Chapter 1: Introducing the Modern Environment of Business, Law

“Check Your Answer” to the End-of-Chapter Case Questions

Chapter 1: Today’s Business Environment: Law and Ethics

Answers to Select Case Questions

2. The general rule that exists now is that since the government has ordered the posting of warning labels on cigarettes, and since the dangers of smoking are well known, consumers have been warned and are not due compensation if they kill themselves by smoking. The Cippoline case, since reviewed by the Supreme Court, appears to be of limited impact since the victim was adjudged to have become addicted to cigarettes before the warning label was ordered in 1964. If cigarette makers were held responsible for all health problems associated with cigarettes, then, like alcohol and other dangerous products, the damages would likely be so high it would effectively ban the products. Presumably, in a free society if adults are clearly informed of the risks of products that cannot be made safe, they accept the risk. Tobacco and alcohol producers cannot take the dangers out of the products except at the margin by encouraging responsible drinking and the like. Are drugs like cocaine different?

4. The Court held it a form of sex discrimination to prevent women of child-bearing age from holding the more dangerous jobs. The company argued that it did this to protect itself from possible liability in case of damage to babies and that the decision was ethical. The replacements for these workers were often men or more senior women, who tended to be higher income workers, so this was not a current cost-saving move. Note that a later ruling related to the ADA restricted the results of this case.

Chapter 2: The Court Systems


2. The traditional rule-apply the law where the injury occurred-would call for the application of Missouri law. Here, the court, like many jurisdictions, rejected the traditional rule and adopted the significant interests test. "The rights and liabilities of the parties with respect to an issue in tort are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the occurrence and the parties under the principles stated in [the Restatement (2d)]."

"South Dakota has all of the important contacts. First, the principal conduct which allegedly caused the injury was the distribution of the candy in the bus on the first leg of the trip. Missouri had no contact with that conduct. Even if Missouri could claim some limited contact with Dakota Charter's alleged failure to maintain a safe premises after the candy was distributed, Missouri's contact was relatively unimportant to the issue of comparative negligence because comparative negligence law is not a rule of the road nor does it regulate the conduct of bus companies using

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Missouri's highways. ...Second, South Dakota was the domicile, residence, place of incorporation and place of business of the parties, as well as the place where the relationship of the parties was centered. These contacts are important to the issue of comparative negligence because the economic impact of the law applied will be felt where the parties reside."

Applying the tests from the Restatement:

a. the needs of the interstate and international systems,"First, neither Missouri nor South Dakota's laws significantly affect the needs of interstate systems because neither interstate relations nor automobile movement would be influenced by either law."

b. the relevant policies of the forum, "This state's policy has been clearly expressed by the legislature in our comparative negligence statute."

c. the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, "Although Missouri also has a comparative negligence policy, South Dakota has the only significant interest in a determination of the comparative negligence issue because all of the contacts are in South Dakota, and Missouri's policy would not be furthered by its application to South Dakota domiciliaries who have no important contact with Missouri. Where the forums interests are the "most deeply affected" under these factors, it is generally fitting that forum's law should be applied."

d. the protection of justified expectations,"The protection of justified expectancy, although important in consensual relationships, has no importance in this negligence action. Generally, people do not consider the legal consequences of their conduct or how law may be applied prior to becoming involved in an accident."

e. the basic policies underlying the particular field of law,"The policy of ameliorating the harsh consequences of common law contributory negligence rules is furthered by both states' comparative negligence laws. Although Chambers argue that Missouri's policy is better, that contention is debatable. Furthermore, even if Missouri's policy could be considered 'better,' conflicts analysis should not be used to apply the law of a state that has no interest in having its rule applied. The proper solution in such cases is to change the forum's inferior law."

f. certainty, predictability and uniformity of result,"Little significance can be attached to the ease of determining and applying comparative negligence law or to the certainty, predictability and uniformity of result. Both states' laws are easy to determine and apply. Furthermore, because the differences in the law are so minor, there will be few differences in result."

g. ease in the determination and application of the law to be applied. "Both states' laws are easy to determine and apply. Furthermore, because the differences in the law are so minor, there will be few differences in result."

4. Vacated and remanded. The district court lacked jurisdiction, so the judgment is void. Parrot Bay, a foreign corporation, is not responsible for the actions of the fishing boat operator, another


foreign entity. The relationship between Parrot Bay and the fishing boat operator did not arise out of, or relate to, Parrot Bay’s contacts with the United States. It was not foreseeable by Parrot Bay that Oldfield might suffer an injury on a boat that it did not own or operate while he stayed at Parrot Bay as a result of his having visited the resort’s website and made a reservation for a room there. Therefore Parrot Bay cannot be subject to U.S. court jurisdiction in this matter. Oldfield can pursue his claim against the fishing boat operator in court in Costa Rica.

6. There was a sufficient basis for specific jurisdiction. This exists when: 1) the non-resident defendant purposefully availed himself of the privilege of conducting activities in the forum by some affirmative act or conduct; 2) plaintiff’s claim just arise out of or result from defendant’s forum-related activities; and 3) the exercise of jurisdiction must be reasonable. Williams and Ritzman purposely availed themselves of the privilege of conducting activities in California as required to establish specific jurisdiction in California for medical malpractice proceedings. They knew that Jones would have felt benefit or harm in California from their therapy. Hence, defendants will have to defend themselves in California from the claims made by Jones.

Chapter 3: The Trial Process


1. Affirmed. An appellate court may direct the entry of judgment as a matter of law when it determines that the evidence was erroneously admitted at trial and that the remaining evidence, properly admitted, is insufficient to continue a submissible case. The court rejected the argument that the plaintiffs would have provided a stronger case had they known that their key expert testimony would be dismissed. It is not sensible to argue that a part will present less than their best evidence at trial in the expectation of another trial.

