilty, not
guilty, or nolo contendere. Although technically not an admission of guilt, nolo contendere pleas indicate that the
defendant does not contest the charges. This decision by
the defendant will lead to a finding of guilt. Unlike evidence of a guilty plea, however, evidence of a defendant’s
nolo plea is inadmissible in later civil cases against that
Criminal Prosecutions: An Overview
LO5-5 Identify the major steps in a criminal prosecution.
Persons arrested for allegedly committing a crime are taken
to the police station and booked. Booking is an administrative procedure for recording the suspect’s arrest. In some
states, temporary release on bail may be available at this
stage. After booking, the police file an arrest report with
the prosecutor, who decides whether to charge the suspect
with an offense. If she decides to prosecute, the prosecutor
prepares a complaint identifying the accused and detailing
the charges. Most states require that arrested suspects be
taken promptly before a magistrate or other judicial officer (such as a justice of the peace or judge whose court is
of limited jurisdiction) for an initial appearance. During
this appearance, the magistrate informs the accused of the
charges and outlines the accused’s constitutional rights. In
misdemeanor cases in which the accused pleads guilty, the
sentence may be (but need not be) imposed without a later
hearing. If the accused pleads not guilty to a misdemeanor
charge, the case is set for trial. In felony cases, as well as
misdemeanor cases in which the accused pleads not guilty,
the magistrate sets the amount of bail.
In many states, defendants in felony cases are protected
against unjustified prosecutions by an additional procedural step, the preliminary hearing. The prosecutor must
introduce enough evidence at this hearing to persuade a
magistrate that there is probable cause to believe the accused committed a felony.3 If persuaded that probable
The state need not satisfy the beyond a reasonable doubt standard
of proof at the preliminary hearing stage. The prosecutor sufficiently
establishes probable cause by persuading the magistrate to believe it is
more likely than not that the defendant committed the felony alleged.
3
Judgment of Ninth Circuit vacated; case remanded for further
proceedings.
For federal crimes, a prosecutor in the relevant U.S. Attorney’s office
files an information to institute the case if the offense involved carries
a penalty of not more than one year of imprisonment. Federal prosecutions for more serious crimes with potentially more severe penalties are
commenced by means of a grand jury indictment.
4
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Part Two Crimes and Torts
defendant based on the same conduct amounting to the
criminal violation. Individuals and corporate defendants
therefore may find nolo pleas attractive when their chances
of mounting a successful defense to the criminal prosecution are poor and the prospect of later civil suits is likely.
At or shortly after the arraignment, the defendant who
pleads not guilty chooses the type of trial that will take
place. Persons accused of serious crimes for which incarceration for more than six months is possible have a constitutional right to be tried by a jury of their peers. The
accused, however, may waive this right and opt for a bench
trial (i.e., before a judge only).
Role of Constitutional Safeguards
The
preceding text referred to various procedural devices designed to protect persons accused of crime. The Bill of
Rights, the first 10 amendments to the U.S. Constitution,
sets forth other rights of criminal defendants. These rights
guard against unjustified or erroneous criminal convictions and serve as reminders of government’s proper role
in the administration of justice in a democratic society.
Justice Oliver Wendell Holmes aptly addressed this latter
point when he said, “I think it less evil that some criminals should escape than that the government should play
an ignoble part.”
Although the literal language of the Bill of Rights refers only to federal government actions, the U.S. Supreme
Court has applied the most important Bill of Rights guarantees to state government actions by “selectively incorporating” those guarantees into the Fourteenth Amendment’s
due process protection. Once a particular safeguard has
been found to be “implicit in the concept of ordered liberty” or “fundamental to the American scheme of justice,”
it has been applied equally in state and federal criminal trials. This has occurred with the constitutional protections
examined earlier in this chapter as well as with the Fourth,
Fifth, and Sixth Amendment guarantees discussed in the
following sections.
LO5-6
Describe the basic protections afforded by the Fourth,
Fifth, and Sixth Amendments.
The Fourth Amendment The Fourth Amendment protects persons against arbitrary and unreasonable
governmental violations of their privacy rights. It states:
The right of the people to be secure in their persons, houses,
papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but
upon probable cause, supported by Oath or affirmation, and
particularly describing the place to be searched, and the persons or things to be seized.
Key Fourth Amendment Questions
The
Fourth Amendment’s language and judicial interpretations
of it reflect the difficulties inherent in balancing citizens’
legitimate expectations of privacy against government’s
important interest in securing evidence of wrongdoing. The
immediately following paragraphs introduce key Fourth
Amendment questions and offer parenthetical answers of
a general nature. More complete discussion and explanation of Fourth Amendment issues and principles will then
appear in the text material and cases included later in this
section of the chapter. In addition, Figure 2, which will appear later in the chapter, will provide further detail.
Two basic questions arise when a government action
is challenged under the Fourth Amendment. First, was
there a search or seizure? (If the government action did
not constitute a search or seizure, there cannot have been
a Fourth Amendment violation.) If there was a search or
seizure, this second basic question must be addressed:
Was it unreasonable? (The Fourth Amendment furnishes protection only against “unreasonable” searches
and seizures.)
Questions about the Fourth Amendment language
regarding warrants often accompany the fundamental questions noted above. Must the government have
a warrant in order to comply with the Fourth Amendment when it conducts a search or seizure? (The Fourth
Amendment language stops short of making warrants
mandatory in all instances. However, cases interpreting and applying the Fourth Amendment indicate that
a search conducted in accordance with a properly supported warrant issued by a judge or magistrate will be
considered reasonable.) What is necessary for a valid
warrant? (“[P]robable cause” for the issuance of the
warrant must exist, and the warrant’s language must
“particularly descri[be]” the relevant place, persons,
or things.) May a warrant’s validity be challenged for
lack of probable cause or on other grounds? (Yes, if the
challenging party has standing to do so.) How are warrantless searches treated under the Fourth Amendment?
(They tend to be considered unreasonable. As later discussion reveals, however, the Supreme Court has identified various types of warrantless searches that do not
violate the Fourth Amendment.)
Finally, this important question frequently presents
itself: What is the usual remedy if an unreasonable search
or seizure took place? (The exclusionary rule is applied—
meaning that evidence obtained in or as the result of
the unreasonable search or seizure cannot be used in a
Chapter Five Criminal Law and Procedure
criminal case against the party whose Fourth Amendment
rights were violated.)
We now look in greater depth at the questions introduced above. Whether a search took place for Fourth
Amendment purposes depends to a great extent on
whether the affected person (whether human or corporate) had a reasonable expectation of privacy that was
invaded. The Supreme Court has stated that the Fourth
Amendment protects persons rather than places. However, consideration of places and items often becomes
necessary because of the amendment’s reference to “the
right of the people to be secure in their persons, houses,
papers, and effects” and because reasonable expectations of privacy often are connected with places and
things. Accordingly, the Supreme Court has held that
the Fourth Amendment’s protection extends to such
places or items as private dwellings and immediately
surrounding areas (often called the curtilage), offices,
sealed containers, mail, and telephone booths (nearly a
relic of the past). The Court has denied Fourth Amendment protection to places, items, or matters as to which
it found no reasonable expectations of privacy, such as
open fields, bank records, and voluntary conversations
between government informants and criminal suspects
or defendants.
