Basic Business Law (BPP432/80)
2007 Fall Quarter
Syllabus Review – Our Contract!!
David Oliveiri
Basic Business Law BPP432/80
David Oliveiri
Logistics
 Course:
Basic Business Law (BPP 432/80) -- 2007 Fall Quarter
 Time:
5:50-8:50PM Thursdays (except 9/18 and 11/20)
 Me:
David Oliveiri, Office: CS4-110E, Phone: x55144,
E-Mail: david.oliveiri@simon.rochester.edu
 My Assistant: Pamela Bamann (x52246; CS-3-211A)
 Text: Smith & Roberson’s Business Law, Mann & Roberts, 13th
Edition (Thomson/West, 2006); ISBN 0-324-20486-8
 Course Web-Site: http://simonexchange.rochester.edu
Basic Business Law BPP432/80
David Oliveiri
Course Objectives
• To develop familiarity with selected laws, regulations, legal principles,
and legal processes that govern (a) efficient exchange, generally; and
(b) how and in what ways managers and entrepreneurs organize and
interact to facilitate exchange.
• Law of “Contracts,” “Agency,” “Business Associations.”
• Emphasis on United States Law; But…
• Emphasis on Spirit or Intent of Law
• To understand and appreciate the constraints, risks, and opportunities
that the legal environment provides to business managers and
entrepreneurs.
• Transactional Focus
• Managerial Decision-Making in a Legal Environment
• Business Risk Management, “Bargain-Arounds,” Commercial Rights and
Responsibilities … Business Valuation
Basic Business Law BPP432/80
David Oliveiri
Letter from Business Supplier:
“I’m changing our Existing Agreement by revising
the due dates of my deliveries, price you will pay for
deliveries, when your payments are due, the penalties you
will incur if payments are late, and how partial payments
are to be applied to what you owe me.
Best Regards, …”
Basic Business Law BPP432/80
David Oliveiri
Law and the
Credit Card Industry
Basic Business Law BPP432/80
David Oliveiri
The Changes: We are changing your Card
Agreement by revising the provisions concerning
the default rate, promotional offers, periodic finance
charges, minimum due, and application of payments
to the minimum due.
David Oliveiri
Law and the
Credit Card Industry

State “Usury” Rates – Legislative Ceiling on Interest
Rates.

1980 Citibank “Squeeze” -- New York State Usury Laws
and Double-Digit Inflation Rates -- "You are lending
money at 12% and paying 20%..."

1978 US Supreme Court Decision (Marquette National
Bank v. First of Omaha Service Corp.) – “National banks
only have to obey the interest-rate caps of the state they
are chartered in, not that of the state where a bank's
customer lives.”

South Dakota Legislature Eliminated Usury Ceiling –
Revenue Measure.
Basic Business Law BPP432/80
David Oliveiri
Law and the
Credit Card Industry
Basic Business Law BPP432/80
David Oliveiri
Default Rate: All your annual percentage rates (APR’s) may
increase if you default under any Card Agreement that you
have with us because you fail to make a payment to us when
due, you exceed your credit line, or you make a payment to
us that is not honored. In these circumstances, we may
automatically increase your APRs (including any
promotional APRs) on all balances to the Default APR,
which equals the Prime Rate plus up to 22.1 5%. As of
September 1, 2006, the Default ANNUAL PERCENTAGE
RATE is 30.40%. Which corresponds to a daily periodic rate
of 0.0833%.
Basic Business Law BPP432/80
David Oliveiri
Right to Opt Out: To opt out of these changes, you must
write us by November 30, 2006, indicating that you are
opting out. Write us at Citibank. c/o Customer Service,1
Center, P.O. Box 45147, Jacksonville, Florida, 32232-5147,
and include your name, address, and account number. If you
notify us by that time that you do not accept these changes,
your account will be closed and you may pay off the balance
of your account under the current terms. However, use of your
card after the effective date of these changes is deemed
acceptance of the changes even if you have notified us that
you do not wish to accept the charges.
Basic Business Law BPP432/80
David Oliveiri
Effective October 1, 2006, Citibank (South
Dakota), N.A. will be the issuer of your account.
From that date, the words "we, us, and our" as
used in your Card Agreement will refer to
Citibank (South Dakota), N.A.
Basic Business Law BPP432/80
David Oliveiri
Evaluation of Performance
 Midterm Examination (10/18)
33 1/3%
 Cumulative Final
33 1/3%
 Participation (Team-Based + Individual)
33 1/3%
Basic Business Law BPP432/80
David Oliveiri
Learning Approach –
Typical Class




