Business Law
The Ethical, Global, and Digital Environment
18e
E I G H TE E N TH E DI TI O N
Jamie Darin Prenkert
A. James Barnes
Joshua E. Perry
Todd Haugh
Abbey R. Stemler
all of Indiana University
Pixtal/AGE Fotostock
Final PDF to printer
BUSINESS LAW
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The Authors
The Authors
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 is the Associate Dean of Academics for the Kelley School. He served as
chair of the Department of Business Law and Ethics from 2014
to 2016 and from 2019 to 2020, having served as an Associate
Vice Provost for Faculty and Academic Affairs for the Indiana
University–Bloomington campus from 2016 to 2019. Professor
Prenkert is a former editor in chief of the American Business
Law Journal and is 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.
A. James Barnes, Professor of Public and Environ-
mental 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.
Joshua E. Perry, Graf Family Professor and Associate
Professor of Business Law and Ethics, joined the faculty of Indiana University’s Kelley School of Business in 2009. He currently
serves as chair of the Department of Business Law and Ethics,
an appointment he has held since 2020. He was formerly the
Faculty Chair for the Kelley School’s Undergraduate Program.
A three-time winner of the IU Trustees’ Teaching Award and
two-time winner of the Kelley Innovative Teaching Award, he
teaches graduate and undergraduate courses on business ethics,
critical thinking, and the legal environment of business. 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, where he was Senior Articles Editor
on the Law Review. 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 in Nashville, Tennessee, at a boutique litigation
firm, where he specialized in dispute resolution and risk mitigation for clients in the health care, intellectual property, and
entertainment industries. 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. He is the author of over 30 articles and essays that
have appeared in a variety of journals, including the American
Business Law Journal; the Georgia Law Review; the Notre Dame
Journal of Law, Ethics, and Public Policy; the Journal of Law,
Medicine and Ethics; and the University of Pennsylvania Journal
of Law and Social Change, among others. His expertise has been
featured in The New York Times, USA Today, Wired, Fast Company, Huffington Post, and Salon. Since 2015, he also has served
on the editorial board for the Journal of Business Ethics as section editor for law, public policy, and ethics.
Todd Haugh, Associate Professor of Business Law and
Ethics and Weimer Faculty Fellow at Indiana University’s Kelley School of Business. His scholarship focuses on whitecollar and corporate crime, business and behavioral ethics, and
federal sentencing policy. His work has appeared in top law and
business journals, including the Northwestern University Law
Review, Notre Dame Law Review, Vanderbilt Law Review, and the
MIT-Sloan Management Review. Prof. Haugh’s expertise relating to the burgeoning field of behavioral compliance has led to
frequent speaking and consulting engagements with major U.S.
iii
iv
The Authors
companies and ethics organizations. He is also regularly quoted
in national news publications such as The New York Times, The
Wall Street Journal, Forbes, Bloomberg News, and USA Today.
A graduate of the University of Illinois College of Law and
Brown University, Professor Haugh has extensive professional
experience as a white-collar criminal defense attorney, a federal
law clerk, and a member of the general counsel’s office of the
U.S. Sentencing Commission. In 2011, he was chosen as one
of four Supreme Court Fellows of the Supreme Court of the
United States to study the administrative machinery of the federal judiciary.
Prior to joining the Kelley School, where he teaches courses
on business ethics, white-collar crime, and critical thinking,
Professor Haugh taught at DePaul University College of Law
and Chicago-Kent College of Law. He is a recipient of numerous
teaching and scholarly awards, including a Trustees Teaching
Award and multiple Innovative Teaching Awards, and a Jesse
Fine Fellowship from the Poynter Center for the Study of Ethics
and American Institutions, to which he now serves as a board
member. In 2019 he was awarded the Distinguished Early Career Achievement Award by the Academy of Legal Studies in
Business.
Abbey R. Stemler, Assistant Professor of Business Law
and Ethics at Indiana University’s Kelley School of Business.
She is a leading scholar on the sharing economy, and her
scholarship and teaching have garnered many university and national awards. She is frequently sought out for her expertise on
platform-based technology companies, such as Facebook, Uber,
and Google.
Professor Stemler has published multiple articles in leading
law journals such as the Iowa Law Review, Emory Law Journal,
Maryland Law Review, Georgia Law Review, and Harvard Journal on Legislation. Her research explores the interesting spaces
where law has yet to catch up with technology. In particular,
her aim is to expose the evolving realities of Internet-based innovations and platforms and to find ways to effectively regulate
them without hindering their beneficial uses. As she sees it,
many modern firms inhabit a world that operates under alien
physics—where free is often costly and “smart” is not always
wise. She employs tools and insights from economics, behavioral science, regulatory theory, and rhetoric to understand
how we, as a society, can better protect consumers, privacy,
and democracy.
Professor Stemler is also a faculty associate at the Berkman
Klein Center for Internet & Society at Harvard University,
practicing attorney, entrepreneur, and consultant for governments and multinational organizations such as the World Bank
Group.
Preface
Preface
This is the 18th Edition (and the 24th 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 the law of an increasingly digital world. The 18th 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:
www.law.cornell.edu/ucc.
Continuing Strengths
The 18th Edition continues the basic features that have made its
predecessors successful. They include:
• Comprehensive coverage. We believe that the text continues to
excel in both 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, the text lends itself to the flipped
classroom, allowing coverage of 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 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.
Important Changes
in This Edition
For this edition, we welcome Todd Haugh and Abbey Stemler,
our Indiana University colleagues, to the author team. They bring
new teaching, research, and legal practice experiences to our
team that have helped shape our approach to the 18th Edition
and will allow us to continue to deliver excellent coverage of the
ever-changing legal environment of business.
Our longtime co-author Arlen Langvardt decided to retire
from authoring the textbook along with retiring from his faculty
position at Indiana University. The author team wishes to express
our gratitude for his leadership on the textbook for the past couple of editions and to thank him for the profound impact he has
made on this text. In his place, Jamie Prenkert has moved into the
lead author role. Co-author Jim Barnes remains our connection
to the long and vital history of this textbook. With this edition,
Jim will have been a co-author of this text for more than 50 years!
In this edition, the combination of new and longstanding
authors has led to a number of innovations, while maintaining
the thorough yet accessible approach for which the book is well
known. Along with a more explicit focus on compliance in addition to ethics (see Ethics and Compliance in Action features),
the 18th Edition includes new cases, tracks recent developments
in various substantive areas of law, and offers revisions to various textual material in our ongoing commitment to clarity and
completeness. The book continues to include both hypothetical
examples and real-life cases so that instructors can elucidate important concepts for students while also maintaining student interest and engagement. Key additions and revisions for the 18th
Edition include the following:
Chapter 1
• New problem case dealing with a spectator injured by a foul
ball at a professional baseball game. The problem case can be
used to enrich class discussion around case law reasoning, as
illustrated in the Coomer case in the main text.
• Introduction of the new Ethics and Compliance in Action feature, which is present throughout the book.
Chapter 2
• New discussion of the Forced Arbitration Injustice Repeal Act
(Fair Act).
Chapter 3
• Incorporation in the text of several recent Supreme Court
cases, including Trump v. Vance (separation of powers and
v
vi
Preface
Supremacy Clause), Burwell v. Hobby Lobby Stores and Masterpiece Cakeshop, Ltd. v. Colorado Civil Rights Commission (First
Amendment religion clause, as well as the federal Religious
Freedom Restoration Act).
• Reorganization of the Commerce Clause discussion and the
addition of 2018 Supreme Court decision South Dakota v.
­Wayfair, Inc., which illustrates the standard for excessive burden on interstate commerce.
• New figure describing the Food and Drug Administration’s tobacco regulations pursuant to the Family Smoking Prevention
and Tobacco Control Act and related court challenges, with
specific focus on First Amendment speech issues.
• New discussion of the claims against Harvard College and
the University of North Carolina related to their admissions
practices.
Chapter 12
• New case, Mid-American Salt, LLC v. Morris County Cooperative
Pricing Council, which illustrates that requirements contracts,
though recognized under the UCC, must create some obligation in order to avoid being illusory.
• Revision of the discussion of forbearance as a form of consideration for added clarity.
Chapter 4
• New discussion of the Business Roundtable’s 2019 statement
regarding stakeholder theory.
Chapter 18
• New case, Macomb Mechanical, Inc. v. Lasalle Group Inc.,
which illustrates the operation of a “pay if paid” clause as a
condition precedent.
Chapter 5
• New discussion of Fourth Amendment searches and the thirdparty doctrine.
• New case note that highlights the importance of New York Central & Hudson River Railroad v. United States, which established
the concept of corporate criminal liability.
• Revision of discussion of criminal racketeering offenses.
• New problem regarding whether a health care company and its
senior executives had standing to challenge a warrant in a tax
fraud case based on Fourth Amendment grounds.
• New problem case on the Sixth Amendment’s reach in the context of corporate criminal fines based on the Apprendi line of
Supreme Court cases.
Chapter 7
• New case that provides a clear illustration of negligence elements in the context of an easily understood fact pattern.
Chapter 8
• New case, ZUP, LLC v. Nash Manufacturing, Inc., which
provides a relatable example of the patent requirement of
nonobviousness.
Chapter 9
• New case, Grimes v. Young Life, Inc., which deals with a hybrid
contract and the application of the predominant factor test.
• New case, PWS Environmental, Inc. v. All Clear Restoration and
Remediation, LLC, which provides a straightforward application of quasi-contract.
Chapter 10
• New Cyberlaw in Action feature dealing with Twitter and offer
terms.
• Replacement of the term “insanity” with the more modern concept of “mental incapacity.”
Chapter 11
• General update of examples to ensure that concepts and technology references remain relevant.
Chapter 16
• Discussion of the 21st Century Integrated Digital Experience
Act (IDEA).
Chapter 17
• New Ethics and Compliance in Action feature, which explores
the ethics of obligating a donee beneficiary to an arbitration
clause.
Chapter 19
• New case, National Music Museum: America’s Shrine to Music
v. Johnson, which deals with a contract for the sale of a guitar
once owned by Elvis Presley and illustrates the rules concerning the passage of title.
Chapter 20
• New introduction problem, which explores products liability
and ethical issues involving JUUL e-cigarettes.
• New Cyberlaw in Action feature that explores the question
of whether Amazon, when it sells a defective product via a
third-party seller, can be held liable. The box references and
discusses recent litigation including Allstate New Jersey Insurance Co. v. Amazon.com; Eberhart v. Amazon.com; Oberdorf v.
Amazon.com, Inc.; and Papataros v. Amazon.com.
• Revision of discussion of punitive damages to include recent
verdicts against Johnson & Johnson and Monsanto.
Chapter 21
• New case, Hillerich & Bradsby v. Charles Products, which addresses whether a buyer timely notified the seller that products
delivered to the buyer for sale to children in buyer’s Louisville
Slugger Museum Store were defective (i.e., contained lead content in excess of limits prescribed under the Consumer Products Safety Improvement Act of 2008).
Chapter 22
• New case, Beau Townsend Ford Lincoln v. Don Hinds Ford,
which illustrates the principle that a buyer is liable for
the purchase price of goods that have been received and
accepted and that the buyer is not relieved of that obligation when deceived into making payment to someone other
than the seller to whom the buyer is contractually obligated
to pay.
Chapter 23
• New problem case.
Preface
Chapter 24
• Revision to Francini v. Goodspeed Airport, LLC to note that the
Connecticut Supreme Court upheld the Connecticut Appellate
Court’s decision (included in the text) in 2018.
Chapter 25
• Revisions to text to clarify state and local variations in the law
that have developed in recent years.
• Revision and update to the discussion of a landlord’s duty to
mitigate damages.
Chapter 26
• Revision to the explanation of the formalities of a will for
greater clarity.
Chapter 27
• New Cyberlaw in Action feature discussing the burgeoning
cyber insurance market.
• Updates to the status of health care insurance under the Affordable Care Act.
Chapter 28
• New case, Trump Endeavor 12 LLC v. Fernich, Inc. d/b/a The
Paint Spot, involving a contractor who sued to enforce a lien on
property on which it had provided materials but had not been
paid by the owner of the property.
Chapter 29
• New case, Hyman v. Capital One Auto Finance, where the court
held that a debtor had stated a case for conversion and breach
of the peace in the course of an attempted repossession of her
automobile where the “repo man” involved the state police
without judicial authorization.
Chapter 30
• Revision of discussion of preferential liens.
• New case, Rosenberg v. N.Y State Higher Education Services Corp.,
in which a bankruptcy court granted a discharge of student loans
on the grounds their repayment would constitute an undue hardship. The court criticized previous bankruptcy court decisions
that produced harsh results for students on the grounds that the
courts did not properly apply prior case authority.
• New text concerning the Small Business Organization Act of
2019 that provides a modified procedure to facilitate reorganization under Chapter 11 of small businesses in financial difficulty.
Chapter 32
• New case, Triffin v. Sinha, which illustrates the operation of the
shelter rule: The assignee of a check was held to be entitled to
holder-in-due-course status because the entity that assigned the
check to him was a holder in due course.
Chapter 33
• Revision of the text for clarity and to reflect recent changes in
the law.
Chapter 34
• New case, Grodner & Associates v. Regions Bank, which involves a bookkeeper who defrauded the law firm for which she
worked over a period of 15 months by writing checks utilizing
vii
facsimile signatures and initiating ACH transactions, which
she was not authorized to perform. The bank refused to recredit the account on the grounds the law firm had not notified
the bank of the fraud within a year after receiving a statement
containing an unauthorized payment and the law firm was unable to show any deviation from the bank’s own procedures
or local banking standards or from the terms of the parties’
deposit agreement.
• Revision of discussion of Check 21, the electronic processing
of checks, and Federal Reserve Board Regulations concerning
wire transfers.
Chapter 35
• New case, Krakauer v. Dish Network LLC, which illustrates the
objective standard of manifested assent for agency formation.
• New Cyberlaw in Action feature, which discusses California’s
judicial and legislative responses to misclassification of gig
workers as nonemployee agents in a variety of industries, specifically focusing on sharing-economy platform businesses like
Uber and Lyft.
Chapter 36
• New case, Synergies3 Tec Services, LLC v. Corvo, in which the
court analyzes whether employees’ intentional tort was committed in the scope of their employment.
Chapter 37
• Introduction of one of the newest business forms: the benefit
corporation.
Chapter 38
• New problem case, which deals with the possible creation of a
partnership amid a pandemic.
Chapter 39
• New case, Gelman v. Buehler, which demonstrates to students
the importance of partnership agreements.
Chapter 40
• New introduction problem, which examines the appropriateness for and tax implications of forming a limited liability
company.
• New in-depth discussion of the tax advantages of limited liability companies.
• Removal of discussion of the now-outdated business form: the
limited liability limited partnership.
Chapter 41
• New text, which discusses benefit corporations and their growing importance, including a new chart comparing benefit corporations and certified “B corps.”
• New case about scholarly critique of benefit corporations suggesting they may actually hurt socially conscious companies
that are more traditionally organized.
Chapter 42
• Revision of Ethics and Compliance in Action feature concerning offshore tax havens used by major U.S. companies.
viii
Preface
• New problem cases about the policy arguments for holding
promoters liable for preincorporation contracts and the equity
stakes taken in entrepreneurial ventures on the popular show
Shark Tank.
Chapter 43
• New text related to CEO compensation, including that of Tesla’s Elon Musk and Disney’s Bob Iger.
• New text that highlights the duty-of-care obligations related to
the oversight of legal compliance.
• New case, In re Caremark Int’l Inc. Derivative Litig., which established the fiduciary obligation of board oversight of compliance and effectively created modern corporate compliance
regimes.
• Revised discussion of the foundations of corporate criminal
liability and the costs of white-collar crime.
• New problem case about a shareholder suit against Allergan,
the company that makes Botox, and the theory of legal liability
underlying fiduciary duty claims.
Chapter 44
• New Ethics and Compliance in Action feature about the ethicality of share dissolution at Facebook.
• New problem case regarding dividend distribution under the
Model Business Corporation Act.
Chapter 45
• New discussion of the Security and Exchange Commission’s
powers, including implications of recent Supreme Court opinions Lucia v. SEC and Kokesh v. SEC.
• New and revised text about Section 5 of the Securities Act of
1933, including Rules 163A, 135, 169, and the Jumpstart Our
Business Startups (JOBS) Act.
• Revision of the Concept Review concerning the communications issuers may provide to the public.
• New text on “gun jumping” violations levied against Google
and Salesforce.
• Revisions to text on offering exemptions, including new text
concerning Regulation A, Regulation Crowdfunding, and Rule
506, and deletion of text referring to the withdrawn Rule 595.
• Revision of Ethics and Compliance in Action feature related to
the trade-offs and criticisms of the JOBS Act.
• Revision of the Concept Review regarding issuers’ exemptions
from registration requirements.
• New discussion of scienter and the Private Litigation Securities Reform Act.
• Revision of text concerning insider trading, including a new
discussion of classical and misappropriation theories, as well
as tippee liability under Dirks v. SEC.
• New case, SEC v. Dorozhko, which considered computer hacking as insider trading under the misappropriation theory.
• New case note comparing United States v. Newman and United
States v. Salman, which address the personal benefit test of tippee liability.
• New problem case on whether Elon Musk violated securities
laws based on his tweets.
• New problem case about insider trading prosecution of
Mathew Martoma and SAC Capital Advisors.
Chapter 46
• New discussion of Regulation Best Interest, including a summary chart of obligations of broker-dealers.
• New case, United States v. Goyal, which concerned the evidence used to convict a former CFO for securities fraud violations under Section 10(b) of the 1934 Act.
• New problem case about whether the suit against a seller of
high-performance liquid chromatography systems met the
pleading standards for scienter and materiality under the securities laws.
Chapter 47
• Revision to discussion of Federal Communications Commission action about network neutrality regulation.
Chapter 48
• Revision to discussion of the recent actions taken by the FTC
to regulate deceptive practices.
• Revision to discussion of the Truth in Lending Act.
• New discussion of the Economic Growth, Regulatory Relief,
and Consumer Protection Act (Economic Growth Act) and its
impact on the Fair Credit Reporting Act.
Chapter 49
• New case box about United States v. Apple, Inc., in which Apple
was held responsible for violating the Sherman Act when it
conspired among major book publishers to raise the retail
prices of ebooks.
• New Ethics and Compliance in Action feature that discusses
how antitrust laws may hinder socially responsible business
practices.
Chapter 50
• New Ethics and Compliance in Action feature about consolidation among big tech firms such as Facebook and Instagram.
Chapter 51
• New case concerning workers’ compensation, American Greetings Corp. v. Bunch, in which an employee is injured during a
work-related event but not while performing day-to-day work
responsibilities.
• Added discussion of emergency medical and family leave provisions of the Families First Coronavirus Response Act.
• Revised discussion of collective bargaining and unionization
to reflect recent Supreme Court cases, including Janus v. AFSCME and Epic Systems Corp. v. Lewis.
• New discussion of the Equal Pay Act that includes consideration of the U.S. Women’s National Soccer Team’s pay discrimination claim against U.S. Soccer.
• New case, Bostock v. Clayton County, in which the U.S. Supreme Court held that Title VII of the 1964 Civil Rights Act
prohibition against discrimination in employment because of
sex includes discrimination on the basis of sexual orientation
and gender identity.
Preface
Chapter 52
• Revision of text to incorporate retrenchment by Trump administration of Environmental Protection Agency regulations to control greenhouse gasses associated with global
climate change, including the Clean Power Plan and the automobile fuel economy standards adopted during the Obama
administration.
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
Henry Lowenstein, Coastal Carolina University
ix
Dennis Wallace, University of New Mexico
Melanie Stallings Williams, California State
University–Northridge
We also acknowledge the assistance and substantive
c­ ontributions of Professor Sarah Jane Hughes of Indiana
­University’s Maurer School of Law and Professors Angela
­Aneiros (Chapter 25), Victor Bongard (Chapter 24), Shawna
Eikenberry (Chapter 18), Goldburn Maynard (Chapter 26), and
April Sellers (Chapters 3 and 51) of Indiana University’s Kelley
School of Business. We further acknowledge the technical contributions of Elise Borouvka and the research assistance of Lin Ye,
a student at the Maurer School.
Jamie Darin Prenkert
A. James Barnes
Joshua E. Perry
Todd Haugh
Abbey R. Stemler
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A New Kind of Business Law
The 18th Edition of Business Law continues to focus on global, ethical, and digital issues affecting legal aspects of business. The new edition contains a number of new features as well as a revised supplements package. Please take a few moments to page through some of the highlights of this
new edition.
Confirming Pages
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
llnewsPublishingInc.,afirmwhoseprincipalofficesarelocatedinOrlando,Florida,ownsandpublishes
33 newspapers. These newspapers are published in 21 different states of the United States. Among the
AllnewsnewspapersistheSnakebite Rattler,thelonenewspaperinthecityofSnakebite,NewMexico.The
RattlerissoldinprintformonlyinNewMexico.However,manyofthearticlesinthenewspapercanbeviewedby
anyonewithInternetaccess,regardlessofhisorhergeographiclocation,bygoingtotheAllnewswebsite.
InarecentRattler edition,anarticleappearedbeneaththisheadline:“LocalBusinessExecutiveSuedforSexual
Harassment.”Theaccompanyingarticle,writtenbyaRattlerreporter(anAllnewsemployee),statedthataperson
namedPhilAndersonwasthedefendantinthesexualharassmentcase.Besidesbeingmarried,AndersonwasawellknownbusinesspersonintheSnakebitearea.HewasactiveinhischurchandincommunityaffairsinbothSnakebite
(hiscityofprimaryhome)andPetoskey,Michigan(whereheandhiswifehaveasummerhome).Astockphotoof
Anderson,whichhadbeenusedinconnectionwithpreviousRattlerstoriesmentioninghim,appearedalongsidethe
storyaboutthesexualharassmentcase.Anderson,however,wasnotthedefendantinthatcase.Hewasnamedin
theRattler storybecauseofanerrorbytheRattler reporter.Theactualdefendantinthesexualharassmentcasewas
alocalbusinessexecutivewithasimilarname:PhilAnderer.
AndersonplanstofileadefamationlawsuitagainstAllnewsbecauseoftheabove-describedfalsehoodintheRattler
story.Heexpectstoseek$500,000indamagesforharmtohisreputationandforotherrelatedharms.InChapter6,
youwilllearnaboutthesubstantivelegalissuesthatwillariseinAnderson’sdefamationcase.For now, however, the
focus is on important legal matters of a procedural nature.
ConsiderthefollowingquestionsregardingAnderson’scaseasyoureadthischapter:
•Where,inageographicsense,mayAndersonproperlyfileandpursuehislawsuitagainstAllnews?
•MustAndersonpursuehiscaseinastatecourt,ordoeshehavetheoptionoflitigatingitinfederalcourt?
•AssumingthatAndersonfileshiscaseinastatecourt,whatstrategicoptionmayAllnewsexerciseifitacts
promptly?
•Intherun-uptoapossibletrialinthecase,whatlegalmechanismsmayAndersonutilizeinordertofindout,on
apretrialbasis,whattheRattlerreporterandotherAllnewsemployeeswouldsayinpossibletestimonyattrial?
IsAllnewsentitledtodothesamewithregardtoAnderson?
•IfAnderson’scasegoestotrial,whattypesoftrialsarepossible?
•Throughwhatlegalmechanismsmightacourtdecidethecasewithoutatrial?
•Today,manylegaldisputesaredecidedthrougharbitrationratherthanthroughproceedingsincourt.Giventhe
prevalenceofarbitrationthesedays,whyisn’tAnderson’scaseacandidateforarbitration?
Confirming Pages
2-2
LO
Part One
Foundations of American Law
pre3689X_ch02_001_032
2-1
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
2-1
Describethebasicstructuresofstatecourt
systemsandthefederalcourtsystem.
2-2 Explainthedifferencebetweensubject-matter
jurisdictionandinpersonamjurisdiction.
2-3 Identifythemajorlegalissuescourtsmust
resolvewhendecidingwhetherinpersonam
jurisdictionexistswithregardtoadefendantina
civilcase.
2-4 Explainwhatisnecessaryinorderforafederal
courttohavesubject-matterjurisdictionovera
civilcase.
x
BUSINESS LAW COURSES examine many substantive
legal rules that tell us how to behave in business and in
society.Examplesincludetheprinciplesofcontract,tort,
andagencylaw,aswellasthoseofmanyotherlegalareas
addressedlaterinthistext.Mostoftheseprinciplesareappliedbycourtsastheydecidecivilcasesinvolvingprivate
parties.Thischapterlaysafoundationforthetext’sdiscussionofsubstantivelegalrulesbyexaminingthecourtsystemsoftheUnitedStatesandbyoutlininghowcivilcases
proceedfrombeginningtoend.Thechapteralsoexplores
2-5 Identifythemajorstepsinacivillawsuit’s
progressionfrombeginningtoend.
2-6 Describethedifferentformsofdiscovery
availabletopartiesincivilcases.