Even when the circumstances involve an item or area
that might otherwise seem to suggest Fourth Amendment concerns, some government actions may be deemed
insufficiently intrusive to constitute a search or seizure.
For example, the Supreme Court held in United States v.
Place (1983) that it was not a search when police exposed
an airline traveler’s luggage to a narcotics detection dog
in a public place, given the minimally intrusive nature of
the action and the narrow scope of information it revealed.
Relying on Place, the Supreme Court concluded in Illinois v.
Caballes (2005) that no search occurred when law enforcement officers used a drug-sniffing dog on the exterior of a
car whose driver had been stopped for speeding. However,
United States v. Jones 163
in Rodriguez v. United States, 135 S. Ct. 1609 (2015),
the Supreme Court limited Caballes in both legal and practical effect by holding that if the use of the drug-sniffing
dog around the car’s exterior lengthened an otherwise lawful traffic stop beyond the time reasonably necessary to
complete the purpose of the stop, a Fourth Amendment
violation would be present.
On the other hand, the Supreme Court concluded in
Kyllo v. United States (2001) that a search occurred when
law enforcement officers, operating from a public street,
aimed a thermal-imaging device at the exterior of a private
home in an effort to identify heat-emanation patterns that
might suggest the presence of a marijuana-growing operation inside the home. The cases just noted set the stage for
a later case in which the Supreme Court was faced with
deciding whether a search took place when police officers,
acting without a warrant, brought drug-sniffing dogs to a
suspect’s home and put the dogs into service on the suspect’s porch. Would the Court rule as it did in the earlier
drug-sniffing dog cases (Place and Caballes), or would
it follow the lead of Kyllo? Holding that an unreasonable search occurred, the Court emphasized in Florida v.
Jardines, 133 S. Ct. 1409 (2013), as it had in Kyllo, the
particular importance of the home and its curtilage when
balancing the resident’s Fourth Amendment interests
against the evidence-gathering interests of the government.
The two cases that follow provide further illustrations
of Fourth Amendment principles noted earlier. In United
States v. Jones, the Supreme Court decides whether a
search took place when law enforcement officers, acting
without a warrant, attached a GPS device to the underside
of a suspect’s car in an effort to gather evidence pertaining
to possible crimes. In United States v. SDI Future Health,
the Ninth Circuit Court of Appeals decides whether corporate executives have legal standing to challenge the sufficiency of a warrant authorizing law enforcement agents
to search the corporation’s business premises and items
located there.
565 U.S. 400 (U.S. Sup. Ct. 2012)
Antoine Jones, the owner and operator of a District of Columbia nightclub, came under suspicion of trafficking in narcotics. He
became the target of an investigation by a joint FBI and Metropolitan Police Department task force. Officers employed various
investigative techniques, including visual surveillance of the nightclub, installation of a camera focused on the front door of
the club, and a pen register and wiretap covering Jones’s cell phone. In addition, the law enforcement agents installed a GPS
tracking device on the undercarriage of the Jeep Grand Cherokee that Jones’s wife owned but that Jones drove exclusively. The
agents installed the GPS device while it was parked in a public parking lot. They did so without a warrant to authorize such
action and without informing Jones or his wife.
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Part Two Crimes and Torts
Over the next 28 days, the government used the GPS device to track the vehicle’s movements. By means of signals from
multiple satellites, the device established the vehicle’s location and communicated that location by cell phone to a government
computer. It relayed more than 2,000 pages of data over the four-week period.
The government ultimately obtained a multiple-count indictment charging Jones and several alleged co-conspirators
with various drug-trafficking offenses. Before trial, Jones filed a motion asking a federal district court to suppress (i.e.,
rule inadmissible) the evidence obtained through use of the GPS device. The court denied the motion because “‘[a] person traveling in an automobile on public thoroughfares has no reasonable expectation of privacy in his movements from
one place to another’” [quoting the district court’s decision, which quoted United States v. Knotts, 460 U.S. 276, 281
(1983)]. At the trial, the government introduced as evidence GPS-derived locational data that connected Jones to the alleged conspirators’ stash house, where $850,000 in cash and large quantities of illegal drugs were found. The jury found
Jones guilty.
However, the U.S. Court of Appeals for the District of Columbia Circuit reversed the conviction. The D.C. Circuit held
that the warrantless use of the GPS device violated the Fourth Amendment and that the lower court therefore should have suppressed the evidence obtained through the device’s use. The U.S. Supreme Court granted the government’s petition for a writ of
certiorari.
Scalia, Justice
The Fourth Amendment provides in relevant part that “[t]he
right of the people to be secure in their persons, houses, papers,
and effects, against unreasonable searches and seizures, shall not
be violated.” It is beyond dispute that a vehicle is an “effect” as
that term is used in the Amendment. We hold that the government’s installation of a GPS device on a target’s vehicle, and its
use of that device to monitor the vehicle’s movements, constitutes a “search.”
It is important to be clear about what occurred in this case:
The government physically occupied private property for the
purpose of obtaining information. We have no doubt that such a
physical intrusion would have been considered a “search” within
the meaning of the Fourth Amendment when it was adopted. The
text of the Fourth Amendment reflects its close connection to
property, since otherwise it would have referred simply to “the
right of the people to be secure against unreasonable searches
and seizures”; the phrase “in their persons, houses, papers, and
effects” would have been superfluous.
Consistent with this understanding, our Fourth Amendment
jurisprudence was tied to common-law trespass, at least until the
latter half of the 20th century. Our later cases, of course, have deviated from that exclusively property-based approach. In Katz v.
United States, 389 U.S. 347, 351 (1967), we said that “the Fourth
Amendment protects people, not places,” and found a violation in attachment of an eavesdropping device to a public telephone booth. Our later cases have applied the analysis of Justice
Harlan’s concurrence in that case, which said that a violation
occurs when government officers violate a person’s “reasonable
expectation of privacy.” Id. at 360.
The government contends that the Harlan standard shows
that no search occurred here, since Jones had no “reasonable expectation of privacy” in the area of the Jeep accessed
by government agents (its underbody) and in the locations of
the Jeep on the public roads, which were visible to all. But we
need not address the government’s contentions, because Jones’s
Fourth Amendment rights do not rise or fall with the Katz formulation. As explained, for most of our history the Fourth
Amendment was understood to embody a particular concern
for government trespass upon the areas (“persons, houses, papers, and effects”) it enumerates. Katz did not repudiate that
understanding. Less than two years [after Katz was decided,] the
Court upheld defendants’ contention that the government could
not introduce against them conversations between other people
obtained by warrantless placement of electronic surveillance devices in their homes. The opinion rejected the dissent’s contention that there was no Fourth Amendment violation “unless the
conversational privacy of the homeowner himself is invaded.”
Alderman v. United States, 394 U.S. 165, 176 (1969). “[W]e [do
not] believe that Katz, by holding that the Fourth Amendment
protects persons and their private conversations, was intended
to withdraw any of the protection which the Amendment extends to the home. . . .” Id. at 180.