2. Reversed and remanded. Trial courts have wide judicial discretion in partition actions to use equity to make a fair and just division of property among the parties. Great flexibility may be used in such cases. However, the equitable powers do not include requiring a party to buy out the other party’s share of jointly owned property. Curtis could not be required by the court to buy the estate’s share of the equipment, although it could review the value of the equipment, the value of its use, and the appropriateness of the costs incurred in maintaining the equipment. If the parties cannot agree on how to deal with the division of the machinery, the court can order them to be sold.

4. The NLRB was correct. Public policy encourages mediation of labor disagreements. The mediation process must be in confidence and not subject to re-litigation; what goes on in mediation is in confidence. Once the mediation process is entered, there is no obligation to finish but there is an obligation to uphold the integrity of the process.

6. The bank requested the court do dismiss Paranzino’s case. The court found that she “willfully and deliberately disregarded the confidentiality agreement by exposing confidential information,


namely the settlement offer, to the media.” The case was dismissed with prejudice and that decision was upheld on appeal. So she got nothing except attorney fees.

Chapter 4: The Constitution: Focus on Application to Business


3. The tax was upheld. Referring to that case in a later (1922) decision, the court said "the discretion of Congress in the exercise of its constitutional powers to levy excise taxes could not be controlled or limited by the courts because the latter might deem the incidence of the tax oppressive or even destructive." That is, Congress could punish margarine for the purpose of helping the dairy industry and could punish margarine in a discriminatory way by charging different tax rates for different forms of margarine, in this case yellow versus white. Note: White margarine was then sold with yellow coloring packets so consumers could whip the color into the white margarine so it looked more appetizing.

5. The tax (actually called a milk pricing order) was unconstitutional. The law was designed to benefit local producers of milk by creating a tariff-like barrier that was imposed on out-of-state competitors. Although the Massachusetts dairies also paid the tax, they got their money, and more, back. If Massachusetts wants to tax its citizens to subsidize its dairies, that may be allowed, but it cannot finance such a scheme by taxing out-of-state competitors to pay the bill. The argument that only Massachusetts consumers are injured by this pricing scheme is not valid because the milk market is interstate. The argument that the scheme was needed to protect Massachusetts' dairy industry from possibly going out of business is irrelevant. They cannot be protected from "the rigors of interstate competition." (Note that it probably would be legal just to have the state set high internal milk prices, as some states do, which happens to also benefit local dairies. The effect of the scheme is "neutral" in that anyone can offer milk at the listed price.)

7. The Supreme Court struck down the city's discriminatory treatment of publications. There must be a "reasonable fit" between its interests in safety and esthetics and the means used to serve those interests. Since the newsracks ordered removed were only about three percent of all on the streets, their removal would have little impact overall on the problems supposedly caused by newsracks. The city cannot claim that regular newspapers get differential treatment because they are engaged in noncommercial speech while the free circulars are purely commercial; both forms of publications have commercial interests and the free circulars have non-commercial information in them of interest to some people, so there is no reason to treat them differently. Any regulation must be neutral with respect to all types of publications. The court keeps moving closer to the notion that commercial and non-commercial speech should be subject to similar standards.

9. The Court of Appeals affirmed a contempt ruling against Wild and ordered him to produce the records of his company. A corporation does not have Fifth Amendment protection against self-incrimination, even though the incrimination will apply to a person. The Braswell case mentioned in the chapter is a Supreme Court ruling on this point.


10. The U.S. Supreme Court reversed the West Virginia Supreme Court of Appeals (where the vote was 3-2 in favor of the coal company). The Court held that it violated due process for the judge who received such a large contribution from a party to participate in the case. The Court held that the Due Process Clause requires recusal when a judge has a direct, personal, substantial, pecuniary interest in a case.

Chapter 5: Criminal Law and Business


2. Reversed. In a case of first impression on this subject, the appeals court held that legal impossibility is not a defense to the charge of conspiracy and attempt to steal trade secrets, rather than a charge of actual theft of trade secrets, under the EEA. So long as the defendants believed they were going to steal trade secrets, it does not have to be proven that there were actually trade secrets at stake. Defense may see documents only after trial court has conducted an in camera review so that confidential information is protected.

3. Affirmed in part, reversed in part. Jolivet’s mail fraud and conspiracy convictions stand. The mails were used to send fraudulent documents that she prepared and signed. She received insurance proceeds. Her participation in the conspiracy was knowing. However, the money laundering conviction is reversed. Her act of depositing into her bank account the proceeds obtained from the insurance fraud was insufficient to prove that she intended to use the proceeds to carry on unlawful activities, which is required to support a conviction for money laundering. The money in her checking account was used to pay for ordinary living expenses. There was no evidence that the illegally obtained funds were used to further other criminal activity.

5. Affirmed. Under Wyoming law (as in general), a person alleging an illegal search must show a legitimate expectation of privacy in the searched property. In considering whether a person has an expectation of privacy, the court considers: 1) the precautions that the person took to maintain privacy, 2) the likely intent of the drafters of the Wyoming Constitution, 3) the property rights the person possessed in the invaded area, and 4) the legitimacy of the person’s possession of the property subject to search or seizure. Barekman has no reasonable expectation of privacy with respect to his trash, as he put bags out on the street for collection by a third party.

9. Yes, Corner is correct. The 7th Circuit noted that recent Supreme Court decisions have stated the Sentencing Guidelines are advisory and that judges may vary from their recommendations as long as they respect all statutory requirements. Since the sentence is particularly harsh (those convicted of crack cocaine possession are treated much more harshly than those convicted of possession of powder cocaine (some allege because crack is more commonly used by blacks and powder by whites), the trial judge is welcome to deviate from the Guidelines.