2-7 Explainthedifferencesamongthemajorforms
ofalternativedisputeresolution.
these courts, procedures may be informal, and parties
oftenarguetheirowncaseswithoutrepresentationbyattorneys.Courtsoflimitedjurisdictionoftenarenotcourts
ofrecord—meaningthattheymaynotkeepatranscriptof
theproceedingsconducted.Appealsfromtheirdecisions
therefore require a new trial (a trial de novo) in a trial
court.
Trial Courts Courts of limited jurisdiction find the
relevantfacts,identifytheappropriaterule(s)oflaw,and
LEARNING OBJECTIVES
09/11/2009:15PM
Active Learning Objectives open each chapter. LOs
inform you of specific outcomes you should have
after finishing the chapter. Icons reference each LO’s
reference within the chapter.
Confirming Pages
A Guided Tour
2-16
Part One
Foundations of American Law
CYBERLAW IN ACTION
BOXES
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
xi
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 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 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
Confirming Pages
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
2-18
Part One Foundations of American Law
of evidence destruction and, potentially, sanctions imposed by a
court. (For further discussion of related legal and ethical issues, see
this chapter’s Ethics and Compliance in Action box.)
Finally, given the now-standard requests of plaintiffs and
defendants that the opposing party provide access to relevant
Thebroadscopeofdiscoveryrightsinacivilcase to impose appropriate sanctionson thedocument-destroying
e-mails, one should not forget this important piece of advice: Do
willoftenentitleapartytoseekandobtaincopies party.Thesesanctionsmayincludesuchremediesascourtorof e-mails, records, memos, and other documents ders prohibiting the document-destroyer from raising certain
not say anything in an e-mail that you would not say in a formal
andelectronicallystoredinformationfromtheopposingpar- claims or defenses in the lawsuit, instructions to the jury rewritten memo or in a conversation with someone. There is a tooty’sfiles.Inmanycases,someofthemostfavorableevidence
gardingthewrongfuldestructionofthedocuments,andcourt
frequent tendency to think that because e-mails often tend to be
fortheplaintiffwillhavecomefromthedefendant’sfiles,and ordersthatthedocument-destroyerpaycertainattorneyfeesto
informal 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 theopposingparty.
that he or she would not say in another setting. Many individuals
litigationandyouknowthatthefirm’sfilescontainmaterials
Whataboutthetemptationtorefusetocooperateregardand companies have learned the hard way that comments made
thatmaybedamagingtothefirminthelitigation,youmaybe inganopposingparty’slawfulrequestfordiscoveryregarding
in their e-mails or those of their employees proved to be damning
faced with the temptation to alter or destroy the potentially material in one’s possession? Although a refusal to cooperevidence against them in litigation and thus helped the opposing
damagingitems.Thistemptationposesseriousethicaldilem- ate seems less blameworthy than destruction or alteration
parties win the cases.
mas.Isitmorallydefensibletochangethecontentofrecords ofdocuments,extremeinstancesofrecalcitranceduringthe
In keeping with today’s technological world, these
boxes describe and discuss actual instances of how
the Internet is affecting business law today.
ETHICS AND COMPLIANCE IN
ACTION BOXES
Ethics and Compliance in Action
These boxes appear throughout the chapters and
offer critical thinking questions and situations that
relate to ethical/public policy concerns.
ordocumentsonanafter-the-factbasis,inordertolessenthe
adverseeffectonyourfirminpendingorprobablelitigation?
Isdocumentdestructionore-maildeletionethicallyjustifiable
whenyouseektoprotectyourfirm’sinterestsinalawsuit?
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 yourConfirming Pages selfandyourfirm.Themuch-publicizedcollapseoftheEnron
Corporationin2001ledtoconsiderablescrutinyoftheactions
oftheArthurAndersenfirm,whichhadprovidedauditingand
consultingservicestoEnron.AnAndersenpartner,DavidDuncan,pleadedguiltytoacriminalobstructionofjusticecharge
pre3689X_ch02_001_032 2-16
09/11/2009:15PM
thataccusedhimofhavingdestroyed,orhavinginstructedAndersenemployeestodestroy,certainEnron-relatedrecordsin
1-28
Part One Foundations of American Law
ordertothwartaSecuritiesandExchangeCommission(SEC)
investigation of Andersen. The U.S. Justice Department also
between real parties with tangible opposing interests in
eventhoughtheircontroversyhasnotadvancedtothelaunchedanobstructionofjusticeprosecutionagainstAnderthe lawsuit. Courts generally do not issue advisory opinpointwhereharmhasoccurredandlegalreliefmaybesen on the theory that the firm altered or destroyed records
ions on abstract legal questions unrelated to a genuine
necessary. This enables them to determine their legalpertaining to Enron in order to impede the SEC investigation. A jury found Andersen guilty of obstruction of justice.
dispute,anddonotdecidefeigned controversiesthatparposition without taking action that could expose themAlthoughtheAndersenconvictionwaslateroverturnedbythe
ties concoct to seek answers to such questions. Courts
toliability.Forexample,ifDarlenebelievesthatsome- U.S.SupremeCourtbecausethetrialjudge’sinstructionstothe
mayalsorefusetodecidecasesthatareinsufficientlyripe
thingsheplanstodowouldnotviolateEarl’scopyrightjuryonrelevantprinciplesoflawhadbeenimpermissiblyvague
to have matured into a genuine controversy, or that are
onaworkofauthorshipbutsherecognizesthathemayregardingthecriticalissueofcriminalintent,adevastatingefmoot because there no longer is a real dispute between
take a contrary view, she may seek a declaratory judg- fectonthefirmhadalreadytakenplace.
the parties. Reflecting similar policies is the doctrine of
ment on the question rather than risk Earl’s lawsuit Ofcourse,notallinstancesofdocumentalterationordestanding to sue,whichnormallyrequiresthattheplaintiff
by proceeding to do what she had planned. Usually, astructionwillleadtocriminalprosecutionforobstructionof
have some direct, tangible, and substantial stake in the
declaratoryjudgmentisawardedonlywhentheparties’justice. Other consequences of a noncriminal but clearly severe nature may result, however, from document destruction
outcomeofthelitigation.
disputeissufficientlyadvancedtoconstitutearealcase
thatinterfereswithlegitimatediscoveryrequestsinacivilcase.
Stateandfederaldeclaratory judgmentstatutes,howorcontroversy.
In such instances, courts have broad discretionary authority
ever, allow parties to determine their rights and duties
THE GLOBAL BUSINESS
ENVIRONMENT BOXES
witnesses or to certain evidence that has been offered for
admission.Thetrialjudgeutilizesthelegalrulesofevidence
todeterminewhethertosustaintheobjection(meaningthat
Just as statutes may require judicial interpreta- distress,whereuponhiswifeandadoctorwhowasonboardtheobjected-toquestioncannotbeansweredbythewitness
tion when a dispute arises, so may treaties. The gave him shots of epinephrine from an emergency kit thatorthattheofferedevidencewillbedisallowed)or,instead,
The Global Business Environment
techniques that courts use in interpreting treaties
correspond closely to the statutory interpretation techniques
discussedinthischapter.Olympic Airways v. Husain,540U.S.
644(2004),furnishesausefulexample.
In Olympic Airways, the U.S. Supreme Court was faced
withaninterpretationquestionregardingatreaty,theWarsaw
Convention,whichdealswithairlines’liabilityforpassenger
deathsorinjuriesoninternationalflights.Numerousnations
(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
sustainedintheeventofthedeathorwoundingofapassengeroranyotherbodilyinjurysufferedbyapassenger,ifthe
accidentwhichcausedthedamagesosustainedtookplaceon
board the aircraft or in the course of any of the operations
ofembarkingordisembarking.”Aseparateprovisionimposes
limitsontheamountofmoneydamagestowhichaliableairlinemaybesubjected.
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,
buthisseatwasonlythreerowsinfrontofthesmokingsection.BecauseHansonwasextremelysensitivetosecondhand
smoke, he and his wife, Rubina Husain, requested various
timesthathebeallowed,forhealthreasons,tomovetoaseat
fartherawayfromthesmokingsection.Eachtime,therequest
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
planetogetsomefresherair.Hansonwentintorespiratory
Hansoncarried.AlthoughthedoctoradministeredCPRand
oxygen when Hanson collapsed, Hanson died. Husain, acting as personal representative of her late husband’s estate,
suedOlympicinfederalcourtonthetheorythattheWarsaw
Convention made Olympic liable for Hanson’s death. The
federaldistrictcourtandthecourtofappealsruledinfavor
ofHusain.
InconsideringOlympic’sappeal,theU.S.SupremeCourt pre3689X_ch02_001_032
noted that the key issue was one of treaty interpretation:
whethertheflightattendant’srefusalstoreseatHansonconstituted an “accident which caused” the death of Hanson.
NotingthattheWarsawConventionitselfdidnotdefine“accident” and that different dictionary definitions of “accident”
exist,theCourtlookedtoaprecedentcase,Air France v. Saks,
470 U.S. 392 (1985), for guidance. In the Air France case,
theCourtheldthattheterm“accident”intheWarsawConventionmeans“anunexpectedorunusualeventorhappening
thatisexternaltothepassenger.”Applyingthatdefinitionto
the facts at hand, the Court concluded in Olympic Airways
thattherepeatedrefusalstoreseatHansondespitehishealth
concernsamountedtounexpectedandunusualbehaviorfora
flightattendant.Althoughtherefusalswerenotthesolereason why Hanson died (the smoke itself being a key factor),
therefusalswerenonethelessasignificantlinkinthecausation 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
supportingit,theCourtconcludedthattherefusalstoreseat
Hanson constituted an “accident” covered by the Warsaw
Convention.Therefore,theCourtaffirmedthedecisionofthe
lowercourts.
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
investmentbankparticipatedwithSunbeamCorp.inafraudulent scheme that supposedly induced him to sell Sunbeam
hisstakeinanotherfirminreturnforSunbeamshareswhose
value plummeted when Sunbeam collapsed. During the discovery phase of the case, Perelman had sought certain potentiallyrelevante-mailsfromMorganStanley’sfiles.Morgan
Stanley repeatedly failed and refused to provide this discoverable material and, in the process, ignored court orders to
providethee-mails.
Eventually, a fed-up trial judge decided to impose sanctions for Morgan Stanley’s wrongful conduct during the
discoveryprocess.ThejudgeorderedthatPerelman’scontentionswouldbepresumedtobecorrectandthattheburden
of proof would be shifted to Morgan Stanley so that Morgan Stanley would have to disprove Perelman’s allegations.
Inaddition,thetrialjudgeprohibitedMorganStanleyfrom
contesting certain allegations made by Perelman. The jury
laterreturnedaverdictinfavorofPerelmanandagainstMorganStanleyfor$604millionincompensatorydamagesand
$850millioninpunitivedamages.ThecourtorderssanctioningMorganStanleyforitsdiscoverymisconductundoubtedly
playedakeyroleinPerelman’svictory,effectivelyturninga
case that was not a sure-fire winner for Perelman into just
that.Thecaseillustratesthatapartytolitigationmaybeplayingwithfireifhe,she,oritinsistsonrefusingtocomplywith
legitimatediscoveryrequests.
overruleit(meaningthatthequestionmaybeansweredor
thattheofferedevidencewillbeallowed).
Thewitnessesthatplaintiffsanddefendantscalltotestifyattrialmayincludethosewhocantestifyastorelevant
factsofwhichtheyhavepersonalknowledge(oftencalled
Because global issues affect people in many different
aspects of business, this material appears throughout
the text instead of in a separate chapter on
international issues. This feature brings to life global
issues that are affecting business law.
2-18
09/11/2009:15PM
AccordingtothelegalrealistsdiscussedinChapter1,written “book law” is less important than what public decisionmakersactually do.Usingthisapproach,wediscover
a Constitution that differs from the written
Constitution
xii
A Guided
Tour
justdescribed.Theactualpowersoftoday’spresidency,for
instance,exceedanythingonewouldexpectfromreading
LOG ON BOXES
ArticleII.Asyouwillsee,moreover,someconstitutional
provisions
have acquired
a meaning
different from their
These appear throughout
the chapters
and direct
students,
meaningwhenfirstenacted.Americanconstitutionallaw
where appropriate, tohasevolvedratherthanbeingstatic.
relevant websites that will give them
more information aboutManyofthesechangesresultfromthewayonepublic
each featured topic. Many of these
decision
nine-member
U.S. Supreme
Court—
are key legal sites that
may bemaker—the
used repeatedly
by business
law
has interpreted the Constitution over time. Formal constudents and business
professionals
alike.
stitutional
change
can be accomplished only through the
amendmentprocess.Becausethisprocessisdifficulttoemploy,however,amendmentstotheConstitutionhavebeen
relatively infrequent. As a practical matter, the Supreme
Court has become the Constitution’s main “amender”
through its many interpretations of constitutional
First Pages 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 di3-22
Part One Foundations of American Law
verseinterpretations.“Dueprocessoflaw”and“equalprotectionofthelaws”areexamples.Inaddition,thehistory
CONCEPT REVIEW
surrounding the enactment of constitutional provisions
The First Amendment
sometimesissketchy,confused,orcontradictory.
Under the power of judicial review, courts can deLevelofFirstAmendment ConsequencesWhenGovernmentRegulates
TypeofSpeech
Protection
ContentofSpeech
clare the actions
of other government bodies unconstiNoncommercial
Full
tutional. HowGovernmentactionisconstitutionalonlyifactionisnecessaryto
courts
exercise this power depends on
fulfillmentofcompellinggovernmentpurpose.Otherwise,governmentactionviolatesFirstAmendment.
how they choose
to read the Constitution. Courts thus
Commercial(nonmisleading Intermediate
have politicalGovernmentactionisconstitutionalifgovernmenthassubstanpower—a conclusion especially applicable
and about lawful activity)
tialunderlyinginterest,actiondirectlyadvancesthatinterest,and
actionisnomoreextensivethannecessarytofulfillmentofthat
totheSupremeCourt.Indeed,theSupremeCourt’sjusinterest(i.e.,actionisnarrowlytailored).
ticesare,toaconsiderableextent,publicpolicymakers.
Commercial(misleading
None
Governmentactionisconstitutional.
or about unlawful activity)
Theirbeliefsareimportantinthedeterminationofhow
the United States is governed. This is why the justices’
to enhance First Amendment protection for commercial
speech),ithadnotmadeformaldoctrinalchangesasofthe
timethisbookwenttopress.
Matal v. Tam, which appears later in the chapter,
addresses the four-part test utilized in determining the
constitutionalityofcommercialspeechrestrictions,and
illustrates the rigor with which the Supreme Court has
applied the third and fourth parts of the test in recent
years.
Court,reasoned,thegovernmentspeechdoctrineapplied
and shielded the program against a First Amendment–
basedchallengebyanassociationthatdidnotwanttoparticipateinthegovernment-createdprogram.Morerecently,
in Walker v. Texas Division, Sons of Confederate Veterans,
Inc., 576 U.S. 200 (2015), the Supreme Court held that
theFirstAmendmentwasnotviolated—andthatthegovFigure 2.1 The Thirteen
ernmentspeechdoctrineapplied—whentheStateofTexas
rejectedagroup’srequestforaspecialtylicenseplateconFirst Circuit (Boston,
sistingofanimageoftheConfederatebattleflag.IndecidMass.) Maine,
pre3689X_ch03_001-044.indd
3-3
The Government Speech Doctrine
Previous discusingthatthegovernmentspeechdoctrineapplied,theCourt
Massachusetts, New
Hampshire, Puerto Rico,
sionhasrevealedthatwhenthegovernmentrestrictsthe
stressedthegovernment’shistoricuseoflicenseplatesto
Rhode
Island
contentofprivateparties’speech,aFirstAmendmentvioconvey messages and the supervisory
control
maintained
lationislikelytohaveoccurred.Butwhenthegovernment
by the government in running the specialty license plate
itself speaks, it is free to convey its preferred viewpoints
program. Figure 3.3, which appears later in the chapter,
Fifth Circuit (New
and to reject contrary views that private parties wish to
exploresrecentrequirementstoincludegraphicwarnings
Orleans, La.) Louisiana,
express.Suchisthepremiseoftherecentlydeveloped,and
ontobaccoproducts.
Mississippi,
TexasCourt
stillnotpreciselydefined,government speech doctrine.
In Matal v. Tam, which follows,
the Supreme
Whether government speech is present depends
struckdown,onFirstAmendmentgrounds,aprovisionin
largely upon the extent to which the government crafted
federallawthatallowedthegovernmenttorefusetoregisConfirming Pages
the conveyed messages or supervised, through heavy
teratrademarkthatisdisparagingtoindividualsorgroups.
involvement, the communication of the messages. In
(TrademarkregistrationisaddressedinChapter8.DiscusNinth Circuit (San Francisco,
Johanns v. Livestock Marketing Association, 544 U.S. 550
sion of Tam also appears there.) In
so ruling,
Court
Calif.)
Alaska,the
Arizona,
(2005),forinstance,theSupremeCourtupheldafederal
rejected the government’s attemptCalifornia,
to invoke Guam,
the governHawaii,
Idaho, Montana, Nevada,
statute that set up a program of paid advertisements dementspeechdoctrineandremindedreadersthattheFirst
Northern Mariana Islands,
signedtopromotetheimageandsaleofbeefproducts.The
Amendmentprotectsagreatdealofspeechthatisoffen2-4
Part One Foundations of American Law
Oregon, Washington
Court emphasized that the U.S. Department of Agriculsiveinnature.Tamalsoexploresanissuenotedearlierin
turedesignedtheprogram,establisheditscontours,andexthechapter:theproblematicnature,forFirstAmendment
ercisedclosesupervisoryauthorityoverthemessagesthat
purposes,oflawsthatdiscriminateamongspeakersonthe
Abdouch v. Lopez
829 N.W.2d 662 (Neb. 2013)
werecommunicatedintheadvertisements.Therefore,the
basisoftheviewpointstheyexpress.
FIGURES
The figures appear occasionally in certain
chapters. These features typically furnish
further detail on special issues introduced
more generally elsewhere in the text.
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 RevolutionaryRoad. 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
pre3689X_ch03_001-044.indd
10/27/2004:25PM
website
for more than three 3-22
years after Lopez and KLB sold the inscribed copy, contained a picture of the inscription, the word
“SOLD,”
and this statement:
putpoliticalconstraintsonjudgesbecausecourtsdepend
on the other branches of government—and ultimately on
publicbeliefinjudges’fidelitytotheruleoflaw—tomake
theirdecisionseffective.Therefore,judgessometimesmay
be reluctant to declare statutes unconstitutional because
theyarewaryofpowerstruggleswithamorerepresentativebodysuchasCongress.
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
Thischapterexaminescertainconstitutionalprovisionsthat
areimportanttobusiness;itdoesnotdiscussconstitutional
lawinitsentirety.Theseprovisionshelpdefinefederaland
statepowertoregulatetheeconomy.TheU.S.Constitution
limits government regulatory power in two general ways.
First, it restricts federal
legislative authority by listing the
CONCEPT
REVIEWS
powersCongresscanexercise.TheseareknownastheenuThese boxes visually represent important concepts
merated powers.Federallegislationcannotbeconstitutional
presented
in the text to help summarize key ideas at
ifitisnotbasedonapowerspecificallystatedintheConstiatution.Second,theU.S.Constitutionlimitsbothstate
glance and simplify students’ conceptualization ofand
federalpowerbyplacingcertainindependent
checksinthe
complicated
issues.
path of each. In effect, the independent checks establish
thatevenifCongresshasanenumeratedpowertolegislate
onaparticularmatterorastateconstitutionauthorizesa
statetotakecertainactions,therestillarecertainprotected
spheresintowhichneitherthefederalgovernmentnorthe
Confirming Pages
stategovernmentmayreach.
Chapter Two
The Resolution of Private Disputes
Federal Judicial Circuits
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
10/27/2004:25PM
Carolina, South Carolina,
Virginia, West Virginia
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
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.)
CASES
Federal Circuit
(Washington, D.C.)
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.
controversies between the United States and a state; and
This copy is inscribed by Yates: ‘For Helen Abdouch—with admiration and best wishes. Dick Yates. 8/19/63.’
Yates had worked as a
casesinwhichastateproceedsagainstcitizensofanother
speech writer for Robert Kennedy when Kennedy served as Attorney General; Abdouch was the executivestateoragainstaliens.
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.
Civil Procedure
Because Lopez and KLB did not obtain her permission before mentioning her and using the inscription in the advertisement, AbIdentify
the major
douch filed an invasion-of-privacy lawsuit against Lopez and KLB in a Nebraska state district court. Contending that
the Nebraska
court steps in a civil lawsuit’s progression
LO2-5
lacked in personam jurisdiction, Lopez and KLB filed a motion to dismiss the case. The state district court grantedfrom
the motion.
Abdouch
beginning
to end.
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
Abdoucharguesthatthedistrictcourterredinfindingthatthe
Statelackedinpersonamjurisdiction[,oftenreferredtohereas
personal jurisdiction,]overLopezandKLB.Abdoucharguesthat
[thedefendants’]activewebsitedeliberatelytargetedherwithtortiousconduct.Sheallegesthesecontactsaresufficienttocreate
thenecessaryminimumcontactsforspecificjurisdiction.
Personaljurisdictionisthepowerofatribunaltosubjectand
2-13
Civil procedure is the set of legal rules establishing how
a civil lawsuit proceeds from beginning to end.5 Because
minimumcontactswiththeforumstatesoasnottooffendtracivil procedure
sometimes
varies with the jurisdiction in
ditional notions of fair play and substantial
justice. [See
Interquestion,6thefollowingpresentationsummarizesthemost
national Shoe Co. v. Washington,326U.S.310,316(1945).]The
benchmark...iswhetherthedefendant’sminimumcontactswith
widelyacceptedrulesgoverningcivilcasesinstateandfedthe forum state are such that theeralcourts.Knowledgeofthesebasicproceduralmatters
defendant should reasonably
anticipate being haled into court there. Whether a forum state
willbeusefulifyoubecomeinvolvedinacivillawsuitand
court has personal jurisdiction over a nonresident defendant
willhelpyouunderstandthecasesinthistext.
depends on whether the defendant’s
actions created substantial
positionsbeforeajudgeandpossiblyajury.Towinacivil
case,theplaintiffmustproveeachelementofhis,her,orits
claimbyapreponderance of the evidence.7Thisstandardof
proofrequirestheplaintifftoshowthatthegreaterweight
oftheevidence—bycredibility,notquantity—supportsthe
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 attorneyforeachpartypresentshisorherclient’sversion
ofthefacts,triestoconvincethejudgeorjurythatthis
versionistrue,andattemptstorebutconflictingfactual
allegations by the other party. Each attorney also seeks
topersuadethecourtthathisorherreadingofthelaw
iscorrect.
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
Confirming Pages
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 in color and bolded throughout the
important terminology.
xiii
Chapter Two
The Resolution of Private Disputes
2-29
Problems and Problem Cases
residentsAnneandJimCornelsen.WhenAnneCornelson telephoned the Bomblisses and said she was
readytoselltwolittersofTibetanmastiffpuppies,Ron
Bomblissexpressedinterestinpurchasingtwofemales
ofbreedingquality.TheCornelsenshadawebsitethat
allowedcommunicationsregardingdogsavailablefor
purchasebutdidnotpermitactualsalesviathewebsite.TheBomblissestraveledtoOklahomatoseethe
Cornelsens’puppiesandendeduppurchasingtwoof
them. The Cornelsens provided a guarantee that the
puppies were suitable for breeding purposes. Followingthesale,theCornelsensmailed,totheBomblisses’
home in Illinois, American Kennel Club registration
papersforthepuppies.Aroundthissametime,Anne
CornelsenpostedcommentsinanInternetchatroom
frequented by persons interested in Tibetan mastiffs.
Thesecommentssuggestedthatthemotherofcertain
Tibetanmastiffpuppies(includingonetheBomblisses
hadpurchased)mayhavehadageneticdisorder.The
comments were made in the context of an apparent
dispute between the Cornelsens and Richard Eich2. Alex Ferrer, a former judge who appeared as “Judge
horn,whoownedthemothermastiffandhadmadeit
Alex” on a television program, entered into a conavailabletotheCornelsensforbreedingpurposes.The
tractwithArnoldPreston,aCaliforniaattorneywho
Bomblisses believed that the comments would have
renderedservicestopersonsintheentertainmentinbeen seen by other persons in Illinois and elsewhere
dustry.Seekingfeesallegedlydueunderthecontract,
andwouldhaveimpairedtheBomblisses’abilitytosell
Preston invoked the clause setting forth the parties’
theirpuppieseventhough,whentested,theirpuppies
agreementtoarbitrate“anydispute... relatingtothe
werehealthy.TheBomblissesthereforesuedtheCorterms of [the contract] or the breach, validity, or lenelsensinanIllinoiscourtonvariouslegaltheories.
galitythereof... inaccordancewiththerules[ofthe
TheCornelsensaskedtheIllinoiscourttodismissthe
AmericanArbitrationAssociation].”Ferrercountered
caseonthegroundthatthecourtlackedinpersonam
Preston’s demand for arbitration by filing, with the
jurisdiction over them. Did the Illinois court lack in
CaliforniaLaborCommissioner,apetitioninwhichhe
personamjurisdiction?
contendedthatthecontractwasunenforceableunder
the California Talent Agencies Act (CTAA) because
4. HallStreetAssociateswasthelandlordandMattelInc.
Preston supposedly acted as a talent agent without
wasthetenantundervariousleasesforpropertythat
thelicenserequiredbytheCTAA.Inaddition,Ferrer
Mattel used as a manufacturing site for many years.
suedPrestoninaCaliforniacourt,seekingadeclaraTheleasesprovidedthatthetenantwouldindemnify
tionthatthedisputebetweenthepartiesregardingthe
thelandlordforanycostsresultingfromthetenant’s
contractanditsvaliditywasnotsubjecttoarbitration.