More recently, in Soldal v. Cook County, 506 U.S. 56
(1992), the Court unanimously rejected the argument that
although a “seizure” had occurred “in a ‘technical’ sense”
when a trailer home was forcibly removed, no Fourth Amendment violation occurred because law enforcement had not
“invade[d] the [individuals’] privacy.” Id. at 60. Katz, the
Court explained, established that “property rights are not the
sole measure of Fourth Amendment violations,” but did not
“snuf[f] out the previously recognized protection for property.”
Id. at 64. We have embodied that preservation of past rights
in our very definition of “reasonable expectation of privacy,”
which we have said to be an expectation “that has a source
outside of the Fourth Amendment, either by reference to
Chapter Five Criminal Law and Procedure
concepts of real or personal property law or to understandings
that are recognized and permitted by society.” Minnesota v.
Carter, 525 U.S. 83, 88 (1998). Katz did not narrow the Fourth
Amendment’s scope.
The government contends that several of our post-Katz cases
foreclose the conclusion that what occurred here constituted a
search. It relies principally on two cases in which we rejected
Fourth Amendment challenges to “beepers,” electronic tracking devices that represent another form of electronic monitoring. The first case, United States v. Knotts, 460 U.S. 276 (1983),
upheld against Fourth Amendment challenge the use of a beeper
that had been placed in a container of chloroform, allowing law
enforcement to monitor the location of the container. We said
that there had been no infringement of Knotts’ reasonable expectation of privacy since the information obtained—the location of
the automobile carrying the container on public roads, and the
location of the off-loaded container in open fields near Knotts’
cabin—had been voluntarily conveyed to the public. But as we
have discussed, the Katz reasonable-expectation-of-privacy test
has been added to, not substituted for, the common-law trespassory test. The holding in Knotts addressed only the former, since
the latter was not at issue. The beeper had been placed in the
container before it came into Knotts’s possession, with the consent of the then-owner. Knotts did not challenge that installation,
and we specifically declined to consider its effect on the Fourth
Amendment analysis.
The second beeper case, United States v. Karo, 468 U.S.
705 (1984), does not suggest a different conclusion. There
we addressed the question left open by Knotts, whether the
installation of a beeper in a container amounted to a search
or seizure. As in Knotts, at the time the beeper was installed
the container belonged to a third party, and it did not come
into possession of the defendant until later. Thus, the specific
question we considered was whether the installation “with
the consent of the original owner constitute[d] a search or
seizure . . . when the container is delivered to a buyer having no knowledge of the presence of the beeper.” Id. at 707
(emphasis added). We held not. The government, we said,
came into physical contact with the container only before it
belonged to the defendant Karo, and the transfer of the container with the unmonitored beeper inside did not convey
any information and thus did not invade Karo’s privacy. That
conclusion is perfectly consistent with the one we reach here.
Karo accepted the container as it came to him, beeper and all,
and was therefore not entitled to object to the beeper’s presence, even though it was used to monitor the container’s location. Jones, who possessed the Jeep at the time the government
trespassorily inserted the information-gathering device, is on
much different footing.
165
The government also points to our exposition in New York
v. Class, 475 U.S. 106 (1986), that “[t]he exterior of a car . . . is
thrust into the public eye, and thus to examine it does not constitute a ‘search.’” Id. at 114. That statement is of marginal relevance here since, as the government acknowledges, “the officers
in this case did more than conduct a visual inspection of respondent’s vehicle” [quoting the government’s brief, with emphasis
added]. By attaching the device to the Jeep, officers encroached
on a protected area. In Class itself we suggested that this would
make a difference, for we concluded that an officer’s momentary reaching into the interior of a vehicle did constitute a search.
Id. at 114–15.
Finally, the government’s position gains little support
from our conclusion in Oliver v. United States, 466 U.S. 170
(1984), that officers’ information-gathering intrusion on an
“open field” did not constitute a Fourth Amendment search
even though it was a trespass at common law. Id. at 183. Quite
simply, an open field, unlike the curtilage of a home, see United
States v. Dunn, 480 U.S. 294, 300 (1987), is not one of those
protected areas enumerated in the Fourth Amendment. The
government’s physical intrusion on such an area—unlike its
intrusion on the “effect” at issue here—is of no Fourth Amendment significance. Thus, our theory is not that the Fourth
Amendment is concerned with [every] trespass that led to the
gathering of evidence. The Fourth Amendment protects against
trespassory searches only with regard to those items (“persons,
houses, papers, and effects”) that it enumerates. The trespass
that occurred in Oliver [, therefore, did not amount to a Fourth
Amendment violation].
The government argues in the alternative that even if the
attachment and use of the GPS device was a search, it was
reasonable—and thus lawful—under the Fourth Amendment because “officers had reasonable suspicion, and indeed probable
cause, to believe that [Jones] was a leader in a large-scale cocaine
distribution conspiracy” [quoting the government’s brief]. We
have no occasion to consider this argument. The government did
not raise it below, and the D. C. Circuit therefore did not address
it. We consider the argument forfeited.
D.C. Circuit decision in favor of Jones affirmed.
[Note: Five justices subscribed to Justice Scalia’s majority
opinion. The other four justices agreed with the outcome
(that the placement and use of the GPS device was a search
for Fourth Amendment purposes). However, they would have
reached that outcome purely on the basis of the reasonable
expectation of privacy test rather than through taking trespass considerations into account.]
166
Part Two Crimes and Torts
United States v. SDI Future Health, Inc. 568 F.3d 684 (9th Cir. 2009)
After a lengthy investigation spearheaded by the Internal Revenue Service (IRS), investigators concluded that SDI Future
Health, Inc. (SDI) and certain officers of the corporation had engaged in Medicare fraud and tax fraud. Based on the information obtained during the investigation, the federal government applied for a warrant to search SDI’s business premises.
The requested warrant depended heavily on an IRS special agent’s affidavit, which contained information the agent had
learned from former employees and business associates of SDI. The affidavit alleged that SDI, Todd Stuart Kaplan (SDI’s
president), and Jack Brunk (an SDI officer) participated in a conspiracy with physicians and cardiac diagnostic companies to
defraud the Medicare program, the Federal Employees Health Benefit Program, and private health care insurance carriers by
seeking payment for services that SDI never rendered. (Besides being officers of the corporation, Kaplan and Brunk possessed
significant ownership interests in it.) The affidavit also set forth details of the supposed scheme in which SDI, Kaplan, and Brunk
allegedly engaged and noted supposed instances of tax fraud on the part of some or all of the same parties.
In a proposed search warrant submitted with the special agent’s affidavit, the government stated that the premises to be
searched were SDI’s corporate headquarters, principal business offices, and computers. The proposed warrant also listed
24 categories of documents, records, and other items to be seized. A federal magistrate judge who reviewed the affidavit and
the proposed warrant concluded that probable cause existed for the search. He therefore issued the warrant. Federal agents executed the warrant and obtained evidence in the course of the search. A federal grand jury later returned an indictment charging
SDI, Kaplan, and Brunk with 124 counts of health care fraud; various counts of conspiracy regarding health care fraud, money
laundering, and unlawful kickback payments; and other counts of attempting to evade income taxes.