Pre-Read (Assignments in Outline; Supplementary Readings)
Handouts for Week
Lecture (Non-Exhaustive; Lecture Slides/Outlines Distributed)
Self-Tests/Selected End-of-Chapter Problems (Answers
Distributed)
 Team-Based Presentations (Graded, Beginning 10/4)
– 2 per Quarter
– Assigned Teams (by September 27)
– Grading Criteria: (1) Quality of Analysis and Issue Identification;
(2) Specificity and Clarity of Recommendations; and (3)
Credibility and Persuasiveness
– All Team Members Graded Equally; Exception: Free Rider
Petition
 Active Class Participation Essential!
Basic Business Law BPP432/80
David Oliveiri
Tests

Midterm Exam 10/18; Final Exam Period 12/3 - 12/8

Open-Book, Open Notes

“Non-Cumulative” Final

Format -- Short-Answer

“Unless previously arranged and fully agreed to by the
instructor (generally, due to extreme uncontrollable
circumstances), failure to attend or take the Midterm or Final
at its assigned time will result in a grade of 0 for that
particular grade component.”

Exam-Taking Success Strategies For Basic Business Law
Basic Business Law BPP432/80
David Oliveiri
Outline
Week
1. (9/18: 7:10-8:30PM;
9/20)
Topic
What is Law? Effective Decision-Making
in a Legal Environment
{Class Exercises on What is Law;
Effective Decision-Making}
Reading
S&R 1, 2, 3
2. (9/27)
Facilitating Exchange;
Value of Contracts; Creating Enforceable
Rights -- Mutual Assent Requirement
S&R 9, 10
…
Basic Business Law BPP432/80
+ Supplementary Readings
David Oliveiri
Success Strategy
for Basic Business Law
 Spot Issues Among Complex Commercial
Facts
 Identify Pertinent Areas of Law That Impact
Business Goals, Results
 Clear Thought/Statement/Concision to
Define Risks, Compliance Costs, “BargainArounds,” Opportunities
Basic Business Law BPP432/80
David Oliveiri
Basic Business Law (BPP432/80)
2007 Fall Quarter
Instructor: David Oliveiri
Week 1: What is Law? Effective
Decision-Making in a Legal Environment?
Basic Business Law BPP432/80
David Oliveiri
Agenda
 The Big Picture
 What is Law?
 What Law Applies?
 The Lawmaking Process
 Managerial Implications
 Summary; Q&A
Basic Business Law BPP432/80
David Oliveiri
The Intersection of
Law & Business
Yahoo! is an internet service provider with a principal place of
business in Santa Clara, California.
Basic Business Law BPP432/80
David Oliveiri
The Intersection of
Law & Business
 Yahoo! is an internet service provider with a principal
place of business in Santa Clara, California.
 Its American website, www.yahoo.com, targets US
users and provides many services including auction
sites, message boards, and chat rooms, for which
Yahoo! users supply much of the content.
 Nazi discussions have occurred in Yahoo!’s chat
rooms and Nazi-related paraphernalia have appeared
for sale on its auction website.
Basic Business Law BPP432/80
David Oliveiri
The Intersection of
Law & Business
 Section R645-2 of the French Criminal Code
bans exhibition of Nazi propaganda for sale and
prohibits French citizens from purchasing or
possessing such material.
 Although a Yahoo! Subsidiary, Yahoo! France,
operates www.yahoo.fr in France and removes
all Nazi material from its site to comport with
French law, French users can still access the
American Yahoo! Website that carries Nazirelated discussions and auction items.
Basic Business Law BPP432/80
David Oliveiri
The Intersection of
Law & Business
 In April 2000, LICRA and UEJF (two French
associations) discovered that they could access
www.yahoo.com in France and view Nazi
materials.
 On May 22, 2000 a French court, at the request of
LICRA and UEJF, issued an order requiring
Yahoo!—subject to a fine of 100,000 Francs
(approximately $13,300) per day—to prohibit
access to Nazi artifacts on its site and to warn that
viewing such material violates French law.
Basic Business Law BPP432/80
David Oliveiri
How Does this Situation
Affect Yahoo?
Status Quo — Prior to French Litigation
No Care
“Yahoo”
Care
•No Cooperation
No Care
“French Public”
Care
-100,0
-100,-10
•Cost of Care (i.e.,
Filtering Content) = 10
-110,0
-20,-10
•Cost of “Injury” = 100
•Probability of Injury
Given 2-Party Care =
10%
Basic Business Law BPP432/80
David Oliveiri
Effect of French
Court’s Holding
New Status Quo – Imposition of a Rule
“Yahoo”
No Care
No Care
“French Public”
Care
-100,0
-100,-10
-10,-100
Results:
Care
-20,-10
1. Shifts Costs
2. Influences Future Behavior
3. Barrier to Entry?
Basic Business Law BPP432/80
David Oliveiri
Learnings
 Understand What Law Is/Where It Comes From
 Understand What Particular Laws Apply to
Transactions/ Business Activities
 Understand Nature and Role of Lawmaking
 Understand Why Law is Important to Business
Managers
 Understand How Business Managers Make Effective
Business Decisions in a Legal Environment
Basic Business Law BPP432/80
David Oliveiri
Some Perspective:
A Big Picture
Business Environment
Technology
Markets
Computers
Telecommunications
Production Methods
Competitors
Customers
Supplies
Regulation
Taxes
Antitrust
International
Business Strategy
Asset Structure
Customer base
Nature of knowledge creation
Organizational Architecture
Decision-right assignment
Reward system
Performance-evaluation system
Incentives and Actions
Basic Business Law BPP432/80
Firm Value
Source: Managerial
Economics and
Organizational Architecture,
Brickley, Smith,
Zimmerman
David Oliveiri
What Isn’t Law? Example:
Bausch & Lomb ReNu
MoistureLoc Timeline