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
fromproceedingbeforethearbitratorunlessanduntil
showedhighlevelsoftrichloroethylene(TCE),theaptheLaborCommissionerconcludedthatshedidnot
parentresidueofmanufacturingdischargesconnected
haveauthoritytoruleontheparties’dispute.Preston
withMattel’soperationsonthesitebetween1951and
respondedbymovingtocompelarbitration,inreliance
1980. After the Oregon Department of Environmentext ontheFederalArbitrationAct.TheCaliforniacourt
and defined in the Glossary at the end oftalthe
text(DEQ)
for discovered
better comprehension
Quality
even more pollutants, of
deniedPreston’smotiontocompelarbitrationandisMattel signed a consent order with the DEQ providsued the injunction sought by Ferrer. Was the court
ing for cleanup of the site. After Mattel gave notice
correctindoingso?
of intent to terminate the lease in 2001, Hall Street
sued, contesting Mattel’s right to vacate on the date
3. Dog-breedersRonandCatherineBomblisslivedinIlitgaveandclaimingthattheleasesobligedMattelto
linois. They bred Tibetan mastiffs, as did Oklahoma
1. VictoriaWilson,aresidentofIllinois,wishestobring
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
locatedinNewJersey.ANewJerseynewspaperwas
the only print media outlet in which the advertisement was published. However, XYZ also placed the
advertisementonthefirm’swebsite.Thiswebsitemay
beviewedbyanyonewithInternetaccess,regardless
oftheviewer’sgeographiclocation.Where,inageographic sense, may Wilson properly file and pursue
her lawsuit against XYZ? Must Wilson pursue her
caseinastatecourt,ordoesshehavetheoptionof
litigatinginfederalcourt?AssumingthatWilsonfiles
hercaseinstatecourt,whatstrategicoptionmayXYZ
exerciseifitactspromptly?
pre3689X_ch02_001_032
2-29
09/11/2009:15PM
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Brief Contents
Brief Contents
Preface v
Part 1
1
2
3
4
The Nature of Law 1-3
The Resolution of Private Disputes 2-1
Business and the Constitution 3-1
Business Ethics, Corporate Social Responsibility,
Corporate Governance, and Critical Thinking 4-1
Part 2
5
6
7
8
Sales
Formation and Terms of Sales Contracts 19-3
Product Liability 20-1
Performance of Sales Contracts 21-1
Remedies for Breach of Sales Contracts 22-1
Part 5
23
24
25
26
27
Contracts
Introduction to Contracts 9-3
The Agreement: Offer 10-1
The Agreement: Acceptance 11-1
Consideration 12-1
Reality of Consent 13-1
Capacity to Contract 14-1
Illegality 15-1
Writing 16-1
Rights of Third Parties 17-1
Performance and Remedies 18-1
Part 4
19
20
21
22
Crimes and Torts
Criminal Law and Procedure 5-3
Intentional Torts 6-1
Negligence and Strict Liability 7-1
Intellectual Property and Unfair Competition 8-1
Part 3
9
10
11
12
13
14
15
16
17
18
Foundations of American Law
Property
Personal Property and Bailments 23-3
Real Property 24-1
Landlord and Tenant 25-1
Estates and Trusts 26-1
Insurance Law 27-1
Part 6
Credit
28 Introduction to Credit and Secured Transactions 28-3
29 Security Interests in Personal Property 29-1
30 Bankruptcy 30-1
Part 7
Commercial Paper
31 Negotiable Instruments 31-3
xx
32 Negotiation and Holder in Due Course 32-1
33 Liability of Parties 33-1
34 Checks and Electronic Transfers 34-1
Part 8
Agency Law
35 The Agency Relationship 35-3
36 Third-Party Relations of the Principal and the
Agent 36-1
Part 9
Partnerships
37 Introduction to Forms of Business and Formation of
Partnerships 37-3
38 Operation of Partnerships and Related Forms 38-1
39 Partners’ Dissociation and Partnerships’ Dissolution
and Winding Up 39-1
40 Limited Liability Companies and Limited
Partnerships 40-1
Part 10
Corporations
41 History and Nature of Corporations 41-3
42 Organization and Financial Structure of
Corporations 42-1
43 Management of Corporations 43-1
44 Shareholders’ Rights and Liabilities 44-1
45 Securities Regulation 45-1
46 Legal and Professional Responsibilities of Auditors, Consultants, and Securities
Professionals 46-1
Part 11
Regulation of Business
47 Administrative Law 47-3
48 The Federal Trade Commission Act and Consumer
Protection Laws 48-1
49 Antitrust: The Sherman Act 49-1
50 The Clayton Act, the Robinson–Patman Act, and
Antitrust Exemptions and Immunities 50-1
51 Employment Law 51-1
52 Environmental Regulation 52-1
Glossary G-1
Appendix A T
he Constitution of the United States of
America A-1
Appendix B
Index I-1
Uniform Commercial Code B-1
Contents
Contents
1
Alternative Dispute Resolution 2-24
Common Forms of ADR 2-24
Other ADR Devices 2-28
Preface v
Part 1 Foundations of American Law
1
The Nature of Law 1-3
3
An Overview of the U.S. Constitution 3-2
The Evolution of the Constitution and the Role
of the Supreme Court 3-3
The Coverage and Structure of
This Chapter 3-3
State and Federal Power to Regulate 3-4
State Regulatory Power 3-4
Federal Regulatory Power 3-4
Burden on, or Discrimination against, Interstate
Commerce 3-13
Independent Checks on the Federal Government
and the States 3-13
Incorporation 3-13
Government Action 3-14
Means-Ends Tests 3-14
Business and the First Amendment 3-15
Due Process 3-27
Equal Protection 3-28
Independent Checks Applying Only to the
States 3-37
The Contract Clause 3-37
Federal Preemption 3-38
The Takings Clause 3-39
Types and Classifications of Law 1-4
The Types of Law 1-4
Priority Rules 1-8
Classifications of Law 1-10
Jurisprudence 1-10
Legal Positivism 1-11
Natural Law 1-11
American Legal Realism 1-11
Sociological Jurisprudence 1-12
Other Schools of Jurisprudence 1-12
The Functions of Law 1-13
Legal Reasoning 1-13
Case Law Reasoning 1-14
Statutory Interpretation 1-18
Limits on the Power of Courts 1-27
APPENDIX Reading and Briefing Cases 1-29
2
The Resolution of Private Disputes 2-1
State Courts and Their Jurisdiction 2-2
Courts of Limited Jurisdiction 2-2
Trial Courts 2-2
Appellate Courts 2-3
Jurisdiction and Venue 2-3
Federal Courts and Their Jurisdiction 2-9
Federal District Courts 2-9
Specialized Federal Courts 2-12
Federal Courts of Appeals 2-12
The U.S. Supreme Court 2-12
Civil Procedure 2-13
Service of the Summons 2-13
The Pleadings 2-14
Motion to Dismiss 2-14
Discovery 2-15
Summary Judgment 2-17
The Pretrial Conference 2-17
The Trial 2-17
Appeal 2-20
Enforcing a Judgment 2-20
Class Actions 2-20
Business and the Constitution 3-1
4
Business Ethics, Corporate Social
Responsibility, Corporate Governance,
and Critical Thinking 4-1
Why Study Business Ethics? 4-2
The Corporate Social Responsibility Debate 4-3
Ethical Theories 4-3
Rights Theory 4-5
Justice Theory 4-7
Utilitarianism 4-7
Shareholder Theory 4-8
Virtue Theory 4-11
Improving Corporate Governance and Corporate Social
Responsibility 4-12
Independent Boards of Directors 4-13
The Law 4-15
Guidelines for Ethical Decision Making 4-16
xxi
xxii
Contents
What Facts Impact My Decision? 4-16
What Are the Alternatives? 4-17
Who Are the Stakeholders? 4-17
How Do the Alternatives Impact Society as a Whole? 4-17
How Do the Alternatives Impact My Business
Firm? 4-18
How Do the Alternatives Impact Me, the Decision
Maker? 4-18
What Are the Ethics of Each Alternative? 4-19
What Are the Practical Constraints of Each
Alternative? 4-20
What Course of Action Should Be Taken and How Do We
Implement It? 4-20
Knowing When to Use the Guidelines 4-21
Thinking Critically 4-21
Non Sequiturs 4-22
Appeals to Pity 4-22
False Analogies 4-22
Begging the Question 4-22
Argumentum ad Populum 4-23
Bandwagon Fallacy 4-23
Argumentum ad Baculum 4-23
Argumentum ad Hominem 4-23
Argument from Authority 4-24
False Cause 4-24
The Gambler’s Fallacy 4-24
Reductio ad Absurdum 4-25
Appeals to Tradition 4-25
The Lure of the New 4-25
Sunk Cost Fallacy 4-25
Common Characteristics of Poor Decision
Making 4-26
Failing to Remember Goals 4-26
Overconfidence 4-26
Complexity of the Issues 4-27
Resisting Requests to Act Unethically 4-27
Recognizing Unethical Requests and Bosses 4-27
Buying Time 4-28
Find a Mentor and a Peer Support Group 4-28
Find Win–Win Solutions 4-28
Work within the Firm to Stop the
Unethical Act 4-29
Prepare to Lose Your Job 4-30
Leading Ethically 4-30
Be Ethical 4-30
Communicate the Firm’s Core Ethical
Values 4-30
Connect Ethical Behavior with the Firm’s and Workers’ Best
Interests 4-31
Reinforce Ethical Behavior 4-31
2
Part 2 Crimes and Torts
5
Criminal Law and Procedure 5-3
Role of the Criminal Law 5-5
Nature of Crimes 5-5
Purpose of the Criminal Sanction 5-6
Essentials of Crime 5-8
Constitutional Limitations on Power to Criminalize
Behavior 5-10
Criminal Procedure 5-15
Criminal Prosecutions: An Overview 5-15
Role of Constitutional Safeguards 5-15
The Fourth Amendment 5-16
Key Fourth Amendment Questions 5-16
Warrantless Searches and the Fourth Amendment 5-19
The Fifth Amendment 5-24
The Sixth Amendment 5-29
White-Collar Crimes and the Dilemmas of
Corporate Control 5-29
Introduction 5-29
Evolution of Corporate Criminal Liability 5-30
Corporate Criminal Liability Today 5-31
Individual Liability for Corporate Crime 5-32
New Directions 5-33
Important White-Collar Crimes 5-34
Regulatory Offenses 5-34
Fraudulent Acts 5-34
The Sarbanes–Oxley Act 5-37
Bribery and Giving of Illegal Gratuities 5-37
Computer Crime 5-38
6
Intentional Torts 6-1
Interference with Personal Rights 6-5
Battery 6-5
Assault 6-8
Intentional Infliction of Emotional
Distress 6-8
False Imprisonment 6-11
Defamation 6-13
Invasion of Privacy 6-27
Misuse of Legal Proceedings 6-33
Deceit (Fraud) 6-34
Contents
Interference with Property Rights 6-34
Trespass to Land 6-34
Private Nuisance 6-35
Conversion 6-37
Other Examples of Intentional Tort Liability 6-38
7
Negligence and Strict Liability 7-1
Negligence 7-2
Duty and Breach of Duty 7-3
Causation of Injury 7-16
Res Ipsa Loquitur 7-27
Negligence Defenses 7-28
Strict Liability 7-29
Abnormally Dangerous Activities 7-29
Statutory Strict Liability 7-33
Tort Reform 7-33
8
Intellectual Property and Unfair Competition 8-1
Protection of Intellectual Property 8-2
Patents 8-2
Copyrights 8-11
Trademarks 8-25
Trade Secrets 8-35
Definition of a Trade Secret 8-37
Ownership and Transfer of Trade Secrets 8-38
Misappropriation of Trade Secrets 8-38
Commercial Torts 8-40
Injurious Falsehood 8-40
Interference with Contractual Relations 8-41
Interference with Prospective Advantage 8-42
Lanham Act § 43(a) 8-45
3
Part 3 Contracts
9
Introduction to Contracts 9-3
The Nature of Contracts 9-3
The Functions of Contracts 9-4
The Evolution of Contract Law 9-4
The Methods of Contracting 9-4
Basic Elements of a Contract 9-5
Basic Contract Concepts and Types 9-7
Bilateral and Unilateral Contracts 9-7
Valid, Unenforceable, Voidable, and Void
Contracts 9-8
Express and Implied Contracts 9-8
Executed and Executory Contracts 9-8
xxiii
Sources of Law Governing Contracts 9-9
The Uniform Commercial Code: Origin and Purposes 9-9
Application of Article 2 9-9
Application of the Common Law of Contracts 9-9
Law Governing “Hybrid” Contracts 9-9
Relationship of the UCC and the Common Law of
Contracts 9-9
Basic Differences in the Nature of Article 2 and the Common
Law of Contracts 9-11
Influence of Restatement (Second) of Contracts 9-12
“Noncontract” Obligations 9-12
Quasi-Contract 9-13
Promissory Estoppel 9-13
10 The Agreement: Offer 10-1
Requirements for an Offer 10-2
Intent to Contract 10-2
Definiteness of Terms 10-2
Communication to Offeree 10-7
Special Offer Problem Areas 10-7
Advertisements 10-7
Rewards 10-8
Auctions 10-10
Bids 10-11
Which Terms Are Included in the Offer? 10-11
Termination of Offers 10-13
Terms of the Offer 10-13
Lapse of Time 10-13
Revocation 10-13
Rejection 10-15
Death or Mental Incapacity of Either Party 10-18
Destruction of Subject Matter 10-18
Intervening Illegality 10-18
11 The Agreement: Acceptance 11-1
What Is an Acceptance? 11-1
Intention to Accept 11-2
Intent and Acceptance on the Offeror’s Terms 11-5
Communication of Acceptance 11-9
When Is Acceptance Communicated? 11-9
Acceptances by Instantaneous Forms of
Communication 11-9
Acceptances by Noninstantaneous Forms of
Communication 11-9
Stipulated Means of Communication 11-13
Special Acceptance Problem Areas 11-13
xxiv
Contents
Acceptance in Unilateral Contracts 11-13
Acceptance in Bilateral Contracts 11-13
Silence as Acceptance 11-14
Acceptance When a Writing
Is Anticipated 11-16
Acceptance of Ambiguous Offers 11-18
Who Can Accept an Offer? 11-19
12 Consideration 12-1
Elements of Consideration 12-2
Legal Value 12-2
Bargained-For Exchange 12-3
Exchanges That Fail to Meet Consideration
Requirements 12-5
Illusory Promises 12-5
Preexisting Duties 12-8
Past Consideration 12-12
Exceptions to the Consideration
Requirement 12-13
Promissory Estoppel 12-14
Promises to Pay Debts Barred by Statutes of
Limitations 12-17
Promises to Pay Debts Barred by Bankruptcy
Discharge 12-17
Charitable Subscriptions 12-18
13 Reality of Consent 13-1
Effect of Doctrines Discussed in This
Chapter 13-1
Necessity for Prompt and
Unequivocal Rescission 13-2
Misrepresentation and Fraud 13-2
Relationship between Misrepresentation and
Fraud 13-2
Requirements for Rescission on the
Ground of Misrepresentation 13-2
Mistake 13-8
Nature of Mistake 13-8
Requirements for Mutual Mistake 13-9
Requirements for Unilateral Mistake 13-11
Duress 13-13
Nature of Duress 13-13
Requirements for Duress 13-14
Economic Duress 13-17
Undue Influence 13-17
Nature of Undue Influence 13-17
Determining Undue Influence 13-17
14 Capacity to Contract 14-1
What Is Capacity? 14-1
Effect of Lack of Capacity 14-2
Capacity of Minors 14-2
Minors’ Right to Disaffirm 14-2
Period of Minority 14-5
Emancipation 14-5
Time of Disaffirmance 14-5
Ratification 14-5
Duties upon Disaffirmance 14-6
Effect of Misrepresentation of Age 14-8
Capacity of Mentally Impaired Persons 14-8
Theory of Incapacity 14-8
Test for Mental Incapacity 14-9
The Effect of Incapacity Caused by Mental Impairment 14-9
Contracts of Intoxicated Persons 14-11
Intoxication and Capacity 14-11
15 Illegality 15-1
Meaning of Illegality 15-1
Determining Whether an Agreement
Is Illegal 15-2
Agreements in Violation of Statute 15-4
Agreements Declared Illegal by Statute 15-4
Agreements That Violate the Public Policy of a
Statute 15-4
Agreements That May Be in Violation of Public
Policy Articulated by Courts 15-5
Agreements in Restraint of Competition 15-5
Exculpatory Clauses 15-9
Family Relationships and Public Policy 15-12
Unfairness in Agreements: Contracts of
Adhesion and Unconscionable
Contracts 15-13
Unconscionability 15-13
Contracts of Adhesion 15-16
Effect of Illegality 15-17
General Rule: No Remedy for Breach of
Illegal Agreements 15-17
Exceptions 15-17
16 Writing 16-1
The Significance of Writing in
Contract Law 16-1
Purposes of Writing 16-1
Writing and Contract Enforcement 16-2
Overview of the Statute of Frauds 16-2
Contents
History and Purposes 16-2
Effect of Violating the Statute of Frauds 16-2
Contracts Covered by the Statute of
Frauds 16-2
Collateral Contracts 16-3
Interest in Land 16-3
Contracts That Cannot Be Performed within
One Year 16-6
Promise of Executor or Administrator to Pay a Decedent’s
Debt Personally 16-9
Contract in Which Marriage Is the Consideration 16-10
Meeting the Requirements of the Statute of
Frauds 16-11
Nature of the Writing Required 16-11
UCC: Alternative Means of Satisfying the Statute of
Frauds in Sale of Goods Contracts 16-12
Promissory Estoppel and the Statute of Frauds 16-15
The Parol Evidence Rule 16-16
Explanation of the Rule 16-16
Scope of the Parol Evidence Rule 16-16
Admissible Parol Evidence 16-17
Interpretation of Contracts 16-19
17 Rights of Third Parties 17-1
Assignment of Contracts 17-1
Nature of Assignment of Rights 17-2
Creating an Assignment 17-3
Assignability of Rights 17-3
Nature of Assignee’s Rights 17-6
Subsequent Assignments 17-7
Successive Assignments 17-7
Assignor’s Warranty Liability to Assignee 17-7
Delegation of Duties 17-8
Nature of Delegation 17-8
Delegable Duties 17-8
Language Creating a Delegation 17-10
Assumption of Duties by Delegatee 17-11
Discharge of Delegator by Novation 17-11
Third-Party Beneficiaries 17-13
Intended Beneficiaries versus Incidental
Beneficiaries 17-13
Vesting of Beneficiary’s Rights 17-17
18 Performance and Remedies 18-1
Conditions 18-2
Nature of Conditions 18-2
Types of Conditions 18-2
xxv
Creation of Express Conditions 18-7
Excuse of Conditions 18-7
Performance of Contracts 18-8
Level of Performance Expected of
the Promisor 18-8
Good-Faith Performance 18-8
Breach of Contract 18-9
Effect of Material Breach 18-9
Determining the Materiality of the Breach 18-10
Anticipatory Repudiation 18-12
Recovery by a Party Who Has Committed
Material Breach 18-13
Excuses for Nonperformance 18-14
Impossibility 18-14
Commercial Impracticability 18-17
Other Grounds for Discharge 18-17
Discharge by Mutual Agreement 18-17
Discharge by Accord and Satisfaction 18-17
Discharge by Waiver 18-17
Discharge by Alteration 18-17
Discharge by Statute of Limitations 18-18
Discharge by Decree of Bankruptcy 18-18
Remedies for Breach of Contract 18-18
Types of Contract Remedies 18-18
Interests Protected by Contract
Remedies 18-18
Legal Remedies (Damages) 18-19
Equitable Remedies 18-24
Restitution 18-26
4
Part 4 Sales
19 Formation and Terms of Sales Contracts 19-3
Sale of Goods 19-4
Leases 19-6
Higher Standards for Merchants 19-6
UCC Requirements 19-6
Terms of Sales Contracts 19-6
Gap Fillers 19-6
Price Terms 19-7
Quantity Terms 19-8
Output and Needs Contracts 19-8
Exclusive Dealing Contracts 19-8
Time for Performance 19-10
Delivery Terms 19-11
Title 19-11
xxvi
Contents
UCC Changes 19-11
General Title Rule 19-11
Title and Third Parties 19-13
Obtaining Good Title 19-13
Transfers of Voidable Title 19-13
Buyers in the Ordinary Course of Business 19-14
Entrusting of Goods 19-14
Risk of Loss 19-16
Terms of the Agreement 19-16
Shipment Contracts 19-17
Destination Contracts 19-17
Goods in the Possession of Third Parties 19-17
Risk Generally 19-17
Effect of Breach on Risk of Loss 19-19
Insurable Interest 19-19
Sales on Trial 19-19
Sale or Return 19-19
Sale on Approval 19-19
20 Product Liability 20-1
The Evolution of Product Liability Law 20-3
The 19th Century 20-3
The 20th and 21st Centuries 20-3
The Current Debate over Product
Liability Law 20-3
Theories of Product Liability Recovery 20-3
Express Warranty 20-4
Implied Warranty of Merchantability 20-5
Implied Warranty of Fitness 20-5
Negligence 20-10
Strict Liability 20-14
The Restatement (Third) 20-16
Other Theories of Recovery 20-20
Time Limitations 20-20
Damages in Product Liability Cases 20-22
The No-Privity Defense 20-23
Tort Cases 20-23
Warranty Cases 20-23
Disclaimers and Remedy Limitations 20-24
Implied Warranty Disclaimers 20-24
Express Warranty Disclaimers 20-29
Disclaimers of Tort Liability 20-29
Limitation of Remedies 20-29
Defenses 20-29
The Traditional Defenses 20-29
Comparative Principles 20-33
Preemption and Regulatory Compliance 20-35
21 Performance of Sales Contracts 21-1
General Rules 21-2
Good Faith 21-2
Course of Dealing 21-2
Usage of Trade 21-2
Modification 21-4
Waiver 21-4
Assignment 21-5
Delivery 21-5
Basic Obligation 21-5
Place of Delivery 21-5
Seller’s Duty of Delivery 21-5
Inspection and Payment 21-6
Buyer’s Right of Inspection 21-6
Payment 21-6
Acceptance, Revocation, and Rejection 21-6
Acceptance 21-6
Effect of Acceptance 21-9
Revocation of Acceptance 21-9
Buyer’s Rights on Improper Delivery 21-12
Rejection 21-12
Right to Cure 21-15
Buyer’s Duties after Rejection 21-15
Assurance, Repudiation, and Excuse 21-16
Assurance 21-16
Anticipatory Repudiation 21-16
Excuse 21-16
22 Remedies for Breach of Sales Contracts 22-1
Agreements as to Remedies 22-2
Statute of Limitations 22-4
Seller’s Remedies 22-5
Remedies Available to an Injured Seller 22-5
Cancellation and Withholding of Delivery 22-5
Resale of Goods 22-5
Recovery of the Purchase Price 22-6
Damages for Rejection or Repudiation 22-8
Seller’s Remedies Where Buyer
Is Insolvent 22-9
Seller’s Right to Stop Delivery 22-10
Liquidated Damages 22-10
Buyer’s Remedies 22-10
Buyer’s Remedies in General 22-10
Buyer’s Right to Damages 22-11
Buyer’s Right to Cover 22-12
Incidental Damages 22-12
Consequential Damages 22-13
Contents
Damages for Nondelivery 22-13
Damages for Defective Goods 22-15
Buyer’s Right to Specific Performance 22-18
Buyer and Seller Agreements as to Remedies 22-18
5
Part 5 Property
23 Personal Property and Bailments 23-3
Nature of Property 23-4
Classifications of Property 23-4
Personal Property versus Real Property 23-4
Tangible versus Intangible Personal Property 23-4
Public and Private Property 23-4
Acquiring Ownership of Personal Property 23-5
Production or Purchase 23-5
Possession of Unowned Property 23-5
Rights of Finders of Lost, Mislaid, and Abandoned
Property 23-5
Legal Responsibilities of Finders 23-6
Leasing 23-8
Gifts 23-9
Conditional Gifts 23-9
Uniform Transfers to Minors Act 23-9
Will or Inheritance 23-11
Confusion 23-11
Accession 23-11
Bailments 23-12
Nature of Bailments 23-12
Elements of a Bailment 23-12
Creation of a Bailment 23-12
Types of Bailments 23-12
Special Bailments 23-13
Duties of the Bailee 23-13
Duty of Bailee to Take Care of Property 23-13
Bailee’s Duty to Return the Property 23-14
Bailee’s Liability for Misdelivery 23-14
Limits on Liability 23-14
Right to Compensation 23-16
Bailor’s Liability for Defects in the Bailed
Property 23-16
Special Bailments 23-17
Common Carriers 23-17
Hotelkeepers 23-17
Safe-Deposit Boxes 23-17
Involuntary Bailments 23-18
Documents of Title 23-18
xxvii
Warehouse Receipts 23-18
Bills of Lading 23-19
Duty of Care 23-20
Negotiation of Document of Title 23-21
Rights Acquired by Negotiation 23-21
Warranties of Transferor of Document of Title 23-21
24 Real Property 24-1
Scope of Real Property 24-2
Fixtures 24-2
Rights and Interests in Real
Property 24-5
Estates in Land 24-5
Co-ownership of Real Property 24-6
Interests in Real Property Owned by Others 24-9
Easements 24-9
Creation of Easements 24-10
Profits 24-12
Licenses 24-12
Restrictive Covenants 24-12
Acquisition of Real Property 24-18
Acquisition by Purchase 24-18
Acquisition by Gift 24-18
Acquisition by Will or Inheritance 24-18
Acquisition by Tax Sale 24-18
Acquisition by Adverse Possession 24-18
Transfer by Sale 24-20
Steps in a Sale 24-20
Contracting with a Real Estate Broker 24-21
Contract of Sale 24-21
Fair Housing Act 24-21
Deeds 24-22
Form and Execution of Deed 24-23
Recording Deeds 24-23
Methods of Assuring Title 24-24
Seller’s Responsibilities Regarding the Quality of
Residential Property 24-24
Implied Warranty of Habitability 24-25
Duty to Disclose Hidden Defects 24-25
Other Property Condition–Related
Obligations of Real Property Owners
and Possessors 24-25
Expansion of Premises Liability 24-26
Americans with Disabilities Act 24-26
Land Use Control 24-27
Nuisance Law 24-27
Eminent Domain 24-28
xxviii
Contents
Zoning and Subdivision Laws 24-31
Land Use Regulation and Taking 24-32
25 Landlord and Tenant 25-1
Leases and Tenancies 25-2
Nature of Leases 25-2
Types of Tenancies 25-2
Execution of a Lease 25-3
Rights, Duties, and Liabilities of the
Landlord 25-4
Landlord’s Rights 25-4
Landlord’s Duties 25-4
Landlord’s Responsibility for Condition of
Leased Property 25-5
Landlord’s Tort Liability 25-9
Rights, Duties, and Liabilities of
the Tenant 25-15
Rights of the Tenant 25-15
Duty to Pay Rent 25-15
Duty Not to Commit Waste 25-15
Assignment and Subleasing 25-15
Tenant’s Liability for Injuries to Third Persons 25-16
Termination of the
Leasehold 25-16
Eviction 25-16
Agreement to Surrender 25-16
Abandonment 25-16
26 Estates and Trusts 26-1
The Law of Estates and Trusts 26-2
Estate Planning 26-2
Wills 26-2
Right of Disposition by Will 26-2
Nature of a Will 26-2
Common Will Terminology 26-2
Testamentary Capacity 26-3
Execution of a Will 26-6
Incorporation by Reference 26-8
Informal Wills 26-8
Joint and Mutual Wills 26-8
Construction of Wills 26-8
Limitations on Disposition by Will 26-8
Revocation of Wills 26-9
Codicils 26-10
Advance Directives: Planning for Incapacity 26-10
Durable Power of Attorney 26-10
Living Wills 26-10
Durable Power of Attorney for
Health Care 26-10
Federal Law and Advance Directives 26-11
Intestacy 26-12
Characteristics of Intestacy Statutes 26-12
Special Rules 26-12
Simultaneous Death 26-15
Administration of Estates 26-16
The Probate Estate 26-16
Determining the Existence of a Will 26-16
Selecting a Personal Representative 26-16