Arguing that the warrant was vague and overbroad and therefore in violation of the Fourth Amendment, SDI, Kaplan, and
Brunk filed a motion asking the relevant federal district court to suppress evidence obtained from the search (i.e., rule that
the evidence could not be used in the case). After concluding that SDI and the two individual defendants all had standing to
challenge the search of SDI’s business premises, the district court granted the defendants’ motion to suppress. The government
appealed the suppression order to the U.S. Court of Appeals for the Ninth Circuit. The following edited portion of the Ninth
Circuit’s opinion focuses on whether the individual defendants (Kaplan and Brunk) had legal standing to question the constitutionality of the search of the corporation’s (SDI’s) business premises.
O’Scannlain, Circuit Judge
We must decide whether corporate executives may challenge a
police search of company premises not reserved for the executives’ exclusive use.
The government argues that Kaplan and Brunk lack standing to challenge the search and seizure of materials from SDI’s
premises. Wisely, the government does not argue that SDI itself
lacks standing to challenge the underlying search and seizure.
“[A] corporate defendant has standing with respect to searches of
corporate premises and seizure of corporate records.” [Citation
omitted.] We therefore only consider the Fourth Amendment
standing of Kaplan and Brunk. Insofar as they do indeed lack
standing, all evidence is admissible as to charges against them.
By contrast, insofar as we affirm the district court’s suppression
of some evidence, such evidence will be inadmissible against
SDI. Standing, therefore, makes a difference in this case.
According to the government, [Kaplan’s and Brunk’s] mere
ownership and management of SDI, and the steps SDI took to preserve the security of its business files, are inadequate to support the
conclusion that Kaplan and Brunk personally had an expectation of
privacy in the searched areas and seized materials. While “[i]t has
long been settled that one has standing to object to a search of his
office, as well as of his home,” [citation omitted], this case presents
the novel issue of the extent to which a business employee may
have standing to challenge a search of business premises generally.
The Fourth Amendment ensures that “[t]he right of the people
to be secure in their persons, houses, papers, and effects, against
unreasonable searches and seizures, shall not be violated, and no
Warrants shall issue, but upon probable cause, supported by Oath
or affirmation, and particularly describing the place to be searched,
and the persons or things to be seized.” A person has standing to
sue for a violation of this particular “right of the people” only if
there has been a violation “as to him,” personally. [Citation omitted.] In other words, Fourth Amendment standing . . . “is a matter
of substantive Fourth Amendment law; to say that a party lacks
Fourth Amendment standing is to say that his reasonable expectation of privacy has not been infringed.” [Citation omitted.] This
follows from the Supreme Court’s famous observation that the
Fourth Amendment “protects people, not places,” Katz v. United
States, 389 U.S. 347, 351 (1967).
To show the government has violated his Fourth Amendment rights, an individual must have “a legitimate expectation
of privacy in the invaded place.” Defendants must demonstrate
“a subjective expectation of privacy in the area searched, and
their expectation must be one that society would recognize as
objectively reasonable.” [Citations omitted.]
Chapter Five Criminal Law and Procedure
As a logical extension of this approach, “[p]roperty used for
commercial purposes is treated differently for Fourth Amendment purposes from residential property.” Minnesota v. Carter,
525 U.S. 83, 90 (1998). Of course, individuals may still have a
“reasonable expectation of privacy against intrusions by police”
into their offices. But, unlike the nearly absolute protection of
a residence, “the great variety of work environments” requires
analysis of reasonable expectations on a case-by-case basis.
O’Connor v. Ortega, 480 U.S. 709, 716, 718 (1987).
Our precedents provide numerous guideposts, however. For
starters, it is crucial to Fourth Amendment standing that the place
searched be “given over to [the defendant’s] exclusive use.” We
have thus held that mere access to, and even use of, the office of a
co-worker “does not lead us to find an objectively reasonable expectation of privacy.” By the same token, we have rejected managerial
authority alone as sufficient for Fourth Amendment standing. [For
instance,] we [have] held the corporate officer of a hospital, whom
we described as the “de facto controlling force in [its] management,”
did not have standing to challenge the seizure of records from the
hospital print shop. Even though the defendant “had access to and
control of the print shop operations, his rights did not include any
expectation of privacy over documents which were kept at the print
shop premises. . . .” [Case citations omitted throughout paragraph.]
It thus appears that an employee of a corporation, whether
worker or manager, does not, simply by virtue of his status as
such, acquire Fourth Amendment standing with respect to company premises. Similarly, to be merely a shareholder of a corporation, without more, is also not enough. As always, a reasonable
expectation of privacy does not arise ex officio, but must be established with respect to the person in question. The Second Circuit
summarized this point memorably in [often-quoted] language:
When a man chooses to avail himself of the privilege of doing
business as a corporation, even [if] he is its sole shareholder, he
may not vicariously take on the privilege of the corporation under
the Fourth Amendment; documents which he could have protected from seizure, if they had been his own, may be used against
him, no matter how they were obtained from the corporation. Its
wrongs are not his wrongs; its immunity is not his immunity.
[Citation omitted.]
We took this approach in United States v. Gonzalez, 412 F.3d
1102 (9th Cir. 2005), in which we held that the directors of a
small, family-run corporation had standing to challenge a wiretap in one of the company’s buildings. That holding relied on the
facts of the case:
[W]e simply hold that because the [defendants] were corporate
officers and directors who not only had ownership of the [premises] but also exercised full access to the building as well as
managerial control over its day-to-day operations, they had a reasonable expectation of privacy over calls made on the premises.
167
Thus, in Gonzalez we focused on the close control that the
owner-operators exercised over their small business, which happened to be family-run.
Kaplan and Brunk argue that Gonzalez supports their claim
of Fourth Amendment standing, but their argument rests on an
overbroad reading of our opinion. We explicitly tied the defendants’ standing to the “nature of the location.” The defendants
exercised, in the context of “a small, family-run business housing
only 25 employees at its peak,” “managerial control over [the]
day-to-day operations” of the office where the conversations
the wiretap “seized” took place, they owned the building where
the office was located, and they not only could access the office
but actually “exercised full access to the building.” In our detailed factual analysis, therefore, we made clear that it does not
suffice for Fourth Amendment standing merely to own a business, to work in a building, or to manage an office.
The facts in this case place SDI in a gray area outside the
particular facts of Gonzalez, because at most Kaplan and Brunk
managed and worked in the office of a business of which they
were, together, controlling shareholders. SDI’s headquarters is
twice the size of the office at issue in Gonzalez. [The] facts
show that SDI, through Kaplan and Brunk, took steps to protect
the privacy of its headquarters. But the magistrate judge’s findings do not show that Kaplan and Brunk personally managed
the operation of the office on a daily basis, only that they set its
general policy as officers of SDI. Because Kaplan and Brunk
personally exercised less control over the premises in question
than did the defendants in Gonzalez, that precedent does not
control here.
Thus, although our precedents provide a basic outline, we are
left with little case law directly on point. Exclusive use of an office may be sufficient, [citation omitted], but Gonzalez illustrates
that it is not necessary. Between the lines these cases draw, it is
unclear in which premises and materials belonging to a corporation a corporate employee has a legitimate expectation of privacy. One of our sister circuits, however, has crafted a balancing
test that we believe helps to fill in the gap.
