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SMITH & ROBERSON’S
Business Law
S E V E N T E E N T H E D I T I O N
RICHARD A. MANN
Professor of Business Law
The University of North Carolina at Chapel Hill
Member of the North Carolina Bar
BARRY S. ROBERTS
Professor of Business Law
The University of North Carolina at Chapel Hill
Member of the North Carolina and Pennsylvania Bars
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Print Number: 01 Print Year: 2016
About the Authors
Richard A. Mann received a B.S. in mathematics from Barry S. Roberts received a B.S. in business administration
the University of North Carolina at Chapel Hill and a J.D. from Pennsylvania State University, a J.D. from the Uni-
from Yale Law School. He is professor emeritus of business versity of Pennsylvania, and an LL.M. from Harvard Law
law at the Kenan-Flagler School of Business, University of School. He served as a judicial clerk for the Pennsylvania
North Carolina at Chapel Hill, and is past president of Supreme Court prior to practicing law in Pittsburgh. Barry
the Southeastern Regional Business Law Association. He Roberts is professor of business law at the Kenan-Flagler
is a member of Who’s Who in America, Who’s Who in School of Business, University of North Carolina at Chapel
American Law, and the North Carolina Bar. Hill, and is a member of Who’s Who in American Law
Professor Mann has written extensively on a number of and the North Carolina and Pennsylvania Bars.
legal topics, including bankruptcy, sales, secured transac- Professor Roberts has written numerous articles on
tions, real property, insurance law, and business associa- such topics as antitrust, products liability, constitutional
tions. He has received the American Business Law Journal’s law, banking law, employment law, and business asso-
award both for the best article and for the best comment ciations. He has been a reviewer and staff editor for
and has served as a reviewer and staff editor for the publica- the American Business Law Journal. He is coauthor of
tion. Professor Mann is a coauthor of Business Law and Business Law and the Regulation of Business (Twelfth
the Regulation of Business (Twelfth Edition), Essentials of Edition), Essentials of Business Law and the Legal Envi-
Business Law and the Legal Environment (Twelfth Edition), ronment (Twelfth Edition), and Contemporary Business
and Contemporary Business Law. Law.
iii
Contents in Brief
Preface xiv PART 3

Table of Cases xviii Agency 365
Table of Illustrations xxii 19 Relationship of Principal and Agent 366
20 Relationship with Third Parties 389
PART 1
PART 4
The Legal Environment of Business 1
1 Introduction to Law 2 Sales 415
2 Business Ethics and the Social Responsibility 21 Introduction to Sales and Leases 416
of Business 14 22 Performance 438
3 Civil Dispute Resolution 42 23 Transfer of Title and Risk of Loss 459
4 Constitutional Law 67 24 Products Liability: Warranties and Strict
5 Administrative Law 90 Liability in Tort 477
6 Criminal Law 107 25 Sales Remedies 504
7 Intentional Torts 126 PART 5
8 Negligence and Strict Liability 147 Negotiable Instruments 529
26 Form and Content 530
PART 2
27 Transfer and Holder in Due Course 546
Contracts 171 28 Liability of Parties 577
9 Introduction to Contracts 172
29 Bank Deposits, Collections, and Funds
10 Mutual Assent 189 Transfers 597
11 Conduct Invalidating Assent 211
PART 6
12 Consideration 231
13 Illegal Bargains 250
Unincorporated Business Associations 619
30 Formation and Internal Relations of
14 Contractual Capacity 269
General Partnerships 620
15 Contracts in Writing 284
31 Operation and Dissolution of General
16 Third Parties to Contracts 309 Partnerships 644
17 Performance, Breach, and Discharge 327 32 Limited Partnerships and Limited Liability
18 Contract Remedies 345 Companies 671
iv
CONTENTS IN BRIEF v
PART 7 PART 10
Corporations 697 Property 1051
33 Nature, Formation, and Powers 698 47 Introduction to Property, Property
34 Financial Structure 722 Insurance, Bailments, and Documents
of Title 1052
35 Management Structure 745
48 Interests in Real Property 1079
36 Fundamental Changes 776
49 Transfer and Control of Real Property 1099
PART 8 50 Trusts and Decedents’ Estates 1116
Debtor and Creditor Relations 795
Appendices A-1
37 Secured Transactions and Suretyship 796
A The Constitution of the United States
38 Bankruptcy 829
of America A-2
PART 9 B Uniform Commercial Code
(Selected Provisions) B-1
Regulation of Business 859
C Dictionary of Legal Terms C-1
39 Protection of Intellectual Property 860
40 Antitrust 882 Index I-1
41 Consumer Protection 905
42 Employment Law 931
43 Securities Regulation 964
44 Accountants’ Legal Liability 1001
45 Environmental Law 1015
46 International Business Law 1034
Contents
Preface xiv Alternative Dispute Resolution 53

Table of Cases xviii Chapter Summary 56
Table of Illustrations xxii Cases 58
Questions 63
PART 1 Case Problems 64
The Legal Environment of Business 1 Taking Sides 66
1 Introduction to Law 2 4 Constitutional Law 67

Nature of Law 2 Basic Principles of Constitutional Law 68
Classification of Law 4 Powers of Government 69
Sources of Law 5 Limitations on Government 72
Legal Analysis 9 Chapter Summary 77
Chapter Summary 11 Cases 78
Cases 12 Questions 86
Case Problems 87
2 Business Ethics and the Social Taking Sides 89
Responsibility of Business 14
Law Versus Ethics 15 5 Administrative Law 90
Ethical Theories 15 Operation of Administrative Agencies 91
Ethical Standards in Business 18 Limits on Administrative Agencies 94
Ethical Responsibilities of Business 19 Chapter Summary 96
Corporate Governance 20 Cases 97
Chapter Summary 23 Case Problems 103
Cases 24 Taking Sides 106
Questions 24
6 Criminal Law 107
Business Ethics Cases 26
Nature of Crimes 107
3 Civil Dispute Resolution 42 White-Collar Crime 110
The Court System 42 Crimes Against Business 111
The Federal Courts 42 Defenses to Crimes 114
State Courts 44 Criminal Procedure 115
Jurisdiction 45 Chapter Summary 117
Subject Matter Jurisdiction 45 Cases 118
Jurisdiction Over the Parties 47 Questions 123
Civil Dispute Resolution 49 Case Problems 124
Civil Procedure 50 Taking Sides 125
vi
CONTENTS vii
7 Intentional Torts 126 Acceptance of Offer 195

Intent 127 Communication of Acceptance 196
Harm to the Person 128 Variant Acceptances 197
Harm to the Right of Dignity 130 Chapter Summary 199
Harm to Property 132 Cases 200
Harm to Economic Interests 133 Questions 206
Defenses to Intentional Torts 134 Case Problems 208
Chapter Summary 136 Taking Sides 210
Cases 137 11 Conduct Invalidating Assent 211
Questions 143 Duress 211
Case Problems 144 Undue Influence 212
Taking Sides 146 Fraud 212
8 Negligence and Strict Liability 147 Nonfraudulent Misrepresentation 215
Negligence 148 Mistake 216
Breach of Duty of Care 148 Chapter Summary 218
Factual Cause 153 Cases 219
Scope of Liability (Proximate Cause) 153 Questions 226
Harm 154 Case Problems 227
Defenses to Negligence 155 Taking Sides 230
Strict Liability 156 12 Consideration 231
Activities Giving Rise to Strict Liability 157 Legal Sufficiency 231
Defenses to Strict Liability 158 Bargained-For Exchange 236
Chapter Summary 158 Contracts without Consideration 237
Cases 160 Chapter Summary 240
Questions 167 Cases 241
Case Problems 168 Questions 246
Taking Sides 170 Case Problems 248
Taking Sides 249
PART 2
13 Illegal Bargains 250
Contracts 171
Violations of Statutes 250
9 Introduction to Contracts 172 Violations of Public Policy 252
Development of the Law of Contracts 172 Effect of Illegality 254
Definition of a Contract 174 Chapter Summary 255
Requirements of a Contract 174 Cases 256
Classification of Contracts 175 Questions 264
Promissory Estoppel 178 Case Problems 265
Quasi Contracts or Restitution 178 Taking Sides 267
Chapter Summary 179
14 Contractual Capacity 269
Cases 180
Questions 186 Minors 269
Case Problems 186 Incompetent Persons 272
Taking Sides 188 Intoxicated Persons 272
Chapter Summary 273
10 Mutual Assent 189 Cases 273
Offer 189 Questions 279
Essentials of an Offer 190 Case Problems 281
Duration of Offers 192 Taking Sides 283
viii CONTENTS
15 Contracts in Writing 284 Questions 361

Statute of Frauds 284 Case Problems 362
Contracts within the Statute of Frauds 285 Taking Sides 363
Compliance with the Statute of Frauds 290
Effect of Noncompliance 291 PART 3
Parol Evidence Rule 292 Agency 365
The Rule 292
Situations to Which the Rule Does 19 Relationship of Principal and Agent 366
Not Apply 292 Nature of Agency 366
Supplemental Evidence 293 Creation of Agency 368
Interpretation of Contracts 293 Duties of Agent to Principal 369
Chapter Summary 295 Duties of Principal to Agent 372
Cases 297 Termination of Agency 374
Questions 304 Chapter Summary 376
Case Problems 305 Cases 378
Taking Sides 308 Questions 385
Case Problems 386
16 Third Parties to Contracts 309
Taking Sides 388
Assignment of Rights 309
Delegation of Duties 313 20 Relationship with Third Parties 389
Third-Party Beneficiary Contracts 314 Relationship of Principal and Third Persons 389
Chapter Summary 316 Contract Liability of Principal 389
Cases 318 Tort Liability of Principal 396
Questions 323 Criminal Liability of Principal 398
Case Problems 324 Relationship of Agent and Third Persons 399
Taking Sides 326 Contract Liability of Agent 399
17 Performance, Breach, and Discharge 327 Tort of Liability of Agent 401
Conditions 327 Rights of Agent Against Third Person 401
Discharge by Performance 329 Chapter Summary 401
Discharge by Breach 329 Cases 403
Discharge by Agreement of the Parties 331 Questions 410
Discharge by Operation of Law 332 Case Problems 411
Chapter Summary 334 Taking Sides 413
Cases 336
Questions 340 PART 4
Case Problems 342 Sales 415
Taking Sides 344
21 Introduction to Sales and Leases 416
18 Contract Remedies 345 Nature of Sales and Leases 417
Interests Protected by Contract Remedies 345 Definitions 417
Monetary Damages 345 Fundamental Principles of Article 2 and Article 2A 418
Remedies in Equity 349 Formation of Sales and Lease Contracts 421
Restitution 350 Manifestation of Mutual Assent 421
Limitations on Remedies 352 Consideration 424
Remedies for Misrepresentation 353 Form of the Contract 425
Chapter Summary 354 Chapter Summary 427
Cases 355 Cases 428
CONTENTS ix
Questions 434 PART 5

Case Problems 435 Negotiable Instruments 529
Taking Sides 437
26 Form and Content 530
22 Performance 438 Negotiability 531
Performance by the Seller 438 Types of Negotiable Instruments 532
Performance by the Buyer 443 Formal Requirements of Negotiable Instruments 534
Obligations of Both Parties 445 Chapter Summary 539
Questions 454 Case Problems 544
Case Problems 455 Taking Sides 545
Taking Sides 458
27 Transfer and Holder in Due Course 546
23 Transfer of Title and Risk of Loss 459 Transfer 546
Transfer of Title 459 Negotiation 546
Risk of Loss 463 Indorsements 549
Sales of Goods in Bulk 466 Holder in Due Course 553
Chapter Summary 468 Requirements of a Holder in Due Course 553
Cases 469 Holder in Due Course Status 557
Questions 473 The Preferred Position of a Holder in Due Course 557
Case Problems 475 Limitations Upon Holder in Due Course Rights 560
Taking Sides 476 Chapter Summary 563
Cases 565
24 Products Liability: Warranties Questions 572
and Strict Liability in Tort 477 Case Problems 574
Warranties 477 Taking Sides 576
Types of Warranties 478
Obstacles to Warranty Actions 480 28 Liability of Parties 577
Strict Liability in Tort 483 Contractual Liability 577
Requirements of Strict Liability 484 Signature 578
Obstacles to Recovery 486 Liability of Primary Parties 579
Restatement of Torts (Third): Products Liability 487 Liability of Secondary Parties 579
Chapter Summary 489 Termination of Liability 583
Cases 491 Liability Based on Warranty 583
Questions 498 Warranties on Transfer 583
Case Problems 500 Warranties on Presentment 584
Taking Sides 503 Chapter Summary 587
Cases 588
25 Sales Remedies 504 Questions 594
Remedies of the Seller 504 Case Problems 596
Remedies of the Buyer 509 Taking Sides 596
Contractual Provisions Affecting Remedies 513
Chapter Summary 515 29 Bank Deposits, Collections,
Cases 517 and Funds Transfers 597
Questions 523 Bank Deposits and Collections 597
Case Problems 525 Collection of Items 598
Taking Sides 527 Relationship between Payor Bank and its Customer 601
x CONTENTS
Electronic Fund Transfer 604 Continuation After Dissolution 655

Types of Electronic Funds Transfers 604 Chapter Summary 655
Consumer Funds Transfers 605 Cases 658
Wholesale Funds Transfers 606 Questions 666
Questions 614
32 Limited Partnerships and Limited
Case Problems 616
Liability Companies 671
Taking Sides 617
Limited Partnerships 671
Limited Liability Companies 676
PART 6
Other Types of Unincorporated Business
Unincorporated Business Associations 682
Associations 619 Chapter Summary 683
Cases 686
30 Formation and Internal Relations
Questions 693
of General Partnerships 620
Case Problems 695
Choosing a Business Association 620
Taking Sides 696
Factors Affecting the Choice 621
Forms of Business Associations 622 PART 7
Formation of General Partnerships 624 Corporations 697
Nature of Partnership 624
Formation of a Partnership 625 33 Nature, Formation, and Powers 698
Relationships Among Partners 628 Nature of Corporations 699
Duties Among Partners 629 Corporate Attributes 699
Rights Among Partners 630 Classification of Corporations 700
Chapter Summary 634 Formation of a Corporation 702
Cases 636 Organizing the Corporation 702
Questions 641 Formalities of Incorporation 704
Case Problems 642 Recognition or Disregard of Corporateness 705
Taking Sides 643 Defective Incorporation 706
Piercing the Corporate Veil 707
31 Operation and Dissolution Corporate Powers 708
of General Partnerships 644 Sources of Corporate Powers 708
Relationship of Partnership and Partners Ultra Vires Acts 709
with Third Parties 644 Liability for Torts and Crimes 709
Contracts of Partnership 644 Chapter Summary 709
Torts and Crimes of Partnership 647 Cases 712
Notice to a Partner 648 Questions 717
Liability of Incoming Partner 648 Case Problems 718
Dissociation and Dissolution of General Taking Sides 721
Partnerships under the RUPA 648
Dissociation 648 34 Financial Structure 722
Dissolution 649 Debt Securities 723
Dissociation Without Dissolution 651 Authority to Issue Debt Securities 723
Dissolution of General Partnerships under the Types of Debt Securities 723
UPA 653 Equity Securities 724
Dissolution 654 Issuance of Shares 724
Winding Up 654 Classes of Shares 727
CONTENTS xi
Dividends and Other Distributions 728 Priorities among Competing Interests 804
Types of Dividends and Other Distributions 729 Default 808
Legal Restrictions on Dividends and Other Suretyship 810
Distributions 730 Nature and Formation 810
Declaration and Payment of Distributions 733 Duties of Surety 812
Liability for Improper Dividends and Distributions 733 Rights of Surety 813
Chapter Summary 734 Defenses of Surety and Principal Debtor 813
35 Management Structure 745 Taking Sides 828
Corporate Governance 745 38 Bankruptcy 829
Role of Shareholders 748 Federal Bankruptcy Law 829
Voting Rights of Shareholders 748 Case Administration—Chapter 3 830
Enforcement Rights of Shareholders 751 Creditors, the Debtor, and the Estate—Chapter 5 832
Role of Directors and Officers 753 Liquidation—Chapter 7 837
Function of the Board of Directors 753 Reorganization—Chapter 11 841
Election and Tenure of Directors 755 Adjustment of Debts of Individuals—Chapter 13 843
Exercise of Directors’ Functions 755 Creditors’ Rights and Debtor’s Relief Outside
Officers 757 of Bankruptcy 845
Duties of Directors and Officers 757 Creditors’ Rights 845
Chapter Summary 761 Debtor’s Relief 846
Taking Sides 858
36 Fundamental Changes 776
Charter Amendments 776 PART 9
Combinations 777 Regulation of Business 859
Dissolution 781
Chapter Summary 783
39 Protection of Intellectual Property 860
Cases 784 Trade Secrets 860
Questions 790 Trade Symbols 862
Case Problems 791 Trade Names 865
Taking Sides 793 Copyrights 865
Patents 868
PART 8 Chapter Summary 870
Debtor and Creditor Relations 795 Cases 871
Questions 878
37 Secured Transactions and Suretyship 796 Case Problems 879
Secured Transactions in Taking Sides 881
Personal Property 796
Essentials of Secured Transactions 797 40 Antitrust 882
Classification of Collateral 797 Sherman Act 882
Attachment 799 Clayton Act 887
Perfection 801 Robinson-Patman Act 890
xii CONTENTS
Federal Trade Commission Act 891 Chapter Summary 1007