Responsibilities of the Personal
Representative 26-16
Trusts 26-17
Nature of a Trust 26-17
Trust Terminology 26-17
Why People Create Trusts 26-18
Creation of Express Trusts 26-18
Charitable Trusts 26-18
Totten Trusts 26-20
Powers and Duties of the Trustee 26-20
Liability of Trustee 26-21
Spendthrift Trusts 26-21
Termination and Modification of a Trust 26-21
Implied and Constructive Trusts 26-21
27 Insurance Law 27-1
Nature and Benefits of Insurance
Relationships 27-2
Insurance Policies as Contracts 27-3
Interested Parties 27-3
Offer, Acceptance, and Consideration 27-3
Effect of Insured’s Misrepresentation 27-6
Legality 27-6
Form and Content of Insurance
Contracts 27-6
Performance and Breach by Insurer 27-8
Property Insurance 27-8
The Insurable Interest Requirement 27-9
Covered and Excluded Perils 27-9
Nature and Extent of Insurer’s Payment
Obligation 27-13
Right of Subrogation 27-15
Duration and Cancellation of Policy 27-15
Liability Insurance 27-17
Types of Liability Insurance Policies 27-17
Liabilities Insured Against 27-17
Contents
Insurer’s Obligations 27-21
Is There a Liability Insurance Crisis? 27-25
Bad-Faith Breach of Insurance Contract 27-25
6
Part 6 Credit
28 Introduction to Credit and Secured
Transactions 28-3
Credit 28-4
Unsecured Credit 28-4
Secured Credit 28-4
Development of Security 28-5
Security Interests in Personal Property 28-5
Security Interests in Real Property 28-5
Suretyship and Guaranty 28-6
Sureties and Guarantors 28-6
Creation of Principal and Surety Relation 28-8
Defenses of a Surety 28-8
Creditor’s Duties to Surety 28-9
Subrogation, Reimbursement, and Contribution 28-9
Liens on Personal Property 28-10
Security Interests in Personal Property and Fixtures under
the Uniform Commercial Code 28-10
Common Law Liens 28-10
Statutory Liens 28-10
Characteristics of Liens 28-10
Foreclosure of Lien 28-13
Security Interests in Real Property 28-13
Historical Developments of Mortgages 28-13
Form, Execution, and Recording 28-13
Rights and Liabilities 28-13
Foreclosure 28-14
Right of Redemption 28-14
Recent Development Concerning Foreclosures 28-15
Deed of Trust 28-16
Land Contracts 28-17
Mechanic’s and Materialman’s Liens 28-18
Rights of Subcontractors and Materialmen 28-18
Basis for Mechanic’s or Materialman’s Lien 28-18
Requirements for Obtaining a Lien 28-19
Priorities and Foreclosure 28-19
Waiver of Lien 28-19
29 Security Interests in Personal Property 29-1
Article 9 29-2
Security Interests under the Code 29-2
xxix
Security Interests 29-2
Types of Collateral 29-2
Obtaining a Security Interest 29-3
Attachment of the Security Interest 29-3
Attachment 29-3
The Security Agreement 29-3
Purchase Money Security Interests 29-3
Future Advances 29-5
After-Acquired Property 29-5
Proceeds 29-5
Perfecting the Security Interest 29-6
Perfection 29-6
Perfection by Public Filing 29-6
Possession by Secured Party as Public Notice 29-9
Control 29-9
Perfection by Attachment/Automatic Perfection 29-9
Exceptions to Perfection by Attachment: Consumer
Goods 29-10
Motor Vehicles 29-11
Fixtures 29-12
Priority Rules 29-12
Importance of Determining Priority 29-12
General Priority Rules 29-12
Purchase Money Security Interest in Inventory 29-12
Purchase Money Security Interest in Noninventory
Collateral 29-14
Rationale for Protecting Purchase Money Security
Interests 29-15
Buyers in the Ordinary Course of Business 29-15
Artisan’s and Mechanic’s Liens 29-15
Liens on Consumer Goods Perfected Only by Attachment/
Automatic Perfection 29-18
Fixtures 29-18
Default and Foreclosure 29-20
Default 29-20
Right to Possession 29-20
Sale of the Collateral 29-20
Consumer Goods 29-20
Distribution of Proceeds 29-20
Liability of Creditor 29-21
30 Bankruptcy 30-1
The Bankruptcy Code 30-2
Bankruptcy Proceedings 30-2
Liquidations 30-2
Reorganizations 30-3
Family Farms 30-3
xxx
Contents
Consumer Debt Adjustments 30-3
The Bankruptcy Courts 30-3
Chapter 7: Liquidation Proceedings 30-3
Petitions 30-3
Involuntary Petitions 30-3
Automatic Stay Provisions 30-4
Order of Relief 30-5
Meeting of Creditors and Election of Trustee 30-5
Duties of the Trustee 30-5
The Bankruptcy Estate 30-6
Exemptions 30-6
Avoidance of Liens 30-9
Redemptions 30-9
Preferences (Preferential Payments or Liens) 30-9
Preferential Liens 30-10
Transactions in the Ordinary Course of Business 30-10
Fraudulent Transfers 30-10
Claims 30-13
Allowable Claims 30-13
Secured Claims 30-13
Priority Claims 30-13
Distribution of the Debtor’s Estate 30-14
Discharge in Bankruptcy 30-14
Discharge 30-14
Objections to Discharge 30-14
Acts That Bar Discharge 30-16
Nondischargeable Debts 30-16
Reaffirmation Agreements 30-18
Dismissal for Substantial Abuse 30-18
Chapter 11: Reorganizations 30-22
Reorganization Proceeding 30-22
Use of Chapter 11 30-25
Chapter 12: Family Farmers and
Fishermen 30-28
Relief for Family Farmers and Fishermen 30-28
Chapter 13: Consumer Debt Adjustments 30-29
Relief for Individuals 30-29
Procedure 30-29
Discharge 30-33
Advantages of Chapter 13 30-33
7
Part 7 Commercial Paper
31 Negotiable Instruments 31-3
Nature of Negotiable Instruments 31-4
Uniform Commercial Code 31-4
Negotiable Instruments 31-4
Negotiability 31-4
Kinds of Negotiable Instruments 31-5
Promissory Notes 31-5
Certificates of Deposit 31-5
Drafts 31-6
Checks 31-7
Benefits of Negotiable Instruments 31-8
Rights of an Assignee of a Contract 31-8
Rights of a Holder of a Negotiable Instrument 31-9
Formal Requirements for Negotiability 31-9
Basic Requirements 31-9
Importance of Form 31-10
In Writing 31-10
Signed 31-10
Unconditional Promise or Order 31-10
Requirement of a Promise or Order 31-10
Promise or Order Must Be Unconditional 31-10
Fixed Amount of Money 31-12
Fixed Amount 31-12
Payable in Money 31-13
Payable on Demand or at a Definite Time 31-13
Payable on Demand 31-13
Payable at a Definite Time 31-13
Payable to Order or Bearer 31-14
Special Terms 31-16
Additional Terms 31-16
Ambiguous Terms 31-17
32 Negotiation and Holder in Due Course 32-1
Negotiation 32-2
Nature of Negotiation 32-2
Formal Requirements for Negotiation 32-2
Nature of Indorsement 32-2
Wrong or Misspelled Name 32-3
Checks Deposited without Indorsement 32-3
Transfer of Order Instrument 32-3
Indorsements 32-5
Effects of an Indorsement 32-5
Kinds of Indorsements 32-5
Rescission of Indorsement 32-7
Holder in Due Course 32-8
General Requirements 32-9
Holder 32-9
Value 32-11
Good Faith 32-11
Overdue or Dishonored 32-12
Notice of Unauthorized Signature or Alteration 32-13
Contents
Notice of Claims 32-13
Irregular and Incomplete Instruments 32-15
Shelter Rule 32-15
Rights of a Holder in Due Course 32-16
Claims and Defenses Generally 32-16
Importance of Being a Holder in Due Course 32-16
Real Defenses 32-17
Personal Defenses 32-18
Claims to the Instrument 32-20
Claims in Recoupment 32-20
Changes in the Holder in Due Course Rule for
Consumer Credit Transactions 32-21
Consumer Disadvantages 32-21
State Consumer Protection Legislation 32-22
Federal Trade Commission Regulation 32-22
33 Liability of Parties 33-1
Liability in General 33-2
Contractual Liability 33-2
Primary and Secondary Liability 33-2
Obligation of a Maker 33-2
Obligation of a Drawee or an Acceptor 33-3
Obligation of a Drawer 33-3
Obligation of an Indorser 33-3
Obligation of an Accommodation Party 33-4
Signing an Instrument 33-6
Signature by an Authorized Agent 33-6
Unauthorized Signature 33-7
Contractual Liability in Operation 33-8
Presentment of a Note 33-8
Presentment of a Check or a Draft 33-8
Time of Presentment 33-10
Warranty Liability 33-10
Transfer Warranties 33-10
Presentment Warranties 33-12
Payment or Acceptance by Mistake 33-13
Operation of Warranties 33-13
Other Liability Rules 33-15
Negligence 33-15
Impostor Rule 33-15
Fictitious Payee Rule 33-15
Comparative Negligence Rule Concerning Impostors and
Fictitious Payees 33-16
Fraudulent Indorsements by Employees 33-16
Conversion 33-19
Discharge of Contractual Liability on Negotiable
Instruments 33-20
xxxi
Discharge of Contractual Liability 33-20
Discharge by Payment 33-21
Discharge by Cancellation 33-21
Altered Instruments: Discharge by
Alteration 33-21
Discharge of Indorsers and Accommodation Parties 33-22
34 Checks and Electronic Transfers 34-1
The Drawer–Drawee Relationship 34-2
Bank’s Duty to Pay 34-2
Bank’s Right to Charge to Customer’s Account 34-2
Stop-Payment Order 34-5
Bank’s Liability for Payment after Stop-Payment
Order 34-8
Certified Check 34-9
Cashier’s Check 34-9
Death or Incompetence of Customer 34-10
Forged and Altered Checks 34-10
Bank’s Right to Charge Account 34-10
Customer’s Duty to Report Forgeries and
Alterations 34-12
Check Collection and Funds Availability 34-14
Check Collection 34-14
Funds Availability 34-18
Check 21 34-19
Electronic Transfers 34-20
Electronic Fund Transfer Act 34-20
Wire Transfers 34-22
8
Part 8 Agency Law
35 The Agency Relationship 35-3
Creation of an Agency 35-4
Formation 35-4
Capacity 35-5
Nondelegable Obligations 35-5
Agency Concepts, Definitions, and Types 35-5
Authority 35-6
General and Special Agents 35-6
Gratuitous Agents 35-6
Subagents 35-6
Employees and Nonemployee Agents 35-7
Duties of Agent to Principal 35-9
Agent’s Duty of Loyalty 35-10
Agent’s Duty to Obey Instructions 35-12
Agent’s Duty to Act with Care and Skill 35-12
xxxii
Contents
Agent’s Duty to Provide Information 35-12
Agent’s Duties of Segregation, Record-Keeping, and
Accounting 35-12
Duty Not to Receive a Material Benefit 35-12
Duty of Good Conduct 35-12
Duties of Principal to Agent 35-12
Duty to Compensate Agent 35-13
Duties of Reimbursement and Indemnity 35-13
Termination of an Agency 35-14
Termination by Act of the Parties 35-14
Termination by Operation of Law 35-14
Termination of Agency Powers Given as Security 35-15
Effect of Termination on Agent’s Authority 35-16
36 Third-Party Relations of the Principal and the
Agent 36-1
Contract Liability of the Principal 36-2
Actual Authority 36-2
Apparent Authority 36-3
Agent’s Notification and Knowledge 36-3
Ratification 36-3
Estoppel 36-4
Contracts Made by Subagents 36-6
Contract Liability of the Agent 36-6
The Nature of the Principal 36-6
Liability of Agent by Agreement 36-8
Implied Warranty of Authority 36-8
Tort Liability of the Principal 36-10
Respondeat Superior Liability 36-10
Direct Liability 36-13
Liability for Torts of Nonemployee Agents 36-13
Liability for Agent’s Misrepresentations 36-13
Tort Liability of the Agent 36-14
Tort Suits against Principal and Agent 36-15
9
Part 9 Partnerships
37 Introduction to Forms of Business and Formation
of Partnerships 37-3
Types of Business Entities 37-4
Sole Proprietorship 37-4
Partnership 37-4
Limited Liability Partnership 37-5
Limited Partnership 37-5
Corporation 37-6
Professional Corporation 37-6
Limited Liability Company 37-6
Benefit Corporations 37-7
Partnerships 37-9
Creation of Partnership 37-9
RUPA Definition of Partnership 37-10
Creation of Joint Ventures 37-12
Creation of Mining Partnerships 37-13
Creation of Limited Liability Partnerships 37-13
Purported Partners 37-14
Purporting to Be a Partner 37-14
Reliance Resulting in a Transaction with the
Partnership 37-14
Effect of Purported Partnership 37-14
Partnership Capital 37-16
Partnership Property 37-17
Examples 37-17
Need for Partnership Agreement 37-17
Partner’s Partnership Interest 37-19
Partner’s Transferable Interest 37-19
Effect of Partnership Agreement 37-20
38 Operation of Partnerships and Related
Forms 38-1
Duties of Partners to the Partnership and Each
Other 38-2
Having Interest Adverse to Partnership 38-2
Competing against the Partnership 38-2
Duty to Serve 38-4
Duty of Care 38-4
Duty to Act within Actual Authority 38-4
Duty to Account 38-4
Other Duties 38-4
Joint Ventures and Mining Partnerships 38-5
Compensation of Partners 38-5
Profits and Losses 38-5
Management Powers of Partners 38-8
Individual Authority of Partners 38-8
Special Transactions 38-9
Disagreement among Partners: Ordinary Course of
Business 38-10
When Unanimous Partners’ Agreement Is Required 38-11
Joint Ventures and Mining Partnerships 38-11
Effect of Partnership Agreement 38-11
Liability for Torts and Crimes 38-13
Torts 38-13
Tort Liability and Limited Liability Partnerships 38-14
Crimes 38-14
Contents
Lawsuits by and against Partnerships and
Partners 38-14
Limited Liability Partnerships 38-14
39 Partners’ Dissociation and Partnerships’
Dissolution and Winding Up 39-1
Dissociation 39-2
Nonwrongful Dissociation 39-2
Wrongful Dissociation 39-3
Acts Not Causing Dissociation 39-3
Effect of Partnership Agreement 39-3
Dissolution and Winding Up the Partnership
Business 39-3
Events Causing Dissolution and
Winding Up 39-5
Joint Ventures and Mining Partnerships 39-7
Performing Winding Up 39-7
Partner’s Authority during Winding Up 39-9
Distribution of Dissolved Partnership’s
Assets 39-11
Asset Distributions in a Limited Liability
Partnership 39-12
Termination 39-12
When the Business Is Continued 39-12
Successor’s Liability for Predecessor’s Obligations 39-12
Dissociated Partner’s Liability for Obligations Incurred
while a Partner 39-12
Dissociated Partner’s Liability for Obligations Incurred
after Leaving the Partnership 39-13
Effect of LLP Status 39-14
Buyout of Dissociated Partners 39-14
Partners Joining an Existing
Partnership 39-16
Liability of New Partners 39-16
40 Limited Liability Companies and Limited
Partnerships 40-1
Limited Liability Companies 40-1
Tax Treatment of LLCs 40-2
Formation of LLCs 40-2
Members’ Rights and Responsibilities 40-2
Members’ Dissociations and
LLC Dissolution 40-5
Limited Partnerships 40-9
The Uniform Limited Partnership Acts 40-9
Use of Limited Partnerships 40-9
Creation of Limited Partnerships 40-10
xxxiii
Defective Compliance with Limited
Partnership Statute 40-11
Rights and Liabilities of Partners in Limited
Partnerships 40-12
Rights and Liabilities Shared by General
and Limited Partners 40-12
Other Rights of General Partners 40-13
Other Liabilities of General Partners 40-13
Other Rights of Limited Partners 40-14
Other Liabilities of Limited Partners 40-14
Partners’ Dissociations and Limited Partnership
Dissolution 40-14
Partners’ Dissociations 40-14
Limited Partnership Dissolutions 40-16
Mergers and Conversions 40-17
10
Part 10 Corporations
41 History and Nature of Corporations 41-3
History of Corporations 41-4
American Corporation Law 41-4
Classifications of Corporations 41-4
Regulation of For-Profit Corporations 41-6
State Incorporation Statutes 41-6
State Common Law of Corporations 41-7
Regulation of Nonprofit Corporations 41-7
Regulation of Foreign and Alien
Corporations 41-7
Due Process Clause 41-8
Commerce Clause 41-8
Subjecting Foreign Corporations to Suit 41-8
Taxation 41-9
Qualifying to Do Business 41-9
Regulation of a Corporation’s Internal Affairs 41-12
Regulation of Foreign Nonprofit
Corporations 41-12
Piercing the Corporate Veil 41-12
Nonprofit Corporations 41-14
42 Organization and Financial Structure of
Corporations 42-1
Promoters and Preincorporation
Transactions 42-1
Corporation’s Liability on Preincorporation Contracts 42-2
Promoter’s Liability on Preincorporation Contracts 42-2
Obtaining a Binding Preincorporation Contract 42-2
xxxiv
Contents
Preincorporation Share Subscriptions 42-3
Relation of Promoter and Prospective Corporation 42-4
Liability of Corporation to Promoter 42-4
Incorporation 42-4
Steps in Incorporation 42-4
Close Corporation Elections 42-7
Defective Attempts to Incorporate 42-7
De Jure Corporation 42-7
De Facto Corporation 42-8
Corporation by Estoppel 42-8
Defective Incorporation 42-8
Modern Approaches to the Defective
Incorporation Problem 42-8
Incorporation of Nonprofit
Corporations 42-10
Liability for Preincorporation
Transactions 42-11
Financing For-Profit Corporations 42-11
Equity Securities 42-11
Authorized, Issued, and Outstanding Shares 42-12
Options, Warrants, and Rights 42-12
Debt Securities 42-13
Consideration for Shares 42-13
Quality of Consideration for Shares 42-13
Quantity of Consideration for Shares 42-13
Share Subscriptions 42-16
Issuance of Shares 42-16
Transfer of Shares 42-17
Restrictions on Transferability of Shares 42-17
Financing Nonprofit Corporations 42-20
43 Management of Corporations 43-1
Corporate Objectives 43-2
Corporate Powers 43-3
Purpose Clauses in Articles of Incorporation 43-3
Powers of Nonprofit Corporations 43-3
The Board of Directors 43-3
Board Authority under Corporation Statutes 43-4
Committees of the Board 43-4
Who Is an Independent Director? 43-5
Powers, Rights, and Liabilities of Directors as
Individuals 43-5
Election of Directors 43-5
Directors’ Meetings 43-8
Officers of the Corporation 43-9
Managing Close Corporations 43-9
Managing Nonprofit Corporations 43-10
Directors’ and Officers’ Duties to the
Corporation 43-11
Acting within Authority 43-11
Duty of Care 43-11
Board Opposition to Acquisition of Control of a
Corporation 43-16
Oversight of Legal Compliance 43-20
Duties of Loyalty 43-22
Conflicting Interest Transactions 43-22
Usurpation of a Corporate Opportunity 43-23
Oppression of Minority Shareholders 43-25
Trading on Inside Information 43-27
Duties of Directors and Officers of Nonprofit
Corporations 43-27
Corporate and Management Liability for Torts
and Crimes 43-28
Liability of the Corporation 43-28
Directors’ and Officers’ Liability for Torts and
Crimes 43-29
Insurance and Indemnification 43-32
Mandatory Indemnification of Directors 43-32
Permissible Indemnification of Directors 43-32
Insurance 43-32
Nonprofit Corporations 43-32
44 Shareholders’ Rights and Liabilities 44-1
Shareholders’ Meetings 44-2
Notice of Meetings 44-2
Conduct of Meetings 44-2
Shareholder Action without a Meeting 44-2
Shareholders’ Election of Directors 44-2
Straight Voting 44-2
Cumulative Voting 44-3
Classes of Shares 44-3
Shareholder Control Devices 44-3
Fundamental Corporate Changes 44-6
Procedures Required 44-7
Dissenters’ Rights 44-7
Shareholders’ Inspection and Information
Rights 44-13
Preemptive Right 44-15
Distributions to Shareholders 44-16
Dividends 44-16
Share Repurchases 44-18
Ensuring a Shareholder’s Return on
Investment 44-19
Shareholders’ Lawsuits 44-19
Contents
Shareholders’ Individual Lawsuits 44-19
Shareholder Class Action Suits 44-19
Shareholders’ Derivative Actions 44-19
Defense of Corporation by Shareholder 44-22
Shareholder Liability 44-22
Shareholder Liability for Illegal Distributions 44-22
Shareholder Liability for Corporate Debts 44-22
Sale of a Control Block of Shares 44-22
Shareholders as Fiduciaries 44-23
Members’ Rights and Duties in Nonprofit
Corporations 44-25
Members’ Meeting and Voting Rights 44-26
Member Inspection and Information Rights 44-26
Distributions of Assets 44-27
Resignation and Expulsion of Members 44-27
Derivative Suits 44-27
Dissolution and Termination of
Corporations 44-27
Winding Up and Termination 44-29
Dissolution of Nonprofit Corporations 44-29
45 Securities Regulation 45-1
Purposes of Securities Regulation 45-2
Securities and Exchange Commission 45-3
SEC Actions 45-3
What Is a Security? 45-4
Securities Act of 1933 45-7
Registration of Securities under the 1933 Act 45-7
Mechanics of a Registered Offering 45-7
Registration Statement and Prospectus 45-7
Section 5: Timing, Manner, and Content of
Offers and Sales 45-8
Exemptions from the Registration Requirements
of the 1933 Act 45-12
Securities Exemptions 45-12
Transaction Exemptions 45-13
Intrastate Offering Exemption 45-13
Private Offering Exemption 45-13
Small Offering Exemptions 45-15
The JOBS Act and Regulation Crowdfunding 45-16
Transaction Exemptions for Nonissuers 45-16
Sale of Restricted Securities 45-17
Consequence of Obtaining a Securities or Transaction
Exemption 45-20
Liability Provisions of the 1933 Act 45-20
Liability for Defective Registration Statements 45-21
Other Liability Provisions 45-26
xxxv
Criminal Liability 45-26
Securities Exchange Act of 1934 45-26
Registration of Securities under the 1934 Act 45-27
Holdings and Trading by Insiders 45-28
Proxy Solicitation Regulation 45-28
Liability Provisions of the 1934 Act 45-30
Liability for False Statements in Filed Documents 45-30
Section 10(b) and Rule 10b–5 45-31
Elements of a Rule 10b–5 Violation 45-31
Regulation FD 45-43
Criminal Liability 45-44
Tender Offer Regulation 45-44
Private Acquisitions of Shares 45-46
State Regulation of Tender Offers 45-46
State Securities Law 45-46
Registration of Securities 45-46
46 Legal and Professional Responsibilities
of Auditors, Consultants, and Securities
Professionals 46-1
General Standard of Performance 46-3
Professionals’ Liability to Clients 46-3
Contractual Liability 46-3
Tort Liability 46-4
In Pari Delicto 46-7
Breach of Trust 46-7
Securities Law 46-8
Professionals’ Liability to Third Persons:
Common Law 46-8
Negligence and Negligent Misrepresentation 46-8
Fraud 46-13
Professional’s Liability to Third Parties:
Securities Law 46-13
Securities Act of 1933 46-14
Securities Exchange Act of 1934 46-15
State Securities Law 46-18
Securities Analysts’ Conflicts of Interest 46-18
Dodd–Frank Act and Broker-Dealers 46-20
Regulation Best Interest and
Broker-Dealers 46-20
Qualified Opinions, Disclaimers of
Opinion, Adverse Opinions, and Unaudited
Statements 46-22
Criminal, Injunctive, and Administrative
Proceedings 46-23
Criminal Liability under the
Securities Laws 46-24
xxxvi
Contents
Other Criminal Law Violations 46-25
Injunctions 46-26
Administrative Proceedings 46-26
Securities Exchange Act Audit
Requirements 46-27
SOX Section 404 46-27
Cooperation with PCAOB Investigations 46-27
Ownership of Working Papers 46-28
Professional–Client Privilege 46-28
11
Part 11 Regulation of Business
47 Administrative Law 47-3
Origins of Administrative Agencies 47-5
Agency Creation 47-6
Enabling Legislation 47-6
Administrative Agencies and the
Constitution 47-7
Agency Types and Organization 47-11
Agency Types 47-11
Agency Organization 47-12
Agency Powers and Procedures 47-12
Nature, Types, and Source of Powers 47-12
Investigative Power 47-12
Rulemaking Power 47-14
Adjudicatory Power 47-16
Controlling Administrative Agencies 47-17
Presidential Controls 47-17
Congressional Controls 47-17
Judicial Review 47-18
Information Controls 47-27
Freedom of Information Act 47-27
Privacy Act of 1974 47-31
Government in the Sunshine Act 47-31
Issues in Regulation 47-31
“Old” Regulation versus “New”
Regulation 47-31
“Captive” Agencies and Agencies’
“Shadows” 47-31
Is the Agency Doing Its Job? 47-31
Deregulation versus Reregulation 47-32
48 The Federal Trade Commission Act
and Consumer Protection Laws 48-1
The Federal Trade Commission 48-2
The FTC’s Powers 48-2
FTC Enforcement Procedures 48-2
Actions in Court 48-3
Anticompetitive Behavior 48-6
Deception and Unfairness 48-6
Deception 48-6
Unfairness 48-15
Remedies 48-15
Consumer Protection Laws 48-15
Telemarketing and Consumer Fraud and
Abuse Prevention Act 48-15
Do-Not-Call Registry 48-16
Do Not Track 48-17
Magnuson–Moss Warranty Act 48-17
Truth in Lending Act 48-18
Fair Credit Reporting Act 48-19
FACT Act and the Identity
Theft Problem 48-23
Equal Credit Opportunity Act 48-24
Fair Credit Billing Act 48-24
The Dodd–Frank Act 48-24
Fair Debt Collection
Practices Act 48-25
Product Safety Regulation 48-30
49 Antitrust: The Sherman Act 49-1
The Antitrust Policy Debate 49-2
Chicago School Theories 49-3
Traditional Antitrust Theories 49-3
Impact of Chicago School 49-3
Jurisdiction, Types of Cases,
and Standing 49-3
Jurisdiction 49-3
Types of Cases and the Role of Pretrial Settlements 49-4
Criminal Prosecutions 49-4
Civil Litigation 49-4
Standing 49-5
Section 1—Restraints of Trade 49-5
Concerted Action 49-5
Per Se versus Rule of Reason Analysis 49-9
Horizontal Price-Fixing 49-9
Vertical Price-Fixing 49-13
Horizontal Divisions of Markets 49-17
Vertical Restraints on
Distribution 49-18
Group Boycotts and Concerted
Refusals to Deal 49-18
Tying Agreements 49-19
Contents
Reciprocal Dealing Agreements 49-25
Exclusive Dealing Agreements 49-25
Joint Ventures by Competitors 49-25
Section 2—Monopolization 49-26
Monopolization 49-27
Attempted Monopolization 49-34
Conspiracy to Monopolize 49-35
50 The Clayton Act, the Robinson–Patman Act,
and Antitrust Exemptions and
Immunities 50-1
Clayton Act Section 3 50-2
Tying Agreements 50-3
Exclusive Dealing Agreements 50-3
Clayton Act Section 7 50-3
Introduction 50-3
Federal Filing Requirements for Mergers 50-4
Relevant Market Determination 50-4