4/10/06: FDA and CDC issue public health alerts about
Fusarium keratitis and a link to ReNu MoistureLoc
solution

4/21/06: FDA and CDC announce
investigation of B&L’s Greenville
plant

4/27/06: Wall Street Journal reports
Bausch & Lomb knew about
Fusarium infections in Hong Kong in November 2005
Basic Business Law BPP432/80
David Oliveiri
What Isn’t Law?

Morals?
– Wall Street Journal 5/16/06 – “Bausch & Lomb issued a worldwide recall of
its ReNu with MoistureLoc contact-lens solution.” Annual MoistureLoc
Sales = $100 Million; Recall Cost = $50-75 Million

Ethics?
– Bausch & Lomb Web Site – “The health and safety of your eyes has always
been our first priority.”

Law?
• Potential Product Liability of $.5-1 Billion. “After thousands of tests, there is
no evidence of MoistureLoc contamination, tampering, or counterfeiting. That
leads us to believe that there may be some aspect of the MoistureLoc formula,
when combined with certain environmental factors, lens wear and care
practices, and other factors, that might increase the risk of Fusarium infection
in rare circumstances.”

The “Complication” of Stakeholders
– Wall Street Journal 5/16/06 – “…the company’s stock rallied [up 13%],
reflecting investors’ confidence that its explanation would put the matter to
rest, and that other Bausch solutions may not have the same problem.”
Basic Business Law BPP432/80
David Oliveiri
Law and Morals
“You must drive
On the right side
Of the road”
“Thou
Shalt
Not
Kill”
“You should not
Silently stand by and
Watch a blind man
Walk off a cliff”
Source: Smith and Roberson’s Business Law, Mann & Roberts (Thomson/Southwestern, 13th Ed. 2006)
Basic Business Law BPP432/80
David Oliveiri
Law and Morals
Court X: “Strict Product
Liability of ABC Corp.
For Product Y”
Basic Business Law BPP432/80
“Don’t
Market
Defective
Products”
“You should not
silently stand by and
watch a customer
hurt herself with
your product”
David Oliveiri
Stakeholder
Model of Business
Managers
Suppliers
Employee
s
Corporation
Community
Customers
Stockholders
Source: Smith and Roberson’s Business Law, Mann & Roberts (Thomson/Southwestern, 13th Ed. 2006)
Basic Business Law BPP432/80
David Oliveiri
What is Law/Who
Makes Law?
Constitution
The US
Constitution
imposes limits on
the way managers
can do business in
the US? [Art I,
Sec. 8-” Congress
shall have power
…To regulate
Commerce with
foreign Nations,
and among several
states…]
Basic Business Law BPP432/80
David Oliveiri
Spending Uncle
Sam's Money
By
T. Dart Walker
(1869 - 1914)
Basic Business Law BPP432/80
David Oliveiri
Basic Business Law BPP432/80
David Oliveiri
What is Law/Who
Makes Law?
Legislation/Statutes (Administrative Agencies/ Regulations)
 Sarbanes-Oxley
 Securities Act of ’34 -- SEC – Regs
 New York’s General Obligations Law
 PATRIOT ACT “Banking” Regulations…
Basic Business Law BPP432/80
David Oliveiri
What is Law/Who
Makes Law?
Court Decisions
 Precedent/”Stare Decisis” or “Let the Decision
Stand”
– A lower court in a state must always follow the
decisions of a higher state court in its
jurisdiction?
– A California Supreme Court decision must be
followed by a trial-level court in Las Vegas?
 Common Law “Database”
– An 1864 decision by a court on a particular
matter is still good law?
Basic Business Law BPP432/80
David Oliveiri
What is Law?/Other
Considerations
 Private Models (Uniform Commercial Code,
Other Uniform Laws) – “Statutes-inWaiting”
 International Legal Context
– Common Law – UK, Australia, Canada, US
– Code-Based Systems – Western Europe; Roman
Influences
– Socialist Systems – Russia, Eastern Europe
– Religion-Based Systems – Middle East
Basic Business Law BPP432/80
David Oliveiri
What is Law?
Bottom Lines
 Law = C + S + R + D
 C>S>R>D
 Subject To…D Interpreting
C,S,R
Basic Business Law BPP432/80
David Oliveiri
What Law Applies to a
Particular Situation?
--Two Simon alums (Texas and Virginia)
--A drink in New York City
--Internet kiosks in California coffee houses
--Each agrees to invest $35,000
--Cocktail napkin contract; both sign
THEN, One alum refuses to proceed with the deal.