Questions 901 Case Problems 1013
Case Problems 902 Taking Sides 1014
Taking Sides 904
45 Environmental Law 1015
41 Consumer Protection 905 Common Law Actions for Environmental
State and Federal Consumer Protection Agencies 905 Damage 1015
Consumer Purchases 909 Nuisance 1015
Consumer Credit Transactions 912 Trespass to Land 1016
Creditors’ Remedies 917 Strict Liability for Abnormally Dangerous
Activities 1016
Chapter Summary 918
Problems Common to Private Causes of Action 1016
Cases 920
Federal Regulation of the Environment 1016
Questions 927
The National Environmental Policy Act 1017
Case Problems 928
The Clean Air Act 1018
Taking Sides 930
The Clean Water Act 1020
42 Employment Law 931 Hazardous Substances 1022
Labor Law 931 International Protection of the Ozone Layer 1024
Employment Discrimination Law 933 Chapter Summary 1026
Employee Protection 939 Cases 1028
Chapter Summary 942 Questions 1031
Cases 944 Case Problems 1032
Questions 958 Taking Sides 1033
Case Problems 959 46 International Business Law 1034
Taking Sides 963
The International Environment 1034
43 Securities Regulation 964 Jurisdiction Over Actions of Foreign
Governments 1036
Securities Act of 1933 965
Transacting Business Abroad 1037
Definition of a Security 966
Forms of Multinational Enterprises 1042
Registration of Securities 966
Chapter Summary 1043
Exempt Securities 968
Cases 1044
Exempt Transactions for Issuers 969
Questions 1047
Exempt Transactions for Nonissuers 973
Case Problems 1048
Liability 975
Taking Sides 1050
Securities Exchange Act of 1934 976
Disclosure 977 PART 10
Liability 982
Property 1051
Chapter Summary 987
Cases 989 47 Introduction to Property, Property
Questions 998 Insurance, Bailments, and Documents
Case Problems 999 of Title 1052
Taking Sides 1000 Introduction to Property and Personal Property 1052
Kinds of Property 1053
44 Accountants’ Legal Liability 1001 Transfer of Title to Personal Property 1054
Common Law 1001 Property Insurance 1056
Federal Securities Law 1004 Fire and Property Insurance 1056
CONTENTS xiii
Nature of Insurance Contracts 1057 Private Restrictions Upon Land Use 1106
Bailments and Documents of Title 1059 Chapter Summary 1107
Bailments 1059 Cases 1109
Documents of Title 1062 Questions 1113
Questions 1073
50 Trusts and Decedents’ Estates 1116
Case Problems 1076
Taking Sides 1077 Trusts 1116
Types of Trusts 1116
48 Interests in Real Property 1079 Creation of Trusts 1118
Freehold Estates 1079 Decedents’ Estates 1120
Leasehold Estates 1081 Wills 1120
Concurrent Ownership 1085 Intestate Succession 1123
Nonpossessory Interests 1087 Administration of Estates 1124
Chapter Summary 1090 Chapter Summary 1125
Cases 1091 Cases 1126
Questions 1096 Questions 1132
Case Problems 1097 Case Problems 1133
Taking Sides 1098 Taking Sides 1134
49 Transfer and Control of Real Property 1099
Transfer of Real Property 1099 Appendices A-1
Contract of Sale 1099 Appendix A: The Constitution of the
Deeds 1101 United States of America A-2
Secured Transactions 1102 Appendix B: Uniform Commercial Code
Adverse Possession 1104 (Selected Provisions) B-1
Public and Private Controls 1104 Appendix C: Dictionary of Legal Terms C-1
Zoning 1104
Eminent Domain 1105 Index I-1
Preface
T
he format of the Seventeenth Edition follows the tra- case making the Patient Protection and Affordable Care Act’s
dition established by prior editions, in that chapters tax credits available in those States that have a Federal
contain narrative text, illustrations, cases consisting Exchange. The new Restatement (Third) of Torts: Liability
of selected court decisions, chapter summaries, and end-of- for Economic Harm is covered in Chapters 7, 8, 11, 18, and
chapter questions and case problems. 44. The new Restatement (Third) of Restitution and Unjust
Enrichment is covered in Chapters 9, 11, 13, 14, 15, 17, 18,
Topical Coverage 19, and 50. Coverage of limited liability companies has been
updated and expanded in Chapter 32. Coverage of benefit
This text is designed for use in business law and legal
corporations has been added in Chapter 33. Coverage of
environment of business courses generally offered in univer-
suretyship in Chapter 37 has been updated and expanded.
sities, colleges, schools of business and commerce, commu-
The Intellectual Property chapter (Chapter 39) includes the
nity colleges, and junior colleges. By reason of the text’s
new Defend Trades Secrets Act of 2016 and the 2016 amend-
broad and deep coverage, instructors may readily adapt this
ments to the Economic Espionage Act of 1996. The Consumer
text to specially designed courses in business law or the legal
Protection chapter (Chapter 41) covers the FCC’s net-neutrality
environment of business by assigning and emphasizing dif-
rule. The Employment Law chapter (Chapter 42) covers the
ferent combinations of chapters.
Genetic Information Nondiscrimination Act and the U.S.
Furthermore, this text covers the following parts of the
Supreme Court case holding that in disparate-treatment claims,
CPA Exam: (1) the business law area and the legal duties
an employer may not make an applicant’s religious practice a
and responsibilities of accountants area of the Regulation
factor in employment decisions. The chapter on Securities Reg-
Section and (2) the corporate governance area of the Busi-
ulation (Chapter 43) covers the U.S. Securities and Exchange
ness Environment and Concepts Section.
Commission’s new Regulation A and Regulation Crowdfunding
Emphasis has been placed upon the regulatory environ-
exemptions. The Environmental Law chapter (Chapter 45)
ment of business law: the first eight chapters introduce the
includes coverage of the EPA’s regulation of greenhouse gases
legal environment of business, and Part 9 (Chapters 39
and the 2016 amendments to the Toxic Substances Control Act.
through 46) addresses government regulation of business.
The International Business Law chapter (Chapter 46) covers the
Up-to-Date United Nations Convention on the Law of the Sea (UNCLOS).
The constitutional law chapter (Chapter 4) discusses recent Readability of Narrative Text
U.S. Supreme Court decisions in cases challenging the
constitutionality of (1) a Federal statute restricting how To make the text as readable as possible, all unnecessary
much money an individual donor may contribute in total “legalese” has been omitted, and necessary legal terms have
to all candidates or committees during a political cycle, been printed in boldface and clearly defined, explained, and
(2) Michigan’s constitutional amendment banning affirma- illustrated. Each chapter is carefully organized with sufficient
tive action in admissions to the State’s public universities, levels of subordination to enhance the accessibility of the
and (3) States’ refusal to license a marriage between two material. The text is enriched by numerous illustrative hypo-
people of the same sex and to recognize a marriage between thetical and case examples, which help students relate the
two people of the same sex when their marriage was lawfully material to real-life experiences. The end-of-chapter cases are
licensed and performed out of state. The Administrative Law cross-referenced in the text, as are related topics covered in
chapter (Chapter 5) discusses the recent U.S. Supreme Court other chapters.
xiv
PREFACE xv
Chapter Objectives major concepts. Almost all of the chapters include one or
more new questions and/or case problems. We have used the
Each chapter begins with a list of learning objectives for students. questions (based on hypothetical situations) and the case
problems (taken from reported court decisions) in our own
Applying the Law classrooms and consider them excellent stimulants to class-
room discussion. Students, in turn, have found the questions
The Applying the Law feature provides a systematic legal anal-
and case problems helpful in enabling them to apply the
ysis of a realistic situation that focuses on a specific concept
basic rules of law to factual situations.
presented in the chapter. It consists of (1) the facts of a hypo-
thetical case, (2) an identification of the broad legal issue pre-
sented by those facts, (3) a statement of the applicable rule, Taking Sides
(4) the application of the rule to the facts, and (5) a legal con- Each chapter—except for Chapters 1 and 2—has an end-of-
clusion in the case. The Applying the Law feature appears in chapter feature that requires students to apply critical-think-
fourteen chapters. We wish to acknowledge and thank Profes- ing skills to a case-based fact situation. Students are asked to
sor Ann Olazabal, University of Miami, for her contribution identify the relevant legal rules and develop arguments for
in preparing this feature. both parties to the dispute. In addition, students are asked to
explain how they think a court would resolve the dispute.
Practical Advice
Each chapter has a number of statements that illustrate how Appendices
legal concepts covered in the chapter can be applied to com-
mon business situations. The appendices include the Constitution of the United States
(Appendix A), the Uniform Commercial Code (Appendix B),
Case Treatment and a comprehensive Dictionary of Legal Terms (Appendix C).
All the cases have been edited carefully to preserve the actual Pedagogical Benefits
language of the court and to show the essential facts of the case,
the issue or issues involved, the decision of the court, and the Classroom use and study of this book should provide
reason for its decision. We have retained the landmark cases students with the following benefits and skills:
from the prior edition. In addition, we have incorporated
twenty-seven recent cases, including the following U.S. Supreme 1. Perception and appreciation of the scope, extent, and im-
Court cases: DIRECTV, Inc. v. Imburgia; Perez v. Mortgage portance of the law.
Bankers Ass’n.; Omnicare, Inc. v. Laborers District Council Con- 2. Basic knowledge of the fundamental concepts, principles,
struction Industry Pension Fund; Husky International Electron- and rules of law that apply to business transactions.
ics, Inc., v. Ritz; Harris v. Viegelahn; Young v. United Parcel 3. Knowledge of the function and operation of courts and
Service, Inc.; Environmental Protection Agency v. EME Homer government administrative agencies.
City Generation, L. P; and OBB Personenverkehr Ag v. Sachs. 4. Ability to recognize the potential legal problems which
may arise in a doubtful or complicated situation and the
Illustrations necessity of consulting a lawyer and obtaining competent
We have used more than 210 classroom-tested figures, dia- professional legal advice.
grams, charts, tables, and chapter summaries. The figures 5. Development of analytical skills and reasoning power.
and diagrams help students conceptualize the many abstract
concepts in the law; the charts and tables not only summa- Additional Course Tools
rize prior discussions but also help to illustrate relationships
among legal rules. Moreover, each chapter has a summary in
MINDTAP
the form of an annotated outline of the entire chapter,
including key terms. New for Smith and Roberson’s Business Law, 17th edition,
MindTap is a personalized teaching experience with relevant
End-of-Chapter Questions and assignments that guide students to analyze, apply, and
Case Problems improve thinking, allowing instructors to measure skills
and outcomes with ease. Teaching becomes personalized
Classroom-proven questions and case problems appear at through a pre-built Learning Path designed with key student
the end of chapters to test the student’s understanding of objectives and the instructor syllabus in mind. Applicable
xvi PREFACE
reading, multimedia, and activities within the learning path • Full-featured test generator. Create ideal assessments with
intuitively guide students up the levels of learning to (1) Pre- your choice of fifteen question types (including true/false,
pare, (2) Engage, (3) Apply, and (4) Analyze business law multiple choice, opinion scale/Likert, and essay). Multi-
content. These activities are organized in a logical progres- language support, an equation editor, and unlimited meta-
sion to help elevate learning, promote critical-thinking skills data help ensure your tests are complete and compliant.
and produce better outcomes.
• Cross-compatible capability. Import and export content
This customizable online course gives instructors the ability
into other systems.
to add their own content in the Learning Path as well as modify
authoritative Cengage Learning content and learning tools using Acknowledgments
apps that integrate seamlessly with Learning Management Sys-
tems (LMS). Analytics and reports provide a snapshot of class We are grateful to those who provided us with comments for
progress, time in course, engagement, and completion rates. previous editions of the book: Miriam R. Albert, Fordham
University; Mark Altieri, Cleveland State University; Wm.
INSTRUCTOR RESOURCES Dennis Ames, Indiana University of Pennsylvania; Albert
Instructors can access these resources by going to login.cen- Anderson, Mount Aloysius College; Albert Andrews, Jr., Uni-
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password, and searching by ISBN 9781337094757. Denise A. Bartles, Missouri Western State College; Lois
Yoder Beier, Kent State University; Monika Lovewell Bellows,
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activities, and research projects; chapter outlines; teaching
Donald Boren, Bowling Green State University; Joyce Boland-
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to cases; and suggested case questions for students.
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R
• PowerPointV Slides These slides clarify course content Bruns, Jr., Lake Forest Graduate School of Management; Mark
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• create multiple test versions in an instant F. Crusto, Washington University–St. Louis; Richard Daleb-
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• Create tests from school, home, the coffee shop— Eramus, State University of New York–Brockport; Kurt
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PREFACE xvii
Fuchs, Fordham University; Samuel B. Garber, DePaul Art & Design; James L. Porter, University of New Mexico;
University; Nathan T. Garrett, Esq., North Carolina Central Lisa Rackley, Rich Mountain Community College; Elinor
University; Michael J. Garrison, North Dakota State Univer- Rahm, Central Missouri State University; Samuel H. Ramsay,
sity; Daniel Gillespie, DePaul University; Dr. Roy Girasa, Jr., Bryant College; Decateur Reed, Boise State University;
Pace University; Marvin Gordon, Loyola Chicago University; Richard E. Regan, St. John Fisher College; Roger Reinsch,
Sue Gragiano, Bowling Green State University; James Emporia State University; L. Reppert, Marymount University;
Granito, Youngstown State University; John Gray, Faulkner Caroline Rider, Marist College; Roland W. Riggs, Marietta
University; Sally Terry Green, Texas Southern University; College; George Roe, University of Illinois–Chicago; Stanford
Dale A. Grossman, Cornell University; Donald Haley, Rosenberg, La Roche College; Alan Ross, University of
Cleveland State University; Marc Hall, Auburn University California–Berkeley; Mark Rossi, Briar Cliff University; Tim
Montgomery; Brian Hanlon, North Central College; Dr. Ivan Rueth, Marquette University; Stuart Schafer, University of
Harber, Indian River State College; James V. Harrison, Mississippi; Eric D Schwartz, LaRoche College; Donald H.
St. Peter’s State College; Lori K. Harris-Ransom, Caldwell Shoop, North Dakota State University; Carol Wahle Smith,
College; Edward J. Hartman, St. Ambrose University; Frances Central Florida Community College; Peter Smithfield, Argyle
J. Hill, University of Wisconsin–Whitewater; Telford F. Academy; Michael J. Sovansky, Saginaw Valley State Uni-
Hollman, University of Northern Iowa–Cedar Falls; Georgia versity; Janis Stamm, Edinboro University of Pennsylvania;
L. Holmes, Mankato State University; James Holzinger, Beverly E. Stanis, Oakton Community College; James Staruck,
Muhlenberg College; Norman Hope, Tabor College; Sarah H. DePaul University; Al Stauber, Florida State University;
Hudwig, Mary Baldwin College; Velma Jesser, Lane Commu- David Steele, University of Wisconsin–Eau Claire; Lowell E.
nity College; Theresa Johnson, Cleveland State University; Stockstill, Wittenberg University; Peter Strohm, Georgian
Marilee Jones-Confield, California State University–Long Court College; Al Talarczyk, Edgewood College; James D.
Beach; Al Joyner, Eastern Illinois University; Mary C. Keifer, Taylor, Claremont McKenna College; Kevin M. Teeven,
Ohio University; Randall Kilbourne, Northwestern State Bradley University; Robert J. Tepper, University of New
University; Barbara Kirkpatrick, Virginia Intermont College; Mexico; Dale B. Thompson, University of St. Thomas;
Edward M. Kissling, Ocean County College, New Jersey; Leonard Tripodi, St. Joseph’s College; Alix Valenti, Univer-
Robert Klepa, UCLA Extension; Louise Knight, Bucknell sity of Houston–Clear Lake; Karen Vitori, Schoolcraft Col-
University; William J. Koval, Jr., Notre Dame College; Duane lege; Nancy A. Wainwright, Eastern Washington University;
R. Lambert, California State University–Hayward; Joseph F. Charles H. Walker, University of Mississippi; Michael G.
Lenius, Northeastern Illinois University; Andrew Liput, Walsh, Villanova University; Daniel Warner, Western Wash-
Felician College; Avi Liveson, Hunter College; Romain ington University; Peter M. Wasemiller, Fresno Pacific Col-
Lorentz, University of St. Thomas; Sarah H. Ludwig, Mary lege; David Webster, University of South Florida–Tampa;
Baldwin College; Richard Luke, Ricks College; Tanya M. Scott A. White, University of Wisconsin; E. Marshall Wick,
Marcum, Bradley University; Pat Maroney, Florida State Gallaudet University; John G. Williams, Northwestern State
University; Sharon Martin, Empire State College–Brooklyn University; Amy Wilson, Zane State College; Wells J. Wright,
Unit; Bruce Marx, SUNY–Old Westbury; Michael A. Mass, University of Minnesota; Rizvana Zameeruddin, University of
American University; Cheryl Massingale, University of Wisconsin–Parkside; and James B. Zimarowski, University
Tennessee–Knoxville; Greg K. McCann, Stetson University; of Notre Dame.
Bruce McClain, Cleveland State University; Ann L. McClure, We express our thanks and deep appreciation to Debra
Fort Hays State University; James McGee, College of West- Corvey for administrative assistance. For their support we
chester; Charles R. McGuire, Illinois State University; Herbert extend our thanks to Karlene Fogelin Knebel and Joanne
McLaughlin, Bryant College; James Molloy, University of Erwick Roberts. And we are grateful to Vicky True-Baker,
Wisconsin–Whitewater; Sebrena R. Moten, Troy University; Amanda White, and Rebecca von Gillern of South-Western
Donald Nelson, University of Denver; Carol L. Nielsen, for their invaluable assistance and cooperation in connection
Bemidji State University; Christopher J. Nyhus, University of with the preparation of this text.
Mary; L. K. O’Drudy, Jr., University of Virginia; Ann Morales This text is dedicated to our children Lilli-Marie Knebel
Olazabal, University of Miami; David Oliveiri, University of Mann, Justin Erwick Roberts, and Matthew Charles Roberts.
Rochester; Richard Paxton, San Diego Community College;
Gail P. Petravick, Bradley University; Jim Pingel, Everest Richard A. Mann
University–Brandon; Jonathan Politi, Columbus College of Barry S. Roberts
Table of Cases
Cases in italic are the principal cases included at the ends of the chapters. Reference numbers are to pages.
Abrams v. United States, 73 Bouton v. Byers, 183