Chapter 6: Elements of Torts


2. No. "False imprisonment is the intentional restraint or detention of another without just cause." Plaintiff voluntarily went to her manager's office. No force was ever used. She did not attempt to leave although she did not like being there. There was no reason to think force would be used here. Employers have the right to discuss personnel matters with employees. The fact that she was afraid she would be fired or arrested if she left did not make this false imprisonment.

4. The Supreme Court of Nevada upheld a jury award of punitive damages, even though there were no compensatory damages, for the torts of assault, battery, and intentional infliction of emotional distress. It did not find there to be false imprisonment. The jury found that the casino's "employees acted maliciously or oppressively."

6. The Florida high court held: "The tort of "invasion of privacy" includes (1) appropriation-the unauthorized use of a person's name or likeness to obtain some benefit; (2) intrusion-physically or electronically intruding into one's private quarters; (3) public disclosure of private facts-the dissemination of truthful private information which a reasonable person would find objectionable; and (4) false light in the public eye-publication of facts which place a person in a false light even though the facts themselves may not be defamatory. … Invasion of privacy' by intrusion, i.e., physically or electronically intruding into one's private quarters, is not broad enough to include unwelcome conduct including touching in a sexual manner and sexually offensive comments."

8. Yes, the Washington State Supreme Court said (answering a question from the 9th Circuit). The Supreme Court held that damages for emotional distress were recoverable under the Washington Product Liability Act if distress was reasonable and manifested by objective symptomatology.

Chapter 7: Business Torts and Product Liability


2. It is not likely the defense would be valid as the danger was to the final consumers, not to workers in the manufacturing plant where the popcorn was made. Bulk-supplier defense does not let suppliers off the hook if their product poses a danger that they would have the most knowledge about. The risk from a flavoring should be better known to the maker than to the companies that use the flavoring. It is possible both parties could be liable.

4. The court upheld a restraining order against Azar from contacting Lehigh customers, directly or indirectly. This was the tort of interference with an advantageous business relationship. This tort need not be based upon invasion of a relationship based on an enforceable contract that is


subject to breach; nor is proof of fraud required. This case did not involve legitimate vigorous competition, but malicious interference with a favorable business relationship.

6. In several cases in different states, handgun producers have been held liable for injuries suffered by victims of crimes in which handguns were used. The producer was liable for selling a product they knew is often used in committing crimes, so negligence has been found. These cases are not common. The handgun retailer is usually not liable, unless they did not follow proper procedures, such as selling a gun to an underage person or otherwise violating federal or state law in a sale. Most court rule the other way. In a 1995 case, First Commercial Trust v. Locrin Engineering, the supreme court of Arkansas held there was no common law liability for manufacturers when firearms are used in murders and other crimes.

8. The lighter was not unreasonably dangerous under the Illinois consumer contemplation test, which is viewed from the vantage of an ordinary consumer. The lighter is obviously dangerous, but not unreasonably dangerous; so the risk-utility test does not apply. The warning on the lighter "KEEP OUT OF REACH OF CHILDREN" is sufficient. No liability.

Chapter 8: Real and Personal Property


3. Damage to the value of plaintiffs’ property by road construction does not support an action for inverse condemnation. There was no taking subject to compensation. Inverse condemnation occurs when the government has taken private property for public use without formal condemnation proceedings by the governmental taker. There was no taking in this instance.

5. To state a cause of action for breach of an implied warranty of habitability, a tenant must show: 1) entry into a lease for residential property; 2) the subsequent development of dangerous or unsanitary conditions on the premises materially affecting the life, health, and safety of the tenant; 3) reasonable notice of the defects to the landlord; and 4) subsequent failure to restore the premises to habitability. The wiring problem was not trivial and was not repaired in a timely manner to allow occupancy by the beginning of the lease. The landlord was aware of the defect before the house was ever rented.

7. This was a tort of conversion by denying Rouse the use of his car that he had the right to use. To hide something and then return it is conversion. The car was converted, the keys were part of the car. Added to that was the tort of false imprisonment. Rouse was prevented from leaving of his free will as he had the right to do. He was "trapped" waiting for his keys, which were taken to detain him in the hope that he might buy a new car. The judgment was upheld.

9. The Oregon high court upheld a jury award of $7,818 in compensatory damages for lost revenues from the suspension of operations and $50,000 in punitive damages. The cause of action was trespass to personal property. The owners of the property were deprived of the use of their property for a period of time. The trespass was not excused as free speech.


Chapter 9: Intellectual Property


3. The district court dismissed the case but the appeals court reversed and remanded. Factors to be considered in determining whether a likelihood of confusion exists between trademarks include: 1) similarity of marks; 2) similarity of goods or services; 3) relationship between parties’ channels of trade; 4) relationship between parties’ advertising; 5) classes of prospective purchasers; 6) evidence of actual confusion; 7) defendant’s intent in adopting the mark; and 8) strength of plaintiff’s mark. There is an issue of material fact as to whether consumers were likely to be confused by the similarity between the marks here; that precludes summary judgment in the case. Even if Beacon could not show that it lost sales, if it could show that there was confusion among selling agents and likely buyers, it has raised the possibility of damage to its goodwill and business reputation. Those factors are protected by the Lanham Act.

5. Defendant’s motion for summary judgment granted. The treatment of ideas for a television show is not protectable under copyright law. Copyright law does not protect ideas, but the expression of those ideas. Elements of expression that are not protectable include general plots and ideas for scenes that flow naturally from unprotected basic plot idea. Those are common property. Specific details of the ideas for actual programs, such as dialogue, themes, setting, characters, and such would be protected. Milano’s idea of people competing to lose weight for prizes is not subject to copyright protection.