In United States v. Anderson, 154 F.3d 1225 (10th Cir. 1998),
the Tenth Circuit [identified] three factors a court should consider in
cases where an employee has not established that the area searched
is given over to his exclusive use[:] “(1) the employee’s relationship to the item seized; (2) whether the item was in the immediate
control of the employee when it was seized; and (3) whether the
employee took actions to maintain his privacy in the item.”
Though phrased vaguely, the first factor really addresses
whether the item seized was personal property without any relationship to work. In addition, the third factor involves actions
the employee takes on his own behalf, not as an agent of the corporation. Reading Anderson alongside our own precedent, we
conclude that, except in the case of a small business over which
168
Part Two Crimes and Torts
an individual exercises daily management and control, an individual challenging a search of workplace areas beyond his own
internal office must generally show some personal connection
to the places searched and the materials seized. Absent such a
personal connection or exclusive use, a defendant cannot establish standing for Fourth Amendment purposes to challenge the
search of a workplace beyond his internal office.
The district court relied on three facts in concluding that
Kaplan and Brunk had Fourth Amendment standing: their ownership of SDI, their management of SDI from offices in the building
searched, and the security measures SDI took to secure its business
records. Our review of relevant precedent indicates that these facts
are too broad and generalized to support the district court’s conclusion. The security measures that SDI took to ensure the privacy of
its business records are relevant only to the standing of the corporation itself, not of its officers. As for Kaplan and Brunk, their
ownership and management do not necessarily show a legitimate
expectation of privacy. Because neither claims to enjoy “exclusive
use” of the places searched—that is, the entire SDI office—they
each must show a personal connection, along the lines we have
drawn out of Anderson, to justify an expectation of privacy.
Lacking precedent on what is admittedly a novel issue of
law, the district court did not adequately develop the record.
Describe major exceptions to the Fourth Amendment’s
LO5-7 usual preference that the government have a warrant before
conducting a search.
Warrantless Searches and the Fourth
Amendment Although the Fourth Amendment is
sometimes described as setting up a warrant “requirement,” the amendment’s literal language does not do so.
It is more accurate to say that as interpreted by courts,
the Fourth Amendment contemplates a preference for a
warrant but does not require one in all instances. Because
a judge or magistrate must determine whether probable
cause supports the request for the warrant and must ensure
that the government’s intrusive action is appropriately
limited, warrants serve to protect privacy interests and
guard against pure “fishing expeditions” by the government. The preference for warrants, therefore, gives rise
not only to the rule that a search or seizure conducted in
accordance with a proper warrant is reasonable for Fourth
Amendment purposes but also to the assumption that a
warrantless search or seizure may be unreasonable.
Clearly, however, not all warrantless searches and
seizures violate the Fourth Amendment. The Supreme
Therefore, the district court’s grant of the motion to suppress
must be reversed and the matter remanded for further factfinding. It seems that none of the items seized were the personal
property of Kaplan or Brunk, nor were they in the custody of
either. Therefore, on remand, the district court should focus its
inquiry on, but need not confine it to, whether either Kaplan or
Brunk took measures, each on his or the pair’s personal behalf, to
keep the items private and segregated from other general business materials. Of course, Kaplan and Brunk do have standing to
challenge the admission of any evidence obtained from their own
personal, internal offices.
District court’s decision reversed insofar as it held that Kaplan
and Brunk had standing to challenge search; case remanded
for further proceedings.
[Note: In a portion of the opinion not included here, the
Ninth Circuit reiterated that SDI clearly had standing to
challenge the search of its corporate premises. The court held
that SDI’s motion to suppress was valid as to some, but not
all, of the evidence obtained through the search because the
warrant was overbroad. Therefore, the court ruled that certain evidence could not be used against SDI at trial.]
Court has identified various instances in which a warrantless search or seizure will pass muster under the Fourth
Amendment. The list of exceptions to the usual preference
for a warrant includes the following:
Search incident to lawful arrest. Under this longrecognized exception, officers may conduct a warrantless
search of the arrestee himself, the items in his possession, and the items within his control—or to which he has
access—at the time of arrest. (This is permitted regardless
of whether the arrest itself occurred pursuant to a warrant
or whether the arrest was otherwise lawful because there
was probable cause to believe that the arrestee committed
the relevant offense.) The rationale is twofold: to protect
the arresting officers in the possible event that the arrestee
has a weapon and to obtain evidence that otherwise might
be destroyed or go undiscovered. Weapons and evidence
obtained during the search may be seized by the officers.
Does the search-incident-to-arrest exception permit officers to search the content stored on a cell phone or smartphone in the arrestee’s possession at the time of the arrest?
For consideration of that question, see Figure 2.
Certain searches of motor vehicles. Law enforcement
officers may conduct a warrantless search of a motor vehicle when the driver or other recent occupant of the vehicle
Chapter Five Criminal Law and Procedure
169
Figure 2 A Note on Riley v. California
Nearby discussion in the text outlines the search-incident-to-arrest exception to the usual preference for a warrant. If, as is
often the case, an arrestee has a cell phone or smartphone in his or her possession, may law enforcement officers search the
content stored on that phone under the search-incident-to arrest doctrine, or is a warrant to search it necessary? In recent years,
police fairly routinely conducted such a search, relied on search-incident-to-arrest principles in doing so, and not infrequently
found the phone to be a treasure trove of evidence. Critics of such police action asserted that cell phones—and particularly
smartphones—are different from other items an arrestee may have in his or her possession because the phones may contain
huge quantities of information and because, in their view, arrestees should be seen as having reasonable expectations of privacy in regard to what those devices contain. Lower courts reached differing results when addressing the question whether a
warrant is necessary in this setting.
Now there is a clear national rule. In 2014, the Supreme Court decided Riley v. California, 134 S. Ct. 2473. In that case, the
Court held unanimously that the search-incident-to-arrest doctrine does not justify a search of an arrestee’s cell phone or smartphone and that a warrant is necessary in order for such a search to be reasonable for Fourth Amendment purposes. Writing for
the Court, Chief Justice Roberts made it clear that cell phones and smartphones are vastly different from other items that persons
may carry with them, given those devices’ broad-ranging functions and their capacities to store enormous amounts—as well as
various types—of information. The Chief Justice noted that these devices, on which so many persons rely, may furnish “a digital
record of nearly every aspect of the [owners’] lives—from the mundane to the intimate.” The privacy interests of cell phone and
smartphone owners thus carried more weight in the Court’s analysis than did countervailing law enforcement interests.
The Court also emphasized the importance of having a clear rule for law enforcement officers to follow. Rejecting the government’s proposal that officers be able to conduct a warrantless search of an arrestee’s cell phone or smartphone in an effort
to find evidence pertaining to the crime for which he or she was arrested (as opposed to evidence of other possible crimes),
the Court regarded that proposal as unworkable. Such a rule would require too many fact-specific judgments by officers in the
field and afterward by judges in court proceedings. Moreover, such a rule might be exploited by officers to an unreasonable
extent. Hence, the Court stressed that the need for a warrant before searching the cell phone or smartphone exists even when
officers believe that the device in the arrestee’s possession is likely to contain evidence relevant to the crime for which the
arrest occurred. In addition, the Court made no distinction between older cell phones and new smartphones, even though the
smartphones can do far more than the cell phones that seemed so remarkable not many years ago. Either way—cell phone or
high-powered smartphone—officers are expected to know after the Riley decision that a warrant will be necessary before they
can search the content of the device.
is arrested and either (1) the arrestee is still within reaching distance of the vehicle during the search or (2) the
officers have reason to believe the vehicle contains evidence of the crime for which the driver or other occupant
was arrested. The rationale here is essentially the same as
in the search-incident-to-arrest scenario described above.