A.E. Robinson Oil Co., Inc. v. County Forest Products, Brehm v. Eisner, 768
Inc., 409 Brentwood Academy v. Tennessee Secondary School
Alcoa Concrete & Masonry v. Stalker Bros., 256 Athletic Association, 80
Aldana v. Colonial Palms Plaza, Inc., 318 Brown v. Board of Education of Topeka, 76, 85
Alexander v. Fedex Ground Package System, Inc., 378 Brown v. Entertainment Merchants Association, 83
Alpert v. 28 Williams St. Corp., 784 Brown v. Jones, 10
Alzado v. Blinder, Robinson & Co., Inc., 686 Broz v. Cellular Information Systems, Inc., 771
American Manufacturing Mutual Insurance Company v. Burlington Industries, Inc. v. Ellerth, 946, 952
Tison Hog Market, Inc., 823 Burlington N. & S. F. R. Co. v. White, 944
American Needle, Inc. v. National Football League, 893 Burningham v. Westgate Resorts, Ltd., 225
American Tobacco Co. v. United States, 884
Cappo v. Suda, 1111
Anderson v. McOskar Enterprises, Inc., 260
Carson v. Here’s Johnny Portable Toilets, Inc., 142
Any Kind Checks Cashed, Inc. v. Talcott, 569
Carter v. Tokai Financial Services, Inc., 428
Apodaca v. Oregon, 117
Catalano, Inc. v. Target Sales, Inc., 885
Arrowhead School District No. 75, Park County,
Catamount Slate Products, Inc. v. Sheldon, 200
Montana, v. Klyap, 357
Central Hudson Gas and Electric Corp. v. Public Service
Aspen Skiing Co. v. Aspen Highlands Skiing
Commission, 74
Corp, 887
Chapa v. Traciers & Associates, 822
Association For Molecular Pathology v. Myriad Genetics,
Chevron [USA Inc. v. Natural Resources Defense
Inc., 876
Council, Inc.], 98
AT&T Mobility LLC v. Concepcion, 55, 62
Chicago Board of Trade v. United States, 883
Austin v. Michigan Chamber of Commerce, 73
Christy v. Pilkinton, 332
Bagley V. Mt. Bachelor, Inc., 261 Citizens United v. Federal Election Commission, 73
Beam v. Stewart, 770 Coastal Leasing Corporation v. T-Bar S Corporation, 522
Bear’s Adm’x v. Bear, 277 Cohen v. Kipnes, 596
Beatty v. Guggenheim Exploration Co., 1118 Commerce & Industry Insurance Company v. Bayer
Beckman v. Dunn, 130 Corporation, 432
Belden Inc. v. American Electronic Components, Inc., 491 Commonwealth v. Brown., 10
Berardi v. Meadowbrook Mall Company, 219 Conklin Farm v. Doris Leibowitz, 659
Berg v. Traylor, 273 Connes v. Molalla Transport System, Inc., 407
Bigelow-Sanford, Inc. v. Gunny Corp., 518 Consolidated Edison Co. v. NLRB, 95
Bily v. Arthur Young & Co., 1009 Conway v. Cutler Group, Inc., 1109
Border State Bank of Greenbush v. Bagley Livestock Cooke v. Fresh Express Foods Corporation, Inc., 788
Exchange, Inc., 819 Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. v.
Borton v. Forest Hills Country Club, 1095 Bailey, 542
xviii
TABLE OF CASES xix
Coopers & Lybrand v. Fox, 713 Fletcher v. Rylands, 166

Copperwald Corp. v. Independence Tube Corp., 884 Fox v. Mountain West Electric, Inc., 180
County of Washington v. Gunther, 936 Frank B. Hall & Co., Inc. v. Buck, 140
Cox Enterprises, Inc. v. Pension Benefit Guaranty Freeman v. Quicken Loans, Inc., 923
Corporation, 738 F.T.C. v. Motion Picture Advertising Service Co., 891
Credit Alliance Corp. v. Arthur Andersen & Co., 1002 F.T.C. v. Procter & Gamble Co., 888
FTC v. Wyndham Worldwide Corp., 920
Dahan v. Weiss, 301
Furlong v. Alpha Chi Omega Sorority, 450
Dartmouth College v. Woodward, 698
Davis v. Watson Brothers Plumbing, Inc., 591 Gaddy v. Douglass, 383
Denney v. Reppert, 242 Galler v. Galler, 701, 751
Department of Revenue of Kentucky v. Davis, 81 Geier v. American Honda Motor Co., 79
Detroit Lions, Inc. v. Argovitz, 382 Georg v. Metro Fixtures Contractors, Inc., 567
D.I Felsenthal Co. v. Northern Assurance Co., 707 Greene v. Boddie-Noell Enterprises, Inc., 497
Diamond, Commissioner of Patents and Trademarks v. Greenman v. Yuba Power Products, Inc., 495
Chakrabarty, 868 Griggs v. Duke Power Co., 949
Diamond v. Chakrabarty, 878 Gross v. FBL Financial Services, Inc., 937
Dilorenzo v. Valve and Primer Corporation, 245
Directv, Inc. v. Imburgia, 62 Hadfield v. Gilchrist, 1071
Discover Bank v. Superior Court, 62 Hadley v. Baxendale, 348
Dixon, Laukitis And Downing v. Busey Bank, 610 Halla Nursery, Inc. v. Baumann-Furrie & Co., 1002
Dj Coleman, Inc. v. Nufarm Americas, Inc., 430 Hamilton v. Lanning, 853
Dodge v. Ford Motor Co., 733, 739 Harris v. Looney, 714
Donahue v. Rodd Electrotype Co., Inc., 766 Harris v. Viegelahn, 852
Donald R. Hessler v. Crystal Lake Chrysler-Plymouth, Harry Berenter, Inc. v. Berman, 257
Inc., 453 Heinrich v. Titus-Will Sales, Inc., 469
Dr. Miles Medical Co. v. John D. Park & Sons Co., Heritage Bank v. Bruha, 540
895, 896 Herron v. Barnard, 1068
Drake Mfg. Co., Inc. v. Polyflow, Inc., 712 Hochster v. De La Tour, 330, 337
Hoffmann-La Roche Ltd v. Empagran S.A., 883, 1040
Eastman Kodak Co. v. Image Technical Services, Home Rentals Corp. v. Curtis, 1091
Inc., 897 Hospital Corporation of America v. Ftc, 899
Eastwood v. Superior Court, 141 Household Credit Services, Inc. v. Pfennig, 922
Ed Nowogroski Insurance, Inc. v. Rucker, 871 Hun v. Cary, 758
Edgington v. Fitzmaurice, 214 Husky International Electronics, Inc., v. Ritz, 849
EEOC v. Abercrombie & Fitch Stores, Inc., 935
Elderkin v. Gaster, 1109 Ianelli v. Powers, 1085
Enea v. the Superior Court of Monterey County, 640 Illinois v. Gates, 116
Environmental Protection Agency v. Eme Homer City In Re L.B. Trucking, Inc., 492
Generation, L. P., 1028 In Re Magness, 318
Ernst & Ernst v. Hochfelder, 997, 998, 1010 In Re the Score Board, Inc., 275
Escott v. BarChris Const. Corp., 1011 In the Matter of 1545 Ocean Ave., Llc, 692
Estate of Countryman v. Farmers Coop. Ass’n, 690 In the Matter of the Estate of Rowe, 1128
Inter-Tel Technologies, Inc. v. Linn Station Properties,
Faragher v. Boca Raton, 946 LLC, 715
Faragher v. City of Boca Raton, 950
FCC v. Fox Television Stations, Inc., 101, 103 Jackson v. Metropolitan Edison Co., 69
Federal Ins. Co. v. Winters, 320 Jasdip Properties SC, LLC v. Estate of Richardson, 185
Federal Trade Commission v. Ruberoid Co., 9, 90 Jasper v. H. Nizam, Inc., 956
Ferrell v. Mikula, 138 Jenkins v. Eckerd Corporation, 302
First National Bank v. Bellotti, 73 Jerman v. Carlisle, Mcnellie, Rini, Kramer & Ulrich
First State Bank of Sinai v. Hyland, 279 LPA, 925
Fisher v. University of Texas at Austin, 77 Johnson v. Transportation Agency, 935
xx TABLE OF CASES
Jones v. Brown, 10 Midwest Hatchery v. Doorenbos Poultry, 519

Jones v. Star Credit Corp, 419 Miller v. Mcdonald’S Corporation, 380
J.W. Hampton Co. v. United States, 71 Mims v. Arrow Financial Services, LLC, 58
Mirvish v. Mott, 1070
Kalas v. Cook, 300
Monsanto Co. v. Spray-Rite Service Corporation, 884
Keeney v. Keeney, 1126
Montana Food, LLC v. Todosijevic, 689
Kelo v. City of New London, 1110
Moore v. Kitsmiller, 164
Kelso v. Bayer Corporation, 496
Morrison v. National Australia Bank Ltd., 1040, 1046
Kenco Homes, Inc. v. Williams, 517
Motor Vehicle Mfrs. Assn. of United States, Inc. v. State
Kentucky Bankers Ass’n et al. v. Cassady, 243
Farm Mut. Automobile Ins. Co., 102
Kimbrell’S of Sanford, Inc. v. KPS, Inc., 821
Motschenbacher v. R.J. Reynolds Tobacco Co., 142
King v. Burwell, 91
Mountain Peaks Financial Services, Inc. v. Roth-Steffen, 319
King v. Verifone Holdings, Inc., 763
Murphy v. Bdo Seidman, Llp, 1008
Klein v. Pyrodyne Corporation, 165
Landreth Timber Co. v. Landreth, 966 National Business Services, Inc. v. Wright, 253
Lawrence v. Fox, 315 National Federation of Independent Business v. Sebelius,
Leegin Creative Leather Products, Inc. v. PSKS, Inc., 70, 71
885, 895 Nationsbank of Virginia, N.A. v. Barnes, 541
Lefkowitz v. Great Minneapolis Surplus Store, Inc., 9, Neugebauer v. Neugebauer, 221
191, 202 New England Rock Services, Inc. v. Empire Paving, Inc., 243
Leibling, P.C. v. Mellon Psfs (Nj) National Association, New York Times Co. v. Sullivan, 74
611 Northern Corp. v. Chugach Electrical Association, 339
Light v. Centel Cellular Co. of Texas, 241 Northern Pacific Railway Co. v. United States, 883
Local 53 of International Association of Heat and Frost Obb Personenverkehr AG v. Sachs, 1044
Insulators and Asbestos Workers v. Vogler, 935 Obergefell v. Hodges, 75, 76
Logan v. Zimmerman Brush Co., 75 Omnicare, Inc. v. Laborers District Council Construction
Louisiana v. Hamed, 122 Industry Pension Fund, 990
Love v. Hardee’s Food Systems, Inc., 161 O’Neil v. Crane Co., 495
Mackay v. Four Rivers Packing Co., 299 Orr v. Orr, 77
Madison Square Garden Corp., Ill. v. Carnera, 360 Osprey L.L.C. v. Kelly-Moore Paint Co., Inc., 203
Marbury v. Madison, 68 Palsgraf v. Long Island Railroad Co., 163
Mark Line Industries, Inc. v. Murillo Modular Group, Palumbo v. Nikirk, 167
Ltd., 588 Paralyzed Veterans of Am. v. D.C. Arena L. P., 99
Maroun v. Wyreless Systems, Inc., 223 Parents Involved in Community Schools v. Seattle
Marsh v. Alabama, 69 School District No. 1, 76
Martin v. Melland’s Inc., 472 Parker v. Twentieth Century-Fox Corp., 61
Massachusetts v. Environmental Protection Agency, 1020 Parlato v. Equitable Life Assurance Society of the United
Matrixx Initiatives, Inc. v. Siracusano, 993 States, 405
Mayo Foundation For Medical Education And Research Payroll Advance, Inc. v. Yates, 258
v. United States, 97 People v. Farell, 118
McCulloch v. Maryland, 68 Perez v. Mortgage Bankers Ass’n., 99
McCutcheon v. Federal Election Commission, 74 Philip Morris USA v. Williams, 137
McDonnell Douglas Corp. v. Green, 934 Pike v. Bruce Church, Inc., 82
McDowell Welding & Pipefitting, Inc. v. United States Pittsley v. Houser, 182, 429
Gypsum Co., 338 Plessy v. Ferguson, 85, 86
McLaurin v. Oklahoma State Regents, 86 Prestenbach v. Collins, 358
Meinhard v. Salmon, 629 Prine v. Blanton, 1129
Merritt v. Craig, 355 Providence & Worcester Co. v. Baker, 748
Messing v. Bank of America, N.A., 590
Metropolitan Life Insurance Company v. Rjr Nabisco, Radlax Gateway Hotel, LLC v. Amalgamated Bank, 851
Inc., 736 Raffles v. Wichelhaus, 218
TABLE OF CASES xxi
Raytheon Co. v. Hernandez, 934, 935 Telex Corp. v. IBM, 887

Re Keytronics, 636 Texaco, Inc. v. Pennzoil, Co., 134
Reed v. King, 224 Texas Department of Housing and Community
Reed v. Reed, 77 Affairs v. Inclusive Communities Project, 935
Ricci v. Destefano, 949 The Hyatt Corporation v. Palm Beach National
RNR Investments Limited Partnership v. Peoples First Bank, 565
Community Bank, 658 Thomas v. Lloyd, 638
Robertson v. Jacobs Cattle Co., 661 Thor Properties v.Willspring Holdings LLC, 205
Robinson v. Durham, 469 Transatlantic Financing Corp. v. United States, 340
Rosewood Care Center, Inc. v. Caterpillar, Inc., 297 Travelers Indemnity Co. v. Stedman, 592
Ryan v. Friesenhahn, 10, 12 Triffin v. Cigna Insurance, 571
Rylands v. Fletcher, 166 Tucker v. Hayford, 1092
Sackett v. Environmental Protection Agency, 100 Ultramares Corporation v. Touche, 1002
Saudi Arabia v. Nelson, 1045 Union Planters Bank, National Association v. Rogers,
Schmerber v. California, 117 612
Schoenberger v. Chicago Transit Authority, 403 United States v. O’Hagan, 986, 995
Schreiber v. Burlington Northern, Inc., 997 United States v. Socony-Vacuum Oil Co., 885
Schuette v. BAMN, 77 United States v. Windsor, 75, 76
SEC v. Edwards, 989 United Travel Service, Inc. v. Weber, 253
SEC v. W. J. Howey Co., 990 U.S. v. Virginia, 77
Securities and Exchange Commission v. W.J. Utility Air Regulatory Group v. EPA, 1020
Howey Co., 966
S.G. Borello & Sons, Inc. v. Department of Industrial Vance v. Ball State University, 946
Relations, 379 Vanegas v. American Energy Services, 241
Shawnee Telecom Resources, Inc. v. Brown, 786
Shelley v. Kraemer, 69 Waddell v. L.V.R.V. Inc., 451
Sherrod v. Kidd, 204 Wal-Mart Stores, Inc. v. Samara Brothers, Inc., 873
Silvestri v. Optus Software, Inc., 336 Wards Cove Packing Co. v. Antonio, 935
Skidmore v. Swift & Co., 92 Warnick v. Warnick, 663
Smith v. Van Gorkom, 759 Weeks v. United States, 116
Soldano v. O’Daniels, 160 Whatley v. Estate of McDougal, 1130
South Dakota v. Dole, 71 White v. Samsung Electronics America, Inc., 141
South Florida Water Management District v. Miccosukee White v. Winchester Land Development Corp, 716
Tribe of Indians, 1029 Williamson v. Mazda Motor of America, Inc., 78
State of Qatar v. First American Bank of Virginia, 566 Wilson v. Scampoli, 449
State of South Dakota v. Morse, 120 Windows, Inc. v. Jordan Panel Systems Corp., 471
State v. Jones, 10 Womco, Inc. v. Navistar International Corporation,
State v. Rivers, 121 494
Steinberg v. Chicago Medical School, 182 Wood v. Pavlin, 1094
Stine v. Stewart, 321 World-Wide Volkswagen Corp. v. Woodson, 59
Stone v. Mississippi, 73 Wyler v. Feuer, 688
Strougo v. Bassini, 764 Young v. United Parcel Service, Inc., 953
Supap Kirtsaeng v. John Wiley & Sons, Inc., 875
Sweatt v. Painter, 85, 86 Zelnick v. Adams, 276
Table of Illustrations
1-1 Law and Morals 4 7-1 Intent 128

1-2 Classification of Law 4 7-2 Privacy 131
1-3 Comparison of Civil and Criminal Law 5 7-3 Intentional Torts 135
1-4 Hierarchy of Law 6
8-1 Negligence and Negligence Per Se 150
2-1 Kohlberg’s Stages of Moral Development 19 8-2 Defenses to a Negligence Action 156
2-2 The Stakeholder Model 22
2-3 Pharmakon Employment 27 9-1 Law Governing Contracts 174
2-4 Pharmakon Affirmative Action Program 27 9-2 Contractual and Noncontractual Promises 175
2-5 Mykon R&D Expenditures 29 9-3 Validity of Agreements 176
2-6 Global Summary of the AIDS Epidemic 31 9-4 Contracts, Promissory Estoppel, and
2-7 Regional Statistics for HIV and AIDS Quasi Contracts (Restitution) 178
End of 2014 31 10-1 Duration of Revocable Offers 196
2-8 Stock Price of Vulcan, Inc. 40 10-2 Mutual Assent 198
2-9 Average Daily Volume of Vulcan, Inc., 10-3 Offer and Acceptance 198
Stock for Week 40
2-10 Purchases of Vulcan Stock by Selected 11-1 Misrepresentation 216
Executives 41 12-1 Consideration in Unilateral and Bilateral
3-1 Federal Judicial System 43 Contracts 233
3-2 Circuit Courts of the United States 44 12-2 Modification of a Preexisting Contract 235
3-3 State Court System 45 12-3 Consideration 239
3-4 Federal and State Jurisdiction 47
14-1 Incapacity: Minors, Nonadjudicated
3-5 Subject Matter Jurisdiction 47
Incompetents, and Intoxicated Persons 273
3-6 Stare Decisis in the Dual Court System 48
3-7 Jurisdiction 49 15-1 The Statute of Frauds 289
3-8 Stages in Civil Procedure 54 15-2 Parol Evidence Rule 294
3-9 Comparison of Court Adjudication,
17-1 Discharge of Contracts 334
Arbitration, and Mediation/Conciliation 55
18-1 Contract Remedies 351
4-1 Separation of Powers: Checks and
Balances 69 19-1 Duties of Principal and Agent 372
4-2 Powers of Government 72
20-1 Contract Liability of Disclosed Principal 391
4-3 Limitations on Government 73
20-2 Contract Liability of Unidentified Principal 392
5-1 Administrative Rulemaking 93 20-3 Contract Liability of Undisclosed Principal 393
5-2 Limits on Administrative Agencies 94 20-4 Tort Liability 396
6-1 Degrees of Mental Fault 108 21-1 Law of Sales and Leases 417
6-2 Constitutional Protection for the Criminal 21-2 Selected Rules Applicable to Merchants 420
Defendant 115 21-3 Battle of the Forms 424
xxii
TABLE OF ILLUSTRATIONS xxiii
21-4 Contract Law Compared with UCC Law 31-1 Contract Liability 645
of Sales and Leases 426 31-2 Tort Liability 647
31-3 Dissociation and Dissolution under RUPA 653
22-1 Tender of Performance by the Seller 441
22-2 Performance by the Buyer 446 32-1 Comparison of General and Limited
Partners 676
23-1 Passage of Title in Absence of Agreement 32-2 Comparison of Member-Managed and
by Parties 461 Manager-Managed LLCs 680
23-2 Void Title 462 32-3 Liability Limitations in LLPs 682
23-3 Voidable Title 462
23-4 Entrusting of Goods to a Merchant 463 33-1 Promoter’s Preincorporation Contracts
23-5 Passage of Risk of Loss in Absence Made in the Corporation’s Name 703
of Breach 467 33-2 Comparison of Charter and Bylaws 705
34-1 Issuance of Shares 726
24-1 Warranties 482
34-2 Debt and Equity Securities 729
24-2 Product Liability 488
34-3 Key Concepts in Legal Restrictions upon
25-1 Remedies of the Seller 509 Distributions 731
25-2 Remedies of the Buyer 514 34-4 Liability for Improper Distributions 734
26-1 Use of Negotiable Instruments 531 35-1 Management Structure of Corporations:
26-2 Order to Pay: Draft or Check 532 The Statutory Model 747
26-3 Draft 533 35-2 Management Structure of Typical Closely
26-4 Check 533 Held Corporation 747
26-5 Promise to Pay: Promissory Note or 35-3 Management Structure of Typical Publicly
Certificate of Deposit 534 Held Corporation 747
26-6 Note 534 35-4 Concentrations of Voting Power 750
26-7 Certificate of Deposit 535 35-5 Shareholder Suits 752
27-1 Bearer Paper 547 36-1 Fundamental Changes under Pre-1999

