Chapter 3 Business Ethics and Social Responsibility Page 31-35 Assignment Week 4 Who doesnt love ice cream (well some of us do) Ben

Essentials

Business Law I Essentials

OpenStax Rice University 6100 Main Street MS-375 Houston, Texas 77005 To learn more about OpenStax, visit https://openstax.org. Individual print copies and bulk orders can be purchased through our website. ©2019 Rice University. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution 4.0 International License (CC BY 4.0). Under this license, any user of this textbook or the textbook contents herein must provide proper attribution as follows:

– If you redistribute this textbook in a digital format (including but not limited to PDF and HTML), then you must retain on every page the following attribution: “Access for free at openstax.org.”

– If you redistribute this textbook in a print format, then you must include on every physical page the following attribution: “Access for free at openstax.org.”

– If you redistribute part of this textbook, then you must retain in every digital format page view (including but not limited to PDF and HTML) and on every physical printed page the following attribution: “Access for free at openstax.org.”

– If you use this textbook as a bibliographic reference, please include https://openstax.org/details/books/business-law-i-essentials in your citation.

For questions regarding this licensing, please contact [email protected] Trademarks The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, OpenStax CNX logo, OpenStax Tutor name, Openstax Tutor logo, Connexions name, Connexions logo, Rice University name, and Rice University logo are not subject to the license and may not be reproduced without the prior and express written consent of Rice University. B&W PAPERBACK BOOK ISBN-13 978-1-975076-62-7

DIGITAL VERSION ISBN-13 978-1-947172-78-4 ORIGINAL PUBLICATION YEAR 2019 10 9 8 7 6 5 4 3 2 1

OPENSTAX OpenStax provides free, peer-reviewed, openly licensed textbooks for introductory college and Advanced Placement® courses and low-cost, personalized courseware that helps students learn. A nonprofit ed tech initiative based at Rice University, we’re committed to helping students access the tools they need to complete their courses and meet their educational goals. RICE UNIVERSITY OpenStax, OpenStax CNX, and OpenStax Tutor are initiatives of Rice University. As a leading research university with a distinctive commitment to undergraduate education, Rice University aspires to path-breaking research, unsurpassed teaching, and contributions to the betterment of our world. It seeks to fulfill this mission by cultivating a diverse community of learning and discovery that produces leaders across the spectrum of human endeavor.

PHILANTHROPIC SUPPORT OpenStax is grateful for our generous philanthropic partners, who support our vision to improve educational opportunities for all learners. Laura and John Arnold Foundation

Arthur and Carlyse Ciocca Charitable Foundation

Ann and John Doerr

Bill & Melinda Gates Foundation

Girard Foundation

Google Inc.

The William and Flora Hewlett Foundation

Rusty and John Jaggers

The Calvin K. Kazanjian Economics Foundation

Charles Koch Foundation

Leon Lowenstein Foundation, Inc.

The Maxfield Foundation

Burt and Deedee McMurtry

Michelson 20MM Foundation

National Science Foundation

The Open Society Foundations

Jumee Yhu and David E. Park III

Brian D. Patterson USA-International Foundation

The Bill and Stephanie Sick Fund

Robin and Sandy Stuart Foundation

The Stuart Family Foundation

Tammy and Guillermo Treviño

Study where you want, what you want, when you want.

Access. The future of education. openstax.org

When you access College Success in our web view, you can use our new online highlighting and note-taking features to create your own study guides.

Our books are free and flexible, forever. Get started at openstax.org/details/books/business-law-i-essentials