7. No. "...the executives at Hormel as not amused. They worry that sales of SPAM will drop off it is linked with 'evil in porcine form.' Spa'am, however, is not the boarish Beelzebub that Hormel seems to fear. ... Spa'am is a comic character who 'seems childish rather than evil.' ... By film's end, 'Spa'am is shown sailing away with other Muppets as good humor and camaraderie reign.' Hormel also expresses concern that even comic association with an unclean 'grotesque' boar will call into question the purity and high quality of its meat product. But the district court found no evidence that Spa'am was unhygienic. At worst, he might be described as 'untidy.' Moreover, by now Hormel should be inured to any such ridicule. Although SPAM is in fact made from pork shoulder and ham meat, and the name itself supposedly is a portmanteau word for spiced ham, countless jokes have played off the public's unfounded suspicion that SPAM is a product of less than savory ingredients." The use of the character Spa'am is unlikely to create any confusion with the product SPAM, nor will the value of SPAM be injured by blurring of distinction or by tarnishment of reputation. There is no deception involved. Further, the merchandising of Muppet Treasure Island merchandise that will carry the likeness of Spa'am will not be confused in the marketing of SPAM itself.

8. The Supreme Court held that color alone may serve as a trademark. Qualitex could register its green-gold color of press pads as a trademark that could then be protected from infringement. The color has attained "secondary meaning" which means it alone identified and distinguishes the brand of the press pads, and hence, indicates the source of the product. Color is not a functional feature. Trademark law is not to be used to inhibit legitimate competition by allowing


firms to control useful features by trademark; rather, trademarks are to promote competition by protecting a firms reputation by protecting non-functional aspects of the good or service that have gained recognition in the marketplace.

Chapter 10: Contracts


1. There was no contract. The deposit check for $25,000 was not payment for an option, it was just a check that Polk could keep if he wished to accept the offer from Avon, but there was no consideration to create an option contract. There was no contract at all because Avon had responded to Polk with a counteroffer that Polk refused. When Avon then went back to the previous offer from Polk, a new offer was created that Polk could refuse. Even though the terms were the same as an offer from Polk, once that offer was refused by making a counteroffer, that offer was gone for good. Polk could accept or reject the offer from Avon. When he rejected it, that was the end of that.

2. Anglin wins. Barry claimed “there was no meeting of the minds as to the rate of compensation for Anglin’s work because the purchase order only described Anglin’s rates as ‘mutually agreed upon.’ Anglin counters that there was an oral agreement with Barry that the rates were the prevailing ‘street rates’ of $45.00 per hour ... depending on the type of employee performing the service.” In such cases, “the court looks to the intention of the parties as expressed or manifested in their words or acts. The evidence does not support Barry’s contention that Anglin’s rates were too indefinite to enforce.” One of Barry’s employees testified that he was involved in the discussions and that he understood the rates that would be charged. Furthermore, Barry accepted and paid the first five invoices submitted. “The contract between Barry and Anglin was enforceable because the rate of compensation was definite. Evidence of the oral agreement and of Barry’s conduct was sufficient to establish the existence of the contract to pay Anglin’s rates.”

3. There was no lease contract. The tenant made an offer, consistent with oral discussions, but the offer was not accepted in writing. Since it was a contract for real estate over two years, under the statute of frauds, the contract had to be in writing. "The tenant's mere offer to relet the premises for a two-year period at the rate of $1,800 per month certainly shows no contract to lease the premises for a two-year period. The tenant's offer was made contingent upon the lessor's written acceptance thereof and, in the absence of such acceptance, there could be no contract. ...for the lessor to rely upon the tenant's part performance of an alleged two-year lease as obviating compliance with the statute of frauds, the lessor must first show the existence of a contract to rent the premises for a two-year period. ...it is immaterial that there is no evidence that the lessor rejected the tenant's offer. What is material is that there is no evidence that the lessor did accept the tenant's offer by sending a confirmation letter."

5. Minors ordinarily cannot be held to contracts such as this one for the purchase of a car. A minor does not have the contractual capacity to execute such a contract, so it can be disaffirmed and the parties returned to their original state. The car dealer could only expect to enforce the


contract if the minor had a parent or guarding also sign the contract so that it could be enforced against the adult. The purchase of the car is not a necessity of life that can be enforced against the parents without their consent, so the contract can be disaffirmed, and the car and the money returned to the rightful owners (less the drop in the value of the car due to its use).

Chapter 11: Domestic and International Sales


3. Marquette was not in good faith; Norcem was correct and could refuse to buy. "The contract between the parties specifically states that the parties were to negotiate the sale price of certain shipments of cement. Because every contract imposes an obligation of good faith in its performance (see, UCC 1-203), plaintiff's refusal to consider any payment other than the maximum amount permitted by the contract invests some merit in the defense that plaintiff refused to negotiate in good faith." The parties intended the price term be left open, so there was a contract, but Marquette had to negotiate it in good faith and could not force the highest price.

5. Besides the statements in the ad, Dresser's contract stated assorted technical information relevant to storm strength. Dresser's contract also stated that there was an express warranty, in lieu of any other warranty, giving a six month warranty that the tower was free from defects. Dresser claimed this specific term eliminated liability for failure otherwise. "Although we agree with Dresser that a seller cannot be held to be the insurer of its product, Dresser nevertheless provided the catalog to Community to induce purchase of its product, and in the absence of clear affirmative proof to the contrary, the above affirmation must be considered part of the 'basis of the bargain.' [UCC 2-313] Standing alone, the statements provide a warranty that Dresser's tower would be properly designed so as to safely withstand the maximum wind velocities and ice loads to which it would likely be subjected. Dresser did not indicate that this broad affirmation was superseded or canceled by the technical specifications in the contract.... When the affirmation is read in tandem with the contract, as part of the 'fabric' of the agreement of the parties (See Comment 3 to 2-313) it enlarges the warranty created by the technical wind loading specification, giving evidence of its full intent and scope." Furthermore, since the tower had a 25 year life, a six month warranty is unreasonable. UCC 1-204 allows the courts to determine reasonable time under the circumstances; six months is not reasonable. Furthermore, the express warranty was not relevant because no one claimed there was a problem with workmanship in original construction; the point was that the tower did not meet the terms Dresser claimed it could in its advertisements and technical specifications read together. Damages for $1.275 million.