27-2 Negotiation of Bearer and Order Paper 547 RMBCA 782
27-3 Stolen Order Paper 548 37-1 Fundamental Rights of Secured Party and
27-4 Indorsements 551 Debtor 797
27-5 Placement of Indorsement 552 37-2 Requisites for Enforceability of Security
27-6 Rights of Transferees 554 Interests 802
27-7 Effects of Alterations 560 37-3 Methods of Perfecting Security Interests 805
27-8 Alteration 561 37-4 Priorities 809
27-9 Availability of Defenses Against Holders 37-5 Suretyship Relationship 811
and Holders in Due Course 562 37-6 Assumption of Mortgage 812
27-10 Rights of Holder in Due Course under 37-7 Defenses of Surety and Principal Debtor 814
the Federal Trade Commission Rule 562
38-1 Collection and Distribution of the Debtor’s
28-1 Contractual Liability 582 Estate 839
28-2 Liability on Transfer 585 38-2 Comparison of Bankruptcy Proceedings 845
28-3 Liability Based on Warranty 586
39-1 Intellectual Property 870
29-1 Bank Collections 598
40-1 Restraints of Trade under the Sherman Act 886
29-2 Parties to a Funds Transfer 608
40-2 Meeting Competition Defense 891
29-3 Credit Transaction 608
41-1 Magnuson-Moss Warranty Act 911
30-1 General Partnership, Limited Partnership,
41-2 Consumer Rescission Rights 912
Limited Liability Company, and
Corporation 621 42-1 Unfair Labor Practices 933
30-2 Tests for Existence of a Partnership 626 42-2 Charges Filed with the EEOC from 2008
30-3 Partnership Property Compared with to 2015 934
Partner’s Interest 632 42-3 Federal Employment Discrimination Laws 938
xxiv TABLE OF ILLUSTRATIONS
43-1 Registration and Exemptions under the 45-1 Major Federal Environmental Statutes 1025
1933 Act 969
43-2 Exempt Transactions for Issuers under the 47-1 Kinds of Property 1054
1933 Act 974 47-2 Duties in a Bailment 1061
43-3 Registration and Liability Provisions of the
1933 Act 977 48-1 Freehold Estates 1081
43-4 Applicability of the 1934 Act 978 48-2 Assignment Compared with Sublease 1083
43-5 Disclosure under the 1934 Act 979 48-3 Rights of Concurrent Owners 1086
43-6 Parties Forbidden to Trade on Inside
Information 984 49-1 Fundamental Rights of Mortgagor
43-7 Civil Liability under the 1933 and 1934 Acts 986 and Mortgagee 1103
49-2 Eminent Domain 1106
44-1 Accountants’ Liability to Third Parties for
Negligent Misrepresentation 1003 50-1 Trusts 1117
44-2 Accountants’ Liability under Federal 50-2 Allocation of Principal and Income 1119
Securities Law 1006 50-3 Per Stirpes and Per Capita 1124
P A R T
1
The Legal
Environment of
Business
CH 1 INTRODUCTION TO LAW CH 5 ADMINISTRATIVE LAW
CH 2 BUSINESS ETHICS AND THE CH 6 CRIMINAL LAW

SOCIAL RESPONSIBILITY OF
BUSINESS CH 7 INTENTIONAL TORTS
CH 3 CIVIL DISPUTE RESOLUTION CH 8 NEGLIGENCE AND STRICT

LIABILITY
CH 4 CONSTITUTIONAL LAW
CHAPTER 1
Introduction to Law
CHAP T E R OUT C O M E S
After reading and studying this chapter, you should be able to:
• Identify and describe the basic functions of law. • Identify and describe the sources of law.
• Distinguish between (1) law and justice and (2) law • Explain the principle of stare decisis.
and morals.
• Distinguish between (1) substantive and procedural
law, (2) public and private law, and (3) civil and
criminal law.
L
aw concerns the relations of individuals with one of law better but also to understand its relation to other
another as such relations affect the social and eco- areas of law.
nomic order. It is both the product of civilization and
the means by which civilization is maintained. As such, law
reflects the social, economic, political, religious, and moral 1-1 Nature of Law
philosophy of society. The laws of the United States influ-
The law has evolved slowly, and it will continue to change.
ence the lives of every U.S. citizen. At the same time, the
It is not a pure science based upon unchanging and univer-
laws of each State influence the lives of its citizens and the
sal truths. Rather, it results from a continuous effort to bal-
lives of many noncitizens as well. The rights and duties of
ance, through a workable set of rules, the individual and
all individuals, as well as the safety and security of all people
group rights of a society.
and their property, depend upon the law.
The law is pervasive. It interacts with and influences the
political, economic, and social systems of every civilized 1-1a DEFINITION OF LAW
society. It permits, forbids, or regulates practically every A fundamental but difficult question regarding law is this:
human activity and affects all persons either directly or indi- what is it? Numerous philosophers and jurists (legal schol-
rectly. Law is, in part, prohibitory: certain acts must not be ars) have attempted to define it. American jurists and
committed. For example, one must not steal; one must not Supreme Court Justices Oliver Wendell Holmes and
murder. Law is also partly mandatory: certain acts must be Benjamin Cardozo defined law as predictions of the way
done or be done in a prescribed way. Taxes must be paid; that a court will decide specific legal questions. William
corporations must make and file certain reports with State Blackstone, an English jurist, on the other hand, defined law
or Federal authorities; traffic must keep to the right. Finally, as “a rule of civil conduct prescribed by the supreme power
law is permissive: individuals may choose to perform or not in a state, commanding what is right, and prohibiting what
to perform certain acts. Thus, one may or may not enter is wrong.” Similarly, Austin, a nineteenth-century English
into a contract; one may or may not dispose of one’s estate jurist, defined law as a general command that a state or sov-
by will. ereign makes to those who are subject to its authority by
Because the areas of law are so highly interrelated, an laying down a course of action enforced by judicial or
individual who intends to study the several branches of law administrative tribunals.
known collectively as business law should first consider the Because of its great complexity, many legal scholars have
nature, classification, and sources of law as a whole. This attempted to explain the law by outlining its essential char-
enables the student not only to understand any given branch acteristics. Roscoe Pound, a distinguished American jurist
2
CHAPTER 1 INTRODUCTION TO LAW 3
and former dean of the Harvard Law School, described law A third essential function of the law is preservation of the
as having multiple meanings: state. In our system, law ensures that changes in leadership
and the political structure are brought about by political
First, we may mean the legal order, that is, the regime
actions such as elections, legislation, and referenda, rather
of ordering human activities and relations through sys-
than by revolution, sedition, and rebellion.
tematic application of the force of politically organized
society, or through social pressure in such a society
backed by such force. We use the term “law” in this 1-1c LEGAL SANCTIONS
sense when we speak of “respect for law” or for the A primary function of the legal system is to make sure that
“end of law.” legal rules are enforced. Sanctions are the means by which
Second, we may mean the aggregate of laws or the law enforces the decisions of the courts. Without sanc-
legal precepts; the body of authoritative grounds of tions, laws would be ineffectual and unenforceable.
judicial and administrative action established in such An example of a sanction in a civil (noncriminal) case is
a society. We may mean the body of received and the seizure and sale of the property of a debtor who fails to
established materials on which judicial and adminis- pay a court-ordered obligation, called a judgment. Moreover,
trative determinations proceed. We use the term in under certain circumstances, a court may enforce its order
this sense when we speak of “systems of law” or of by finding an offender in contempt and sentencing him to
“justice according to law.” jail until he obeys the court’s order. In criminal cases, the
Third, we may mean what Mr. Justice Cardozo principal sanctions are the imposition of a fine, imprison-
has happily styled “the judicial process.” We may ment, and capital punishment.
mean the process of determining controversies,
whether as it actually takes place, or as the public, the 1-1d LAW AND MORALS
jurists, and the practitioners in the courts hold it Although moral and ethical concepts greatly influence the
ought to take place.
law, morals and law are not the same. They may be consid-
ered as two intersecting circles, as shown in Figure 1-1. The
1-1b FUNCTIONS OF LAW
area common to both circles includes the vast body of ideas
At a general level, the primary function of law is to maintain that are both moral and legal. For instance, “Thou shall not
stability in the social, political, and economic system while kill” and “Thou shall not steal” are both moral precepts and
simultaneously permitting change. The law accomplishes this legal constraints.
basic function by performing a number of specific functions, On the other hand, the part of the legal circle that does
among them dispute resolution, protection of property, and not intersect the morality circle includes many rules of law
preservation of the state. that are completely unrelated to morals, such as the rules
Disputes, which inevitably arise in a society as complex stating that you must drive on the right side of the road and
and interdependent as ours, may involve criminal matters, that you must register before you can vote. Likewise, the por-
such as theft, or noncriminal matters, such as an automobile tion of the morality circle which does not intersect the legal
accident. Because disputes threaten the stability of society, circle includes moral precepts not enforced by law, such as
the law has established an elaborate and evolving set of rules the moral principle that you should not silently stand by and
to resolve them. In addition, the legal system has instituted watch a blind man walk off a cliff or that you should provide
societal remedies, usually administered by the courts, in place food to a starving child.
of private remedies such as revenge.
The recognition of private ownership of property is fun- u SEE FIGURE 1-1: Law and Morals
damental to our economic system, based as it is upon the
exchange of goods and services among privately held units of
consumption. Therefore, a second crucial function of law is 1-1e LAW AND JUSTICE
to protect the owner’s use of property and to facilitate volun- Law and justice represent separate and distinct concepts.
tary agreements (called contracts) regarding exchanges of Without law, however, there can be no justice. Although jus-
property and services. Accordingly, a significant portion of tice has at least as many definitions as law does, justice may
law, as well as this text, involves property and its disposition, be defined as fair, equitable, and impartial treatment of the
including the law of property, contracts, sales, commercial competing interests and desires of individuals and groups
paper, and business associations. with due regard for the common good.
4 PART 1 THE LEGAL ENVIRONMENT OF BUSINESS
FIGURE 1-1 Law and Morals
On the other hand, law is no guarantee of justice. Some of Basic to understanding these classifications are the terms
history’s most monstrous acts have been committed pursuant right and duty. A right is the capacity of a person, with the
to “law.” Examples include the actions of Nazi Germany aid of the law, to require another person or persons to per-
during the 1930s and 1940s and the actions of the South form, or to refrain from performing, a certain act. Thus, if
African government under apartheid from 1948 until 1994. Alice sells and delivers goods to Bob for the agreed price of
Totalitarian societies often have shaped formal legal systems $500 payable at a certain date, Alice has the capability, with
around the atrocities they have sanctioned. the aid of the courts, of enforcing the payment by Bob of the
$500. A duty is the obligation the law imposes upon a person
1-2 Classification of Law to perform, or to refrain from performing, a certain act. Duty
and right are correlatives: no right can rest upon one person
Because the subject is vast, classifying the law into categories without a corresponding duty resting upon some other person
is helpful. Though a number of classifications are possible, or, in some cases, upon all other persons.
the most useful categories are (1) substantive and procedural,
(2) public and private, and (3) civil and criminal. u SEE FIGURE 1-2: Classification of Law
FIGURE 1-2 Classification of Law
1-2a SUBSTANTIVE AND PROCEDURAL LAW the injured party. The principal forms of relief the civil law
Substantive law creates, defines, and regulates legal rights provides are a judgment for money damages and a decree
and duties. Thus, the rules of contract law that determine ordering the defendant to perform a specified act or to desist
when a binding contract is formed are rules of substantive from specified conduct.
law. This book is principally concerned with substantive law. A crime is any act or omission that public law prohibits in
On the other hand, procedural law establishes the rules for the interest of protecting the public and that the government
enforcing those rights that exist by reason of substantive law. makes punishable in a judicial proceeding brought (prosecuted)
Thus, procedural law defines the method by which one may by it. The government must prove criminal guilt beyond a
obtain a remedy in court. reasonable doubt, which is a significantly higher burden of
proof than that required in a civil action. The government
1-2b PUBLIC AND PRIVATE LAW prohibits and punishes crimes upon the ground of public policy,
which may include the safeguarding of the government itself,
Public law is the branch of substantive law that deals with
human life, or private property. Additional purposes of criminal
the government’s rights and powers in its political or sover-
law include deterrence and rehabilitation.
eign capacity and in its relation to individuals or groups.
Public law consists of constitutional, administrative, and u SEE FIGURE 1-3: Comparison of Civil and Criminal Law
criminal law. Private law is that part of substantive law gov-
erning individuals and legal entities (such as corporations) in
their relations with one another. Business law is primarily 1-3 Sources of Law
private law.
The sources of law in the U.S. legal system are the Federal
1-2c CIVIL AND CRIMINAL LAW and State constitutions, Federal treaties, interstate compacts,
The civil law defines duties the violation of which constitutes Federal and State statutes and executive orders, the ordinances
a wrong against the party injured by the violation. In con- of countless local municipal governments, the rules and
trast, the criminal law establishes duties the violation of regulations of Federal and State administrative agencies, and
which is a wrong against the whole community. Civil law is a an ever-increasing volume of reported Federal and State
part of private law, whereas criminal law is a part of public court decisions.
law. (The term civil law should be distinguished from the The supreme law of the land is the U.S. Constitution. The
concept of a civil law system, which is discussed later in this Constitution provides that Federal statutes and treaties shall be
chapter.) In a civil action the injured party sues to recover the supreme law of the land. Federal legislation and treaties are,
compensation for the damage and injury he has sustained as therefore, paramount to State constitutions and statutes. Federal
a result of the defendant’s wrongful conduct. The party legislation is of great significance as a source of law. Other
bringing a civil action (the plaintiff) has the burden of proof, Federal actions having the force of law are executive orders of the
which he must sustain by a preponderance (greater weight) President and rules and regulations of Federal administrative
of the evidence. Whereas the purpose of criminal law is to pun- officials, agencies, and commissions. The Federal courts also con-
ish the wrongdoer, the purpose of civil law is to compensate tribute considerably to the body of law in the United States.
FIGURE 1-3 Comparison of Civil and Criminal Law

Civil Law Criminal Law
Commencement of Action Aggrieved individual (plaintiff) sues State or Federal government prosecutes
Purpose Compensation Punishment

Deterrence Deterrence
Rehabilitation
Preservation of peace
Burden of Proof Preponderance of the evidence Beyond a reasonable doubt
Principal Sanctions Monetary damages Capital punishment