Horizontal Mergers 50-5
Vertical Mergers 50-13
Conglomerate Mergers 50-14
Clayton Act Section 8 50-15
The Robinson–Patman Act 50-16
Jurisdiction 50-16
Section 2(a) 50-17
Defenses to Section 2(a) Liability 50-22
Indirect Price Discrimination 50-23
Buyer Inducement of Discrimination 50-24
Antitrust Exceptions and Exemptions 50-24
Statutory Exemptions 50-24
State Action Exemption 50-25
The Noerr–Pennington Doctrine 50-25
Patent Licensing 50-29
Foreign Commerce 50-29
51 Employment Law 51-1
Legislation Protecting Employee Health,
Safety, and Well-Being 51-2
Workers’ Compensation 51-2
The Occupational Safety and Health Act 51-6
The Family and Medical Leave Act 51-6
Legislation Protecting Wages, Pensions,
and Benefits 51-7
Social Security 51-7
Unemployment Compensation 51-7
ERISA 51-8
The Fair Labor Standards Act 51-8
xxxvii
Collective Bargaining and
Union Activity 51-8
Equal Opportunity Legislation 51-10
The Equal Pay Act 51-10
Title VII 51-11
Section 1981 51-27
The Age Discrimination in Employment Act 51-27
The Americans with Disabilities Act 51-28
Genetic Information Nondiscrimination Act 51-32
Immigration Reform and Control Act 51-32
Uniformed Services Employment and Reemployment
Rights Act 51-32
Executive Order 11246 51-33
State Antidiscrimination Laws 51-33
Retaliation 51-33
Employee Privacy 51-34
Polygraph Testing 51-34
Drug and Alcohol Testing 51-35
Employer Searches 51-36
Records and References 51-36
Employer Monitoring 51-36
Job Security 51-36
The Doctrine of Employment at Will 51-36
The Common Law Exceptions 51-37
52 Environmental Regulation 52-1
Historical Perspective 52-2
The Environmental Protection Agency 52-2
The National Environmental Policy Act 52-3
Air Pollution 52-3
Background 52-3
Clean Air Act 52-3
Ambient Air Control Standards 52-3
Acid Rain Controls 52-4
Control of Hazardous Air Pollutants 52-4
New Source Controls 52-4
Permits 52-7
Enforcement 52-7
Automobile Pollution 52-8
International Air Problems 52-9
Water Pollution 52-12
Background 52-12
Early Federal Legislation 52-12
Clean Water Act 52-12
Discharge Permits 52-12
Water Quality Standards 52-13
Enforcement 52-13
xxxviii
Contents
Wetlands 52-16
Waters of the United States 52-16
Ocean Dumping 52-16
Liability for Oil Spills 52-17
Drinking Water 52-19
Waste Disposal 52-19
Background 52-19
The Resource Conservation and Recovery Act 52-20
Underground Storage Tanks 52-20
State Responsibilities 52-20
Enforcement 52-20
Solid Waste 52-23
Superfund 52-23
Community Right to Know and Emergency Cleanup 52-26
Regulation of Chemicals 52-26
Background 52-26
Regulation of Agricultural Chemicals 52-26
Toxic Substances Control Act 52-27
International Developments Concerning
Regulation of Toxic Substances 52-27
Biotechnology 52-29
Glossary G-1
Appendix A The Constitution of the
United States of America A-1
Appendix B
Code B-1
Index I-1
Uniform Commercial
List of Cases
Abdouch v. Lopez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-4
Cordas v. Uber Technologies, Inc.. . . . . . . . . . . . . . . . . . . . 10-12
Advance Dental Care, Inc. v. SunTrust Bank. . . . . . . . . . . . . . 1-9
Coyle v. Schwartz. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42-19
Aliaga Medical Center v. Harris Bank. . . . . . . . . . . . . . . . . . . 34-6
Currie v. Chevron U.S.A., Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . 7-7
Alice Corporation Ltd. v. CLS Bank International . . . . . . . . . 8-4
D’Agostino v. Federal Insurance Company . . . . . . . . . . . . . 10-16
Allstate Lien & Recovery Corporation v. Stansbury . . . . . . 28-11
Day v. Fortune Hi-Tech Marketing, Inc.. . . . . . . . . . . . . . . . . 12-5
American Greetings Corp. v. Bunch. . . . . . . . . . . . . . . . . . . . 51-4
DePetris & Bachrach, LLP v. Srour . . . . . . . . . . . . . . . . . . . . 36-9
American Needle, Inc. v. National Football League . . . . . . . 49-6
Dixon v. Crawford, McGilliard, Peterson & Yelish. . . . . . . 39-14
A Note on United States v. Apple. . . . . . . . . . . . . . . . . . . . . . 49-13
Dodge v. Ford Motor Co.. . . . . . . . . . . . . . . . . . . . . . . . . . . 44-16
Arthur Andersen LLP v. United States. . . . . . . . . . . . . . . . . 46-29
Doe v. Roman Catholic Archdiocese of Indianapolis . . . . . 12-13
AT&T Mobility LLC v. Concepcion. . . . . . . . . . . . . . . . . . . . 2-25
Domingo v. Mitchell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-3
Ballard v. Dornic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-7
Drake Manufacturing Company, Inc. v. Polyflow, Inc.. . . . 41-10
Bank of America, N.A. v. Inda . . . . . . . . . . . . . . . . . . . . . . . 32-10
Durham v. McDonald’s Restaurants of Oklahoma, Inc.. . . . . 6-9
Banks v. Lockhart. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-6
Duro Textiles, LLC v. Sunbelt Corporation. . . . . . . . . . . . . . 11-8
Bauer v. Qwest Communications Company, LLC. . . . . . . . 11-14
Dynegy, Inc. v. Yates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-4
Beau Townsend Ford Lincoln v. Don Hinds Ford. . . . . . . . . 22-6
EEOC v. Kohl’s Dep’t Stores, Inc. . . . . . . . . . . . . . . . . . . . . 51-30
Beer v. Bennett. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22-11
E & G Food Corp. v. Cumberland Farms. . . . . . . . . . . . . . . 32-18
Berghuis v. Thompkins. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-25
Escott v. BarChris Construction Corp.. . . . . . . . . . . . . . . . . 45-22
Bertrand v. Mullin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-20
Evory v. RJM Acquisitions Funding, L.L.C.. . . . . . . . . . . . . 48-26
Bissinger v. New Country Buffet. . . . . . . . . . . . . . . . . . . . . . . 20-6
Exxon Shipping Co. v. Baker. . . . . . . . . . . . . . . . . . . . . . . . . 52-17
Black v. William Insulation Co.. . . . . . . . . . . . . . . . . . . . . . . . 7-22
Farrell v. Macy’s Retail Holdings, Inc.. . . . . . . . . . . . . . . . . . 6-11
Bostock v. Clayton County, Georgia. . . . . . . . . . . . . . . . . . . 51-18
Federal Trade Commission v. Ross. . . . . . . . . . . . . . . . . . . . . 48-4
Bouchat v. Baltimore Ravens Limited Partnership. . . . . . . . . 8-21
Federal Trade Commission v. Staples, Inc.. . . . . . . . . . . . . . 50-10
Branham v. Ford Motor Co. . . . . . . . . . . . . . . . . . . . . . . . . . 20-17
Ferris, Baker Watts, Inc. v. Ernst & Young, LLP . . . . . . . . 46-16
Brehm v. Eisner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43-13
Filer, Inc. v. Staples, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-5
Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. .50-18
Finch v. Raymer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37-18
Brooks v. Lewin Realty III, Inc.. . . . . . . . . . . . . . . . . . . . . . . . 25-6
Fish v. Tex. Legislative Serv., P’ship. . . . . . . . . . . . . . . . . . . . 38-6
Browning v. Poirier. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16-7
Fitzgerald v. Racing Association of Central Iowa . . . . . . . . . 3-28
Cabot Oil & Gas Corporation v. Daugherty Petroleum, Inc. .11-16
Forcht Bank v. Gribbins. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-4
Cahaba Disaster Recovery v. Rogers. . . . . . . . . . . . . . . . . . . 22-15
Francini v. Goodspeed Airport, LLC. . . . . . . . . . . . . . . . . . 24-11
Capshaw v. Hickman. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-18
Frontier Leasing Corp. v. Links Engineering, LLC. . . . . . . . 36-5
CBS Corp. v. FCC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-7
Gamboa v. Alvarado. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15-18
Cincinnati Insurance Company v. Wachovia Bank National Association . . . . . . . . . . . . . . . . . . . . . . . . . . 34-10
Garden Ridge, L.P. v. Advance International, Inc.. . . . . . . . 18-22
Citizens National Bank of Paris v. Kids Hope United, Inc.. 26-19
Gelman v. Buehler. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39-6
Citizens United v. Federal Election Commission . . . . . . . . . 3-17
General Credit Corp. v. New York Linen Co.. . . . . . . . . . . 32-19
Clark’s Sales and Service, Inc. v. Smith . . . . . . . . . . . . . . . . . 15-7
George v. Al Hoyt & Sons, Inc.. . . . . . . . . . . . . . . . . . . . . . . 18-20
Coggins v. New England Patriots Football Club, Inc.. . . . . 43-26
Gniadek v. Camp Sunshine at Sebago Lake, Inc.. . . . . . . . . 35-16
Coleman v. Retina Consultants, P.C. . . . . . . . . . . . . . . . . . . . 8-39
Columbia Realty Ventures v. Dang. . . . . . . . . . . . . . . . . . . . . 28-6
Gold v. Deloitte & Touche, LLP (In re NM Holdings Co., LLC). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46-5
Coma Corporation v. Kansas Department of Labor . . . . . . . 15-2
Grace Label, Inc. v. Kliff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-3
Coomer v. Kansas City Royals Baseball Corp.. . . . . . . . . . . . 1-15
Grande v. Jennings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-7
Gaskell v. University of Kentucky. . . . . . . . . . . . . . . . . . . . . 51-13
xxxix
xl
List of Cases
Green v. Ford Motor Co.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-33
Kirtsaeng v. John Wiley & Sons, Inc.. . . . . . . . . . . . . . . . . . . 8-16
Green Garden Packaging Co. v. Schoenmann Produce Co..16-14
Kolodziej v. Mason . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-8
Green Wood Industrial Company v. Forceman International Development Group . . . . . . . . . . . 22-13
Kraft, Inc. v. Federal Trade Commission. . . . . . . . . . . . . . . . 48-7
Grimes v. Young Life, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-10
Krupinski v. Deyesso. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42-9
Grodner & Associates v. Regions Bank . . . . . . . . . . . . . . . . 34-13
Kruser v. Bank of America NT & SA. . . . . . . . . . . . . . . . . . 34-21
Guth v. Loft, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43-24
Lach v. Man O’War, LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . 40-17
Gyamfoah v. EG&G Dynatrend (now EG&G Technical Services) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-20
Leegin Creative Leather Products v. PSKS, Inc. . . . . . . . . . 49-14
Harrison v. Family Home Builders, LLC . . . . . . . . . . . . . . . 18-10
Lewis-Gale Medical Center, LLC v. Alldredge. . . . . . . . . . . . 8-42
Hecht v. Andover Assoc. Mgmt. Co.. . . . . . . . . . . . . . . . . . . . 40-4
Lincoln Composites, Inc. v. Firetrace USA, LLC . . . . . . . . 20-30
Helena Chemical Co. v. Williamson. . . . . . . . . . . . . . . . . . . . 22-2
Lindh v. Surman. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-10
Heritage Bank v. Bruha . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31-12
Long v. Provide Commerce, Inc.. . . . . . . . . . . . . . . . . . . . . . . 11-2
Hertz Corp. v. Friend. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-10
Lord v. D & J Enterprises, Inc.. . . . . . . . . . . . . . . . . . . . . . . . 7-11
Hicks v. Sparks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-10
Macomb Mechanical, Inc. v. LaSalle Group, Inc. . . . . . . . . . 18-5
Hill v. Nakai (In re Estate of Hannifin) . . . . . . . . . . . . . . . . 26-13
Magri v. Jazz Casino Co., LLC. . . . . . . . . . . . . . . . . . . . . . . . . 7-3
Hillerich & Bradsby Co. v. Charles Products. . . . . . . . . . . . 21-13
Marion T v. Northwest Metals Processors. . . . . . . . . . . . . . . 33-6
Holiday Motor Corp. v. Walters . . . . . . . . . . . . . . . . . . . . . . 20-12
Mark v. FSC Securities Corp.. . . . . . . . . . . . . . . . . . . . . . . . 45-14
Houseman v. Dare. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-25
Massachusetts v. Environmental Protection Agency. . . . . . 52-10
Huntington National Bank v. Guishard, Wilburn & Shorts. 33-11
Matal v. Tam. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-23
Hutchison v. Kaforey. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-3
Mathias v. Accor Economy Lodging, Inc.. . . . . . . . . . . . . . . . . 6-3
Hyman v. Capital One Auto Finance . . . . . . . . . . . . . . . . . . 29-21
Mayo Foundation for Medical Education v. United States. . . .47-23
In re Bernard L. Madoff Investment Securities . . . . . . . . . . 30-11
McDonough v. McDonough. . . . . . . . . . . . . . . . . . . . . . . . . . 40-7
In re Borden. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29-15
McLellan v. Charly. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-15
In re Burt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-30
McMillian v. McMillian. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38-2
In re Caremark Int’l Inc. Derivative Litig. . . . . . . . . . . . . . . 43-20
Medmarc Casualty Insurance Co. v. Avent America, Inc.. . 27-21
In re Foreclosure Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-15
Meyer v. Christie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39-4
In re Lance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29-10
Michigan Battery Equipment, Inc. v. Emcasco Insurance Co.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27-11
In re Made In Detroit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-24
In re Rogers (Wallace v. Rogers). . . . . . . . . . . . . . . . . . . . . . .30-7
Krakauer v. Dish Network, L.L.C. . . . . . . . . . . . . . . . . . . . . . 35-4
Lehigh Presbytery v. Merchants Bancorp. . . . . . . . . . . . . . . . 32-6
In re Siegenberg. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-19
Mid-American Salt, LLC v. Morris County Cooperative Pricing Council. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-7
James v. City of Costa Mesa. . . . . . . . . . . . . . . . . . . . . . . . . . 1-24
Miller v. Burnett. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-17
Janke v. Brooks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-5
Milner v. Department of the Navy . . . . . . . . . . . . . . . . . . . . 47-28
J.D. Fields & Company, Inc. v. United States Steel International, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-5
Mitchell Partners, L.P. v. Irex Corp.. . . . . . . . . . . . . . . . . . . 44-24
Johnson v. Bank of America, N.A. . . . . . . . . . . . . . . . . . . . . . 17-9
Montgomery Cellular Holding Co., Inc. v. Dobler. . . . . . . . . 44-8
Johnson v. Fluor Corporation. . . . . . . . . . . . . . . . . . . . . . . . 51-25
Mortgage Grader, Inc. v. Ward & Olivo, L.L.P . . . . . . . . . . 38-15
Johnson v. J. Walter Thompson U.S.A., LLC . . . . . . . . . . . 51-23
Moser v. Moser. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40-11
Jones v. Wells Fargo Bank, N.A.. . . . . . . . . . . . . . . . . . . . . . 33-19
Moss v. Batesville Casket Co.. . . . . . . . . . . . . . . . . . . . . . . . . 20-9
Jordan v. Jewel Food Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . 6-29
MP Nexlevel of Cal., Inc. v. CVIN. . . . . . . . . . . . . . . . . . . . 37-15
J.T. ex rel. Thode v. Monster Mountain, LLC . . . . . . . . . . . . 14-2
Music Acceptance Corp. v. Lofing. . . . . . . . . . . . . . . . . . . . 32-22
Kelo v. City of New London. . . . . . . . . . . . . . . . . . . . . . . . . 24-29
National College Loan Trust 2004-1 v. Irizarry . . . . . . . . . . . 33-4
Kibler v. Hall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-31
National Federation of Independent Business v. Sebelius . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-9
*
Killian v. Ricchetti. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-3
Mogilevsky v. Rubicon Technology, Inc.. . . . . . . . . . . . . . . . 24-4
List of Cases
xli
National Music Museum: America’s Shrine to Music v. Johnson. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-12
SmithStearn Yachts, Inc. v. Gyrographic Communications, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42-3
NBN Broadcasting, Inc. v. Sheridan Broadcasting Networks, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38-12
Sogeti USA LLC v. Scariano. . . . . . . . . . . . . . . . . . . . . . . . . . 17-3
Neumann v. Liles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-14
SRM Global Fund L.P. v. Countrywide Financial Corp.. . . 45-32
Noble Roman’s v. Pizza Boxes . . . . . . . . . . . . . . . . . . . . . . . . 19-9
Stahlecker v. Ford Motor Co.. . . . . . . . . . . . . . . . . . . . . . . . . 7-24
North Atlantic Instruments, Inc. v. Haber . . . . . . . . . . . . . . 35-10
Star Athletica, LLC v. Varsity Brands, Inc.. . . . . . . . . . . . . . . 8-12
North Carolina State Board of Dental Examiners v. Federal Trade Commission . . . . . . . . . . . . . . 50-26
Steinberg v. United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-3
Nye Capital Appreciation Partners, L.L.C. v. Nemchik. . . . . 45-5
Stratford v. Long . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-19
Obergefell v. Hodges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-30
Stuart v. Pittman. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27-3
Obsidian Finance Group, LLC v. Cox . . . . . . . . . . . . . . . . . . 6-24
Supply Chain Assocs., LLC v. ACT Electronics, Inc.. . . . . 41-14
O’Connor v. Oakhurst Dairy. . . . . . . . . . . . . . . . . . . . . . . . . . 1-19
Suture Express, Inc. v. Owens & Minor Distribution, Inc.. . 49-20
Olmsted v. Saint Paul Public Schools. . . . . . . . . . . . . . . . . . 13-15
Synergies3 Tec Services, LLC v. Corvo . . . . . . . . . . . . . . . . 36-11
Omnicare, Inc. v. NCS Healthcare, Inc.. . . . . . . . . . . . . . . . . 43-7
Tan v. Arnel Management Company . . . . . . . . . . . . . . . . . . 25-13
Paciaroni v. Crane . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39-10
Tedeton v. Tedeton. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42-14
Palmatier v. Wells Fargo Financial National Bank. . . . . . . . . 29-4
Paramount Communications, Inc. v. Time, Inc.. . . . . . . . . . 43-18
The Industrial Development Board of the City of Montgomery v. Russell. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-11
Patterson v. CitiMortgage, Inc.. . . . . . . . . . . . . . . . . . . . . . . 13-12
Thomas v. Archer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-15
Pearson v. Shalala. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47-7
Timothy v. Keetch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-7
Pelican National Bank v. Provident Bank of Maryland . . . . 31-14
Toms v. Calvary Assembly of God, Inc.. . . . . . . . . . . . . . . . . 7-30
Pena v. Fox. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-5
Town of Freeport v. Ring. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32-3
Peterson v. AT&T Mobility Services, LLC. . . . . . . . . . . . . . 51-38
Philibert v. Kluser. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-17
Toyo Tire North America Manufacturing, Inc. v. Davis. . . . . . . . . . . . . . . . . . . . . . . . . . 6-35
Pittman v. Henry Moncure Motors. . . . . . . . . . . . . . . . . . . . 21-10
Trapani Construction Co. v. Elliot Group, Inc.. . . . . . . . . . . . 9-6
POM Wonderful LLC v. Coca-Cola Co.. . . . . . . . . . . . . . . . . 8-45
Treadwell v. J.D. Construction Co.. . . . . . . . . . . . . . . . . . . . . 36-7
POM Wonderful, LLC v. Federal Trade Commission . . . . . 48-9
Tricontinental Industries, Ltd. v. PricewaterhouseCoopers, LLP . . . . . . . . . . . . . . . . . . . . . . . 46-10
Price v. High Pointe Oil Company, Inc.. . . . . . . . . . . . . . . . . . 1-5
ProMedica Health System, Inc. v. Federal Trade Commission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50-6
PWS Environmental, Inc. v. All Clear Restoration and Remediation, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-14
South Dakota v. Wayfair, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . 3-5
Stephen A. Wheat Trust v. Sparks. . . . . . . . . . . . . . . . . . . . . . 13-4
Triffin v. Sinha. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32-15
Trump Endeavor 12 LLC v. Fernich, Inc. d/b/a The Paint Spot. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-19
Tyson Foods, Inc. v. Bouaphakeo. . . . . . . . . . . . . . . . . . . . . . 2-21
Rasmussen v. Jackson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37-12
United States v. Anderson. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-35
Reynolds Health Care Services, Inc. v. HMNH, Inc.. . . . . . . 44-4
United States v. Domenic Lombardi Realty. . . . . . . . . . . . . 52-24
Riegel v. Medtronic, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-37
United States v. Goyal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46-24
Rochester Gas and Electric Corporation. v. Delta Star. . . . 21-17
United States v. Hopkins. . . . . . . . . . . . . . . . . . . . . . . . . . . . 52-13
Rogers v. Household Life Insurance Co.. . . . . . . . . . . . . . . . .14-9
United States v. Hsiung. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49-10
Rosenberg v. N.Y. State Higher Education Services Corp.. 30-16
United States v. Jensen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43-29
RR Maloan Investment v. New HGE. . . . . . . . . . . . . . . . . . 32-11
United States v. Jones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-17
Safeco Insurance Co. of America v. Burr. . . . . . . . . . . . . . . 48-20
United States v. Microsoft Corp.. . . . . . . . . . . . . . . . . . . . . . 49-28
SEC v. Dorozhko. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45-37
United States v. Newman. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45-40
Sekhar v. United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-8
United States v. Ohio Edison Company. . . . . . . . . . . . . . . . . 52-5
Shaw v. United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-13
United States v. Salman. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45-41
Singh v. Uber Technologies Inc.. . . . . . . . . . . . . . . . . . . . . . 15-14
United States v. Southern Union Co. . . . . . . . . . . . . . . . . . . 52-20
xlii
List of Cases
United States Life Insurance Company in the City of New York v. Wilson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-10
Wendzel v. Feldstein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-10
United Techs. Corp. v. Treppel. . . . . . . . . . . . . . . . . . . . . . . 44-14
Wilke v. Woodhouse Ford, Inc.. . . . . . . . . . . . . . . . . . . . . . . 20-25
Urbain v. Beierling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39-8
Winger v. CM Holdings, L.L.C.. . . . . . . . . . . . . . . . . . . . . . . 7-14
Utility Air Regulatory Group v. Environmental Protection Agency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47-19
World Harvest Church v. Grange Mutual Casualty Co.. . . . 27-18
Valley Bank of Ronan v. Hughes. . . . . . . . . . . . . . . . . . . . . . 34-16
Woven Treasures v. Hudson Capital . . . . . . . . . . . . . . . . . . 29-13
Victory Clothing Co. v. Wachovia Bank, N.A.. . . . . . . . . . . 33-16
Wykeham Rise, LLC v. Federer . . . . . . . . . . . . . . . . . . . . . . 24-13
Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50-20
Yung-Kai Lu v. University of Utah . . . . . . . . . . . . . . . . . . . . 16-18
Wallis v. Brainerd Baptist Church. . . . . . . . . . . . . . . . . . . . . 17-14
Zaretsky v. William Goldberg Diamond Corp.. . . . . . . . . . . 19-14
Walters v. YMCA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-10
Zelnick v. Adams. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-7
Weil v. Murray. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-8
Zimmerman v. Allen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-6
Weissman v. City of New York. . . . . . . . . . . . . . . . . . . . . . . 23-15
ZUP, LLC v. Nash Manufacturing, Inc.. . . . . . . . . . . . . . . . . . 8-7
Welsh v. Lithia Vaudm, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 12-9
Whitman v. American Trucking Associations . . . . . . . . . . . 47-10
World of Boxing LLC v. King. . . . . . . . . . . . . . . . . . . . . . . . 18-15
Zapata Corp. v. Maldonado. . . . . . . . . . . . . . . . . . . . . . . . . . 44-21
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Part One
Chapter 1
The Nature of Law
Chapter 2
Foundations of
American Law
The Resolution of Private Disputes
Chapter 3
Business and the Constitution
Chapter 4
Business Ethics, Corporate Social
Responsibility, Corporate Governance,
and Critical Thinking
Pixtal/AGE Fotostock
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.