6. Affirmed. "Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is ... an implied warranty that the goods shall be fit for such purpose." Leavitt established that he had detailed conversations with the dealer about his concerns about engine power and braking and was specifically assured that the vehicle would do the job needed. The court properly concluded that "the measure of damages was the


difference between the value of the coach as warranted and the value of the coach at the time that plaintiff reasonably should have concluded that defendant would be unable to repair the coach." Further, Leavitt may recover attorney fees under the Magnuson-Moss Warranty Act because, under Michigan law, such fees may be considered consequential damages that are also covered.

Chapter 12: Business Organizations


2. Covalt and High were still both shareholders of CSI and partners in the building they rented to CSI. Hence, even though Covalt was working for a competitor, he had a fiduciary duty both the CSI and the partnership. When there is a dispute between two equal partners, neither has the power to force a change; that is, in case of disagreement, the status quo has preference over the actions preferred by the partner who wants change. High had a duty to CSI and the partnership; he believed the lower rent was justified, he had the right to keep it at the same price; Covalt could not force him to raise it. Further, a rent increase would hurt CSI, which both parties had an interest to protect also. In this case, there can be no damages, but since the partners cannot agree on an important feature of the partnership—the rent of the building—they should dissolve the partnership. Either party can force that to happen.

4. The partners were under a fiduciary duty of full disclosure to all partners involved in the business venture: "Appellants owed a fiduciary duty to plaintiff as the widow and executrix of their deceased partner in purchasing from her their deceased partner's interest in the partnership. Throughout the transaction they were bound to act toward her "in the highest good faith" and they were forbidden to obtain any advantage over her in the matter by, among other things, the slightest concealment."

6. No, piercing the corporate shield was not warranted; Haff was due protection from personal liability. To win the case, plaintiff must show that Haff misrepresented or concealed material facts; there was no evidence of that. Cosgrove never asked for credit references and, over a ten year period, did not seem concerned about the legal form of the company. Haff maintained the company as a separate entity, following state rules for corporations and federal tax rules. There was no co-mingling of personal and corporate funds.

Chapter 13: Negotiable Instruments, Credit, and Bankruptcy


1. Judgment for defendant. "As opposed to instruments such as ordinary checks, which are typically made payable to the order of a specific person and are therefore knows as 'order paper,' bearer paper is payable to the 'bearer,' i.e., whoever walks in carrying (or 'bearing') the instrument." As UCC § 3-111 states, "an instrument is payable to bearer when by its terms it is


payable to ... 'cash.'" Since the voucher is labeled "Cash Voucher" and says "Bet Against the Value or Exchange for Cash," the voucher is bearer paper. The defendant is the holder in due course of the voucher, and is "deemed to have taken it free from all defenses that could be raised by the plaintiff under UCC § 3-302. To hold otherwise would require extensive verification procedures to be under taken by all transferees of bearer paper, which would impede negotiability, which is the essence of bearer paper.

3. No. The surety bond, in statute and in form, specifically states that it covers retail sales, that is, final sales to customers. Elworth bought the motorcycles at wholesale and intended to resell them at retail at his Harley dealership. The bond does not apply to wholesale buyers who were cheated.

5. No, Moody was a co-maker of the notes, he was not a surety, and so he could not claim the status of a surety. He was fully liable to the other makers who covered his share of the payments due to the lender. His obligation was to the lender; any fight he has with the other makers of the notes is between them, it is not the problem of the lender, who is owed what was promised by all of the makers of the notes. "Primary obligors, with present and future interest in a loan, cannot defeat their obligations by raising surety/accommodation maker status."

8. No, the Wisconsin lien for wages is void. The bankruptcy trustee controls the bankrupt estate under the federal bankruptcy code and will pay the debts under its terms. The state cannot get around the federal requirements. A lien imposed after bankruptcy is filed is irrelevant.

Chapter 14: Agency and the Employment Relationship


2. Hubco was a dealer for MAI, but their relationship was contractual, not agency. Agency "does not mean that an agency relationship exists every time one party has a contractual right to control some aspect of another party's business." The "dealership agreement gave MAI some degree of control over the manner in which Hubco handled MAI products." These controls concerned display of equipment, payments, credit standards, and reporting. "Only when a manufacturer controls the day to day or operative details of the dealer's business is an agency potentially created." But MAI did not control Hubco's daily business activities, including how it dealt with its customers. MAI sold equipment to Hubco; title passed; Hubco was not selling as a sales agent for MAI; it resold at whatever price it wished to charge. Their relationship was as seller and buyer. Further, there was no evidence that MAI ever made any representations to Hunter that it relied upon in this matter.

4. Guardsmark is not liable. There was nothing in Kadah's background or job record to indicate any problem. It was not responsible for supervising his every move while he was on duty, so if he was found guilty, that did not impute responsibility to his employer. The payment of his legal fees by Guardsmark did not imply ratification of his actions by indicating that the company would assist in his defense. Under California law, Guardsmark would be liable to Kadah if he


had to pay to defend himself and he was found not liable, since he incurred the costs as a result of activities that occurred while he was on the job. It was in the company's interest to ensure that Kadah had competent counsel.