TABLE OF CONTENTS

Preface 1

1 American Law, Legal Reasoning, and the Legal System 3

1.1 Basic American Legal Principles 3 1.2 Sources and Types of Law 5 1.3 Important Business Laws and Regulations 7

2 Disputes and Dispute Settlement 15

2.1 Negotiation 15 2.2 Mediation 19 2.3 Arbitration 22

3 Business Ethics and Social Responsibility 31

3.1 Business Ethics 31 3.2 Social Responsibility 35

4 Business and the United States Constitution 43

4.1 Commerce Clause 43 4.2 Constitutional Protections 47

5 Criminal Liability 53

5.1 Common Business Crimes 53 5.2 Civil vs: Criminal Liability 57

6 The Tort System 63

6.1 Intentional Torts and Negligence 63 6.2 Product and Strict Liability 67

7 Contract Law 75

7.1 Consideration and Promissory Estoppel 75 7.2 Capacity and Legality 78

7.3 Breach of Contract and Remedies 80

8 Sales Contracts 85

8.1 The Nature and Origins of Sales Contracts 85 8.2 Warranties and Sales Contracts 91

9 Employment and Labor Law 97

9.1 Employment, Worker Protection, and Immigration Law 97 9.2 Labor Law 101 9.3 Equal Opportunity in Employment 105

10 Government Regulation 113

10.1 Administrative Law 113 10.2 Regulatory Agencies 117

11 Antitrust Law 123

11.1 History of Antitrust Law 123 11.2 Antitrust Laws 127

12 Unfair Trade Practices and the Federal Trade Commission 133

12.1 Unfair Trade Practices 133 12.2 The Federal Trade Commission 136

13 International Law 141

13.1 Introduction to International Law 141 13.2 Sources and Practice of International Law 145

14 Securities Regulation 151

14.1 Liability Under the Securities Act 151 14.2 The Framework of Securities Regulation 154

This OpenStax book is available for free at http://cnx.org/content/col30149/1.5

Index 167

This OpenStax book is available for free at http://cnx.org/content/col30149/1.5

Welcome to Business Law I Essentials, an OpenStax resource. This textbook was written to increase student access to high-quality learning materials, maintaining the highest standards of academic rigor at little to no cost.

About OpenStax

OpenStax is a nonprofit based at Rice University, and it’s our mission to improve student access to education. Our first openly licensed college textbook was published in 2012, and our library has since scaled to over 30 books for college and AP® courses used by hundreds of thousands of students. OpenStax Tutor, our low-cost personalized learning tool, is being used in college courses throughout the country. Through our partnerships with philanthropic foundations and our alliance with other educational resource organizations, OpenStax is breaking down the most common barriers to learning and empowering students and instructors to succeed.

About OpenStax resources

Attribution and Customization Business Law I Essentials was developed by Barnes and Noble Education LoudCloud and is licensed under a Creative Commons Attribution NonCommercial ShareAlike 4.0 International license (CC-BY-NC-SA), which means that noncommercial entities can remix and build upon the content, as long as they provide attribution to OpenStax and its content contributors and redistribute it under the same license as the original.

Because our books are openly licensed, you are free to use the book in its current format or augment it with additional content, cases, or other teaching materials. Feel free to remix the content by assigning your students certain chapters and sections in your syllabus, in the order that you prefer. You can even provide a direct link in your syllabus to the sections in the web view of your book.

Art attribution In Business Law I Essentials, most art contains attribution to its title, creator, or rights holder, host platform, and license within the caption. Because the art is openly licensed, anyone may reuse the art as long as they provide the same attribution to its original source and share it under the same license as the original art.

Errata All OpenStax textbooks undergo a review process. However, like any professional-grade textbook, errors sometimes occur. Since our books are web based, we can make updates periodically when deemed pedagogically necessary. If you have a correction to suggest, submit it through the link on your book page on openstax.org. Subject matter experts review all errata suggestions. OpenStax is committed to remaining transparent about all updates, so you will also find a list of past errata changes on your book page on openstax.org.

Format You can access this textbook for free in web view or PDF through openstax.org, and for a low cost in print.

Preface

Preface 1

About Business Law I Essentials

Business Law I Essentials is a brief introductory textbook designed to meet the scope and sequence requirements of courses on Business Law or the Legal Environment of Business. The concepts are presented in a streamlined manner, and cover the key concepts necessary to establish a strong foundation in the subject. The textbook follows a traditional approach to the study of business law. Each chapter contains learning objectives, explanatory narrative and concepts, references for further reading, and end-of-chapter questions.

Business Law I Essentials may need to be supplemented with additional content, cases, or related materials, and is offered as a foundational resource that focuses on the baseline concepts, issues, and approaches. OpenStax’s Creative Commons licensing, described above, offers a instructors and course designers a great deal of flexibility in its use.

Community Hubs OpenStax partners with the Institute for the Study of Knowledge Management in Education (ISKME) to offer Community Hubs on OER Commons—a platform for instructors to share community-created resources that support OpenStax books, free of charge. Through our Community Hubs, instructors can upload their own materials or download resources to use in their own courses, including additional ancillaries, teaching material, multimedia, and relevant course content. We encourage instructors to join the hubs for the subjects most relevant to your teaching and research as an opportunity both to enrich your courses and to engage with other faculty.

To reach the Community Hubs, visit www.oercommons.org/hubs/OpenStax.

Technology Partners As allies in making high-quality learning materials accessible, our technology partners offer optional low-cost tools that are integrated with OpenStax books. To access the technology options for your text, visit your book page on openstax.org.