1-4
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 judge-made
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 written 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
1-5
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. As a result, with regard to the common law,
judges sometimes serve in the unexpected role of crafting
legal rules in addition to interpreting the 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 but lost. 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 negligent
1-6
Part One Foundations of American Law
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 . . . against his
veterinarian following the death of his dog . . . . The trial court [ruled
in favor of the veterinarian], 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 . . . argu[ed] that the plaintiff’s damages did not exceed the $25,000 [minimum amount for
a valid case in 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
the Court of Appeals’ own characterization and for the reasons
Chapter One
The Nature of Law
1-7
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.
1-8
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
1-9
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
III. Legal Analysis
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.
A. Availability of an Adequate U.C.C. Remedy
[C]ourts 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.
B. Indistinct Causes of Action with Conflicting Defenses
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.
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
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Part One Foundations of American Law
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
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.
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
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.
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.
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
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 the
essence of the 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
1-11
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.
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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 view,
Oliver Wendell Holmes, The Common Law (1881).
3
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 of
Chapter One
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 appear 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
1-13
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 will
The reasoning courts employ in constitutional cases resembles that used
in common law cases, but often is somewhat looser. See Chapter 3.
4
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Part One Foundations of American Law
Ethics and Compliance in Action
Some schools of jurisprudence discussed in this
chapter concern themselves with the relationship
between law and notions of morality. These schools
of jurisprudence involve considerations related to key aspects of
ethical theories, which address ethical issues arising in business
contexts, corporate governance, and compliance. Chapter 4
defines major ethical theories. Chapter 44 discusses corporate
governance issues in more detail. And compliance, which refers
to the processes by which an organization polices its own behavior to ensure that it conforms to applicable laws, is addressed
throughout this text. In this Ethics and Compliance in Action
feature, we will focus on those parallel considerations between
two schools of jurisprudence and several ethical theories.
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
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 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.
widely accepted ethical or policy reason for treating the present case differently from its predecessor. Because people 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 employees-at-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,
Also, though they exercise the power infrequently, courts sometimes
completely overrule their own prior decisions.
5
Chapter One
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
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 which injuries
The Nature of Law
1-15
suffered as a result of certain risks that are inherent to an
activity—like being struck by a foul ball at a baseball game —
are not legally considered to be the fault of the baseball team
or stadium, even though it was theoretically possible for the
team or stadium to have done more to protect the injured
person from the risk. (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 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 and 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 and 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
Chapter 7 includes a detailed discussion of the negligence defense of
assumption of risk.
7
stands. Such risks are an unavoidable—even desirable—part of
the joy that comes with being close enough to the Great American 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,
1-16
Part One Foundations of American Law
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
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”
Long before the Kansas City Athletics moved to Oakland and the
fledging [sic] 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 noduty 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
Chapter One
conscious decision to favor the collective interests of all spectators by rejecting as a matter of law the individual claims of
injured 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).
In Lowe, 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
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
The Nature of Law
1-17
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
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.
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
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Part One Foundations of American Law
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
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 for
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
1-19
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 as “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.
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. 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.
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
­ andling—in one way or another—of certain, expressly enumerh
ated 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
that the exemption’s text has a latent clarity, at least after one
applies various interpretive aids. Each side then goes on to argue
1-20
Part One Foundations of American Law
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. 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 standalone, 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. 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.[a]
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,
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.
[a]
Chapter One
“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.
To address this anomaly, the drivers cite to Antonin Scalia &
Bryan Garner, Reading Law: The Interpretation of Legal Texts
The Nature of Law
1-21
(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.[b]
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
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.” 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.
[b]
1-22
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.
***
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 result-oriented 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.
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.
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
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
Chapter One
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.
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
The Nature of Law
1-23
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.
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
1-24
Part One Foundations of American Law
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
James v. City of Costa Mesa
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.
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 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 U.S. 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
Chapter One
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 CSAauthorized 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 [“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 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
The Nature of Law
1-25
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 CSAauthorized 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.
***
1-26
Part One Foundations of American Law
Affirmed.
2. Legislative History
DISSENT BY: Marsha S. Berzon, Circuit Judge
James’ reading of the statute also accords much better with the overall thrust of the legislative history. That history, while not entirely
without ambiguity, strongly supports James’s interpretation.
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
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”
[T]he 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.
***
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’.
Chapter One
The Nature of Law
1-27
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 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,
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
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 operated a wellknown electronic forum for those who sought 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 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.
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”
1-28
Part One Foundations of American Law
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 (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”
exist, the Court looked to a precedent case, Air France v. Saks,
470 U.S. 392 (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 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.
Chapter One
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, “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.
3. At the beginning of each case, there is a statement of
facts containing the most important facts that gave rise
to the case. These appear in italics and are largely written by the authors of this text, though some of the language may be that of the court.
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,
The Nature of Law
1-29
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
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?
1-30
Part One
Foundations of American Law
Holdings Michigan common law has never allowed
the recovery of noneconomic damages for the negligent
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
Problems and Problem Cases
1. 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
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.
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 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?
2. 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.
Chapter One
• A state constitution and a treaty that has been ratified by Congress.
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.” 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. 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?
5. Keith Rawlins and his daughter, Jenna, attended the July
20, 2012, baseball game between the Cleveland Indians
and the Baltimore Orioles. That night, following the
game, the Indians were hosting a post-game fireworks
display. As a result, the Cleveland Fire Department
ordered that certain sections of spectator seating had
to be vacated prior to the display. The Rawlinses’ seats
were in one of those sections. Rawlins and his daughter
claimed that ushers indicated that they had to vacate
their seats prior to the end of the game. Though they
The Nature of Law
1-31
did not want to leave, they complied, and as they proceeded up the steps to leave the stadium, Rawlins was
struck in the head with a foul ball. Rawlins was seriously injured as a result, and Jenna suffered emotional
trauma from seeing her father injured in this way. They
sued the Indians. Based on the discussion of the common law “baseball rule” in the Coomer case in this
chapter and the precedents that applied and declined
to apply it, if you were the judge in this case, would you
apply the baseball rule to shield the Cleveland Indians
from liability or would you distinguish this case from
those where the baseball rule applies? Why?
6. 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 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?
1-32
Part One Foundations of American Law
7. 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 under-50 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?
8. 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?
9. 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 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
Chapter One
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
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?
10. R
oommates.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
The Nature of Law
1-33
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 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 wellknown 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?
2-2
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 subject-matter 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,
chancery, 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 when
2-3
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
2-4
Part One Foundations of American Law
Abdouch v. Lopez
829 N.W.2d 662 (Neb. 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.”
2-5
[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]
2-6
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 (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 Daimler-­
manufactured 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
2-7
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, based on
2-8
Part One Foundations of American Law
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 all-purpose
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 all-­purpose 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 service 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.
2-9
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.
2-10
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 (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 court 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.
2-11
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
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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 2.1 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
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Figure 2.1 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
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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 plaintiff’s
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. The deponent is under
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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 audiovisual 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.
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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 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 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 and Compliance 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.
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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 of
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
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Part One Foundations of American Law
Ethics and Compliance 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 authority
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,
to impose appropriate sanctions on the document-destroying
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 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 basis of
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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-bycase basis.
Over the last decade, 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 plaintiffs all
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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
court’s grant of class action certification. Besides concluding that the commonality element held lacking in WalMart 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 to perform on a given
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Part One Foundations of American Law
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 eight-minute 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
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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 WalMart. 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 led to calls in
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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). In 2019 the
U.S. House of Representatives passed the Forced Arbitration
Injustice Repeal Act (FAIR Act), which prohibits a forced arbitration agreement from being enforced if it requires forced
arbitration of an employment, consumer, or civil rights claim
against a corporation. As this book went to press, passage in
the Senate and enactment of this legislation was uncertain.
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
to 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
AT&T Mobility LLC v. Concepcion
563 U.S. 333 (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 (Cal. 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
2-27
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.
mandate arbitration but require it to be of the individual
claim variety.
mock jury trial that does not bind the parties. If the parties
do not settle after completion of the summary jury 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.
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.
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, court-annexed 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
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
2-29
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 by evidence, and
Chapter Two
The Resolution of Private Disputes
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 Ostonakulov 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?
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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
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Part One Foundations of American Law
GM. GM Canada was incorporated under Canadian
law and has its principal place of business in Ontario,
Canada. It does not do business 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:
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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.
Explain the burden-on-commerce doctrine’s
role in making certain state government actions
unconstitutional.
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Describe the incorporation doctrine’s role in
making most guarantees of the Bill of Rights
operate to protect persons not only against certain
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).
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3-6
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Part One
Foundations of American Law
Describe the differences between noncommercial
speech and commercial speech and the respective
levels of First Amendment protection they receive.
Explain the difference between procedural due
process and substantive due process.
Identify the instances when an Equal Protection
Clause–based challenge to government action
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,
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
triggers more rigorous scrutiny than the rational
basis test.
3-9 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.
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.
Of course, there is sometimes disagreement (between
state and federal officials, for example) about whether a
particular branch of government has overreached. For example, in 2020, President Trump challenged a subpoena
(issued as part of a state criminal investigation) for financial records related to his personal and business financial
records. The president argued that a sitting president is absolutely immune from such a process; among other things,
he argued that the criminal subpoenas would divert him
from his duties and impose an intolerable burden on a
president’s ability to perform his Article II functions. The
Supreme Court found that distraction was not sufficient to
confer absolute immunity and held that Article II and the
Supremacy Clause do not preclude or require a heightened
standard for the issuance of a state criminal subpoena to
a sitting president. Trump v. Vance, 140 S. Ct. 2412 (2020).
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
Chapter Three Business and the Constitution
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.
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.
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 governed. This is why the justices’
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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 (that is, commerce between or among multiple
states) 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
(that is, commerce within a state) 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
Chapter Three Business and the Constitution
upheld the application 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-of-state 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 States v.
Lopez, 514 U.S. 549 (1995), and United States v. ­Morrison,
529 U.S. 598 (2000), offered clear reminders that the
power to regulate interstate commerce is not without limits. Those cases struck down laws that made possessing a
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gun in a school zone a federal crime (Lopez) and addressed
gender-motivated violent crimes (Morrison). In both cases,
the Court held that Congress had exceeded its power.
One area that has tested Congress’s Commerce Clause
power is the federal ban on marijuana. Though many states
and cities have made it legal as a matter of state law, it
remains (at least at the time of this writing) illegal under
federal law. The Supreme Court has found that Congress
has the power to prohibit its use under federal law, finding
that there exists an interstate market for the drug and that
such a law regulates economic activity. Gonzales v. Raich,
545 U.S. 1 (2005).
In the case below, the Court considered whether a
state law was an unconstitutional burden on interstate
commerce.
South Dakota v. Wayfair, Inc.
138 S. Ct. 2080 (2018)
The State of South Dakota (like most states) requires companies to collect a sales tax on goods and services sold in the state and remit
the money to the state. That practice is fairly straightforward for businesses that sell their products through physical locations in the
state (brick-and-mortar stores, for example), when a customer pays at the point of sale. But online retailers with no physical location in
the state had argued that states could not force them to collect the tax. The U.S. Supreme Court had ruled in the past, most recently in
a case called Quill Corp. v. North Dakota (504 U.S. 298 (1992)), that states could not require a business to collect the state’s sales
tax if that business had no physical presence in the state. That ruling was based on the Commerce Clause: Without a strong connection
between the business and the state (such as a physical presence), the tax collection requirement imposed an undue burden on the free
flow of interstate commerce.
South Dakota sued Wayfair and other online retailers, seeking to require them to collect its sales tax from online sales to customers in South Dakota. It argued that the “physical presence” rule was depriving them of needed tax dollars and should be overturned.
Because of binding precedent from the U.S. Supreme Court (i.e., the Quill case and a case before it called Bellas Hess), the retailers
won on their motions for summary judgment in the trial court and the South Dakota Supreme Court. The U.S. Supreme Court granted
certiorari to hear South Dakota’s appeal.
Kennedy, Justice
All concede that taxing the sales in question here is lawful. The
question is whether the out-of-state seller can be held responsible
for its payment, and this turns on a proper interpretation of the
Commerce Clause, U.S. Const., Art. I, § 8, cl. 3.
Under this Court’s decisions in Bellas Hess and Quill, South
Dakota may not require a business to collect its sales tax if the
business lacks a physical presence in the State. Without that physical presence, South Dakota instead must rely on its residents to
pay the use tax owed on their purchases from out-of-state sellers.
“[T]he impracticability of [this] collection from the multitude
of individual purchasers is obvious.” National Geographic Soc. v.
California Bd. of Equalization, 430 U.S. 551, 555 (1977). And consumer compliance rates are notoriously low. . . . It is estimated
that Bellas Hess and Quill cause the States to lose between $8 and
$33 billion every year. . . . In South Dakota alone, the Department of Revenue estimates revenue loss at $48 to $58 million
annually. Particularly because South Dakota has no state income
tax, it must put substantial reliance on its sales and use taxes for
the revenue necessary to fund essential services. Those taxes account for over 60 percent of its general fund.
In 2016, South Dakota confronted the serious inequity Quill
imposes by enacting S. 106—“An Act to provide for the collection of sales taxes from certain remote sellers, to establish certain
Legislative findings, and to declare an emergency.” The legislature
found that the inability to collect sales tax from remote sellers was
“seriously eroding the sales tax base” and “causing revenue losses
and imminent harm . . . through the loss of critical funding for
state and local services.” § 8(1). . . . The Act applies only to sellers
that, on an annual basis, deliver more than $100,000 of goods or
services into the State or engage in 200 or more separate transactions for the delivery of goods or services into the State.
Respondents Wayfair, Inc., Overstock.com, Inc., and Newegg,
Inc., are merchants with no employees or real estate in South
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Part One Foundations of American Law
Dakota. . . . Each easily meets the minimum sales or transactions
requirement of the Act, but none collects South Dakota sales tax.
II.
The Constitution grants Congress the power “[t]o regulate Commerce . . . among the several States.” Art. I, § 8, cl. 3. . . . Although
the Commerce Clause is written as an affirmative grant of authority to Congress, this Court has long held that in some instances
it imposes limitations on the States absent congressional action.
Modern precedents rest upon two primary principles that
mark the boundaries of a State’s authority to regulate interstate
commerce. First, state regulations may not discriminate against
interstate commerce; and second, States may not impose undue
burdens on interstate commerce.
[A] State “may tax exclusively interstate commerce so long
as the tax does not create any effect forbidden by the Commerce
Clause.” [Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 285
(1977)]. After all, “interstate commerce may be required to pay
its fair share of state taxes.” D. H. Holmes Co. v. McNamara, 486
U.S. 24, 31 (1988).
In National Bellas Hess, Inc. v. Department of Revenue of Ill.,
386 U.S. 753, 754–55 (1967),] . . . [t]he Court held that . . . [unless a] retailer maintained a physical presence such as “retail outlets, solicitors, or property within a State,” the State lacked the
power to require that retailer to collect a local use tax. Ibid.
In 1992, the Court reexamined the physical presence rule in
Quill.
III
The physical presence rule has “been the target of criticism over
many years from many quarters.” Direct Marketing Assn. v. Brohl,
814 F.3d 1129, 1148, 1150–1151 (10th Cir. 2016) (Gorsuch, J.,
concurring). . . . Quill created an inefficient “online sales tax loophole” that gives out-of-state businesses an advantage. And “while
nexus rules are clearly necessary,” the Court “should focus on
rules that are appropriate to the twenty-first century, not the nineteenth.” Hellerstein, Deconstructing the Debate Over State Taxation
of Electronic Commerce, 13 Harv. J. L. & Tech. 549, 553 (2000).
Each year, the physical presence rule becomes further removed
from economic reality and results in significant revenue losses to
the States. These critiques underscore that the physical presence
rule, both as first formulated and as applied today, is an incorrect
interpretation of the Commerce Clause.
All agree that South Dakota has the authority to tax these
transactions. . . . The central dispute is whether South Dakota
may require remote sellers to collect and remit the tax without
some additional connection to the State. . . . There just must be
“a substantial nexus with the taxing State.”
Physical presence is not necessary to create a substantial
nexus. The Quill majority expressed concern that without the
physical presence rule “a state tax might unduly burden interstate
commerce” by subjecting retailers to tax collection obligations in
thousands of different taxing jurisdictions. But the administrative
costs of compliance, especially in the modern economy with its
Internet technology, are largely unrelated to whether a company
happens to have a physical presence in a State. For example, a
business with one salesperson in each State must collect sales
taxes in every jurisdiction in which goods are delivered; but a business with 500 salespersons in one central location and a website
accessible in every State need not collect sales taxes on otherwise
identical nationwide sales.
Quill puts both local businesses and many interstate businesses
with physical presence at a competitive disadvantage relative to
remote sellers. Remote sellers can avoid the regulatory burdens
of tax collection and can offer de facto lower prices caused by the
widespread failure of consumers to pay the tax on their own. . . .
In effect, Quill has come to serve as a judicially created tax shelter
for businesses that decide to limit their physical presence and still
sell their goods and services to a State’s consumers—something
that has become easier and more prevalent as technology has
advanced.
Worse still, the rule produces an incentive to avoid physical
presence in multiple States. . . . Rejecting the physical presence
rule is necessary to ensure that artificial competitive advantages
are not created by this Court’s precedents.
Modern e-commerce does not align analytically with a test
that relies on the sort of physical presence defined in Quill.
Between targeted advertising and instant access to most consumers via any internet-enabled device, “a business may be present
in a State in a meaningful way without” that presence “being physical in the traditional sense of the term.” Quill’s physical presence
rule intrudes on States’ reasonable choices in enacting their tax
systems. And that it allows remote sellers to escape an obligation
to remit a lawful state tax is unfair and unjust. It is unfair and unjust
to those competitors, both local and out of State, who must remit
the tax; to the consumers who pay the tax; and to the States that
seek fair enforcement of the sales tax, a tax many States for many
years have considered an indispensable source for raising revenue.
In essence, respondents ask this Court to retain a rule that allows their customers to escape payment of sales taxes—taxes that
are essential to create and secure the active market they supply
with goods and services. An example may suffice. Wayfair offers to sell a vast selection of furnishings. Its advertising seeks
to create an image of beautiful, peaceful homes, but it also says
that “[o]ne of the best things about buying through Wayfair is
that we do not have to charge sales tax.” Brief for Petitioner 55.
What Wayfair ignores in its subtle offer to assist in tax evasion
is that creating a dream home assumes solvent state and local
governments. State taxes fund the police and fire departments
that protect the homes containing their customers’ furniture and
Chapter Three Business and the Constitution
ensure goods are safely delivered; maintain the public roads and
municipal services that allow communication with and access to
customers; support the “sound local banking institutions to support credit transactions [and] courts to ensure collection of the
purchase price,” Quill, 504 U.S., at 328 (opinion of White, J.);
and help create the “climate of consumer confidence” that facilitates sales.