6. The appeals court held it was for the jury to decide if National was liable in tort on the theory of vicarious liability. "A master is liable for the negligence of his servant if at the time of the negligent act the latter is acting within the scope of his employment, and this liability applies even in instances where the servant, while disobeying his master's orders injures a third party. On the other hand, an act committed by the servant solely for this own purposes is outside the scope of employment for 'unless an assault, or other tort, is actuated in part at least by a purpose to serve a principal, the principal is not liable.'" The jury could find that Picard was acting in his employer's interest by having the dog with him, as most people would see that as a reasonable part of guard service. Attempting to show Meyers the dog could also be found to be attempting to further the employer's interest, even though these acts were in violation of company policy.

Chapter 15: Employment and Labor Regulations


2. Certified question answered by the Virginia Supreme Court. The public policy exception to the employment-at-will doctrine does not apply to a common law wrongful termination claim by an employee who alleged that she was terminated, in violation of public policy, for refusing to drop a criminal assault charge against her manager. The state statute that concerns obstruction of justice does not grant a person involved in criminal prosecution any specific right. The statute has to do with protecting the public from flaws in the legal system itself, it does not serve to protect individuals against intimidation. Note that this is one area of law in which the supreme court of another state may have answered this the opposite way.

4. Yes they could sue for intentional tort. Workers compensation makes employers immune from tort suits by employees, in Washington (as in most states) except in case of a "deliberate injury." Since the employees contended that there was knowing exposure to toxic chemicals for several years, they could have a claim for deliberate injury that would allow tort suit. "Employers who engage in such egregious conduct should not burden and compromise the industrial insurance risk pool." That is, they are on their own for any damages done in such instances. "Deliberate intention to produce the injury," usually means a physical assault. There must be more than negligence or even gross negligence. Here, Boeing knew of the problem and knew it would make more workers ill; this was not negligence, it was "willful disregard of actual knowledge by [Boeing] of continuing injuries to employees.... If the injury is substantially certain to occur as a consequence of actions the employer intended, the employer is deemed to have intended the injuries as well." Like other states, this is an accepted basis for intentional tort, a rule so adopted in Washington in this case.

7. The fictional film in question, “And Women Must Weep” showed alleged risks of unionization. The court noted the film was high quality, professional anti-union propaganda


supposedly based on true stories. Managers told the workers that what happened in the film could happen at their company if they unionized. It showed violence and the company eventually being shut down by a strike. The Court upheld the right of the employers to show the film. “The film is a one-sided brief against unionism, devoid of rational content perhaps, but nonetheless not reasonably to be construed as threatening retaliation or force.... The film, in short, may be characterized as an expose of what happens to union members when dominated by ruthless and unthinking union officials.” The film did not cross the line of making threats of retaliation, nor did management claim that the current union leaders involved at the plant were corrupt.

Chapter 16: Employment Discrimination


1. White persons can sue under Title VII, so the fact that he is not a minority is not relevant to his right to bring an action for employment discrimination based on race. When someone is discriminated against because of an interracial marriage, it is race-based discrimination. He was denied a job because of racial consideration.

3. Reversed. Per curiam. "No reasonable person could have believed that the single incident recounted above violated Title VII's standard." This was an isolated incident that could not be considered "extremely serious" as would be needed to justify such a suit. Breeden even admitted that the incident "did not bother or upset her." Her claim of retaliation also fails because her employer was already contemplating her transfer prior to her filing the EEOC complaint. There is not sufficient evidence to believe that the employer's action was retaliation.

5. Reversed. Per curiam. "No reasonable person could have believed that the single incident recounted above violated Title VII's standard." This was an isolated incident that could not be considered "extremely serious" as would be needed to justify such a suit. Breeden even admitted that the incident "did not bother or upset her." Her claim of retaliation also fails because her employer was already contemplating her transfer prior to her filing the EEOC complaint. There is not sufficient evidence to believe that the employer's action was retaliation.

7. The school board loses. Title VII expressly protects seniority; that statutory right could not be bargained away by the union in favor of more junior minority teachers. To adopt such a plan because of a general assertion that minority teachers are needed role models is an inadequate justification. Discrimination based on seniority status might be allowed in limited circumstances (compelling governmental interest) with strong justification (narrowly tailored to the achievement of a goal), but not in this situation.


Chapter 17: The Regulatory Process


2. The FDA did not have to review the drugs. The Court held there is a presumption of unreviewability of decisions of agencies not to undertake enforcement actions. Like other law enforcement agencies, regulators have substantial discretion to decide what actions to bring. Unless a statute specifies otherwise, the presumption is in favor of the agency's enforcement decision or non-decision.

4. The court held the rule to not be consistent with the statute. While courts give deference to an agency’s interpretation of a statute, when an agency clearly goes too far or not far enough, a rule is stricken. The statute says drivers should know if “a tire” is low on air, not if only one tire is low on air. Therefore, the rule must require air pressure sensors on every tire.

Chapter 18: Securities Regulation


1. The Court said that just because the shares sold in this housing cooperative were called "stock," the law looks to the reality of the situation, not the word that is used in a non_legal manner. There was no evidence of an intent in this case to mislead anyone into believing that they were purchasing a share of an investment. There were no characteristics of investment stock. Essentially there was simply a deposit being placed on the right to occupy an apartment when a building was finished.

3. In this case, the accounting firm Ernst & Ernst had audited the books of a Chicago investment firm for twenty years. Those audits were prepared for filing with the SEC under the annual report required of investment housing. The accountants never discovered that the president of the firm was running a fraudulent securities scheme. That is, the accountants were always given false sets of books that balanced quite well. No other person was aware of the scam that was going on. When the president of the investment house committed suicide, the fraud was discovered. Investors who had lost money in the fraud sued the accounting firm for securities fraud under Rule 10b-5.

5. District court granted summary judgment for the insiders, which was reversed on appeal. The appeals court noted that economic forecasts and predictions may for the basis of securities fraud action, even when such statements are couched in cautionary language. Given the inconclusive drilling results the executives were given, it is not clear that their statements about the expected size of the find were justified, or that they should not have been accompanied by clarification about the nature of the tests and the reasons why they might not be reliable. (There was also a sufficient basis for a cause of action for fraud under Texas law.)