What Law Applies? C, S, R, D of United States, Texas,
Virginia, New York, and/or California?

What Law Applies = f (Place, Type of Conduct, Hierarchy,
Intent?)

When Does This Even Matter?
Basic Business Law BPP432/80
David Oliveiri
What Law Applies?
Geographic Sources of Law
(C, S, R, D) – United States
Basic Business Law BPP432/80
David Oliveiri
A Court Won’t Entertain
Dispute Unless
It Has … Jurisdiction
Jurisdiction
Parties
In rem
Personal
Subject Matter
Quasi in
rem
State
Concurrent
Federal
Source: Smith and Roberson’s Business Law, Mann & Roberts (Thomson/Southwestern, 13th Ed. 2006)
Basic Business Law BPP432/80
David Oliveiri
Subject Matter Jurisdiction – The
Types of Disputes Particular Courts
Can Entertain
Exclusive
State
Jurisdiction;
Everything
Else
Federal
Matters
Exclusive Federal
Jurisdiction
1. Federal crimes
2. Bankruptcy
3. Patents
4. Copyright and trademarks
5. Admiralty
6. Antitrust
7. Suits against the United
States
8. Specified Federal statutes
Concurrent Jurisdiction
1. Federal questions
2. Diversity of Citizenship
Source: Smith and Roberson’s Business Law, Mann & Roberts (Thomson/Southwestern, 13th Ed. 2006)
Basic Business Law BPP432/80
David Oliveiri
Role of Lawsuits (Or
Threat of Lawsuits)
Lawsuits (or Threat of Lawsuits) = Mechanism to Apply
Law = f (Jurisdiction, C>S>R>D, Interpretation, Validity)
 Adjudicate Disputes
 Confer Rights
 Enforce Rights
Basic Business Law BPP432/80
David Oliveiri
Mechanisms of Legal System–
Lawsuits and Lawmaking
 Judicial Lawmaking : Lawsuits = Disputes, Disputes
= Facts + Law
– Stages - Summons/Complaint, Answer, Discovery,
Motions, Pretrial Conference, Trial, Appeal
– Written Opinions of Court = Common Law
– Decision “Philosophies” of Judges -- Rights-Based
Justice, Distributive Justice, Economic Efficiency
 Non-Judicial Lawmaking = Statutes, Regulations, To
Address “Public” Issues
– Supply = Politicians and Political Process
– Demand = Special Interests
END RESULT: LAW
Basic Business Law BPP432/80
David Oliveiri
Why is Law and Lawmaking
Important to Business
Managers?
 Legal Rules Define Enforceable Rights for DealMaking, Conduct of Business
– Legal Rules Minimize Information Costs!
– Legal Rules Minimize Transaction Costs!
– And …”Inefficient” Legal Rules May Provide a Predictable “Starting
Point for Bargains”
 Law Impacts Enterprise Value
– Threats of VIOXX, Bausch & Lomb MoistureLoc Lawsuits?
– EEOC, EPA, SEC Investigations?
– The role of Due Diligence and Purchase Agreement Warranties and
Representations in Corporate Mergers and Acquisitions
 Criminal Liability
Basic Business Law BPP432/80
David Oliveiri
Managerial Analysis
of Legal Issues