IV
***
Though Quill was wrong on its own terms when it was decided
in 1992, since then the Internet revolution has made its earlier
error all the more egregious and harmful. . . . In 1992, less than
2 percent of Americans had Internet access. Today that number is about 89 percent. When it decided Quill, the Court could
not have envisioned a world in which the world’s largest retailer
would be a remote seller.
The Internet’s prevalence and power have changed the dynamics of the national economy. In 1992, mail-order sales in the
United States totaled $180 billion. Last year, e-commerce retail
sales alone were estimated at $453.5 billion.
This expansion has also increased the revenue shortfall faced
by States seeking to collect their sales and use taxes. In 1992, it
was estimated that the States were losing between $694 million
and $3 billion per year in sales tax revenues as a result of the physical presence rule. Now estimates range from $8 to $33 billion.
Here, the tax distortion created by Quill exists in large part
because consumers regularly fail to comply with lawful use taxes.
Some remote retailers go so far as to advertise sales as tax free.
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
3-7
For these reasons, the Court concludes that the physical presence rule of Quill is unsound and incorrect. The Court’s decisions
in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and National
Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753
(1967), should be, and now are, overruled.
V
In the absence of Quill and Bellas Hess, the first prong of the
Complete Auto test simply asks whether the tax applies to an
activity with a substantial nexus with the taxing State. “[S]uch
a nexus is established when the taxpayer [or collector] ‘avails
itself of the substantial privilege of carrying on business’ in that
jurisdiction.” Polar Tankers, Inc. v. City of Valdez, 557 U.S. 1, 11
(2009).
Here, the nexus is clearly sufficient based on both the economic and virtual contacts respondents have with the State.
The Act applies only to sellers that deliver more than $100,000
of goods or services into South Dakota or engage in 200 or
more separate transactions for the delivery of goods and services into the State on an annual basis. This quantity of business could not have occurred unless the seller availed itself
of the substantial privilege of carrying on business in South
Dakota. And respondents are large, national companies that
undoubtedly maintain an extensive virtual presence. Thus, the
substantial nexus requirement of Complete Auto is satisfied in
this case.
The judgment of the Supreme Court of South Dakota is vacated,
and the case is remanded for further proceedings not inconsistent
with this opinion.
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
3-8
Part One Foundations of American Law
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.
Figure 3.1 A Note on the Affordable Care Act Decision
Congress enacted the Patient Protection and Affordable Care Act (hereinafter, Affordable Care Act or ACA) 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 in the chapter. It focuses on the 2012 decision’s taxing-power 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
Chapter Three Business and the Constitution
3-9
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.
At the time of this writing, the Supreme Court was preparing to consider another challenge to the ACA. In cases brought by
a group of states, some plaintiffs claim the entire law should be struck down because of changes that Congress had made to the
law. Specifically, Congress changed the penalty for not buying health insurance, making the penalty zero. A legal question the
cases present is whether the change to the law means that the entire ACA is now unconstitutional.
National Federation of Independent Business v. Sebelius
567 U.S. 519 (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 in Figure 3.1, 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.
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 3.1, 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 3.1, 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
3-10
Part One Foundations of American Law
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 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 3.1.]
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
Chapter Three Business and the Constitution
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 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.
3-11
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 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.”
3-12
Part One Foundations of American Law
[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.” [Id.]
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 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.
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.
Chapter Three Business and the Constitution
Burden on, or Discrimination against,
Interstate Commerce
LO3-3
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 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 burden-on-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
3-13
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 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.
Independent Checks on
the Federal Government
and the States
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
LO3-4
not only against certain federal government actions, but
also against certain state and local government actions.
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Part One Foundations of American Law
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 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.
Government Action
People often talk as if the
Constitution protects them against anyone who might
threaten their rights. However, most of the Constitution’s
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
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
v. Alabama, 326 U.S. 501 (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, 334 U.S. 1 (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, 365 U.S. 715 (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.
Means-Ends Tests
Explain the differences among the means-ends tests used
LO3-5 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
Chapter Three Business and the Constitution
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 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
LO3-6 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
3-15
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 religion portions of the First Amendment are mostly
beyond the scope of this text. Two issues related to business,
though, bear mention here. First, in 2017, a company called
Hobby Lobby argued that its religious beliefs should exempt it
from having to comply with certain Affordable Care Act regulations that it found objectionable—specifically, a rule requiring it to cover the cost of contraceptives for its employees. The
Court did not consider the First Amendment implications
but instead ruled in Hobby Lobby’s favor on the ground that
the company had religious beliefs under a statute called the
Religious Freedom Restoration Act. Burwell v. Hobby Lobby
Stores, 573 U.S. 682 (2014).
Second, in one well-publicized case, a baker in Colorado declined to bake a cake for a same-sex wedding,
claiming that it violated his religious beliefs. He argued
that the cakes he baked, though for a business, were expressive activity protected by the First Amendment. The
U.S. Supreme Court ruled in his favor but not on First
Amendment grounds (instead, it found that the state administrative agency had acted improperly when considering his claim). It seems inevitable that the Court will
address the First Amendment arguments in some similar
case in the future, eventually deciding whether a business
has such a right. See Masterpiece Cakeshop, Ltd. v. Colorado
Civil Rights Commission, 138 S. Ct. 1719 (2018).
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 distinct,
but that is not always the case in actual practice. Consider
the cases involving so-called expressive conduct—conduct so
inherently expressive that it is treated for First Amendment
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Part One Foundations of American Law
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 (2017), the conductversus-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 cash-paying
customers and that an added fee would be tacked on for creditcard-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 the 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, 576 U.S.
155 (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 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
Chapter Three Business and the Constitution
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. Figure 3.2, which
follows the case, describes some observed impacts of the
Citizens United decision on subsequent election cycles.
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
3-17
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 (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.
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.
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.
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Part One Foundations of American Law
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 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 state-law 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
Chapter Three Business and the Constitution
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 the speech comes from a corporation rather than an individual.” This protection for speech is inconsistent with Austin’s
anti-distortion 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
3-19
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 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.
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Foundations of American Law
District court’s judgment reversed as to constitutionality of restrictions on corporate independent expenditures.
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.
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 3.2 A Note on Post–Citizens United Developments
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.
Chapter Three Business and the Constitution
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 mid-1970s, 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
3-21
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, 514 U.S. 476 (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, 517 U.S. 484 (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, 527 U.S. 173 (1999),
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 twoplus 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
formal changes in the commercial speech doctrine (so as
3-22
Part One Foundations of American Law
CONCEPT REVIEW
The First Amendment
Type of Speech
Level of First Amendment Consequences When Government Regulates Protection
Content of Speech
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.
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., 576 U.S. 200 (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. Figure 3.3, which appears later in the chapter,
explores recent requirements to include graphic warnings
on tobacco products.
In Matal v. Tam, which follows, the Supreme Court
struck 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
rejected the government’s attempt to invoke the government speech doctrine and reminded 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.
Chapter Three Business and the Constitution
Matal v. Tam
3-23
137 S. Ct. 1744 (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
3-24
Part One Foundations of American Law
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 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.
Chapter Three Business and the Constitution
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
3-25
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 renders
3-26
Part One Foundations of American Law
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.
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.
Figure 3.3 A Note on Tobacco Regulations
What about rules that require tobacco companies to print warnings about their products; do those infringe on the
companies’ First Amendment rights? Congress has passed and amended several laws regulating the labeling and
advertising of tobacco products. In 2009, it passed a law known as the Family Smoking Prevention and Tobacco
Control Act (TCA). The TCA requires a federal agency, the Food and Drug Administration (FDA), to issue regulations that require color graphics depicting the health risks of smoking.
Here are some examples of the required graphic images the FDA has proposed (see www.fda.gov/tobacco-products/
labeling-and-warning-statements-tobacco-products/cigarette-health-warnings#sample):
Chapter Three Business and the Constitution
3-27
Companies that produce these products have challenged both the FDA’s rules and the TCA. The U.S. Court of
Appeals for the D.C. Circuit struck down one set of regulations in 2012, holding that the required images proposed
by the FDA violated the First Amendment and that the FDA did not provide substantial evidence that graphic warnings on cigarette advertising would directly advance its interest in reducing smoking rates to a material degree. R.J.
Reynolds Tobacco Co. v. Food & Drug Admin., 696 F.3d 1205 (D.C. Cir. 2012). In a separate ruling also in 2012, the
U.S. Court of Appeals for the Sixth Circuit upheld the TCA’s graphic warning requirement, finding the provision did
not violate the First Amendment and the graphic warning requirement was reasonably related to the government’s
interest in preventing consumer deception. Discount Tobacco City & Lottery, Inc. v. United States, 674 F.3d 509 (6th
Cir. 2012).
Several public health and medical organizations sued in 2016 to force the FDA to issue final regulations on
graphic labels, as required by the TCA. The U.S. District Court for the District of Massachusetts ruled in favor of the
plaintiffs and ordered the FDA to issue a final rule requiring graphic health warnings by March 15, 2020. American
Academy of Pediatrics v. FDA, 2019 WL 1047149 (D. Mass. March 5, 2019).
The FDA then issued a new final rule, which at the time of this writing is the subject of litigation. Several tobacco
companies filed a lawsuit in the Federal District Court for the Eastern District of Texas against the FDA, seeking to
invalidate the graphic health warnings and the requirement under the Tobacco Control Act. The companies argued
that the new rule requiring graphic warnings violates the First Amendment, the TCA’s requirement that FDA issue
a rule requiring the health warning violates the First Amendment, and the FDA acted arbitrarily and capriciously in
drafting and issuing the rule.
Philip Morris USA Inc. filed a similar challenge in the U.S. District Court for the District of Columbia. The company alleges that the rule violates the First Amendment rights of tobacco companies by requiring them to “disparage
their own products with shocking and inflammatory graphic images.” The complaint seeks declaratory and injunctive
relief to prevent implementation of the rule.
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.
LO3-7
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
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.
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Part One Foundations of American Law
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, 198 U.S. 45 (1905), 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.
Equal Protection
Identify the instances when an Equal Protection Clause–
LO3-8 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 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 (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.
Chapter Three Business and the Constitution
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 in-state
and out-of-state businesses. Neither does it favor a State’s longtime 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 do what
that court says it seeks to do, namely, advance the racetracks’
economic interests. Its grant to the racetracks of authority to
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
3-29
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.
Iowa Supreme Court decision reversed, and case remanded for further proceedings.
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,
3-30
Part One Foundations of American Law
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 fivejustice 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’
Obergefell v. Hodges
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
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 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.
576 U.S. 644 (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.)
Chapter Three Business and the Constitution
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 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
3-31
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, same-sex
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
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Part One Foundations of American Law
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), 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.
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
Chapter Three Business and the Constitution
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.
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
3-33
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
S. 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
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Part One Foundations of American Law
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
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 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 same-sex 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
Chapter Three Business and the Constitution
3-35
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 same-sex 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.
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 same-sex
marriage performed in another State on the ground of its samesex 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. Although what is considered a “suspect class” is subject
to review and change, race, alienage, and national origin
generally are considered suspect classes.
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
Sixth Circuit’s judgment reversed.
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Part One Foundations of American Law
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
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 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 race-conscious
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 in Schuette v. Coalition to Defend Affirmative Action,
572 U.S. 291 (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.”
A lawsuit against Harvard College claims that Harvard’s
admissions process violates Asian American applicants.
The claim is not based on the Constitution; rather, it alleges violation of a federal law that prohibits discrimination among organizations or programs that receive federal
funds (42 U.S.C. §2000d et seq.). But it is relevant for this
discussion because the equal protection analysis applies to
cases brought under that law. The federal district court in
the Harvard case therefore analyzed the issue under the
principles set forth in Fisher and found in favor of Harvard. At the time of this drafting, the case remained on
appeal. See Students for Fair Admissions, Inc. v. President
and Fellows of Harvard College, 397 F. Supp. 3d 126 (D.
Mass. 2019). A similar case (though a direct constitutional
challenge) against the University of North Carolina was
pending as this book went to press (see Students for Fair
Admission, Inc. v. University of North Carolina, 2019 WL
4773908 (M.D.N.C. Sept. 30, 2019)).
2. 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
Chapter Three Business and the Constitution
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Ethics and Compliance 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 may
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.
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.
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.
Under the Fifth Amendment’s Due Process Cause, standards similar to
those described in this section apply to the federal government.
2
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.
These statutes impaired the obligations of existing private
contracts by relieving debtors of what they owed 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, 462 U.S. 176 (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 pass-on 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
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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 sex (gender)
Intermediate scrutiny
Moderately rigorous test—government action is unconstitutional unless substantially related to fulfillment of important government purpose.
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.
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
Chapter Three Business and the Constitution
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 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.
Eminent domain and the Takings Clause’s application to land use problems are discussed in Chapter 24.
3
3-39
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, 505 U.S. 1003
(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.
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 3.4 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 alreadyannounced 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
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Part One Foundations of American Law
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
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
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.
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.)
Chapter Three Business and the Constitution
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
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
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
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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 out-of-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.
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.
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Part One Foundations of American Law
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 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 it 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 court-ordered 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-decadeslong 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
Chapter Three Business and the Constitution
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 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
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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
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 Williams-Yulee, 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
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Part One Foundations of American Law
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
Williams-Yulee 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 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 a 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 ethical responsibilities do businesses and business leaders have and to whom?
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:
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4-2
Appreciate the strengths and weaknesses of the
various ethical theories.
Apply the Guidelines for Ethical Decision
Making to business and personal decisions.
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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 corporate actors, however, these are not reasons to act ethically,
but instead the natural consequences of so acting.
Chapter Four Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
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.
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
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interests of other corporate stakeholders, such as employees, suppliers, customers, and the community. In August
2019, the Business Roundtable endorsed the stakeholder
theory approach, noting the importance of delivering value
to customers, investing in employees, dealing fairly and ethically with suppliers, supporting local communities, and generating long-term value for shareholders. 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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Part One Foundations of American Law
Ethics and Compliance 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
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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 a manufacturing
Chapter Four Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
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 repay.” According to Kant, you would not want this
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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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Part One Foundations of American Law
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.
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.
Chapter Four Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
For 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 bicycle
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Part One Foundations of American Law
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
Chapter Four Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
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
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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 26 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 these executives
Ethics and Compliance 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. In 2015, the City of Seattle increased its minimum wage
of city workers to $15 per hour, and New York City followed
suit in 2019. Between 2020 and 2025, Washington, D.C.; New
Jersey; Massachusetts; Maryland; Illinois; and California are
scheduled to see similar increases.
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 Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
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—for both 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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Part One Foundations of American Law
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 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.
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
long-held 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 Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
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.
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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.
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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
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 profits growing.
Chapter Four Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
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 equitybased 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,
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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
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Part One Foundations of American Law
the stock market crash of 1929. Although environmentalists 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 4.1
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 4.1 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
inconveniencing 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?
Chapter Four Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
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.
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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 27 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
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Part One Foundations of American Law
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 alternative 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
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 off-balance-sheet
partnerships had real economic value to Enron (as they did
when Enron first created off-balance-sheet 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.
Chapter Four Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
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.
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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
What Are the Ethics of Each Alternative? television sales in Juarez. But that impact is judged not by
Because our goal is to make a decision that is not only
whether society as a whole is bettered (as with utilitarian
prudent for the firm, but also ethical and defensible in the
analysis) or whether Juarez workers are more deserving of
event we are required to give an accounting for our actions,
jobs (as with justice theory analysis), but is solely judged by
we must consider the ethics of each alternative, not from
how it impacts the firm’s bottom line.
one but a variety of ethical viewpoints. Our stakeholders’
Nonetheless, profit maximization may compel a devalues comprise many ethical theories; ignoring any one
cision maker to consider stakeholders other than the
theory will likely cause an incomplete consideration of the
corporation and its shareholders. A decision to move to
issues and may result in unforeseen, regrettable outcomes.
Juarez may mobilize American consumers to boycott our
TVs, for example, or cause a public relations backlash if
What Would a Utilitarian Do? A utilitarian would choose
our Juarez employees receive wages far below our Sacrathe alternative that promises the highest net welfare to socimento workers. These and other impacts on corporate
ety as a whole. If we define our society as the United States,
stakeholders may negatively impact the firm’s profits.
moving to Juarez may nonetheless produce the highest
Although projecting profits is not a precise science,
net benefit because the benefits to American citizens from
tools you learned in finance classes should enhance your
a lower cost of televisions and to American shareholders
ability to select an alternative that maximizes your firm’s
from higher profits may more than offset the harm to our
profits within the limits of the law.
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Part One Foundations of American Law
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
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
Chapter Four Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
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
high-fat 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
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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 as 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 you
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Part One Foundations of American Law
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
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.
Examples of begging the question are difficult to identify sometimes because they are hidden in the language of
Chapter Four Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
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
4-23
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,
“As a woman, how can you be against corporate policies that
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Part One Foundations of American Law
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.
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.
Chapter Four Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
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.
4-25
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 11. 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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Part One Foundations of American Law
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.ethicsunwrapped.utexas.edu
Ethics Unwrapped uses a fun and accessible video format to present
the latest research from psychology, neuroscience, and behavioral
economics explaining how biases and pressures can cloud our
thinking and compromise our ethical decision making.
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.
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
Chapter Four Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
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. 4-27
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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Part One Foundations of American Law
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 besides 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 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
Chapter Four Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
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
4-29
Consult
the Firm's
Ethics
Officer
Be Willing
to Lose
Your Job
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Part One Foundations of American Law
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
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.
Chapter Four Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
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
whistle-blowing 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 unethical
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
4-31
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 price-fixing
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
4-32
Part One Foundations of American Law
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. A
n 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. J erry 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?
Chapter Four Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
7. This American Life is an 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
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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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Criminal Law and Procedure
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Crimes and Torts
Chapter 6
Intentional Torts
Chapter 7
Negligence and Strict Liability
Chapter 8
Intellectual Property and Unfair
Competition
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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 fraud 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?
5-4
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
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.
THE LIST FEATURES FAMILIAR corporate names:
Enron, Arthur Andersen, WorldCom, Adelphia, ImClone,
Volkswagen, Wells Fargo, 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 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 Bernie 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
5-6
Describe the basic protections afforded by the
Fourth, Fifth, and Sixth Amendments.
5-7 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 Describe the major elements that must be proven
in order to establish a violation of the Computer
Fraud and Abuse Act.
position as Tyco’s CEO, also faced incarceration. Madoff
received a 150-year 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 wrongdoing
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.
During recent years, the U.S. Department of Justice
considered whether to file criminal charges against General
Motors for allegedly misleading federal regulators regarding
an ignition switch problem that led to crashes in which persons were injured or killed. Volkswagen pleaded guilty in
Chapter Five Criminal Law and Procedure
2017 to criminal charges in connection with its employees’
scheme to install devices in vehicles so that the cars would
receive false and deceptively positive results on governmentrequired emissions tests. In 2019, Wells Fargo agreed to
pay $3 billion to resolve the company’s potential criminal
and civil liability stemming from a decade-long practice of
pressuring employees to meet unrealistic sales goals. That
practice led over 5,000 employees to provide millions of
accounts and products to customers under false pretenses,
often by creating false records or misusing customers’ identities. The BP, GM, Volkswagen, and Wells Fargo 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 was written some
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, 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 organizational 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 reputation-harming
effect of a criminal conviction. In some cases, the 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
5-5
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. Proponents of using criminal law against corporations may also
point to its expressive function. In other words, in addition
to offering higher penalties, the criminal law signals society’s moral outrage in a way that a money judgment—even
a multibillion-dollar one—cannot.
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, which may include incarceration.
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,
5-6
Part Two Crimes and Torts
misdemeanors are punishable by lesser fines or limited confinement in jail. Depending on their 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, specific 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. Additionally, deterrence
theories presuppose that would-be offenders even know the
law and its sanctions, a suspect notion at best.
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. Rehabilitation was the dominant model of criminal
law for much of this nation’s history but was called into question in the 1970s and fell out of favor. Critics of rehabilitation commonly point to high rates of recidivism as evidence
of the general failure of rehabilitation efforts to date.
Incapacitation of convicted offenders may also contribute to the goal of prevention. While incarcerated, offenders
may also have much less ability to commit other crimes.
This excludes crimes committed against other inmates and
guards. It also ignores the downstream impacts of incarceration on families and communities.
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 equally 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 or otherwise non-carceral
sentence.
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 probation office.
Figure 5.1 explains how federal law approaches the
proper determination of a convicted offender’s punishment.
Figure 5.1 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 1987. 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.
Chapter Five Criminal Law and Procedure
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
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 Organizational Sentencing Guidelines, discussed later in the chapter, pertains to
the sentencing of organizations convicted of federal crimes.)
Approximately 20 years ago, questions began arising
about 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 higher than 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.
In 2005, 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
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 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 or the defendant
agreed to the facts in a plea agreement). 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. 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
5-7
5-8
Part Two Crimes and Torts
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. 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
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
appropriate even if it appears that the sentence departed from
the Guidelines because of the judge’s policy disagreement with
the Guidelines.
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. Whether judges actually use this discretion, or are instead
“anchored” to the Guidelines’ ranges, is an empirical question.
As might be expected, it appears that as more time since Booker
passes, judges seem willing to use more of their inherent discretion.
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
570 U.S. 729 (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.” 18 U.S.C. § 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 review the case.
Chapter Five Criminal Law and Procedure
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.
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 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
5-9
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. 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 mail-fraud 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 yet-to-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.
5-10
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, 569 U.S. 530 (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.
Alvarez, 567 U.S. 709 (2012), the Supreme Court struck
down a portion of the Stolen Valor Act, a federal law that
criminalized false statements made about earning a military
medal. Although the defendant had lied repeatedly about
having served in the military and earning a Purple Heart,
the Court found the statute broadly applied to false statements made at any time, in any place, and to any person,
which conflicted with the First Amendment. In addition,
the Court held in United States v. Stevens, 559 U.S. 460
(2010), 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.
Chapter Five Criminal Law and Procedure
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 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.
5-11
In Reno v. American Civil Liberties Union, 521 U.S. 844
(1997), the Court struck down most of the 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
LO5-3 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.” To avoid
5-12
Part Two Crimes and Torts
the potential vagueness problem suggested by the statute’s
“honest services” language, the Supreme Court adopted a
limited 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 high 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 with
Shaw v. United States
5-13
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 (2016)
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 18 U.S.C. § 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.
5-14
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.
Judgment of Ninth Circuit vacated; case remanded for further
proceedings.
Chapter Five Criminal Law and Procedure
Criminal Procedure
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
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 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). Pursuant to the Supreme
Court’s decision in Ramos v. Louisiana, 139 S. Ct. 1318
(2019), the Sixth Amendment requires that jury verdicts
for serious crimes must be unanimous in all state and federal cases.
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
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
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
5-15
5-16
Part Two Crimes and Torts
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 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 5.2, which appears later
in the chapter, provides 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’s
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 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
Chapter Five Criminal Law and Procedure
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, 462 U.S. 696 (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, 543 U.S. 405 (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, in Rodriguez v.
United States, 575 U.S. 348 (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, 533 U.S. 27 (2001), that a search
United States v. Jones
5-17
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 heatemanation 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, 569 U.S. 1 (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 case that follows provides further illustration 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.
565 U.S. 400 (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.
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 (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.
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 Supreme Court granted the government’s petition for a writ of certiorari.
5-18
Part Two Crimes and Torts
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 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 thenowner. 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
Chapter Five Criminal Law and Procedure
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.
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
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,”
5-19
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.]
Justice Sotomayor’s concurrence in Jones became especially
important in the Court’s 2018 opinion in Carpenter v. United States,
138 S. Ct. 2206, which addressed whether the government could
obtain cell phone location records without a warrant pursuant to the
Stored Communications Act. The Court held that data used in tracking a person by cell towers was similar to that of using a GPS tracking device as in Jones. In addition, the “third-party doctrine,” which
provides that people who voluntarily provide information to third
parties like phone companies have no reasonable expectation of privacy, did not change the result because consumers do not choose to
share their geographic location and movements through cell phones.
In reaching this conclusion, the Court stressed “the inescapable and
automatic” nature of the collection of cell phone data, and that cell
phones hold the “privacies of life” for many Americans.
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
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Part Two Crimes and Torts
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
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 5.2.
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 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 searchincident-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
Figure 5.2 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.
In 2014, the Supreme Court decided Riley v. California, 573 U.S. 373. In that case, the Court held unanimously that the searchincident-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.
Chapter Five Criminal Law and Procedure
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.
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 co-occupant of a residence does
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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 cooccupant 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 the 2014 case Fernandez v.
California, 571 U.S. 292.
Searches under exigent circumstances. Courts 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, 569 U.S. 141 (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.
Yet, in Mitchell v. Wisconsin, 139 S. Ct. 2525 (2019), the
Court appears to have reopened the door of warrantless
blood draws when the motorist is unconscious. The test
for exigency is, according to the Court, when there is a
compelling need for official action and no time to secure
a warrant. In holding that the state met that test merely
because the defendant was unconscious, the opinion may
have created a presumption of exigent circumstances in
such situations.