Equitable remedies Imprisonment
Fines
FIGURE 1-4 Hierarchy of Law
The same pattern exists in every State. The paramount 1-3a CONSTITUTIONAL LAW
law of each State is contained in its written constitution. A constitution—the fundamental law of a particular level of
(Although a State constitution cannot deprive citizens of government—establishes the governmental structure and
Federal constitutional rights, it can guarantee rights beyond allocates power among the levels of government, thereby
those provided in the U.S. Constitution.) State constitutions defining political relationships. One of the fundamental
tend to be more specific than the U.S. Constitution and, gen- principles on which our government is founded is that of
erally, have been amended more frequently. Subordinate to separation of powers. As detailed in the U.S. Constitution,
the State constitution are the statutes that the State’s legisla- this means that the government consists of three distinct and
ture enacts and the case law that its judiciary develops. Like- independent branches: the Federal judiciary, the Congress,
wise, State administrative agencies issue rules and regulations and the executive branch.
having the force of law, as do executive orders promulgated by A constitution also restricts the powers of government
the governors of most States. In addition, cities, towns, and and specifies the rights and liberties of the people. For
villages have limited legislative powers within their respective example, the Constitution of the United States not only
municipal areas to pass ordinances and resolutions. specifically states what rights and authority are vested in the
national government but also specifically enumerates certain
u SEE FIGURE 1-4: Hierarchy of Law rights and liberties of the people. Moreover, the Ninth
Amendment to the U.S. Constitution makes it clear that this journey’s end. The law, like the traveler, must be ready for
enumeration of rights does not in any way deny or limit the morrow. It must have a principle of growth.”
other rights that the people retain.
All other law in the United States is subordinate to the EQUITY As the common law developed in England, it
Federal Constitution. No law, Federal or State, is valid if it became overly rigid and beset with technicalities. Conse-
violates the Federal Constitution. Under the principle of quently, in many cases, the courts provided no remedies
judicial review, the Supreme Court of the United States because the judges insisted that a claim must fall within one
determines the constitutionality of all laws. of the recognized forms of action. Moreover, courts of
common law could provide only limited remedies; the prin-
1-3b JUDICIAL LAW cipal type of relief obtainable was a monetary judgment.
The U.S. legal system is a common law system, first devel- Consequently, individuals who could not obtain adequate
oped in England. It relies heavily on the judiciary as a source relief from monetary awards began to petition the king
of law and on the adversary system for the adjudication of directly for justice. He, in turn, came to delegate these peti-
disputes. In an adversary system, the parties, not the court, tions to his chancellor.
must initiate and conduct litigation. This approach is based Gradually, there evolved a supplementary system of judi-
upon the belief that the truth is more likely to emerge from cial relief for those who had no adequate remedy at common
the investigation and presentation of evidence by two law. This new system, called equity, was administered by a
opposing parties, both motivated by self-interest, than from court of chancery presided over by a chancellor. The chan-
judicial investigation motivated only by official duty. Other cellor, deciding cases on “equity and good conscience,”
English-speaking countries, including England, Canada, and afforded relief in many instances in which common law
Australia, also use the common law system. judges had refused to act or in which the remedy at law was
In distinct contrast to the common law system are civil inadequate. Thus, two systems of law administered by differ-
law systems, which are based on Roman law. Civil law ent tribunals developed side by side: the common law courts
systems depend on comprehensive legislative enactments and the courts of equity.
(called codes) and an inquisitorial method of adjudication. An important difference between law and equity was
In the inquisitorial system, the judiciary initiates litigation, that the chancellor could issue a decree, or order, compel-
investigates pertinent facts, and conducts the presentation of ling a defendant to do or refrain from doing a specific act.
evidence. The civil law system prevails in most of Europe, A defendant who did not comply with the order could be
Scotland, the State of Louisiana, the province of Quebec, held in contempt of court and punished by fine or impris-
Latin America, and parts of Africa and Asia. onment. This power of compulsion available in a court of
equity opened the door to many needed remedies not
COMMON LAW The courts in common law systems have available in a court of common law.
developed a body of law, known as “case law,” “judge-made Equity jurisdiction, in some cases, recognized rights that
law,” or “common law,” that serves as precedent for were enforceable at common law but for which equity
determining later controversies. In this sense, common law is provided more effective remedies. For example, in a court of
distinguished from other sources of law such as legislation equity, for breach of a land contract, the buyer could obtain
and administrative rulings. a decree of specific performance commanding the defendant
To evolve steadily and predictably, the common law has seller to perform his part of the contract by transferring title
developed by application of stare decisis (to stand by the to the land. Another powerful and effective remedy available
decisions). Under the principle of stare decisis, courts, in only in the courts of equity was the injunction, a court order
deciding cases, adhere to and rely on rules of law that they requiring a party to do or refrain from doing a specified
or superior courts announced and applied in prior decisions act. Still another remedy not available elsewhere was
involving similar cases. Judicial decisions thus have two uses: reformation, in which case, upon the ground of mutual
(1) to determine with finality the case currently being mistake, contracting parties could bring an action to
decided and (2) to indicate how the courts will decide similar reform or change the language of a written agreement to
cases in the future. Stare decisis does not, however, preclude conform to their actual intentions. Finally, an action for
courts from correcting erroneous decisions or from choosing rescission of a contract allowed a party to invalidate a
among conflicting precedents. Thus, the doctrine allows contract under certain circumstances.
sufficient flexibility for the common law to change. Although courts of equity provided remedies not available
The strength of the common law is its ability to adapt to in courts of law, they granted such remedies only at their dis-
change without losing its sense of direction. As Justice cretion, not as a matter of right. The courts exercised this
Cardozo said, “The inn that shelters for the night is not the discretion according to the general legal principles, or
maxims, that they formulated over the years. A few of these has not changed from term to term. But even as late as
familiar maxims of equity are the following: Equity will not 1875 more than 40 percent of the controversies before the
suffer a wrong to be without a remedy. Equity regards the sub- Court were common-law litigation, fifty years later
stance rather than the form. Equity abhors a forfeiture. Equity only 5 percent, while today cases not resting on statutes
delights to do justice and not by halves. He who comes into are reduced almost to zero. It is therefore accurate to say
equity must come with clean hands. He who seeks equity must that courts have ceased to be the primary makers of law
do equity. in the sense in which they “legislated” the common law.
In nearly every jurisdiction in the United States, courts of It is certainly true of the Supreme Court that almost
common law and courts of equity have united to form a sin- every case has a statute at its heart or close to it.
gle court that administers both systems of law. Vestiges of
the old division remain, however. For example, the right to a This modern emphasis upon legislative or statutory law
trial by jury applies only to actions at law but not, under has occurred because common law, which develops evolutio-
Federal law and in almost every State, to suits filed in equity. narily and haphazardly, is not well suited for making drastic
or comprehensive changes. Moreover, courts tend to be hesi-
RESTATEMENTS OF LAW The common law of the United tant about overruling prior decisions, whereas legislatures
States results from the independent decisions of the State frequently repeal prior enactments. In addition, legislatures
and Federal courts. The rapid increase in the number of are independent and able to choose the issues they wish to
decisions by these courts led to the establishment of the address, while courts may deal only with issues that arise in
American Law Institute (ALI) in 1923. The ALI was com- actual cases. As a result, legislatures are better equipped to
posed of a distinguished group of lawyers, judges, and law make the dramatic, sweeping, and relatively rapid changes in
professors who set out to prepare the law that enable it to respond to numerous and vast tech-
nological, social, and economic innovations.
an orderly restatement of the general common law of
While some business law topics, such as contracts, agency,
the United States, including in that term not only the
property, and trusts, still are governed principally by the
law developed solely by judicial decision, but also the
common law, most areas of commercial law have become
law that has grown from the application by the courts
largely statutory, including partnerships, corporations, sales,
of statutes that were generally enacted and were in
commercial paper, secured transactions, insurance, securities
force for many years. Wolk in, “Restatements of the
regulation, antitrust, and bankruptcy. Because most States
Law: Origin, Preparation, Availability,” 21 Ohio B.A.
enacted statutes dealing with these branches of commercial
Rept. 663 (1940).
law, a great diversity developed among the States and
Currently the ALI is made up of more than 4,300 lawyers, hampered the conduct of commerce on a national scale. The
judges, and law professors. increased need for greater uniformity led to the development
Regarded as the authoritative statement of the common of a number of proposed uniform laws that would reduce the
law of the United States, the Restatements cover many im- conflicts among State laws.
portant areas of the common law, including torts, contracts, The most successful example is the Uniform Commercial
agency, property, and trusts. Although not law in themselves, Code (UCC), which was prepared under the joint
they are highly persuasive and frequently have been used by sponsorship and direction of the ALI and the Uniform Law
courts in support of their opinions. Because they state much Commission (ULC), which is also known as the National
of the common law concisely and clearly, relevant portions Conference of Commissioners on Uniform State Laws
of the Restatements are frequently relied upon in this book. (NCCUSL). (Selected provisions of the Code are set forth
in Appendix B of this book.) All fifty States (although
Louisiana has adopted only Articles 1, 3, 4, 5, 7, and 8), the
1-3c LEGISLATIVE LAW
District of Columbia, and the Virgin Islands have adopted
Since the end of the nineteenth century, legislation has the UCC. The underlying purposes and policies of the
become the primary source of new law and ordered social Code are as follows:
change in the United States. The annual volume of legislative
law is enormous. Justice Felix Frankfurter’s remarks to the 1. simplify, clarify, and modernize the law governing
New York City Bar in 1947 are even more appropriate in commercial transactions;
the twenty-first century: 2. permit the continued expansion of commercial
Inevitably the work of the Supreme Court reflects the practices through custom, usage, and agreement of
great shift in the center of gravity of law-making. Broadly the parties; and
speaking, the number of cases disposed of by opinions 3. make uniform the law among the various jurisdictions.
The ULC has drafted more than three hundred uniform significant legal trend of the last century, and perhaps more
laws, including the Uniform Partnership Act, the Uniform values today are affected by their decisions than by those of
Limited Partnership Act, and the Uniform Probate Code. The all the courts, review of administrative decisions apart.”
ALI has developed a number of model statutory formulations, Federal Trade Commission v. Ruberoid Co., 343 U.S. 470
including the Model Code of Evidence, the Model Penal Code, (1952). This is evidenced by the great increase in the number
a Model Land Development Code, and a proposed Federal and activities of Federal government boards, commissions,
Securities Code. In addition, the American Bar Association and other agencies. Certainly, agencies create more legal
has promulgated the Model Business Corporation Act. rules and adjudicate more controversies than all the legisla-
tures and courts combined.
TREATIES A treaty is an agreement between or among
independent nations. Article II of the U.S. Constitution
authorizes the President to enter into treaties with the advice
1-4 Legal Analysis
and consent of the Senate, “providing two thirds of the Decisions in State trial courts generally are not reported or
Senators present concur.” published. The precedent a trial court sets is not sufficiently
Only the Federal government, not the States, may enter weighty to warrant permanent reporting. Except in New
into treaties. A treaty signed by the President and approved York and a few other States where selected trial court opin-
by the Senate has the legal force of a Federal statute. Accord- ions are published, decisions in trial courts are simply filed
ingly, a Federal treaty may supersede a prior Federal statute, in the office of the clerk of the court, where they are available
while a Federal statute may supersede a prior treaty. Like for public inspection. Decisions of State courts of appeals
statutes, treaties are subordinate to the Federal Constitution are published in consecutively numbered volumes called
and subject to judicial review. “reports.” Court decisions are found in the official State
reports of most States. In addition, West Publishing
EXECUTIVE ORDERS In addition to his executive functions, Company publishes State reports in a regional reporter,
the President of the United States also has authority to called the National Reporter System, composed of the follow-
issue laws, which are called executive orders. Typically, ing: Atlantic (A., A.2d, or A.3d), South Eastern (S.E. or
Federal legislation specifically delegates this authority. An S.E.2d), South Western (S.W., S.W.2d, or S.W.3d), New York
executive order may amend, revoke, or supersede a prior Supplement (N.Y.S. or N.Y.S.2d), North Western (N.W. or
executive order. An example of an executive order is the N.W.2d), North Eastern (N.E. or N.E.2d), Southern (So.,
one issued by President Johnson in 1965 prohibiting So.2d, or So.3d), Pacific (P., P.2d, or P.3d), and California
discrimination by Federal contractors on the basis of race, Reporter (Cal.Rptr., Cal.Rptr.2d, or Cal.Rptr.3d). At least
color, sex, religion, or national origin in employment on twenty States no longer publish official reports and have des-
any work the contractor performed during the period of ignated a commercial reporter as the authoritative source of
the Federal contract. State case law. After they are published, these opinions, or
The governors of most States enjoy comparable authority “cases,” are referred to (“cited”) by giving (1) the name of
to issue executive orders. the case; (2) the volume, name, and page of the official State
report, if any, in which it is published; (3) the volume, name,
1-3d ADMINISTRATIVE LAW and page of the particular set and series of the National
Administrative law is the branch of public law that is Reporter System; and (4) the volume, name, and page of any
created by administrative agencies in the form of rules, other selected case series. For instance, Lefkowitz v. Great
regulations, orders, and decisions to carry out the regulatory Minneapolis Surplus Store, Inc., 251 Minn. 188, 86 N.W.2d
powers and duties of those agencies. Administrative 689 (1957) indicates that the opinion in this case may be
functions and activities concern matters of national safety, found in Volume 251 of the official Minnesota Reports at
welfare, and convenience, including the establishment and page 188; and in Volume 86 of the North Western Reporter,
maintenance of military forces, police, citizenship and natu- Second Series, at page 689.
ralization, taxation, coinage of money, elections, environ- The decisions of courts in the Federal system are found in
mental protection, and the regulation of transportation, a number of reports. U.S. District Court opinions appear in
interstate highways, waterways, television, radio, trade and the Federal Supplement (F.Supp. or F.Supp.2d). Decisions of
commerce, and, in general, public health, safety, and welfare. the U.S. Court of Appeals are found in the Federal Reporter
To accommodate the increasing complexity of the social, (Fed., F.2d, or F.3d), and the U.S. Supreme Court’s opinions
economic, and industrial life of the nation, the scope of are published in the U.S. Supreme Court Reports (U.S.),
administrative law has expanded enormously. Justice Jackson Supreme Court Reporter (S.Ct.), and Lawyers Edition
stated, “the rise of administrative bodies has been the most (L.Ed.). While all U.S. Supreme Court decisions are reported,
not every case decided by the U.S. District Courts and the A serviceable method by which students may analyze and
U.S. Courts of Appeals is reported. Each circuit has estab- brief cases after reading and comprehending the opinion is
lished rules determining which decisions are published. to write a brief containing the following:
In reading the title of a case, such as “Jones v. Brown,”
1. the facts of the case,
the “v.” or “vs.” means “versus” or “against.” In the trial court,
Jones is the plaintiff, the person who filed the suit, and Brown 2. the issue or question involved,
is the defendant, the person against whom the suit was 3. the decision of the court, and
brought. When a case is appealed, some, but not all, courts of 4. the reasons for the decision.
appeals place the name of the party who appeals, or the
appellant, first, so that “Jones v. Brown” in the trial court By way of example, the edited case of Ryan v. Friesenhahn
becomes, if Brown loses and becomes the appellant, “Brown v. (see Case 1-1) is presented after the chapter summary and
Jones” in the appellate court. But because some appellate then briefed using the suggested format.
courts retain the trial court order of names, determining from u See Case 1-1
the title itself who was the plaintiff and who was the defendant
is not always possible. The student must read the facts of each You can and should use this same legal analysis when
case carefully and clearly identify each party in her mind to learning the substantive concepts presented in this text and
understand the discussion by the appellate court. In a criminal applying them to the end-of-chapter questions and case
case, the caption in the trial court will first designate the pros- problems. By way of example, in a number of chapters
ecuting government unit and then will indicate the defendant, throughout the text, we have included a boxed feature called
as in “State v. Jones” or “Commonwealth v. Brown.” Applying the Law, which provides a systematic legal analysis
The study of reported cases requires the student to under- of a single concept learned in the chapter. This feature begins
stand and apply legal analysis. Normally, the reported opin- with the facts of a hypothetical case, followed by an identifi-
ion in a case sets forth (1) the essential facts, the nature of cation of the broad legal issue presented by those facts. We
the action, the parties, what happened to bring about the then state the rule of law—or applicable legal principles,
controversy, what happened in the lower court, and what including definitions, which aid in resolving the legal issue—
pleadings are material to the issues; (2) the issues of law or and apply it to the facts. Finally, we state a legal conclusion,
fact; (3) the legal principles involved; (4) the application of or decision in the case. An example of this type of legal
these principles; and (5) the decision. analysis follows.
APPLYING return. The person making the gift is called the donor, and
the person receiving it is known as the donee. A valid gift
THE LAW Introduction to Law requires (1) the donor’s present intent to transfer the prop-
erty and (2) delivery of the property.
FACTS Jackson bought a new car and planned to sell his APPLICATION In this case, Jackson is the would-be donor
old one for about $2,500. But before he did so, he hap- and Trina the would-be donee. To find that Jackson had
pened to receive a call from his cousin, Trina, who had just already made a gift of the car to Trina, both Jackson’s
graduated from college. Among other things, Trina told intent to give it to her and delivery of the car to Trina
Jackson she needed a car but did not have much money. would need to be demonstrated. It is evident from their
Feeling generous, Jackson told Trina he would give her his telephone conversation that Jackson did intend at that
old car. But the next day a coworker offered Jackson point to give the car to Trina. It is equally apparent from
$3,500 for his old car, and Jackson sold it to the coworker. his conduct that he later changed his mind, because he
ISSUE Did Jackson have the right to sell his car to the sold it to someone else the next day. Consequently, he did
coworker, or legally had he already made a gift of it to not deliver the car to Trina.
Trina?
CONCLUSION Because the donor did not deliver the
RULE OF LAW A gift is the transfer of ownership of prop- property to the donee, legally no gift was made. Jackson
erty from one person to another without anything in was free to sell the car.
C H A P T E R S U M M A R Y
NATURE OF LAW Definition of Law “a rule of civil conduct prescribed by the supreme power in a
state, commanding what is right, and prohibiting what is wrong” (William Blackstone)
Functions of Law to maintain stability in the social, political, and economic system
through dispute resolution, protection of property, and the preservation of the state,
while simultaneously permitting ordered change
Legal Sanctions are means by which the law enforces the decisions of the courts
Law and Morals are different but overlapping; law provides sanctions, while morals
do not
Law and Justice are separate and distinct concepts; justice is the fair, equitable, and
impartial treatment of competing interests with due regard for the common good
CLASSIFICATION OF LAW Substantive and Procedural Law

• Substantive Law law creating rights and duties
• Procedural Law rules for enforcing substantive law
Public and Private Law
• Public Law law dealing with the relationship between government and individuals
• Private Law law governing the relationships among individuals and legal entities
Civil and Criminal Law
• Civil Law law dealing with rights and duties the violation of which constitutes a
wrong against an individual or other legal entity
• Criminal Law law establishing duties which, if violated, constitute a wrong
against the entire community
SOURCES OF LAW Constitutional Law fundamental law of a government establishing its powers and
limitations
Judicial Law
• Common Law body of law developed by the courts that serves as precedent for
determination of later controversies
• Equity body of law based upon principles distinct from common law and
providing remedies not available at law
Legislative Law statutes adopted by legislative bodies
• Treaties agreements between or among independent nations
• Executive Orders laws issued by the President or by the governor of a State
Administrative Law body of law created by administrative agencies to carry out
their regulatory powers and duties
C A S E S
C A S E RYAN v. FRIESENHAHN
1-1
Court of Appeals of Texas, 1995
911 S.W.2d 113
Rickhoff, J. Sabrina to become intoxicated. The Texas Alcoholic Beverage