7. Affirmed. The case is subject to the Private Securities Litigation Reform Act (PSLRA) which was designed "to curb abuse in private securities lawsuits." The Act mandates a more stringent pleading standard for securities fraud actions, especially for scienter requirements. Other courts agree that "plaintiffs can adequately plead scienter by setting forth facts raising a 'strong inference' of intentional or reckless misconduct." Plaintiffs have failed to show such recklessness on the part of Fleming or its executives. Recklessness is conduct that is an extreme departure form the standards of ordinary care that present a danger of misleading buyers or sellers that were so obvious that the party could not have been unaware of it. Here there is an allegation of fraud by hindsight. The company did not know how the litigation in question would turn out and so could not anticipate the possible impact on company stock price.

8. The SEC was correct that Gebhart could be barred for life. He acted recklessly, making false statements promoting the security when he had no basis for doing so. As a professional, he could not rely on the word of a friend, so there was scienter present and securities fraud existed. He did not have actual knowledge of the scam, but his recklessness was grounds for the fraud. He assured clients that the company was sound and engaged in good business practices, when he had no reasonable basis for that statement. He had a duty to do a meaningful investigation into the company.

Chapter 19: Consumer Protection


2. The Colorado Supreme Court remanded for new trial. It held that the first trial finding that the drug caused the plaintiff's injuries was sufficiently supported by the evidence. It is up to the jury to determine the facts, the credibility of the witnesses, and weigh the evidence. Their finding in that regard is not upset. The court cited the California supreme court which held that the jury may find "a product is defective in design if 1) the plaintiff proves that the product failed to perform as safely as an ordinary consumer would expect when used in an intended or reasonably foreseeable manner, or 2) the plaintiff proves that the product's design proximately caused injury and the defendant fails to prove, in light of the relevant factors, that on balance the benefits of the challenged design outweigh the risk of danger inherent in such design." The first part is the "consumer expectation test," the second is a "risk-benefit analysis to measure the reasonableness of a danger." The second test applies here. The trial court failed to make that clear to the jury, so the verdict for plaintiff is reversed. Plaintiff must convince a jury that the drug was defectively designed using the risk-benefit analysis, not the consumer expectation test. Then the drug maker must be allowed to raise the "unavoidably unsafe products" case, which often is applied to drugs. The four factors to be considered in this defense are: "The product's utility must greatly outweigh the risk created by its use; the risk must be a known one; the product's benefits must not be achievable in another manner; and the risk must be unavoidable under the present state of knowledge." Hence, the maker may be liable despite FDA approval.

4. Yes, deceptive. “No reasonable fact finder could conclude that the solicitation was not likely to deceive consumers acting reasonably under the circumstances.” Most people had no idea they


agreed to the Internet service when they cashed the checks. This solicitation was likely to mislead in a material manner. Courts do not favor fine print in general, especially when it is key to a deal and is in a location unlikely to be read carefully.

6. Dismissal vacated; remanded for further proceedings. To recover on a false advertising claim under the Lanham Act, the plaintiff must show: 1) that the defendant made false or misleading descriptions of fact or representation of fact in commercial advertisements about its product; 2) that this statement actually deceived or had a tendency to deceive a substantial segment of its audience; 3) that this deception was material, in that it is likely to influence purchasing decisions; 4) that the defendant placed this false or misleading statement in interstate commerce; and 5) that plaintiff was, or is likely to be, injured as a result of false or misleading statements, either by direct diversion of sales from itself to defendant or by lessening of goodwill associated with its products. Clorox has shown enough to bring a claim under this Act and so the suit should not have been dismissed without giving the company an opportunity to argue the validity of its claims.

Chapter 20: Antitrust Law


2. The court held that because there was a collective bargaining agreement between the NBA and the players' union, the antitrust laws could not apply to the terms of the agreement due to the labor exemption from antitrust. Employers (teams) can bargain together with the players via their union and not violate antitrust law. Further, the court noted that given the collective bargaining agreement, even if the antitrust laws applied, the features of the plan attacked-such as the college draft of players, the right of first refusal system (current team of a player has right to match any other team offer when the player is a free agent), and the revenue sharing and salary cap system-do survive the rule of reason test.

4. The Supreme Court upheld the judgment against the larger ski company, holding it liable for $2.5 million in damages which were trebled under the Sherman Act to $7.5 million. The Court noted that it was common practice in the skiing industry for separate ski hills to share tickets. The practice is not anti-competitive. By removing one of the four ski hills from the common ticket (Aspen Highlands separated from Ajax, Buttermilk, and Snowmass), the larger ski company was able to do serious damage to the business of the smaller ski hill. The main purpose of the action was to hurt the smaller ski hill, not improve competition. Hence, the termination of a voluntary cooperative sales practice was held to be anti-competitive.

6. The government sued Syufy for unlawfully monopolizing the market for exhibiting first-run movies in the Las Vegas area. The appellate court rejected the government's suit. Although Syufy did at one point acquire all of Las Vegas's movie theaters devoted to first-run movies, the court pointed out that no harm to competition resulted because entry into the movie-exhibition industry is easy (thus restraining the ability of an exhibitor to jack-up prices). The court also emphasized the fact that Syufy's suppliers—Hollywood movie studios—are powerful and


sophisticated firms who have adequate incentives and ability to bargain with any local monopoly movie distributor to ensure that such a distributor does not charge monopoly prices to consumers. After all, if a monopolist movie exhibitor raises ticket prices to monopoly levels, fewer people go to the movies and the studios' profits fall. Studios will not only bargain hard with a monopolist exhibitor to keep ticket prices at competitive levels, these studios will also help to establish competitive exhibitors if the monopolist distributor refuses to charge competitive ticket prices.