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Part Two Crimes and Torts
DNA swabs in the booking process. In Maryland v. King, 569
U.S. 435 (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 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
The Supreme Court initially authorized application of the exclusionary
rule in federal criminal cases only. In Mapp v. Ohio, 367 U.S. 643 (1961), the
Court made the exclusionary rule applicable to state criminal cases as well.
5
States, 371 U.S. 471 (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
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.
Chapter Five Criminal Law and Procedure
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 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,
5-23
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
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Part Two Crimes and Torts
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.
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, 384 U.S. 436 (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 incustody 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 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 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. Texas, 570 U.S. 178 (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 pre-custody 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 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
Chapter Five Criminal Law and Procedure
the officer. Notwithstanding popular misconceptions, the
Fifth Amendment does not establish a complete right to
remain silent but only guarantees that criminal defendants
may not be compelled to testify against themselves. Therefore, as long as police do not deprive defendants the opportunity to claim a Fifth Amendment privilege, there is no
constitutional violation.
Berghuis v. Thompkins
5-25
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 (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.
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 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. 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, and a jury
found him guilty on all counts. 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 on the same
grounds. The district court ruled against Thompkins. The Sixth Circuit reversed, ruling for Thompkins 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 [Miranda] 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 Miranda right to counsel, the Court in Davis v. United
States, 512 U.S. 452, 459 (1994), held that a suspect must do so
“unambiguously.” [Davis established that if] an accused makes
a statement concerning the right to counsel “that is ambiguous
or equivocal” or makes no statement, the police are not required
to end the interrogation, or ask questions to clarify whether the
accused wants to invoke his or her Miranda rights.
The Court has not yet stated whether an invocation of the
right to remain silent can be ambiguous or equivocal, but there is
no principled reason to adopt different standards for determining
when an accused has invoked the Miranda right to remain silent
and the Miranda right to counsel at issue in Davis. Both protect
the privilege against compulsory self-incrimination by requiring
an interrogation to cease when either right is invoked.
There is good reason to require an accused who wants to
invoke his or her right to remain silent to do so unambiguously.
A requirement of an unambiguous invocation of Miranda rights
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Part Two Crimes and Torts
results in an objective inquiry that “avoid[s] difficulties of proof
and . . . provide[s] guidance to officers” on how to proceed in
the face of ambiguity. Davis, 512 U.S., at 458–459. If an ambiguous act, omission, or statement could require police to end the
interrogation, police would be required to make difficult decisions about an accused’s unclear intent and face the consequence
of suppression if they guess wrong. Suppression of a voluntary
confession in these circumstances would place a significant burden on society’s interest in prosecuting criminal activity. Treating an ambiguous or equivocal act, omission, or statement as an
invocation of Miranda rights “might add marginally to Miranda’s
goal of dispelling the compulsion inherent in custodial interrogation.” Moran v. Burbine, 475 U.S. 412, 425 (1986). But “as
Miranda holds, full comprehension of the rights to remain silent
and request an attorney are sufficient to dispel whatever coercion
is inherent in the interrogation process” [quoting Burbine].
Thompkins did not say that he wanted to remain silent or that
he did not want to talk with the police. Had he made either of
these simple, unambiguous statements, he would have invoked his
right to cut off questioning. Here he did neither, so he did not
invoke his right to remain silent.
We next consider whether Thompkins waived his right to
remain silent. Even absent the accused’s invocation of the right to
remain silent, the accused’s statement during a custodial interrogation is inadmissible at trial unless the prosecution can establish that the accused “in fact knowingly and voluntarily waived
[Miranda] rights” when making the statement. North Carolina v.
Butler, 441 U.S. 369, 373 (1979). The waiver inquiry has two distinct dimensions: waiver must be “voluntary in the sense that it
was the product of a free and deliberate choice rather than intimidation, coercion, or deception,” and [must be] “made with a full
awareness of both the nature of the right being abandoned and the
consequences of the decision to abandon it” [quoting Burbine}.
Some language in Miranda could be read to indicate that waivers are difficult to establish absent an explicit written waiver or a
formal, express oral statement. In addition, Miranda stated that
“a heavy burden rests on the government to demonstrate that the
defendant knowingly and intelligently waived his privilege against
self-incrimination and his right to retained or appointed counsel.”
The course of decisions since Miranda, informed by the application of Miranda warnings in the whole course of law enforcement, demonstrates that waivers can be established even absent
formal or express statements of waiver. The main purpose of
Miranda is to ensure that an accused is advised of and understands the right to remain silent and the right to counsel.
One of the first cases to decide the meaning and import of
Miranda with respect to the question of waiver was North Carolina v.
Butler. Butler interpreted the Miranda language concerning the
“heavy burden” to show waiver in accord with usual principles of
determining waiver, which can include waiver implied from all the
circumstances. The prosecution therefore does not need to show
that a waiver of Miranda rights was express. Butler made clear that
a waiver of Miranda rights may be implied through “the defendant’s silence, coupled with an understanding of his rights and a
course of conduct indicating waiver.” The Court in Butler therefore
“retreated” from the “language and tenor of the Miranda opinion,”
which “suggested that the Court would require that a waiver . . . be
‘specifically made.’” [Citation omitted.]
If the state establishes that a Miranda warning was given and
the accused made an uncoerced statement, this showing, standing
alone, is insufficient to demonstrate a valid waiver of Miranda
rights. The prosecution must make the additional showing
that the accused understood these rights. Where the prosecution
shows that a Miranda warning was given and that it was understood by the accused, an accused’s uncoerced statement establishes an implied waiver of the right to remain silent.
The record in this case shows that Thompkins waived his right
to remain silent. There is no basis in this case to conclude that
he did not understand his rights; and on these facts it follows that
he chose not to invoke or rely on those rights when he did speak.
First, there is no contention that Thompkins did not understand his
rights; and from this it follows that he knew what he gave up when he
spoke. There was more than enough evidence in the record to conclude that Thompkins understood his Miranda rights. Thompkins
received a written copy of the Miranda warnings; Detective Helgert
determined that Thompkins could read and understand English;
and Thompkins was given time to read the warnings. Thompkins,
furthermore, read aloud the fifth warning, which stated that “you
have the right to decide at any time before or during questioning to
use your right to remain silent and your right to talk with a lawyer
while you are being questioned.” He was thus aware that his right to
remain silent would not dissipate after a certain amount of time and
that police would have to honor his right to be silent and his right to
counsel during the whole course of interrogation. Those rights, the
warning made clear, could be asserted at any time. Helgert, moreover, read the warnings aloud.
Second, Thompkins’ answer to Detective Helgert’s question
about whether Thompkins prayed to God for forgiveness for
shooting the victim is a “course of conduct indicating waiver”
of the right to remain silent (quoting Butler). If Thompkins
wanted to remain silent, he could have said nothing in response
to Helgert’s questions, or he could have unambiguously invoked
his Miranda rights and ended the interrogation. The fact that
Thompkins made a statement about three hours after receiving a
Miranda warning does not overcome the fact that he engaged in
a course of conduct indicating waiver. Police are not required to
rewarn suspects from time to time.
Third, there is no evidence that Thompkins’s statement was
coerced. Thompkins does not claim that police threatened or
injured him during the interrogation or that he was in any way
Chapter Five Criminal Law and Procedure
fearful. Thompkins knowingly and voluntarily made a statement
to police, so he waived his right to remain silent.
In sum, a suspect who has received and understood the Miranda
warnings, and has not invoked his Miranda rights, waives the right
to remain silent by making an uncoerced statement to the police.
Thompkins did not invoke his right to remain silent and stop the
questioning. Understanding his rights in full, he waived his right to
remain silent by making a voluntary statement to the police.
Sixth Circuit’s judgment reversed; case remanded with
instructions to deny petition for writ of habeas corpus.
Production of Records The preceding discussion of the
privilege against self-incrimination applies to criminal defendants in general. The Fifth Amendment’s scope, however, has
long been of particular concern to businesspersons charged
with crimes. Documentary evidence often is quite important
to the government’s case in white-collar crime prosecutions.
To what extent does the Fifth Amendment protect business
records? More than a century ago, the Supreme Court held,
in Boyd v. United States, 116 U.S. 616 (1886), that the Fifth
Amendment protects individuals against compelled production of their private papers.
In more recent years, however, the Court has drastically
limited the scope of the protection contemplated by Boyd. The
Court has held various times that the private papers privilege
is personal and thus cannot be asserted by a corporation, partnership, or other “collective entity.” Because such entities have
no Fifth Amendment privilege against self-incrimination, the
Court has held that when an organization’s individual officer or agent has custody of organization records, the officer
or agent cannot assert any personal privilege to prevent their
disclosure. This rule holds even if the contents of the records
incriminate her personally. Finally, various decisions allow
the government to require business proprietors to keep certain records relevant to transactions that are appropriate subjects for government regulation. These “required records” are
not entitled to private papers protection. They may be subpoenaed and used against the record keeper in prosecutions for
regulatory violations.
The Court’s business records decisions during the
past four decades cast further doubt on the future of the
private papers doctrine. Instead of focusing on whether
subpoenaed records are private in nature, the Court now
considers whether the act of producing the records would
be sufficiently testimonial to trigger the privilege against
5-27
Sotomayor, Justice, with whom Justices Stevens, Ginsburg, and
Breyer join, dissenting
Today’s decision turns Miranda upside down. Criminal suspects
must now unambiguously invoke their right to remain silent—
which, counterintuitively, requires them to speak. At the same
time, suspects will be legally presumed to have waived their rights
even if they have given no clear expression of their intent to do so.
Those results . . . find no basis in Miranda or our subsequent cases
and are inconsistent with the fair-trial principles on which those
precedents are grounded.
self-incrimination. In Fisher v. United States, 425 U.S. 391
(1976), the Court held that an individual subpoenaed to
produce personal documents may assert his Fifth Amendment privilege only if the act of producing the documents
would involve incriminating testimonial admissions. This
is likely when the individual producing the records is in
effect certifying the records’ authenticity or admitting the
existence of records previously unknown to the government
(demonstrating that he had access to the records and, therefore, possible knowledge of any incriminating contents).
In United States v. Doe, 465 U.S. 605 (1984), the Court
extended the act-of-production privilege to a sole proprietor whose proprietorship records were subpoenaed. The
Court, however, held that normal business records were not
themselves protected by the Fifth Amendment because they
were voluntarily prepared and thus not the product of compulsion. In view of Doe’s emphasis on the testimonial and
potentially incriminating nature of the act of producing business records, some observers thought that officers of collective entities under government investigation might be able
to assert their personal privileges against self-incrimination
as a way to avoid producing incriminating business records.
Braswell v. United States, 487 U.S. 99 (1988), dashed
such hopes, however, as the Court refused to extend its Doe
holding to cover a corporation’s sole shareholder who acted
in his capacity as custodian of corporate records. The Court
held that Braswell (the sole shareholder), having chosen to
operate his business under the corporate form, was bound
by the rule that corporations and similar entities have no
Fifth Amendment privilege. Because Braswell acted in a representative capacity in producing the requested records, the
government could not make evidentiary use of his act of production. The government, however, was free to use the contents of the records against Braswell and the corporation.
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Part Two Crimes and Torts
Double Jeopardy Another important Fifth Amendment
provision is the Double Jeopardy Clause, which prevents a
second criminal prosecution for the same offense after the
defendant has been acquitted or convicted of that offense.
Moreover, it bars the imposition of multiple punishments
for the same offense.
The Double Jeopardy Clause does not, however, preclude
the possibility that a single criminal act may lead to more
than one criminal prosecution. One criminal act may produce several statutory violations, all of which may give rise
to prosecution. For example, a defendant who commits sexual assault may also be prosecuted for battery, assault with a
deadly weapon, and kidnapping if the facts of the case indicate that the relevant statutes were violated. In addition, the
Supreme Court has long used a “same elements” test (also
known as the Blockburger test for the opinion articulating
it) to determine what constitutes the same offense. This
means that a single criminal act with multiple victims (e.g.,
a restaurant robbery in which several patrons are robbed)
could result in several prosecutions because the identity of
The Global Business Environment
If an arrestee who is a foreign national makes
incriminating statements to law enforcement
authorities without having been informed of his
right under an international agreement to have his detention
reported to his country’s consulate, does the exclusionary rule
apply? The U.S. Supreme Court confronted that question in
Sanchez-Llamas v. Oregon, 548 U.S. 331 (2006).
The relevant international agreement in Sanchez-Llamas
was the Vienna Convention on Consular Relations, which was
drafted in 1963 with the purpose, as set forth in its preamble, of
“contribut[ing] to the development of friendly relations among
nations, irrespective of their differing constitutional and social
systems.” Approximately 170 countries have subscribed to the
Vienna Convention. The United States became a party to it in
1969. Article 36 of the Vienna Convention provides that “if he
so requests, the competent authorities of the receiving State
shall, without delay, inform the consular post of the sending
State if, within its consular district, a national of that State is
arrested or committed to prison or to custody pending trial or
is detained in any other manner.” Thus, when a national of one
country is detained by authorities in another, the authorities
must notify the consular officers of the detainee’s home country
if the detainee so requests. Article 36 further provides that “[t]
he said authorities shall inform the [detainee] without delay of
his rights under this sub-paragraph.” The Convention also states
that the rights provided by Article 36 “shall be exercised in conformity with the laws and regulations of the receiving State, subject to the proviso, however, that the said laws and regulations
must enable full effect to be given to the purposes for which the
rights accorded under this Article are intended.”
Moises Sanchez-Llamas, a Mexican national, was arrested
in Oregon in 1999 for alleged involvement in an exchange of
gunfire in which a police officer was wounded. Following the
arrest, police officers gave Sanchez-Llamas the Miranda warnings in both English and Spanish. However, the officers did not
inform Sanchez-Llamas that he could ask to have the Mexican
Consulate notified of his detention. Article 36 of the Vienna
Convention was thus violated. During the interrogation that followed the issuance of the Miranda warnings, Sanchez-Llamas
made incriminating statements that led to attempted murder
charges, as well as various other charges, against him. After he
made the incriminating statements and the formal charges were
filed, Sanchez-Llamas learned of his Article 36 rights. He then
moved for suppression of his incriminating statements (i.e., for
an order that those statements be excluded from evidence at the
trial) because of the Article 36 violation. The Oregon trial court
denied the suppression motion. Sanchez-Llamas was convicted
and sentenced to prison. After the appellate courts in Oregon
affirmed, the U.S. Supreme Court agreed to decide the case.
Assuming that—but without deciding whether—individuals
have a right to invoke Article 36 in a judicial proceeding (as
opposed to nations enforcing the Convention through political or other appropriate channels), the Supreme Court held in
­Sanchez-Llamas that the exclusionary rule was not a proper remedy for an Article 36 violation. The Court noted that the Vienna
Convention itself said nothing about the exclusionary rule as a
remedy. Instead, through the statement that Article 36 rights
are to be “exercised in conformity with the laws and regulations
of the receiving State,” the Convention left the implementation
of Article 36 to domestic law. The Court stated that it “would
be startling” if the Convention were interpreted as requiring
suppression of evidence as a remedy for an Article 36 violation
because “[t]he exclusionary rule as we know it is an entirely
American legal creation.” The Court stressed that there was “no
reason to suppose that Sanchez-Llamas would be afforded the
relief he seeks here in any of the other 169 countries party to the
Vienna Convention.” (Presumably, then, a U.S. national should
not assume that the exclusionary rule will apply to his case if
he is arrested in another Vienna Convention nation and makes
incriminating statements to law enforcement officers without
having been informed of his Article 36 rights.)
The Court emphasized that “[b]ecause the [exclusionary]
rule’s social costs are considerable, suppression is warranted
only where the rule’s ‘remedial objectives are thought most efficaciously served.’” [Case citations omitted.] The Court emphasized
that “[w]e have applied the exclusionary rule primarily to deter
constitutional violations”—normally those involving unreasonable
searches in violation of the Fourth Amendment or incriminating
Chapter Five Criminal Law and Procedure
statements of accused persons whose Fifth Amendment rights
had been violated because their confessions were not voluntary
or because they had not been given the Miranda warnings. No
such problems attended the incriminating statements made by
Sanchez-Llamas. From the Court’s perspective, “[t]he violation
of the right to consular notification . . . is at best remotely connected to the gathering of evidence” and “there is likely to be
little connection between an Article 36 violation and evidence or
statements obtained by police.” The Court reasoned that even if
law enforcement officers fail to provide detained foreign nationals
notice of their Article 36 rights, the same general interests served
by Article 36 would be safeguarded by other protections available to persons in the situation in which Sanchez-Llamas found
himself. The Court stressed that “[a] foreign national detained
each victim would be an additional fact or element of proof
in each case.
In addition, the Double Jeopardy Clause does not protect against multiple prosecutions by different sovereigns.
A conviction or acquittal in a state prosecution does not
prevent a subsequent federal prosecution for a federal
offense arising out of the same event, or vice versa. Finally,
the Double Jeopardy Clause does not bar a private plaintiff
from pursuing a civil case (normally for one or more of the
intentional torts discussed in Chapter 6) against a defendant who was criminally prosecuted by the government for
the same alleged conduct.
The Sixth Amendment
LO5-6
Describe the basic protections afforded by the Fourth,
Fifth, and Sixth Amendments.
The Sixth Amendment applies to criminal cases in various ways. It entitles criminal defendants to a speedy trial
by an impartial jury and guarantees them the right to
confront and cross-examine the witnesses against them.
The Sixth Amendment also gives the accused in a criminal case the right “to have the assistance of counsel” in
her defense. This provision has been interpreted to mean
not only that the accused may employ her own attorney
but also that an indigent criminal defendant is entitled to
court-appointed counsel. Included in the previously discussed Miranda warnings is a requirement that the police
inform the accused of his right to counsel before custodial interrogation begins. Edwards v. Arizona, 452 U.S. 973
(1981), established that once the accused has requested
the assistance of counsel, he may not as a general rule be
interrogated further until counsel is made available to him.
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on suspicion of crime, like anyone else in our country, enjoys
under our system the protections of the Due Process Clause[,]
. . . is entitled to an attorney, and is protected against compelled
self-incrimination.”
Finally, the Court stated that Vienna Convention rights could be
vindicated in ways other than suppression of evidence. The Court
observed that a defendant could make an Article 36 argument “as
part of a broader challenge to the voluntariness of his statements
to police” and that if a defendant alludes to a supposed Article 36
violation at trial, “a court can make appropriate accommodations to
ensure that the defendant secures, to the extent possible, the benefits of consular assistance.” Having concluded that the exclusionary
rule was not an appropriate remedy for the Article 36 violation at
issue, the Court upheld the conviction of Sanchez-Llamas.
The Supreme Court later held that the Edwards rule against
further questioning is triggered only by an unambiguous
request for counsel.7 In McNeil v. Wisconsin, 501 U.S. 171
(1991), the Court provided further latitude for law enforcement officers by holding that if a defendant has made an incourt request for an attorney’s assistance regarding a crime
with which he has been formally charged, that request does
not preclude police interrogation of him—in the absence of
counsel—regarding another unrelated crime.
Finally, an accused is entitled to effective assistance of
counsel. This means that the accused is entitled to representation at a point in the proceedings when an attorney
may effectively assist him, and to reasonably competent
representation by that attorney. Inadequate assistance of
counsel is a proper basis for setting aside a conviction and
ordering a new trial, but the standard applied to these cases
makes ineffective assistance of counsel claims difficult
ones for convicted defendants to invoke successfully.
White-Collar Crimes and the
Dilemmas of Corporate Control
Introduction
White-collar crime is the term used to
describe a wide variety of nonviolent criminal offenses committed by businesspersons and business organizations. This
term includes offenses committed by employees against their
employers, as well as corporate officers’ offenses that harm
the corporation and its shareholders. It also includes criminal
offenses committed by corporate employers and employees
In Davis v. United States, 512 U.S. 452 (1994), the court concluded
that “Maybe I should talk to a lawyer” was too ambiguous to trigger the
Edwards rule.
7
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Part Two Crimes and Torts
Ethics and Compliance in Action
The highly publicized financial scandals involving
Enron, WorldCom, Volkswagen, and other firms
mentioned near the beginning of this chapter
involved conduct that in some instances was alleged to be
criminal. Regardless of whether criminal violations occurred,
the alleged conduct was widely perceived to be questionable
on ethical grounds and motivated by a desire for short-term
gains notwithstanding the costs to others. Consider the broadranging and sometimes devastating effects of the perceived
ethical lapses and the related legal proceedings (civil and
criminal) faced by the firms and certain executives. These
effects included:
• The crippling or near-crippling blow to the viability of the
firms involved.
against society. Each year, corporate crime costs consumers billions of dollars. It takes various forms, from consumer
fraud, securities fraud, mail or wire fraud, and tax evasion
to price-fixing, environmental pollution, and other regulatory
violations. Corporate crime presents our legal system with
various problems that are unique.
Corporations form the backbone of the most successful economic system in history. They dominate the international economic scene and provide us with substantial
benefits in the forms of efficiently produced goods and services. Yet these same corporations, through their agents,
may pollute the environment, swindle their customers,
mislead investors, produce dangerously defective products, and conspire with others to injure or destroy competition. How are we to achieve effective control over these
large organizations so important to our existence? Increasingly, we have come to rely on the criminal law as a major
corporate control instrument. The criminal law, however,
was developed with individual wrongdoers in mind. Thus,
criminal prosecutions aimed at individual white collar
offenders generally follow the same legal and procedural
avenues as other prosecutions. But even run-of-the-mill
white-collar crime usually occurs within an organizational
context. And corporate crime is inherently organizational
in nature. Any given corporate action may be the product
of the combined actions of many individuals acting within
the corporate hierarchy. It may be that no individual had
sufficient knowledge to possess the mens rea necessary for
criminal responsibility under usual criminal law principles. Moreover, criminally penalizing corporations raises
special problems in view of the obvious inability to apply
standard sanctions such as imprisonment to legal entities.
• The collapse in value of the firms’ stock and the resulting
loss to disillusioned and angry shareholders who felt they
had been hoodwinked.
• The harm to the professional and personal reputations of the
individuals involved in the business decisions that triggered
legal scrutiny and raised serious ethical concerns.
• The job losses experienced by large numbers of employees
who had nothing whatsoever to do with the questionable
actions that effectively brought down the firm or made massive layoffs necessary.
• The effects on the families of those who lost their jobs.
• The lack of confidence on the part of would-be investors in the
profit figures and projections put forth every day by
corporations—including those that have done nothing irregular.
• The ripple effects of the above on the economy generally.
Evolution of Corporate Criminal Liability
The law initially rejected the notion that corporations could
be criminally responsible for their employees’ actions. Early
corporations, small in size and number, had little impact on
public life. Their small size made it relatively easy to pinpoint individual wrongdoers within the corporation.
As corporations grew in size and power, however, the
social need to control their activities grew accordingly.
Corporate criminal liability evolved and expanded in two
ways. First, legislatures enacted statutes creating regulatory
offenses that did not require proof of mens rea. Second,
courts began holding corporations responsible for violating criminal laws that previously had been applied only to
individuals. Although those laws required proof of mens
rea, courts tended to conclude that the mens rea requirement regarding a corporate defendant could be satisfied by
imputing the criminal intent of employees to the corporation in a fashion similar to the imposition of tort liability
on corporations under the respondeat superior doctrine.8 The Supreme Court adopted this reasoning in its New York
Central opinion, which established corporate criminal liability. See Figure 5.3.
Corporations now may face criminal liability for almost
any offense if the statute in question indicates a legislative intent to hold corporations responsible. This legislative intent requirement is sometimes problematic. Many
state criminal statutes may contain language suggesting an
intent to hold only individuals liable. For example, manslaughter statutes often define the offense as “the killing
Chapter 36 discusses respondeat superior in detail.
8
Chapter Five Criminal Law and Procedure
5-31
Figure 5.3 A Note on New York Central
The most important case in white collar and corporate crime has to be the Supreme Court’s 1909 opinion in New York Central
& Hudson River Railroad v. United States, 212 U.S. 481, because it approved the use of criminal sanctions against corporations.
In New York Central, a railroad and its employee were charged and convicted of violating the Elkins Act, a statute passed in
1903 that authorized the Interstate Commerce Commission to impose heavy fines on railroads that offered rebates and on the
shippers that accepted these rebates. Unlike most other statutes at the time, the Elkins Act explicitly imposed criminal liability
on the corporation for acts committed by the corporate agent. The statute stated that
anything done or omitted . . . by a corporation common carrier . . . which, if done or omitted . . . by any director or officer
[or other agent] thereof . . . would constitute a misdemeanor under . . . this act, shall also be held to be a misdemeanor committed by such corporation. . . .
In construing and enforcing the provisions of this section, the act, omission, or failure of any officer [or] agent . . .
employed by any common carrier, acting within the scope of his employment, shall in every case be also deemed to be the
act, omission, or failure of such carrier, as well as