This is an appeal from a take-nothing summary judgment Code provides that one commits an offense if, with criminal
granted the defendants in a social host liability case. Appel- negligence, he “makes available an alcoholic beverage to a
lants’ seventeen-year-old daughter was killed in a single-car minor.” [Citation.] The exception for serving alcohol to a
accident after leaving appellees’ party in an intoxicated con- minor applies only to the minor’s adult parent. [Citation.]
dition. While we hold that the appellants were denied an op- An unexcused violation of a statute constitutes negligence
portunity to amend their pleadings, we also find that their per se if the injured party is a member of the class protected
pleadings stated a cause of action for negligence and negli- by the statute. [Citation.] The Alcoholic Beverage Code was
gence per se. We reverse and remand. designed to protect the general public and minors in particu-
Todd Friesenhahn, son of Nancy and Frederick Friesen- lar and must be liberally construed. [Citation.] We conclude
hahn, held an “open invitation” party at his parents’ home that Sabrina is a member of the class protected by the Code.
that encouraged guests to “bring your own bottle.” Sabrina In viewing the Ryans’ allegations in the light most favor-
Ryan attended the party, became intoxicated, and was able to them, we find that they stated a cause of action
involved in a fatal accident after she left the event. According against the Friesenhahns for the violation of the Alcoholic
to the Ryans’ petition, Nancy and Frederick Friesenhahn Beverage Code.
were aware of this activity and of Sabrina’s condition. c. Common Law Negligence The elements of negligence
Sandra and Stephen Ryan, acting in their individual and include (1) a legal duty owed by one person to another;
representative capacities, sued the Friesenhahns for wrongful (2) breach of that duty; and (3) damages proximately caused
death, negligence, and gross negligence. * * * by the breach. [Citation.] To determine whether a common
*** law duty exists, we must consider several factors, including
a. The Petition The Ryans pled, in their third amended peti- risk, foreseeability, and likelihood of injury weighed against
tion, that Todd Friesenhahn planned a “beer bust” that was the social utility of the defendant’s conduct, the magnitude
advertised by posting general invitations in the community of the burden of guarding against the injury and consequen-
for a party to be held on the “Friesenhahn Property.” The in- ces of placing that burden on the defendant. [Citation.] We
vitation was open and general and invited persons to may also consider whether one party has superior knowledge
“B.Y.O.B.” (bring your own bottle). According to the peti- of the risk, and whether one party has the right to control
tion, the Friesenhahns had actual or constructive notice of the actor whose conduct precipitated the harm. [Citation.]
the party and the conduct of the minors in “possessing, As the Supreme Court in [citation] explained, there are
exchanging, and consuming alcoholic beverages.” two practical reasons for not imposing a third-party duty on
The Ryans alleged that the Friesenhahns were negligent in social hosts who provide alcohol to adult guests: first, the
(1) allowing the party to be held on the Friesenhahn property; host cannot reasonably know the extent of his guests’ alcohol
(2) directly or indirectly inviting Sabrina to the party; (3) consumption level; second, the host cannot reasonably be
allowing the party to continue on their property “after they expected to control his guests’ conduct. [Citation.] The Tyler
knew that minors were in fact possessing, exchanging, and court in [citation] relied on these principles in holding that a
consuming alcohol”; (4) failing “to provide for the proper con- minor “had no common law duty to avoid making alcohol
duct at the party”; (5) allowing Sabrina to become intoxicated available to an intoxicated guest [another minor] who he
and failing to “secure proper attention and treatment”; (6) and knew would be driving.” [Citation.]
allowing Sabrina to leave the Friesenhahn property while driv- We disagree with the Tyler court because the rationale
ing a motor vehicle in an intoxicated state. * * * expressed [by the Supreme Court] in [citation] does not apply
b. Negligence Per Se Accepting the petition’s allegations as to the relationship between minors, or adults and minors. The
true, the Friesenhahns were aware that minors possessed and adult social host need not estimate the extent of a minor’s
consumed alcohol on their property and specifically allowed alcohol consumption because serving minors any amount of
alcohol is a criminal offense. [Citation.] Furthermore, the drinking at the party and of Sabrina’s condition when she left
social host may control the minor, with whom there is a spe- the party. The trial court granted summary judgment for the
cial relationship, analogous to that of parent-child. [Citation.] Friesenhahns.
***
As this case demonstrates, serving minors alcohol creates II. Issue
a risk of injury or death. Under the pled facts, a jury could Is a social host who serves alcoholic beverages to a minor
find that the Friesenhahns, as the adult social hosts, allowed liable in negligence for harm suffered by the minor as a result
open invitations to a beer bust at their house and they could of the minor’s intoxication?
foresee, or reasonably should have foreseen, that the only
means of arriving at their property would be by privately III. Decision
operated vehicles; once there, the most likely means of In favor of the Ryans. Summary judgment reversed and case
departure would be by the same means. That adults have remanded to the trial court.
superior knowledge of the risk of drinking should be appa-
rent from the legislature’s decision to allow persons to IV. Reasons
become adults on their eighteenth birthday for all purposes Accepting the Ryans’ allegations as true, the Friesenhahns
but the consumption of alcohol. [Citations.] were aware that minors possessed and consumed alcohol on
While one adult has no general duty to control the their property and specifically allowed Sabrina to become
behavior of another adult, one would hope that adults would intoxicated. The Texas Alcoholic Beverage Code provides that
exercise special diligence in supervising minors—even during a person commits an offense if, with criminal negligence, he
a simple swimming pool party involving potentially dangerous “makes available an alcoholic beverage to a minor.” A viola-
but legal activities. We may have no special duty to watch one tion of a statute constitutes negligence per se if the injured
adult to be sure he can swim, but it would be ill-advised to turn party is a member of the class protected by the statute. Since
loose young children without insuring they can swim. When the Alcoholic Beverage Code was designed to protect the gen-
the “party” is for the purpose of engaging in dangerous and eral public and minors in particular, Sabrina is a member of
illicit activity, the consumption of alcohol by minors, adults the class protected by the Code. Therefore, we find that the
certainly have a greater duty of care. [Citation.] Ryans stated a cause of action against the Friesenhahns for the
* * * Accordingly, we find that the Ryans’ petition stated a violation of the Alcoholic Beverage Code.
common-law cause of action. In considering common-law negligence as a basis for
*** social host liability, the Texas Supreme Court has held that
We reverse and remand the trial court’s summary judgment. there are two practical reasons for not imposing a third-party
duty on social hosts who provide alcohol to adult guests:
Brief of Ryan v. Friesenhahn first, the host cannot reasonably know the extent of his
I. Facts guests’ alcohol consumption level; second, the host cannot
Todd Friesenhahn, son of Nancy and Frederick Friesenhahn, reasonably be expected to control his guests’ conduct.
held an open invitation party at his parents’ home that However, this rationale does not apply where the guest is a
encouraged guests to bring their own bottle. Sabrina Ryan minor. The adult social host need not estimate the extent of
attended the party, became intoxicated, and was involved a minor’s alcohol consumption because serving minors any
in a fatal accident after she left the party. Sandra and Stephen amount of alcohol is a criminal offense. Furthermore, the
Ryan, Sabrina’s parents, sued the Friesenhahns for negli- social host may control the minor, with whom there is a
gence, alleging that the Friesenhahns were aware of underage special relationship, analogous to that of parent-child.
CHAPTER 2
Business Ethics and the Social

Responsibility of Business
CHAP T E R OUT C O M E S
After reading and studying this chapter, you should be able to:
• Describe the differences between law and ethics. • Explain Kohlberg’s stages of moral development.
• List and contrast the various ethical theories. • Explain the ethical responsibilities of business.
• Describe cost-benefit analysis and explain when it
should be used and when it should be avoided.
B
usiness ethics is a subset of ethics: no special set of have been so sophisticated as almost to defy belief.
ethical principles applies only to the world of busi- But the ordinary run of those willing and able to take
ness. Immoral acts are immoral, whether or not a unfair advantage of others are mere apprentices in the
businessperson has committed them. In the past few years, art when compared with the manipulations thought
countless business wrongs—such as insider trading, fraudu- up by those connected in one way or another with
lent earnings statements and other accounting misconduct, transactions in securities.
price-fixing, concealment of dangerous defects in products,
Ethics can be broadly defined as the study of what is
reckless lending and improper foreclosures in the housing
right or good for human beings. It pursues the questions of
market, and bribery—have been reported almost daily.
what people ought to do, what goals they should pursue. In
Companies including Enron, WorldCom, Adelphia, Parmalat,
Business Ethics, 5th ed., Richard T. DeGeorge provides the
Arthur Andersen, and Global Crossing have violated the
following explanation of ethics:
law, and some of these firms no longer exist as a result of
these ethical lapses. In 2004, Martha Stewart was convicted In its most general sense ethics is a systematic attempt
of obstructing justice and lying to investigators about a stock to make sense of our individual and social moral expe-
sale. More recently, Bernie Madoff perpetrated the largest rience, in such a way as to determine the rules that
Ponzi scheme in history with an estimated loss of $20 billion ought to govern human conduct, the values worth pur-
in principal and approximately $65 billion in paper losses. suing, and the character traits deserving development
In May 2011, Galleon Group (a hedge fund) billionaire Raj in life. The attempt is systematic and therefore goes
Rajaratnam was found guilty of fourteen counts of conspir- beyond what reflective persons tend to do in daily life
acy and securities fraud. In 2013, large international banks in making sense of their moral experience, organizing
faced a widening scandal—and substantial fines—over it, and attempting to make it coherent and unified. …
attempts to rig benchmark interest rates, including the Lon- Ethics concerns itself with human conduct, taken here
don Interbank Offered Rate (LIBOR). to mean human activity that is done knowingly and,
Unethical business practices date from the very begin- to a large extent, willingly. It does not concern itself
ning of business and continue today. As one court stated in with automatic responses, or with, for example,
connection with a securities fraud, actions done in one’s sleep or under hypnosis.
Since the time to which the memory of man runneth Business ethics, as a branch of applied ethics, is the
not to the contrary, the human animal has been full of study and determination of what is right and good in busi-
cunning and guile. Many of the schemes and artifices ness settings. Business ethics seeks to understand the moral
14
CHAPTER 2 BUSINESS ETHICS AND THE SOCIAL RESPONSIBILITY OF BUSINESS 15
issues that arise from business practices, institutions, and “legal” business practices, such as failing to fulfill a promise
decision making and their relationship to generalized human that is not legally binding; exporting products banned in the
values. Unlike the law, analyses of ethics have no central United States to developing countries, where they are not pro-
authority, such as courts or legislatures, upon which to rely; hibited; manufacturing and selling tobacco or alcohol prod-
nor do they have clear-cut, universal standards. Despite these ucts; or slaughtering baby seals for fur coats. The mere fact
inherent limitations, making meaningful ethical judgments is that these practices may be legal does not prevent them from
still possible. To improve ethical decision making, it is im- being challenged on moral grounds.
portant to understand how others have approached the task. Just as it is possible for legal acts to be immoral, it is
Some examples of the many ethics questions confronting equally possible for illegal acts to seem morally preferable to
business may clarify the definition of business ethics. In the following the law. It is, for example, the moral conviction of
employment relationship, countless ethical issues arise regard- the great majority of people that those who sheltered Jews in
ing the safety and compensation of workers, their civil rights violation of Nazi edicts during World War II and those who
(such as equal treatment, privacy, and freedom from sexual committed acts of civil disobedience in the 1950s and 1960s
harassment), and the legitimacy of whistle-blowing. In the to challenge racist segregation laws in the United States were
relationship between business and its customers, ethical issues acting properly and that the laws themselves were immoral.
permeate marketing techniques, product safety, and consumer
protection. The relationship between business and its owners
bristles with ethical questions involving corporate governance,
2-2 Ethical Theories
shareholder voting, and management’s duties to the share- Philosophers have sought for centuries to develop dependa-
holders. The relationship among competing businesses ble universal methods for making ethical judgments. In ear-
involves numerous ethical matters, including efforts to pro- lier times, some thinkers analogized the discovery of ethical
mote fair competition over the temptation of collusive con- principles with the derivation of mathematical proofs. They
duct. The interaction between business and society at large asserted that people could discover fundamental ethical rules
has additional ethical dimensions: pollution of the physical by applying careful reasoning a priori. (A priori reasoning is
environment, commitment to the community’s economic and based on theory rather than experimentation and deductively
social infrastructure, and the depletion of natural resources. At draws conclusions from cause to effect and from generaliza-
the international level, these issues not only recur but also tions to particular instances.) In more recent times, many
couple themselves to additional ones, such as bribery of for- philosophers have concluded that although careful reasoning
eign officials, exploitation of developing countries, and con- and deep thought assist substantially in moral reasoning,
flicts among differing cultures and value systems. experience reveals that the complexities of the world defeat
In resolving the ethical issues raised by business conduct, it most attempts to fashion precise, a priori guidelines. Never-
is helpful to use a seeing-knowing-doing model. First, the de- theless, reviewing the most significant ethical theories can
cision maker should see (identify) the ethical issues involved aid analysis of business ethics issues.
in the proposed conduct, including the ethical implications of
the various available options. Second, the decision maker 2-2a ETHICAL FUNDAMENTALISM
should know (resolve) what to do by choosing the best option.
Finally, the decision maker should do (implement) the chosen Under ethical fundamentalism, or absolutism, individuals look
option by developing strategies for implementation. to a central authority or set of rules to guide them in ethical
This chapter first surveys the most prominent ethical the- decision making. Some look to the Bible; others look to the
ories, then examines ethical standards in business, and con- Koran or the writings of Karl Marx or to any number of living
cludes by exploring the ethical responsibilities of business. or deceased prophets. The essential characteristic of this
approach is a reliance upon a central repository of wisdom. In
some cases, such reliance is total. In others, it occurs to a lesser
2-1 Law Versus Ethics degree: followers of a religion or a spiritual leader may believe
As discussed in Chapter 1, the law is strongly affected by that all members of the group have an obligation to assess
moral concepts, but law and morality are not the same. moral dilemmas independently, according to each person’s
Although it is tempting to say “if it’s legal, it’s moral,” such a understanding of the dictates of certain fundamental principles.
proposition is inaccurate and generally too simplistic. For
example, it would seem gravely immoral to stand by silently 2-2b ETHICAL RELATIVISM
while a blind man walks off a cliff if one could prevent the fall Ethical relativism is a doctrine asserting that individuals
by shouting a warning, even though one is under no legal obli- must judge actions by what they feel is right or wrong for
gation to do so. Similarly, moral questions arise concerning themselves. It holds that both parties to a disagreement
regarding a moral question are correct, because morality is rel- less overall pleasure than not following them. In applying
ative. While ethical relativism promotes open-mindedness and utilitarian principles to developing rules, rule utilitarianism
tolerance, it has limitations. If each person’s actions are always thus supports rules that on balance produce the greatest
correct for that person, then his behavior is, by definition, satisfaction. Determining whether telling a lie in a given
moral, and no one can truly criticize it. If a child abuser truly instance would produce greater pleasure than telling the
felt it right to molest children, a relativist would accept the truth is less important to the rule utilitarian than deciding
proposition that the child abuser was acting properly. As whether a general practice of lying would maximize society’s
almost no one would accept the proposition that child abuse pleasure. If lying would not maximize pleasure generally,
could ever be ethical, few can truly claim to be relativists. Once then one should follow a rule of not lying, even though tell-
a person concludes that criticizing or punishing behavior is, in ing a lie occasionally would produce greater pleasure than
some cases, appropriate, he abandons ethical relativism and would telling the truth.
faces the task of developing a broader ethical methodology. Utilitarian notions underlie cost-benefit analysis, an analyt-
Although bearing a surface resemblance to ethical relativ- ical tool used by many business and government managers
ism, situational ethics actually differs substantially. Situational today. Cost-benefit analysis first quantifies in monetary terms
ethics holds that developing precise guidelines for navigating and then compares the direct and indirect costs and benefits
ethical dilemmas is difficult because real-life decision making is of program alternatives for meeting a specified objective.
so complex. To judge the morality of someone’s behavior, the Cost-benefit analysis seeks the greatest economic efficiency,
person judging must actually put herself in the other person’s given the underlying notion that acts achieving the greatest
shoes to understand what motivated the other to choose a par- output at the least cost promote the greatest marginal happi-
ticular course of action. In this respect, situational ethics shares ness over less efficient acts, other things being equal.
with ethical relativism the notion that we must judge actions The primary purpose of cost-benefit analysis is to choose
from the perspective of the person who actually made the judg- from alternative courses of action the program that maxi-
ment. From that point on, however, the two approaches differ mizes society’s wealth. For example, based on cost-benefit
dramatically. Ethical relativism passes no judgment on what a analysis, an auto designer might choose to devote more effort
person did other than to determine that he truly believed the to perfecting a highly expensive air bag that would save hun-
decision was right for him. Much more judgmental, situational dreds of lives and prevent thousands of disabling injuries
ethics insists that once a decision has been viewed from the than to developing an improved car hood latching mecha-
actor’s perspective, a judgment can be made as to whether or nism that would produce a less favorable cost-benefit ratio.
not her action was ethical. Situational ethics does not cede the The chief criticism of utilitarianism is that in some impor-
ultimate judgment of propriety to the actor; rather, it insists tant instances, it ignores justice. A number of situations
that another evaluate the actor’s decision or act from the per- would maximize the pleasure of the majority at great social
spective of a person in the actor’s shoes. cost to a minority. Under a strict utilitarian approach, for
example, it would be ethical to compel a few citizens to
2-2c UTILITARIANISM undergo painful, even fatal medical tests to develop cures for
Utilitarianism is a doctrine that assesses good and evil in the rest of the world. For most people, however, such action
terms of the consequences of actions. Those actions that pro- would be unacceptable. Another major criticism of utilitari-
duce the greatest net pleasure compared with the net pain anism is that measuring pleasure and pain in the fashion its
are better in a moral sense than those that produce less net supporters advocate is extremely difficult, if not impossible.
pleasure. As Jeremy Bentham, one of the most influential
proponents of utilitarianism, proclaimed, a good or moral 2-2d DEONTOLOGY
act is one that results in “the greatest happiness for the great- Deontological theories (from the Greek word deon, meaning
est number.” “duty” or “obligation”) address the practical problems of util-
The two major forms of utilitarianism are act utilitarian- itarianism by holding that certain underlying principles are
ism and rule utilitarianism. Act utilitarianism assesses each right or wrong regardless of calculations regarding pleasure
separate act according to whether it maximizes pleasure over or pain. Deontologists believe that actions cannot be meas-
pain. For example, if telling a lie in a particular situation pro- ured simply by their results but must be judged by means
duces more overall pleasure than pain, then an act utilitarian and motives as well.
would support lying as the moral thing to do. Rule utilitar- Our criminal laws apply deontological reasoning. Know-
ians, disturbed by the unpredictability of act utilitarianism ing that John shot and killed Marvin is not enough to tell us
and by its potential for abuse, follow a different approach by how to judge John’s act. We must know whether John shot
holding that general rules must be established and followed Marvin in anger, in self-defense, or by mistake. Although
even though, in some instances, following rules may produce under any of these motives Marvin is dead, we judge John
quite differently depending on the mental process that we and flexible moral guidelines, utilitarians and others criticize
believe led him to commit the act. Similarly, deontologists deontologists for rigidity and excessive formalism. For exam-
judge the morality of acts not so much by their consequen- ple, if one inflexibly adopts as a rule to tell the truth, one
ces, but by the motives that lead to them. To act morally, a ignores situations in which lying might well be justified. A
person not only must achieve just results but also must person hiding a terrified wife from her angry, abusive hus-
employ the proper means. band would seem to be acting morally by falsely denying that
The eighteenth-century philosopher Immanuel Kant prof- the wife is at the person’s house. Yet, a deontologist, feeling
fered the best-known deontological theory. Kant asserted bound to tell the truth, might ignore the consequences of
what he called the categorical imperative, which has been truthfulness, tell the husband where his wife is, and create
summarized as follows: the possibility of a terrible tragedy. Less dramatically, one
wonders whether the world would effect a higher ethical
1. Act only according to that maxim by which you can, at
code by regarding as immoral “white lies” concerning
the same time, will that it should become a universal law.
friends’ appearance, clothing, or choice of spouse.
2. Act as never to treat another human being merely as a
means to an end. 2-2e SOCIAL ETHICS THEORIES
Thus, for an action to be moral, it (1) must possess the Social ethics theories assert that special obligations arise from
potential to be made a consistently applied universal law and the social nature of human beings. Such theories focus not
(2) must respect the autonomy and rationality of all human only on each person’s obligations to other members of soci-
beings and avoid treating them as an expedient. That is, one ety but also on the individual’s rights and obligations within
should avoid doing anything that he or she would not have society. For example, social egalitarians believe that society
everyone do in a similar situation. For example, you should should provide all persons with equal amounts of goods and
not lie to colleagues unless you support the right of all col- services regardless of the contribution each makes to increase
leagues to lie to one another. Similarly, you should not cheat society’s wealth.
others unless you advocate everyone’s right to cheat. We Two other ethics theories have received widespread atten-
apply Kantian reasoning when we challenge someone’s tion in recent years. One is the theory of distributive justice
behavior by asking, what if everybody acted that way? proposed by Harvard philosopher John Rawls, which seeks
Under Kant’s approach, it would be improper to assert a to analyze the type of society that people in a “natural state”
principle to which one claimed personal exception, such as would establish if they could not determine in advance
insisting that it was acceptable for you to cheat but not for whether they would be talented, rich, healthy, or ambitious,
anyone else to do so. Because everyone would then insist on relative to other members of society. According to Rawls, the
similar rules by which to except themselves, this principle society contemplated through this “veil of ignorance” should
could not be universalized. be given precedence in terms of development because it con-
Kant’s philosophy also rejects notions of the end justifying siders the needs and rights of all its members. Rawls did not
the means. To Kant, every person is an end in himself or argue, however, that such a society would be strictly egalitar-
herself and deserves respect simply because of his or her ian. That would unfairly penalize those who turned out to be
humanity. Thus, any sacrifice of a person for the greater the most talented and ambitious. Instead, Rawls suggested
good of society would be unacceptable to Kant. that such a society would stress equality of opportunity, not
In many respects, Kant’s categorical imperative is a varia- of results. On the other hand, Rawls stressed that society
tion of the Golden Rule. Like the Golden Rule, the categori- would pay heed to the least advantaged to ensure that they
cal imperative reflects the idea that people are, to a certain did not suffer unduly and that they enjoyed society’s benefits.
extent, self-centered. As one writer on business ethics notes, To Rawls, society must be premised on justice. Everyone is
this is what makes the Golden Rule so effective: entitled to her fair share in society, a fairness all must work
to guarantee.
It is precisely this self-centeredness of the Golden Rule In contrast to Rawls, another Harvard philosopher, Rob-
that makes it so valuable, and so widely acknowledged, ert Nozick, stressed liberty, not justice, as the most important
as a guide. To inquire of yourself, “How would I feel in obligation that society owes its members. Libertarians stress
the other fellow’s place?” is an elegantly simple and market outcomes as the basis for distributing society’s
reliable method of focusing in on the “right” thing to rewards. Only to the extent that one meets the demands of
do. The Golden Rule works not in spite of selfishness, the market does one deserve society’s benefits. Libertarians
but because of it. Tuleja, Beyond the Bottom Line. oppose interference by society in their lives as long as they
As does every theory, Kantian ethics has its critics. Just as do not violate the rules of the marketplace, that is, as long as
deontologists criticize utilitarians for excessive pragmatism they do not cheat others and as long as they honestly disclose
the nature of their transactions with others. The fact that imprecise is not the same as concluding that moral standards
some end up with fortunes while others accumulate little are unnecessary or nonexistent.
simply proves that some can play in the market effectively Research by noted psychologist Lawrence Kohlberg pro-
while others cannot. To libertarians, this is not unjust. vides insight into ethical decision making and lends credibility
What is unjust to them is any attempt by society to take to the notion that moral growth, like physical growth, is part
wealth earned by citizens and then distribute it to those who of the human condition. Kohlberg observed that people pro-
did not earn it. These theories and others (e.g., Marxism) gress through stages of moral development according to two
judge society in moral terms by its organization and by its major variables: age and education. During the first level—the
method of distributing goods and services. They demonstrate preconventional level—a child’s conduct is a reaction to the
the difficulty of ethical decision making in the context of fear of punishment and, later, to the pleasure of reward.
a social organization: behavior that is consistently ethical Although people who operate at this level may behave in a
from individual to individual may not necessarily produce a moral manner, they do so without understanding why their
just society. behavior is moral. The rules are imposed upon them. During
adolescence—Kohlberg’s conventional level—people conform
2-2f OTHER THEORIES their behavior to meet the expectations of groups, such as
The preceding theories do not exhaust the possible approaches family, peers, and eventually society. The motivation for con-
to evaluating ethical behavior, but represent the most com- formity is loyalty, affection, and trust. Most adults operate at
monly cited theories advanced over the years. Several other this level. According to Kohlberg, some people reach the third
theories also deserve mention. Intuitionism holds that a level—the postconventional level—at which they accept and
rational person possesses inherent powers to assess the cor- conform to moral principles because they understand why the
rectness of actions. Though an individual may refine and principles are right and binding. At this level, moral principles
strengthen these powers, they are just as basic to humanity as are voluntarily internalized, not externally imposed. Moreover,
our instincts for survival and self-defense. Just as some people individuals at this stage develop their own universal ethical
are better artists or musicians, some people have more insight principles and even question the laws and values that society
into ethical behavior than others. Consistent with intuitionism and others have adopted.
is the good persons philosophy, which declares that individu- Kohlberg believed that these stages are sequential and that
als who wish to act morally should seek out and emulate those not all people reach the third or even the second stage. He
who always seem to know the right choice in any given situa- therefore argued that exploring ways of enabling people to
tion and who always seem to do the right thing. One variation develop to the advanced stage of postconventional thought
of these ethical approaches is the “Television Test,” which was essential to the study of ethics. Other psychologists assert
directs us to imagine that every ethical decision we make is that individuals do not pass from stage to stage but rather
being broadcast on nationwide television. Adherents of this function in all three stages simultaneously.
approach believe an appropriate decision is one we would be u SEE FIGURE 2-1: Kohlberg’s Stages of Moral Development
comfortable broadcasting on television for all to witness.
Whatever the source of our ethical approach, we cannot
avoid facing moral dilemmas that challenge us to recognize
2-3 Ethical Standards in Business and to do the right thing. Moreover, for those who plan busi-
ness careers, such dilemmas will necessarily have implica-
This section explores the application of the theories of ethical tions for many others: employees, shareholders, suppliers,
behavior to the world of business. customers, and society at large.
2-3a CHOOSING AN ETHICAL SYSTEM 2-3b CORPORATIONS AS MORAL AGENTS