Weapons and evidence obtained during the search of the
vehicle may be seized by the officers.
Investigative stops upon reasonable suspicion. Officers need not have a warrant to stop a vehicle if they have
a reasonable suspicion that the driver committed a traffic
violation (for which a ticket might be issued but no arrest
would be made) or if they have a reasonable suspicion of
other wrongdoing on the part of the driver or other vehicle
occupant. In such an investigative stop, the detention of the
driver and vehicle occupants does not violate the Fourth
Amendment if the stop is brief and otherwise reasonably
conducted. If no arrest occurs but the officers proceed to
conduct a warrantless search of the vehicle, there normally
will be a Fourth Amendment violation. However, the officers may search the vehicle if the driver consents or if
probable cause to search arises on the basis of the officers’
visual observations, other sensory perceptions, or further
key facts that come to the officers’ attention. If evidence
discovered in the search of the vehicle helps to form the
basis of criminal charges against the driver or other vehicle
occupants, the persons charged have legal standing to challenge the validity of the stop (by arguing that the necessary
reasonable suspicion was lacking) and the ensuing search
(by arguing that the search stemmed from an improper
stop or was unsupported by probable cause).
Stop-and-frisk searches for weapons. If law enforcement officers’ observations give them a reasonable suspicion that a person may be engaged in criminal activity,
the officers may detain the person briefly for investigative purposes without violating the Fourth Amendment.
During that detention—usually called a “Terry stop” because of the case in which the Supreme Court held that the
Fourth Amendment permits such police action—officers
may conduct a pat-down search of the detained person in
order to determine whether he is carrying a weapon that
could endanger the officers.
170
Part Two Crimes and Torts
Plain view. If an officer sees contraband or other evidence in plain view (meaning that the item is readily visible to the officer without any special efforts), the officer
may seize the item and will not violate the Fourth Amendment in doing so.
Consensual searches. Searches that occur with the
consent of a person who owns or possesses the relevant
place or thing are considered reasonable. Therefore, one
who consents to a search of her home, office, or car will
normally be regarded as having forfeited any Fourth
Amendment objection she might otherwise have been
able to make. If there are co-occupants of a residence and
any co-occupant gives law enforcement officers consent
to search the property, the permission granted by that
co-occupant will normally insulate the search against
a Fourth Amendment challenge brought later by a nonpresent and nonconsenting co-occupant. As the Supreme
Court recognized in Georgia v. Randolph, 547 U.S. 103
(2006), however, a consent to search provided by one cooccupant of a residence does not protect the search against
a Fourth Amendment challenge by another co-occupant
who was present at the time of the search and objected to
its occurrence. If the police cannot (as the Randolph decision indicates) lawfully conduct a search of a residence
when an on-the-premises co-occupant refuses to consent,
does the Fourth Amendment permit the police to return
to the home when the nonconsenting co-occupant is no
longer present, obtain consent from another co-occupant,
and conduct the search? The Supreme Court said “yes” in
a 2014 case (Fernandez v. California, 134 S. Ct. 1126).
Searches under exigent circumstances. Court have
upheld warrantless searches of premises that law enforcement officers enter in order to protect persons present
there if the officers reasonably believe those persons are at
risk of imminent serious harm. The emergency nature of
such a situation obviously would not allow time to obtain
a warrant. The Supreme Court has ruled that the exigent
circumstances exception can also apply to warrantless
searches of premises entered by officers when they are
in hot pursuit of a fleeing suspect. In Kentucky v. King,
563 U.S. 452 (2011), the Court held that this exception
justified officers’ warrantless entry and search of an apartment. In that case, officers who had been pursuing a fleeing suspect entered the apartment when, after knocking on
the door and announcing their presence, they heard sounds
that made them think evidence was being destroyed. The
Court concluded that the additional exigency of preventing
evidence destruction helped to make the warrantless entry
and search acceptable under the Fourth Amendment, even
though the officers guessed wrong about which apartment
the suspect they had been chasing had actually entered.
In Missouri v. McNeely, 133 S. Ct. 1552 (2013), however,
the Court rejected the state’s argument that concern about possible dissipation of evidence of blood alcohol content should
justify applying the exigent circumstances doctrine to authorize a warrantless drawing of blood from a motorist suspected
of driving under the influence of alcohol. Weighing that law
enforcement concern against the invasive nature of a forced
drawing of blood (as opposed to a noninvasive breath test)
caused the Court to conclude that a warrant was necessary.
DNA swabs in the booking process. In Maryland v.
King, 133 S. Ct. 1958 (2013), the Supreme Court weighed
in on a practice engaged in fairly frequently by law enforcement officers in recent years: taking a DNA sample from
arrestees—usually those charged with crimes involving
violence—without a warrant and as part of the booking process. The sample tends to be taken quickly through insertion
of a swab inside the arrestee’s cheek. Upholding a Maryland
law that permitted such warrantless use of the DNA swab
on those arrested for violent crimes, a five-justice majority of the Supreme Court regarded the bodily intrusion as
minimal and stressed the usefulness of the resulting evidence in accurately identifying the arrestee. The dissenters
were troubled by what they regarded as the real (though unspoken) reason why the Court permitted the gathering of
DNA evidence in this way: the usefulness of the resulting
evidence in solving crimes other than the ones for which the
arrestee was arrested—crimes for which law enforcement
authorities otherwise had no reason to suspect the arrestee.
Customs searches. Given the importance of controlling the nation’s borders and regulating the passage of persons and items into the country, government agents have
fairly broad authority to conduct warrantless searches in
the customs and border contexts.
Administrative inspections of closely regulated businesses. Various statutes and regulations subject certain
types of businesses to inspections by government agents
in order to safeguard public health and welfare. To the extent that these inspections come within the scope of the
relevant statutes and regulations, they are considered to be
reasonable for Fourth Amendment purposes even though
they occur without a warrant.
Exclusionary Rule
LO5-8 Explain what the exclusionary rule is.
The exclusionary rule serves as the basic remedial device
in cases of Fourth Amendment violations. Under this judicially crafted rule, evidence seized in illegal searches
cannot be used in a subsequent trial against an accused
Chapter Five Criminal Law and Procedure
whose constitutional rights were violated.5 In addition,
if information obtained in an illegal search leads to the
later discovery of further evidence, that further evidence
is considered “fruit of the poisonous tree” and is therefore
excluded from use at trial under the rule established in
Wong Sun v. United States (1963). Because the exclusionary rule may result in suppression of convincing evidence
of crime, it has generated controversy. The rule’s supporters regard it as necessary to deter police from violating
citizens’ constitutional rights. The rule’s opponents assert
that it has no deterrent effect on police who believed they
were acting lawfully. A loudly voiced complaint in some
quarters has been that “because of a policeman’s error, a
criminal goes free.”
During roughly the past three decades, the Supreme
Court has responded to such criticism by rendering decisions that restrict the operation of the exclusionary rule.