7. Affirmed. Johnson lacked standing to maintain an antitrust claim. There was no antitrust injury arising from the hospital's decision not to grant her the money to start her own practice. The initial oral discussions with the hospital recruiter did not form a contract. The hospital encouraged her to remain in the area, and she had privileges at the hospital, but it had no duty to bankroll her practice. Her freedom to compete in that market was not restrained; it just was not subsidized.

9. Utah Pie won. The Supreme Court found that Robinson-Patman had been violated because defendant large national frozen pie company sold frozen pies in the relevant Salt Lake City market at prices below those charged in other markets which were closer to its plants. Predatory pricing injured Utah Pie.

Chapter 21: Environmental Law


2. The polluter was found liable under strict liability for abnormally dangerous materials, for negligence, for trespass, and for nuisance. Compensatory damages were $5.3 million plus interest. Punitive damages of $7.5 million were assessed due to the gross, willful, and wanton disregard for human safety. The court found that the polluter has a duty to protect others from unreasonable harm, so that they could recover for emotional distress, loss of property value, fear of health hazards due to polluted water supply, and reduction in the quality of life. The appeals court upheld most of the verdict, ruling that damages may be awarded when plaintiff can prove to a reasonable medical certainty that injuries were caused by defendant's actions. Mere possibilities of injury do not suffice. Plaintiffs can recover for fear of cancer and other diseases given that they established a reasonable medical basis for their fears. Punitive damages could be imposed because of the willful and wanton behavior of defendant during the dumping of the chemicals.

4. EPA won in a 5-4 decision. The EPA, like other agencies administering statutes, is entitled to considerable deference. To uphold the right of EPA to grant such variances (which are all over the place in terms of who gets to pollute how much), the court need only find that the agency's understanding of the statute is sufficiently rational to preclude a court from substituting its judgment for that of the agency. Legislative history did not show an intent of Congress to forbid variances.


6. Granted. The citizens gave the state the required 60-day notice of the suit and filed the suit within 120 days of the date the notice was given to the state. The residents allegation that the river smelled and looked polluted, and that they use the river less for recreational, aesthetic and commercial purposes because the city violates its NPDES permit, sufficiently alleges injury in fact to support their standing to bring a citizen suit under the Clean Water Act. The remedy sought under the Act would redress the residents' injuries resulting from the pollution. The court's remedy would bring the city into compliance with its NPDES permit so that ARK members could use and enjoy the waterways without fear of pollution. The fact that the city and the state had entered into an agreement to bring the facility into compliance does not bar the suit.

Chapter 22: The International Legal Environment of Business


2. Seawinds sued Nedlloyd in California state court alleging in essence that Nedlloyd breached express and implied obligations under the shareholders' agreement. In resolving the dispute, Nedlloyd contended that the shareholders' agreement required the application of Hong Kong law to Seawinds' claims. In opposition, Seawinds argued that California law should be applied to its causes of action. The Supreme Court of California held that a valid choice-of-law clause existed in the contract between the parties. Since the clause is valid, it encompasses all causes of action arising from or related to their contract regardless of how those causes of action are characterized. The court applied the Restatement test: first, the court must determine (1) whether the chosen state has a substantial relationship to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties' choice of law. If either test is met, then the court must determine whether the chosen state's law is contrary to a fundamental policy of California. The court found that Seawinds was incorporated in Hong Kong, thereby satisfying the first part of the test. The court then determined that it could perceive of "no fundamental policy of California requiring the application of California law to Seawinds' claims."

4. The Supreme Court held that the act of state doctrine prohibits a foreign judicial body from ruling on the validity of the acts of a sovereign taken within the sovereign's territory. The Cuban government had the right to nationalize its sugar industry. Whether or not proper payments were made to other parties is a separate issue, but those who suffered nationalization could not claim to have superior legal rights to payments. Those matters would have to go to the International Court of Justice or other venues. After this case, Congress amended the Foreign Assistance Act to allow the courts to ignore the act of state doctrine in cases of expropriation.

6. The court rejected the bank's sovereign immunity and act of state arguments. "Foreign states and their agencies and instrumentalities are generally immune from suit in United States courts. Neither party disputes that the Bank of Jamaica, wholly owned by the government of Jamaica, is included within this definition. Plaintiffs contend, however, that the Defendants' activity falls within the exception to sovereign immunity ... the 'commercial activity' exception.


"No one disputes that the regulation of imports and exports is a sovereign prerogative; or that the bank has the power to redefine investment priorities; or that the bank, in administering the Jamaican Economic Recovery Program, must decide with whom it will deal. These are all governmental acts. The act complained of, however, is not the bank's administration of the Program, but the breach of its implied contract with Chisholm & Co. entered into in furtherance of that program. Once the bank decides to contract with someone to obtain financing, it must follow the rules of the marketplace, and one of those rules is that contracts cannot be breached. Therefore, the Court holds that the bank's implied contract with Chisholm & Co. and its alleged misrepresentations constitute commercial activity...."

The next issue was whether the bank's acts in dealing with Chisholm had sufficient jurisdictional nexus with the U.S. In international commerce, much business is conducted through telephone calls, telexes, and wire transfers of intangible debits and credits. It can be difficult to determine exactly where an act such as the formation or breach of a contract takes place. Because the court found that defendants' acts had a direct effect in the U.S., and, therefore, where the acts actually occurred was irrelevant.

8. Affirmed. A tort based on negligence is not one of the exceptions allowed under the FSIA. While the tort, if any, was probably the responsibility of the independent contractor doing the work, Malaysia is still immune from suit because this does not fall under the commercial activity exception provided by statute.


Documents

Chapter 1: Introducing the Modern Environment of Business, Law