In their efforts to resolve the moral dilemmas facing human- Because corporations are not persons but rather artificial
ity, philosophers and other thinkers have struggled for years entities created by the State, it is not obvious whether they
to refine the various systems discussed previously. No one can or should be held morally accountable. As Lord Chancel-
ethical system is completely precise, however, and each tends lor Thurlow lamented two hundred years ago, “A company
occasionally to produce unacceptable prescriptions for action. has no body to kick and no soul to damn, and by God, it
But to say that a system has limits is not to say it is useless. ought to have both.” Clearly, individuals within corporations
On the contrary, many such systems provide insight into eth- can be held morally responsible, but the corporate entity
ical decision making and help us formulate issues and resolve presents unique problems.
moral dilemmas. Furthermore, concluding that moral stand- Commentators are divided on the issue. Some, like philos-
ards are difficult to articulate and that the boundaries are opher Manuel Velasquez, insist that only people can engage
FIGURE 2-1 Kohlberg’s Stages of Moral Development

Levels Perspective Justification
Preconventional (Childhood) Self Punishment/reward
Conventional (Adolescent) Group Group norms
Postconventional (Adult) Universal Moral principles
in behavior that can be judged in moral terms. Opponents of … The free market operates to equate supply and
this view, like philosophers Kenneth Goodpaster and John demand—supply reflecting the ability and willingness to
Matthews, Jr., concede that corporations are not persons in offer certain goods or services and demand reflecting the
any literal sense, but insist that the attributes of responsibility consumer’s ability and willingness to pay. Price is
inherent in corporations are sufficient in number to permit adjusted to include the maximum number of both bids
judging corporate behavior from a moral perspective. and offers. The market, therefore, is the decision-making
mechanism outside the firm. It is the means by which ba-
sic decisions are made about the use of resources, and all
2-4 Ethical Responsibilities of Business factors are supposed to respond to it, however they wish.
Many people assert that the only responsibility of business is … Just in case it doesn’t work out that way, there is one
to maximize profit and that this obligation overrides any more institution—the Government—which is supposed to
other ethical or social responsibility. Although our economic set rules and provide protection for the society and its
system of modified capitalism is based on the pursuit of self- members. That’s all, said Smith, that it should do: it should
interest, it contains components to check this motivation of set the rules, enforce them, and stand aside. J. Behrman,
greed. Our system always has recognized the need for some Discourses on Ethics and Business, pp. 25–29.
form of regulation, whether by the “invisible hand” of As long as all these constituent institutions continue to
competition, the self-regulation of business, or government exist and operate in a balanced manner, the factors of pro-
regulation. duction—land, capital, and labor—combine to produce an
efficient allocation of resources for individual consumers and
2-4a REGULATION OF BUSINESS for the economy as a whole. To achieve this outcome, how-
As explained and justified by Adam Smith in The Wealth of ever, Smith’s model requires the satisfaction of several condi-
Nations (1776), the capitalistic system is composed of six tions: “standardized products, numerous firms in markets,
“institutions”: economic motivation, private productive prop- each firm with a small share and unable by its actions alone
erty, free enterprise, free markets, competition, and limited to exert significant influence over price, no barriers to entry,
government. Economic motivation assumes that a person and output carried to the point where each seller’s marginal
who receives an economic return for his effort will work cost equals the going market price.” E. Singer, Antitrust
harder; therefore, the economic system should provide Economics and Legal Analysis, p. 2.
greater economic rewards for those who work harder. Private History has demonstrated that the actual operation of the
productive property, the means by which economic motiva- economy has satisfied almost none of these assumptions. More
tion is exercised, permits individuals to innovate and pro- specifically, the actual competitive process falls considerably
duce while securing to them the fruits of their efforts. Jack short of the classic economic model of perfect competition:
Behrman, a professor of business ethics, has described how
Competitive industries are never perfectly competitive
the four other institutions combine with these two to bring
in this sense. Many of the resources they employ can-
about industrialized capitalism:
not be shifted to other employments without substan-
Free enterprise permits the combination of properties tial cost and delay. The allocation of those resources, as
so people can do things together that they can’t do between industries or as to relative proportions within
alone. Free enterprise means a capitalistic combination a single industry, is unlikely to have been made in a
of factors of production under decisions of free indi- way that affords the best possible expenditure of eco-
viduals. Free enterprise is the group expression of the nomic effort. Information is incomplete, motivation
use of private property, and it permits greater effi- confused, and decision therefore ill informed and often
ciency in an industrial setting through variation in the unwise. Variations in efficiency are not directly
levels and kinds of production. reflected in variations of profit. Success is derived in
large part from competitive selling efforts, which in the clique chooses the board of directors and, with the
aggregate may be wasteful, and from differentiation of acquiescence of the board, controls the corporation.
products, which may be undertaken partly by methods R. Nader, M. Green, and J. Seligman, Taming the Giant
designed to impair the opportunity of the buyer to Corporation.
compare quality and price. C. Edwards, Maintaining
In a classic study published in 1932, Adolf Berle and
Competition.
Gardiner Means concluded that significant amounts of eco-
In addition to capitalism’s failure to allocate resources nomic power had been concentrated in a relatively few large
efficiently, it cannot be relied on to achieve all of the social corporations, that the ownership of these corporations had
and public policy objectives a pluralistic democracy requires. become widely dispersed, and that the shareholders had
For example, the free enterprise model simply does not com- become far removed from active participation in management.
prehend or address equitable distribution of wealth, national Since their original study, these trends have steadily continued.
defense, conservation of natural resources, full employment, The large publicly held corporations—numbering five hun-
stability in economic cycles, protection against economic dis- dred to one thousand—own the great bulk of the industrial
locations, health and safety, social security, and other impor- wealth of the United States. Moreover, these corporations are
tant social and economic goals. Because the “invisible hand” controlled by a small group of corporate officers.
and self-regulation by business have failed not only to pre- Historically, the boards of many publicly held corpora-
serve the competitive process in our economic system but tions consisted mainly or entirely of inside directors (corpo-
also to achieve social goals extrinsic to the efficient allocation rate officers who also serve on the board of directors).
of resources, governmental intervention in business has During the past two decades, however, as a result of regula-
become increasingly common. Such intervention attempts to tions by the U.S. Securities and Exchange Commission and
(1) regulate both “legal” monopolies, such as those conferred the stock exchanges, the number and influence of outside
by law through copyrights, patents, and trade symbols, and directors has increased substantially. Now the boards of the
“natural” monopolies, such as utilities, transportation, and great majority of publicly held corporations consist primarily
communications; (2) preserve competition by correcting imper- of outside directors, and these corporations have audit com-
fections in the market system; (3) protect specific groups, espe- mittees consisting entirely of outside directors.
cially labor and agriculture, from failures of the marketplace; Nevertheless, a number of instances of corporate miscon-
and (4) promote other social goals. Successful government duct have been revealed in the first years of this century. In
regulation involves a delicate balance between regulations that response to these business scandals—involving companies
attempt to preserve competition and those that attempt to such as Enron, WorldCom, Global Crossing, Adelphia, and
advance other social objectives. The latter should not under- Arthur Andersen—in 2002, Congress passed the Sarbanes-
mine the basic competitive processes that provide an efficient Oxley Act. This legislation seeks to prevent these types of
allocation of economic resources. scandals by increasing corporate responsibility through the
imposition of additional corporate governance requirements
on publicly held corporations. (This statute is discussed fur-
2-5 Corporate Governance ther in Chapters 6, 35, 43, and 44.)
Moreover, in July 2010, the Dodd-Frank Wall Street
In addition to the broad demands of maintaining a competi-
Reform and Consumer Protection Act (Dodd-Frank Act)
tive and fair marketplace, another factor demanding the ethi-
was enacted, representing the most significant change to U.S.
cal and social responsibility of business is the sheer size and
financial regulation since the New Deal. Its purposes include
power of individual corporations. The five thousand largest
improving accountability and transparency in the financial
U.S. firms currently produce more than half of the nation’s
system, protecting consumers from abusive financial services
gross national product. Statutorily, their economic power
practices, and improving corporate governance in publicly
should be delegated by the shareholders to the board of direc-
held companies. (The Dodd-Frank Act is discussed further
tors, who in turn appoint the officers of the corporation.
in Chapters 3, 29, 34, 35, 36, 41, 43, and 49.)
In reality, this legal image is virtually a myth. In nearly These developments raise social, policy, and ethical issues
every large American business corporation, there exists about the governance of large, publicly owned corporations.
a management autocracy. One man—variously titled the Many observers insist that companies playing such an impor-
President, or the Chairman of the Board, or the Chief tant role in economic life should have a responsibility to
Executive Officer—or a small coterie of men rule the undertake projects that benefit society in ways that go beyond
corporation. Far from being chosen by the directors to mere financial efficiency in producing goods and services.
run the corporation, this chief executive or executive In some instances, the idea of corporate obligation comes
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CAPITULO II
Como el Gallo da a entender a su

amo Micyllo quel es Pitagoras
y como fue trasformado en
gallo y Mycillo dize vna fabula
de quien fue el gallo.
Pues oyeme, Micyllo, que tú oyras