For example, the Court has held that illegally obtained
evidence may be introduced at trial if the prosecution
convinces the trial judge that the evidence would inevitably have been obtained anyway by lawful means. The
Court has also created a “good-faith” exception to the
exclusionary rule. This exception allows the use of evidence seized by police officers who acted pursuant to a
search warrant later held invalid if the officers reasonably
believed that the warrant was valid. In Herring v. United
States, 555 U.S. 135 (2009), the Court declined to apply
the exclusionary rule to evidence obtained as a result of an
arrest made pursuant to a rescinded arrest warrant where
a police employee had negligently failed to remove the
rescinded warrant from a law enforcement database but
the arresting officer relied in good faith on the warrant’s
supposed validity.
Although the Court has not extended this good-faith
exception to warrantless searches in general, it has declined to apply the exclusionary rule where the search was
conducted in reliance on a statute that was later declared
invalid or in reliance on earlier Court decisions that gave
greater Fourth Amendment leeway to law enforcement officers than an otherwise controlling later decision did.
Finally, Utah v. Strieff, 136 S. Ct. 2056 (2016), further
illustrates the Supreme Court’s tendency in recent years
to narrow the application of the exclusionary rule. In that
case, a law enforcement officer detained a person without
sufficient legal cause but quickly learned that there was
an outstanding arrest warrant for the person. The officer
then made the arrest, conducted a search incident to the
The Supreme Court initially authorized application of the exclusionary
rule in federal criminal cases only. In Mapp v. Ohio (1961), the Court
made the exclusionary rule applicable to state criminal cases as well.
5
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arrest, and discovered that the arrestee was in possession
of illegal drugs. In the drug possession prosecution that
followed, the defendant argued that because the initial detention of him was without cause, the seized drugs should
be excluded from evidence under the previously discussed
fruit-of-the-poisonous-tree doctrine. The Supreme Court
rejected that argument, holding instead that the detaining officer’s prompt discovery of the valid arrest warrant
made the connection between the initial stop of the defendant and the officer’s discovery of the drugs too attenuated
to warrant exclusion of the evidence.
The USA PATRIOT Act Approximately six weeks after
the September 11, 2001, terrorist attacks on the United
States, Congress enacted the Uniting and Strengthening
America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act. This statute, commonly known as the USA PATRIOT Act or as simply the
Patriot Act, contains numerous and broad-ranging provisions designed to protect the public against international
and domestic terrorism.
Included in the Patriot Act are measures allowing the
federal government significantly expanded ability, in
terrorism-related investigations, to conduct searches of
property, monitor Internet activities, track electronic communications, and obtain records regarding customers of
businesses. Most, though not all, actions of that nature require a warrant from a special court known as the Foreign
Intelligence Surveillance Court. The statute contemplates,
however, that such warrants may be issued upon less of a
showing by the government than would ordinarily be required, and may be more sweeping than usual in terms of
geographic application. Moreover, warrants issued by the
special court for the search of property can be of the socalled sneak and peek variety, under which the FBI need
not produce the warrant for the property owner or possessor to see and need not notify an absent property owner
or possessor that the search took place (unlike the rules
typically applicable to execution of “regular” warrants).
In addition, the Patriot Act permits warrants for “roving” wiretaps—ones that apply to various communications devices or methods that a person suspected of ties to
terrorism may employ, as opposed to being restricted to a
single communications device or method.
The Patriot Act also calls for banks to report seemingly
suspicious monetary deposits, as well as any deposits exceeding $10,000, not only to the Treasury Department (as
required by prior law) but also to the Central Intelligence
Agency and other federal intelligence agencies. In addition, the statute enables federal law enforcement authorities to seek a Surveillance Court warrant for the obtaining
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of individuals’ credit, medical, and student records, regardless of state or federal privacy laws that would otherwise have applied.
Commentators critical of the Patriot Act have argued
that despite the importance of safeguarding the public
against acts of terrorism, the statute tips the balance too
heavily in favor of law enforcement. They have characterized the statute’s definition of “domestic terrorism” as
so broad that various suspected activities not normally regarded as terrorism (or as harboring or aiding terrorists)
could be considered as such for purposes of the federal
government’s expanded investigatory tools. If that happens, the critics contend, Fourth Amendment and other
constitutional rights may easily be subverted. Others with
reservations about the statute maintain that its allowance
of expanded monitoring of Internet activities and electronic communications and its provisions for retrieval of
library records and other records normally protected by
privacy laws could give the government ready access to
communications and private information of many wholly
innocent persons.
In apparent recognition of the extraordinary action it
was taking in a time of national crisis, Congress included
provisions stating that unless they were renewed, portions
of the Patriot Act would expire at the end of 2005. Congress
has since renewed the bulk of the Patriot Act on more than
one occasion and has made most of its provisions permanent in the sense of not requiring a renewal (though certain
provisions, such as the one dealing with roving wiretaps,
continue to require periodic renewals). With most of the
Patriot Act having been made permanent, those who have
raised civil liberties concerns may continue to seek repeal
of part or all of the statute. Repeal seems unlikely, however, in a political environment that continues to be shaped
in significant ways by the events of 2001.
The expanded investigatory tools provided by the Patriot
Act have existed alongside those provided by an older
statute, the Foreign Intelligence Surveillance Act (FISA),
which was enacted long before the September 11, 2001,
attacks and has been amended various times both before
and since. Under FISA, monitoring of a suspected terrorist’s electronic communications generally required that an
individualized warrant be obtained from the previously
mentioned Foreign Intelligence Surveillance Court (FISA
Court), which operates in secret and whose decisions, unlike those of other courts, are not published. Applications
for warrants from the FISA Court have historically been
approved a very high percentage of the time.
In December 2005, it was revealed that the White
House had implemented a program of monitoring telephone calls of suspected terrorists when one party to the
conversation was located outside the United States. This
monitoring had occurred without an attempt by the government to obtain warrants from the FISA Court. Critics
of this action by the government complained that it violated not only FISA but also the Fourth Amendment. The
White House took the position, however, that the monitoring program was within the inherent powers of the
executive branch. Disputes over the validity of the monitoring program led to discussions over possible amendments to strengthen or loosen FISA’s requirements. These
discussions resulted in an amendment under which the
FISA Court could issue blanket warrants for electronic
monitoring of groups of terrorism suspects for set periods of time (as opposed to the previous sole option of
individualized warrants). With such loosening of what
it saw as FISA’s constraints, the government shut down
its warrantless monitoring program and resumed going
to the FISA Court for warrants. In 2008, Congress enacted a further amendment to FISA. This amendment
expanded the government’s ability to monitor the phone
calls of suspected terrorists, established FISA’s requirement of warrants from the FISA Court as the exclusive
way of exercising this surveillance power, and provided
immunity from legal liability for telephone companies
that had assisted the government in the phone call monitoring activities for which FISA Court warrants had not
been obtained.
Revelations in 2013 and 2014 by ex–Central Intelligence
Agency contractor Edward Snowden about formerly secret
intelligence-gathering by the federal government furnished
a further chapter in the ongoing saga of anti-terrorismrelated surveillance. Snowden’s disclosures regarding the
government’s collection and analysis of huge amounts of
data from phone records led to debates about how much
authority the government should or should not have in that
sense. Later policy statements and legislative efforts have
explored ways to limit and manage the government’s access
to phone records and similar material in ways that would
suitably account for the government’s terrorism-prevention
interests and the public’s privacy interests.