“Legal Issues” = Disputes, Transactions,
Activities

Litigation Example: Decisions to Sue
– Expected Value Test (Positive Expected Value =>
Sue; Negative Expected Value => Do Not Sue)
– EV = NPV Recovery – NPV Cost
– EV = f (timing, probabilities, cash flows); In US,
Each Party Pays Their Own Costs!
– Impact of Asymmetric or Complete Information
Basic Business Law BPP432/80
David Oliveiri
But Only A Very Small
Percentage of Cases
Go To Trial!
Basic Business Law BPP432/80
David Oliveiri
Managerial Analysis of
Legal Issues
 Litigation Example: Decisions to Settle
– Once Again, Expected Value Test
– But … No Positive Expected Value Choice, Generally; So,
Minimize Expected Loss
– => Settle When Expected Value of Settlement is Greater Than
Expected Value of Defending Lawsuit!
– Game Theory Issue: Would You Ever Settle a Frivolous
Lawsuit?
Suppose it costs a disreputable customer of your business $500 to file a
frivolous lawsuit that seeks $50,000 in damages, and it costs you $1000
to employ a lawyer and respond to the complaint by formal answer or
motion. Suppose further that if you ignore the lawsuit and do not
respond you will suffer a default judgment in the amount of $50,000!
Would you be willing to settle even though you know that the suit is
frivolous and that the plaintiff will drop the suit if you make a formal
response? Does your business strategy (and answer) change if all of
your customers have complete information?
David Oliveiri
Basic Business Law BPP432/80
Advanced Applications
 Decision Trees
You have just received a letter from customer’s lawyer, threatening to sue
your company for a million dollars in damages resulting from the
malfunction of your company’s product. You are trying to decide whether
to defend the lawsuit vigorously or settle. The customer’s lawyer has
offered to settle for $600,000 if you accept this offer within 48 hours. After
that, there will be no further settlement discussion. You learn from your
lawyer that it would cost $100,000 to defend this action thru trial and that
you have a 30% chance of winning (i.e. avoiding liability). On the other
hand, there is a 50% chance that a jury will award the plaintiff a million
dollars in damages, and a 20% chance that you will convince a jury that you
are responsible for no more than $300,000 in damages. Should you settle or
go to trial, assuming there are no game theory issues with settlement?
Basic Business Law BPP432/80
David Oliveiri
Decision Trees
Win (+$0);
30% chance
Litigate: Trial
Cost-$100k
Lose Big (-$1,000k);
50% chance
Lose Small (-$300k);
20% chance
Settle; -$600k
Basic Business Law BPP432/80
Note: The probabilities of
all uncertain outcomes must
Add up to 100%
David Oliveiri
Decision Trees
Win; $0 EV
Lose Big; -$500k EV
Litigate: Trial
Cost-$100k
Lose Small; -$60k EV
-$660 EV
-$600 EV
Settle; -$600k
Basic Business Law BPP432/80
Note: To calculate Expected
Values, work backward (right-to
left) in a decision tree
David Oliveiri
Advanced Application:
Game Theory
Thelma and Louise are executives of Endrun Corp. They have been involved
in a pattern of securities laws violations for some time. Today, both Thelma
and Louise have been arrested on warrants obtained by the local federal
prosecutor. They are being held in separate cells, and are not allowed to
communicate with each other. The federal prosecutor meets with Thelma
and Louise separately and makes the following offer to each of them:
– “Confess and Cooperate with us! If your testimony helps us convict your partner
in crime and get a 10 year sentence for her, we will recommend a one year
sentence for you.”
–
“We will offer the same deal to your partner! If you don’t confess, and your
partner testifies against you and helps us get a conviction, you’ll get 10 years.”
– “If you and your partner both confess, the best I can do is get you a 5 year
sentence.”
Thelma and Louise are unable to communicate with each other. But they
know that if neither of them decides to help the federal prosecutor, it is likely
that they will be convicted of a lesser crime and get 3 year sentences. What
will Thelma and Louise do?
Basic Business Law BPP432/80
David Oliveiri
Advanced Application:
Game Theory
Thelma’s Choices
Confess
Louise’s Choices
Basic Business Law BPP432/80
Silence
Confess
5, 5
1, 10
Silence
10, 1
3, 3
David Oliveiri
Thelma/Louise
Applications
Basic Business Law BPP432/80
David Oliveiri
Summary/Q & A

Law and Lawmaking are Important to Business

Law and Lawmaking Affect Business Rights, Behavior,
and Value

“Law” Comes From Multiple Sources – A Vast Matrix (50
states, 13 Federal Circuits, ? Countries)

Law and Ethics Are Not The Same Thing; But Each Affect
Business Value

Law, Lawsuits (Actual or Potential), and Lawmaking Help
Businesses Order Affairs

Business Managers Use Specific Tools to Make Decisions
in a Legal Environment

Yahoo?
Basic Business Law BPP432/80
David Oliveiri