de mi vn quento muy nuevo e
incleyble; que te ago saber queste
que agora te parezco gallo no a
mucho tienpo que fue onbre.
Mycillo.—En verdad yo he oydo
ser esto ansi quel gallo fue vn
paje muy privado del dios Mares
que sienpre le aconpannó en los
plazeres y deleytes e que vna
noche le llevó consigo quando
yba a dormir con Venus, y que
porque tenia gran temor del sol y
que no los viese y lo parlase a
Vulcano, dexóle en su guarda,
requeriendole que no se durmiese
porque si el sol salia y los bia que
lo parlarya a Bulcano, y dizen que
tú te dormiste y el sol salio y que
como los vido fuelo a dezir a su
marido de Venus, y asi Bulcano
con gran enojo vino y prendiolos
en vna rez que fabrycó y presos
llevolos ante los dioses, y que
Mares con el gran enojo que hubo
te bolbió en gallo y que agora por
satisfazer a Mares quando no
haces otro provecho alguno
manifiestas la salida del sol con
grandes clamores y cantos.
Gallo.—Es la verdad todo eso
que se cuenta, mas lo que yo
agora quiero dezir otra cosa es;
muy poco tienpo ha que yo fuy
trasformado en gallo.
Mycillo.—¿Deque manera es
eso ansi; porque lo deseo mucho
saber?
Gallo.—Dime, Micyllo, ¿oyste
algun tienpo de vn Pitagoras
sabio?
Mycillo.—¿Acaso dizes por vn
sofista encantador el qual
constituyó que no se comiesen
carnes ny abas, manjar muy
suabe, para la despedida de la
mesa, y aquel que presvadio a los
onbres que no ablasen por cynco
años?
Gallo.—Pues sabes tanbien
como Pitágoras abia sido
Eufurbio?
Mycillo.—Yo no sé mas sino que
dizen queste Pitagoras abia sido
vn honbre enbaydor que azia
prodigios y encantamientos.
Gallo.—Pues yo soy Pitagoras,
por lo qual te ruego que no me
maltrates con esas enjuryas, pues
no conoscyste mis costumbres.
Mycillo.—Por cierto esto es mas
milagroso ver vn gallo filosofo;
pues declaranos, buen yjo de
Menesarca, qué causa fue la que
te mudó de onbre en ave, porque
ny este acontecimiento es
verisimile ni razonable creer, e
ademas por aver visto en ti dos
cosas muy ajenas de Pitagoras.
Gallo.—Dime quales son.
Mycillo.—Lo vno es verte que
eres parlero y bullicyoso,
mandando el que por cynco años
enteros no ablasen los onbres; lo
otro contradize a su ley porque
como yo no tubiese ayer que te
dar de comer te eché vnas abas y
tú las comiste con muy buena
boluntad, por lo qual es muy mas
necesario que mientas tu en dezir
que seas Pitagoras; que si eres
Pitagoras tú le has contradezido
pues mandaste que se abya de
huyr de comer las habas como la
misma cabeça del padre.
Gallo.—¿No has conoscido ¡oh
Micillo! qué sea la causa de
aqueste acaescimiento que
qunple para qualquier género de
bida? entonces quando era
filosofo desechaba las habas;
mas agora que soy gallo no las
desecho, por serme agradable
manjar; mas si no te fuere
molesto, oyeme e dezirte he
cómo de Pitagoras comence a ser
esto que agora soy, anque hasta
agora he sido transformado en
otras muchas diversas figuras de
animales; dezirtelo he lo que me
acaescyo en cada vna por si.
Mycillo.—Yo te ruego me lo
quentes porque a mi me será muy
sabroso oyrte e tanto que si
alguno me preguntare quál queria
mas, oyrte a ti o bolver aquel
dichoso suenno que sonnava
astaqui, juzgarya ser yguales los
tus sabrosos quentos con aquella
sabrosa posesion de riquezas en
que yo me sonnava estar.
Gallo.—Tú tanbien me traes a la
memoria lo que en el suenno
biste como quien guarda vnas
vanas ymajinaciones, tu fantasia
te regozijas de vna vana
felicydad.
Mycillo.—Mas sé cyerto que
m'es tan dulce este suenno que
nunca del me olvydaré ni de otra
cosa más me quiero acordar.
Gallo.—Por cierto que me
muestras ser tan dulce este
suenno que deseo saber qué fue.
CAPITULO III
Que quenta Mycyllo lo que le

sucedio en el conbite del rico
Everates.
Mycillo.—Yo te [lo de]seo contar

porque me es muy sabroso
dezirlo y acordarme dél; mas
dime tú, Pitagoras, ¿quando me
contarás estas tus
transformacyones?
Gallo.—Quando tú, Micyllo,
acabares de contarme lo que te
acontecyo en la cena y me
dixeres tu suenno, porque te lo
deseo saber.
Mycillo.—Bien te acordarás que
no comi ayer ninguna vez en
casa, porque topandome ayer
aquel rico Eberates en la plaça
me dixo que labado y polido me
fuese con él a comer.
Gallo.—Bien me aquerdo,
porque yo en todo el dia no comi,
asta que viniendo tu a la noche
bien arto, me distes vnas cynco
abas, por cyerto esplendida cena
para gallo el qual en otro tiempo
fue rey y poderoso peleador.
Mycillo.—Pues entonces yo me
eché a dormir quando te di las
abas; luego me dormi e comence
a sonnar en la noche vn suenno
mas sabroso quel vyno, netar ny
anbrosia.
Gallo.—Pues antes que me
quentes el suenno ¡oh Mycyllo!
me quenta todo lo que paso en la
cena de Eberates, porque me
plazerá ny tanpoco te pesará a ti
si agora quisieres, contandome
todo lo que comiste, rumiarlo
como entre suennos.
Mycillo.—Yo pienso serte
enojoso si lo que alli pasó te
contase, mas pues tú lo deseas
saber, yo huelgo de te lo dezir
porque nunca asta agora he sido
conbidado de algun ryco, ¡o
Pitagora! e sabras que ayer rejido
con buena fortuna me topé con
Eutratas[291] y saludandole como
yo lo tenia en costunbre,
encobryame quanto podia por
verguença que no byese my capa
despedaçada, y dizeme el:
Mycyllo, oy celebro el nascimiento
de vna hija mia, he conbidado a
muchas personas para comer e
cenar; e porque me dizen que vno
de los conbidados está enfermo e
no puede venir, vente tú en su
lugar y haz de manera que por
ser festibal el conbite vayas polido
e ataviado lo mejor que pudieres
e comeras allá si acaso si aquel
faltare, porque avn lo pone en
duda. E como yo oí a Hencrates
adorele y fume (sic) rogando a
Dios todopoderoso, porque
tubiese hefeto my felicedad, diese
aquel henfermo en quyo lugar yo
habia de oqupar la silla en el
conbite algun frenesi o modorylla
o dolor de costado o gotata (sic)
de tal manera que le yziese
quedar en su casa y no fuese allá.
Pues myentras llegaba la ora de
la cena yo me fui al baño y me
labé y este tienpo se me yzo vn
siglo o vna gran edad, mas
quando fue el tienpo llegado
voyme solycy[to] lo mejor que yo
pude atabiado, puesta mi pobre
capa de la parte más linpia y que
sus agujeros menos se
parescyesen; allegando a las
puertas hallo otros muchos
onbres, entre los quales veo que
cuatro moços traen sentado en
una silla aquel enfermo en quyo
lugar yo era combidado e benia el
mismo manifestando traer gran
enfermedad, porque jemia muy
doloroso y tosia y escopia muy
asquerosamente; venia amaryllo
e ynchado; era viejo de más de
setenta años y dezian ser vn
filosofo que lee en esquelas y aze
cancyones en publyco; traya vnas
vistiduras muy yploclitas, y como
Archebio el medico le vio y qu'era
alli conbidado le dixo: señor,
mejor fuera que os quedarades
en vuestra casa estando tan
enfermo que salir agora acá; el
qual respondio: no es razon que
Daron filosofo quebrante a su
amigo la palabra avnque esté
enfermo de qualquiera
enfermedad. E dixe yo: mas veo,
sennor Tromopol, que ansi se
llamava el filosofo, que olgara
Ancrates que os muryerades en
vuestra casa y cama en el
servicyo de vuestros qryados que
no venirle a ocupar el conbyte con
hambrientos, y que si acierta aqui
a salirseos el anima, que le
paresce segun venis que no
podeys mucho durar. El filosofo,
como su yntencyon era padescer
qualquiera muerte o ynjuria por
comer de fiesta para satisfazer a
su glotonia, disimuló el donayre
que le dyxe con mucha gravedad,
y estando en esto vino a nosotros
Encrates y mirando por el filosofo
podrydo dixo: buen Temospol,
muchas gracias te doy por aver
venido con esta tu enfermedad al
conbite, puesto caso que aunque
no binieras no se te dexara de
enbiar todo el conbite por orden a
tu posada; sientate e comeras; e
como yo oi que los moços le
metian adentro para le asentar a
comer, muy triste comienzo a
maldezir su flaca enfermedad,
pues no le bastó a destruyr, y muy
amarillo de afrenta de mi
desventura, pues pense cenar
mejor, dispuseme para salir de la
sala del conbite para conplir la
condicyon con que Encrates me
abia conbidado, e comenceme a
deleznar con alguna pesadunbre,
mostrandome al vespede cada
vez que bolbia la cara a mi, y casi
con my rostro amaryllo le dezia:
voyme a mi pesar. Tambien me
enojaba más ver que en toda la
mesa no avia sylla vazia para mí,
porque estaban puestas en
derredor en numero ygual con los
conbidados; en fin como Eucrates
me bio tan triste y me yva,
alcançóme casi a la puerta y
dixome: tu, Mycyllo, buelbe acá e
cenarás con nosotros, y mandó a
vn yjo suyo que se entrase a
cenar con las mujeres y me
dexase aquel lugar. Pues como
poco antes me yva triste y
desventurado, buelbo luego muy
alegre con mi prospero suceso;
como ninguno se quiso sentar
junto al hanbriento filosofo por no
le ver toser, viendo aquella sylla
va[cia] que estava enfrente dél
fuime ally asentar de lo qual
mucho me pesó; luego començo
la cena; ¡oh Pitagoras! qué
opulento comer, qué fertylidad de
manjares, qué diversidad de
vinos, qué copiosidad de
guisados, de salsas y especya, e
quién te lo bastase a contar;
quánto vaso de oro; plateles,
copas y jarros eran todos de oro;
los pajes muy dispuestos y muy
bien atabyados; abia cantores
que nunca dexaban de cantar;
abia dibersos ynstrumentos de
musica que azian muy diversos
instrumentos de melodia y
muchos que dançavan y bailavan
muy gracyosamente; en suma
toda la fiesta pasó en mucha
curyosidad, sino que tenia yo vn
contrapeso que me tercyaba el
plazer, y era que aquel maldito
viejo de Tresuropoles el qual con
su tos y esqupir me ynchia tanto
de asco que yo no podia comer si
la anbre no me ayudara, y por
otra parte no me dexaba tener
atencyon a la musica porque me
fatigava con disputar comigo
quistiones de filosofia,
preguntandome qué sentia de
Juan de voto a Dios con que
espantan los ninnos las amas que
los qrian; afirmome con grandes
juramentos que abia sido su
conbidado y que le diera vna
blanca de aquellas cynco que
consygo suele traer, la qual dixo
que tenia en gran veneracyon y
despues quisome matar sobre
presbadirme con mucha
ynstancya que quando era de dia
no era de noche y cuando era
noche no era de dia. En estas y
en otras vanidades me molia,
hasta que llegado el fin de la
cena, que quisiera yo ver antes su
fin de aquel traidor por que el
gozo de tanto bien me estorbaba.
Ya as oido ¡oh Pitágoras! lo que
en la cena pasó.
Gallo.—Mucho me ha parescido
bien tu buena fortuna; mas no
puedo estar en mi, de enojado de
aquel malaventurado filosofo e
con quantas importunaciones
estorbaba placer tan sabroso.
NOTAS:
[291] En Luciano el nombre del rico es Eucrates. Su imitador lo
escribe con la diversidad que se verá en el texto, si ya esta
variedad de formas no es descuido del copista.
CAPITULO IV
Que pone lo que soñaba Micillo y

lo que da a entender del
sueño; cosa de gran
sentencia.
Micillo.—Pues oye agora, que

no me seria menos gracioso
contartelo. Soñaba yo quel rico
Everates era muerto y sin hijo
alguno que le heredase y que me
dejaba en su testamento como
hijo que le hubiese de heredar; y
asi yo aceté la herencia y fui allá y
comence a tomar de aquella plata
y oro aquellas ollas que se
acababan de sacar debajo de
tierra; tenia alrededor de mí tanto
de tesoro que no pensaba ser yo
el que antes solia coser zapatos;
ya cabalgaba en muy poderosos
caballos y mulas de muy ricos
jaeces y muy acompañado de
gente me iba a pasear; todos me
hacian gran veneracion; hacia
muy esplendidos convites a todos
mis amigos y deleitabame mucho
en ver aquel servicio con vasos
de oro y plata; y estando en estas
prosperidades veniste con tu voz
a mí despertar, que me fue mas
enojoso que si verdaderamente
todo lo perdiera, y deseaba soñar
veinte noches a reo sueño tan
deleitoso para mi.
Gallo.—Deja ya, mi buen Mida,
de más tabular del oro con esa tu
insaciable avaricia; ciego estás,
pues solamente pones tu
bienaventuranza en la posesion
de mucho oro y plata.
Micillo.—¡Oh mi buen Pitagoras!
paréscete que seré yo solo el que
lo suele afirmar; pues aun creo yo
que si verdad es lo que dices que
te has transformado en todos los
estados de los hombres, que
podrias decir quanto más deleite
rescebias cuando del mendigar
descapado, ó cuando poseias
grandes riquezas y andabas
vestido de oro y te preciabas de
hacer grandes prodigalidades
distribuyendo tu posicion y no es
ahora nuevo consentir en el oro
nuestra felicidad, pues abasta la
esperanza de lo haber para dar
animo al cobarde, salud al
enfermo.
CAPITULO V
Pone á quantos peligros se ponen

las personas por adquirir
riquezas y lo que dello les
sucede y si es lícito o no.
Micillo.—Dime agora quantos

son los que menos preciada su
vida y pospuesta la seguridad de
vivir se disponen a salir de sus
propias tierras donde son nacidos
y criados, y desamparados sus
padres y parientes, no estimando
el sosiego de su anima, se ponen
en el mar de las tempestades
ciertas a mal comer y mal beber,
a peligro de morir cada hora en
manos de sus enemigos, para
pasar a las Indias por adquerir las
inciertas riquezas del oro, por
gozar de la felicidad de lo poseer,
y después de pasados diez años
en las Indias o en otros
semejantes lugares a quántos
peligros se disponen por lo ganar
de aquella gente barbara y sin fe
ni sin ley, quanto animó con arte
uno solo a docientos de aquellos
solo por ver entre las piedras el
oro relucir; y aun despues de
haber pasados todos estos
peligros plugiese a Dios fuese
licita su posesion porque no sé yo
con qué color pueden ellos tomar
aquella gente el oro que poseen;
y a fin si fuesen a lo cavar de las
venas de la tierra y con su propio
trabajo y sudor lo procurasen
adquerir descubriendo las minas
donde está, aun con justo título lo
podrían tomar, no haciendo
cuenta si era nescesario de lo
tomar a su rey por estar en su
territorio y juridicion, porque no
quiero agora dudar si posean los
reinos con razon ni los extraños
se los puedan tomar; bien sé yo
que por vedar ellos que se les
predique el Evangelio de Dios les
podemos hacer guerras y todo lo
demas; en suma todo lo puede el
dinero; las peñas quebranta, los
rios pasan en seco; no hay lugar
tan alto que un asno cargado de
oro no lo suba; ¡oh, qué
bienaventuranza es el tener que
dar; qué miseria es el contino
rescebir!; las riquezas conservan
los amigos, allegan los parientes,
adquieren quien de vos diga bien;
todos le saludan, todos le llaman
al rico señor, y si pobre es, de
todos es desechado y aborrescido
de contino; quel pobre os hable,
ois pensando qué os quiere pedir;
en conclusion siempre oi decir
quel oro mandaba todas las cosas
criadas; mas dime, Gallo, porqué
te ries.
Gallo.—Riome porque tú
tambien, Micillo, estás en la
misma necedad que'stá el
inorante vulgo en la opinion que
tienen los ricos; pues creeme a
mi, que muy más trabajada y
desventurada vida pasan ellos
que vosotros, y hablo esto por
saberlo como lo sé muy bien
porque yo soy inspirimentado en
todas las vidas de los hombres;
en un tiempo fui rico y en otro
pobre como ago agora; si esperas
lo oirás.
Micillo.—Pues, por Dios, que es
razon que tú nos cuentes como
fueste transformado y qué has
pasado en cualquier estado de tu
vida.
Gallo.—Pues oyeme y ten por
prosupuesto que en toda mi vida
nunca yo vi estado de hombre
mas bienaventurado quel tuyo.
Micillo.—Yo te ruego que me
enseñes mi bienaventuranza y
cuenta desde qué fueste nascido
hasta ahora que eres gallo y
como fueste en cada uno
transformado y qué te acaesció
en cada una de tus
transformaciones, porque
necesariamente paresce que han
de ser cosas diversas y notabres.
CAPITULO VI
Como cuenta que fue Euforbio y

da a entender a su amo quél
habia sido hormiga.
Gallo.—No es necesidad que te

diga agora cómo Apolo trujo mi
ánima á la tierra y la invistio de
cuerpo humano porque seria muy
prolijo al contar, ni debes tú saber
mas de que al prencipio vine á ser
Euforbio y vine á defender los
muros de Troya contra los
griegos.
Micillo.—Dime ¡oh preclaro
varon Pitagoras! qué fuí yo antes
que fuese Micillo y si hubo en mi
la misma conversion?
Gallo.—Sabras que tú fueste
una hormiga de las Indias de las
que cavan oro para comer.
Micillo.—¡Oh, desdichado de mi!
¿por qué no traje yo acá un poco
de lo que me sobraba allá, para

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Smith and Roberson’s Business Law

17th Edition Richard A. Mann

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Preface xiv PART 3

Preface xiv Alternative Dispute Resolution 53

1 Introduction to Law 2 4 Constitutional Law 67

7 Intentional Torts 126 Acceptance of Offer 195

15 Contracts in Writing 284 Questions 361

Questions 434 PART 5

Electronic Fund Transfer 604 Continuation After Dissolution 655

Federal Trade Commission Act 891 Chapter Summary 1007

Abrams v. United States, 73 Bouton v. Byers, 183

Coopers & Lybrand v. Fox, 713 Fletcher v. Rylands, 166

Jones v. Brown, 10 Midwest Hatchery v. Doorenbos Poultry, 519

Raytheon Co. v. Hernandez, 934, 935 Telex Corp. v. IBM, 887

1-1 Law and Morals 4 7-1 Intent 128

27-1 Bearer Paper 547 36-1 Fundamental Changes under Pre-1999

CH 2 BUSINESS ETHICS AND THE CH 6 CRIMINAL LAW

CH 3 CIVIL DISPUTE RESOLUTION CH 8 NEGLIGENCE AND STRICT

FIGURE 1-1 Law and Morals

FIGURE 1-2 Classification of Law

FIGURE 1-3 Comparison of Civil and Criminal Law

Purpose Compensation Punishment

Burden of Proof Preponderance of the evidence Beyond a reasonable doubt

Principal Sanctions Monetary damages Capital punishment

FIGURE 1-4 Hierarchy of Law

CLASSIFICATION OF LAW Substantive and Procedural Law

Rickhoff, J. Sabrina to become intoxicated. The Texas Alcoholic Beverage

Business Ethics and the Social

2-3a CHOOSING AN ETHICAL SYSTEM 2-3b CORPORATIONS AS MORAL AGENTS

FIGURE 2-1 Kohlberg’s Stages of Moral Development

Conventional (Adolescent) Group Group norms

Postconventional (Adult) Universal Moral principles

Como el Gallo da a entender a su

Pues oyeme, Micyllo, que tú oyras

Que quenta Mycyllo lo que le

Mycillo.—Yo te [lo de]seo contar

Que pone lo que soñaba Micillo y

Micillo.—Pues oye agora, que

Pone á quantos peligros se ponen

Micillo.—Dime agora quantos

Como cuenta que fue Euforbio y

Gallo.—No es necesidad que te

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