The Fifth Amendment
LO5-6
Describe the basic protections afforded by the Fourth,
Fifth, and Sixth Amendments.
The Fifth and Fourteenth Amendments’ Due Process
Clauses guarantee basic procedural and substantive fairness to criminal defendants. The Due Process Clauses are
discussed earlier in this chapter and in Chapter 3.
Chapter Five Criminal Law and Procedure
Privilege against Self-Incrimination
List the components of the Miranda warnings and
LO5-9 state when law enforcement officers must give those
warnings.
In another significant provision, the Fifth Amendment
protects against compelled testimonial self-incrimination
by establishing that “[n]o person . . . shall be compelled
in any criminal case to be a witness against himself.” This
provision prevents the government from coercing a defendant into making incriminating statements and thereby assisting in his own prosecution.
In Miranda v. Arizona (1966), the Supreme Court established procedural requirements—the now-familiar Miranda
warnings—to safeguard this Fifth Amendment right and
other constitutional guarantees. The Court did so by requiring police to inform criminal suspects, before commencing
custodial interrogation of them, that they have the right to
remain silent, that any statements they make may be used
as evidence against them, and that during questioning they
have the right to the presence and assistance of a retained
or court-appointed attorney (with court appointment occurring when suspects lack the financial ability to retain
counsel).6 Incriminating statements that an in-custody suspect makes without first having been given the Miranda
warnings are inadmissible at trial. (The exclusionary rule
is thus the remedy for a Miranda violation.) If the suspect
invokes her right to silence, custodial interrogation must
cease. If, on the other hand, the suspect knowingly and voluntarily waives her right to silence after having been given
the Miranda warnings, her statements will be admissible.
The right to silence is limited, however, in various
ways. For example, the traditional view that the Fifth
Amendment applies only to testimonial admissions serves
as the basis for allowing the police to compel an accused
The portions of the Miranda warnings dealing with the right to an attorney further Sixth Amendment interests. The Sixth Amendment is
discussed later in this chapter.
6
Berghuis v. Thompkins 173
to furnish nontestimonial evidence such as fingerprints,
samples of body fluids, and hair.
Supreme Court decisions have recognized further limitations on the right to silence. For instance, the right has
been held to include a corresponding implicit prohibition
of prosecutorial comments at trial about the accused’s
failure to testify. Although Supreme Court decisions still
support this prohibition, the Court has sometimes allowed
prosecutors to use the defendant’s pretrial silence to impeach his trial testimony. For example, the Court has held
that the Fifth Amendment is not violated by prosecutorial
use of a defendant’s silence (either prearrest or postarrest,
but in advance of any Miranda warnings) to discredit his
trial testimony that he killed the victim in self-defense.
More recently, in Salinas v. United States, 133 S.
Ct. 2174 (2013), the Court held that there was no Fifth
Amendment violation when the prosecutor at a murder
trial commented on the defendant’s failure, during a precustody and prearrest interview, to answer a police officer’s question about a shotgun and shell casings found
at the scene of the crime, even though he did respond to
other questions posed by the officer.
Further inclination to narrow Miranda’s applicability
and effect has sometimes been displayed by the Supreme
Court during roughly the past three decades. In one case,
for example, the Court upheld a suspect’s waiver of his
Miranda rights and approved the use of his confession at
trial, despite the police’s failure to notify the suspect that
an attorney retained for him by a family member was seeking to contact him. Another decision established that an
undercover police officer posing as a fellow inmate need
not give a jailed suspect the Miranda warnings before asking questions that could lead to incriminating admissions.
In Berghuis v. Thompkins, which follows, a five-justice
majority of the Supreme Court holds that a suspect who
wishes to invoke his Miranda right to remain silent must
unambiguously invoke that right—a rule characterized by
the four dissenting justices as “counterintuitively” requiring a suspect to speak up in order to indicate that he wants
to remain silent.
560 U.S. 370 (U.S. Sup. Ct. 2010)
Approximately a year after a Southfield, Michigan, shooting in which one person was killed and another was wounded, suspect
Van Chester Thompkins was arrested. While Thompkins was in custody, police officers interrogated him. At the beginning of the
interrogation, one of the officers, Detective Helgert, informed Thompkins of his Miranda rights set forth in the Miranda decision.
Officers began questioning Thompkins. At no point did Thompkins state that he wished to remain silent, that he did not
want to talk with the police, or that he wanted an attorney. Thompkins was largely silent during the interrogation, which lasted
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approximately three hours. However, he did give a few limited verbal responses such as “yeah,” “no,” or “I don’t know.” On
occasion, he communicated by nodding his head.
Roughly two hours and 45 minutes into the interrogation, Helgert asked Thompkins, “Do you believe in God?” Thompkins
made eye contact with Helgert and said “Yes,” as his eyes (according to the record) “well[ed] up with tears.” Helgert also
asked, “Do you pray to God?” Thompkins said “Yes.” Helgert then asked, “Do you pray to God to forgive you for shooting that
boy down?” Thompkins answered “Yes” and looked away. Thompkins refused to make a written confession, and the interrogation ended approximately 15 minutes later.
In a Michigan trial court, Thompkins was charged with first-degree murder, assault with intent to commit murder, and certain firearms-related offenses. He moved to suppress the statements made during the interrogation (i.e., to have the statements
ruled inadmissible at trial). He argued that he had invoked his Fifth Amendment right to remain silent, that the police officers
were therefore required to end the interrogation at once, that he had not waived his right to remain silent, and that his inculpatory statements were involuntary. The trial court denied the motion. The jury found Thompkins guilty on all counts. He was
sentenced to life in prison without parole. On appeal, Thompkins contended that the trial court erred in refusing to suppress his
pretrial statements under Miranda. The Michigan Court of Appeals rejected the Miranda claim and affirmed the conviction. The
Michigan Supreme Court denied discretionary review.
Thompkins later filed a petition for a writ of habeas corpus in the U.S. District Court for the Eastern District of Michigan.
Again he contended that his Miranda rights had been violated. The federal district court ruled against Thompkins, who appealed
to the U.S. Court of Appeals for the Sixth Circuit. The Sixth Circuit reversed, ruling for Thompkins on his Miranda claim because
his “persistent silence for nearly three hours in response to questioning and repeated invitations to tell his side of the story
offered a clear and unequivocal message to the officers: Thompkins did not wish to waive his rights.” The U.S. Supreme Court
granted certiorari.
Kennedy, Justice
[In Miranda, the Court] formulated a warning that must be given
to suspects before they can be subjected to custodial interrogation. The substance of the warning still must be given to suspects
today. All concede that the warning given in this case was in full
compliance with these requirements. The dispute centers on the
response—or nonresponse—from the suspect.
Thompkins makes various arguments that his answers
to questions from the detectives were inadmissible. He first
contends that he invoked his privilege to remain silent by not
saying anything for a sufficient period of time, so the interrogation should have ceased before he made his inculpatory
statements.
This argument is unpersuasive. In the context of invoking the
Mirand