Contributing Authors and Reviewers

Mirande Valbrune, Esq. Employment Lawyer

Renee De Assis Texas Woman's University

Suzanne Cardell, University of Massachusetts Dartmouth

Tess C. Taylor, Walden University

Dr. Natalie Sappleton, Smartly Institute

C. M. Mitchell, Ashford University

Kenneth Mitchell-Phillips, Portland Community College

2 Preface

This OpenStax book is available for free at http://cnx.org/content/col30149/1.5

Chapter Outline

1.1 Basic American Legal Principles 1.2 Sources and Types of Law 1.3 Important Business Laws and Regulations

Introduction Learning Outcome

• Describe the foundation and sources that establish American law.

1.1 Basic American Legal Principles

The American legal system has its roots in the British legal system. It was developed with the purpose of establishing standards for acceptable conduct, proscribing punishment for violations as a deterrent, establishing systems for enforcement, and peacefully resolving disputes. The ultimate goal of the American legal system is promotion of the common good.

Establishing Standards The American legal system was developed with the goal of establishing a set of standards that outline what is to be considered minimally acceptable behavior. Broadly speaking, federal laws are those that all United States citizens are expected to follow. State and local laws may often be similar to federal laws, but they may also differ quite a bit, and only govern the state’s citizens.

Figure 1.1 (Credit: MarkThomas /pixabay /Attribution 2.0 Generic (CC BY 2.0))

1

American Law, Legal Reasoning, and the Legal System

Figure 1.2 The American legal system is designed to establish a set of standards for acceptable behavior. (Credit: joergelman/ pixabay/ License: CC0)

Promoting Consistency The American legal system follows the British Common Law system, which is designed to leverage past judicial reasoning, while also promoting fairness through consistency. Judges in the Common Law system help shape the law through their rulings and interpretations. This body of past decisions is known as case law. Judges use case law to inform their own rulings. Indeed, judges rely on precedent, i.e., previous court rulings on similar cases, for ruling on their own cases.

All U.S. states, except Louisiana, have enacted “reception statutes,” stating that the judge-made common law of England is the law of the state to the extent that it does not conflict with the state’s current laws.

However, the body of American law is now so robust that American cases rarely cite English materials, except for a British classic or a famous old case. Additionally, foreign law is not cited as binding precedent. Therefore, the current American practice of the common law tradition refers more to the process of judges looking to the precedent set jurisdictionally, and substantially similar to, American case law.

Maintaining Order Congruent with the goal of establishing standards and promoting consistency, laws are also used to promote, provide, and maintain order.

4 Chapter 1 American Law, Legal Reasoning, and the Legal System

This OpenStax book is available for free at http://cnx.org/content/col30149/1.5

Resolving Disputes Conflicts are to be expected given people’s varying needs, desires, objectives, values systems, and perspectives. The American legal system provides a formal means for resolving conflicts through the courts. In addition to the federal court and individual state systems, there are also several informal means for resolving disputes that are collectively called alternative dispute resolution (ADR). Examples of these are mediation and arbitration.

Protecting Liberties and Rights The United States Constitution and state laws provide people with many liberties and rights. American laws operate with the purpose and function of protecting these liberties and rights from violations by persons, companies, governments, or other entities.

Based on the British legal system, the American legal system is divided into a federal system and a state and local system. The overall goal of both systems is to provide order and a means of dispute settlement, as well as to protect citizens’ rights.

Clearly, the purposes of the American legal system are broad and well-considered.

1.2 Sources and Types of Law

The American legal system is made up of many types of codified forms of law, with the United States Constitution being the pre-eminent source of American law. The Constitution establishes the boundaries of federal law, and it must be followed by all citizens, organizations, and entities. It includes Congressional acts, Senate-ratified treaties, executive regulations, and federal case law. The United States Code (“USC”) compiles these laws.

American law mainly originates from constitutional law, statutory law, treaties, administrative regulations, and common law (which includes case law).

The Constitution The United States Constitution is the foremost law of the land. The Constitution’s first ten amendments are referred to as the Bill of Rights, which offers specific protections of individual liberty and justice. Additionally, the Bill of Rights restricts certain powers of government. The Constitution empowers federal law making by giving Congress the power to enact statutes for certain limited purposes, like regulating interstate commerce. The United States Code officially compiles and codifies the federal statutes.

Chapter 1 American Law, Legal Reasoning, and the Legal System 5

Figure 1.3 The U.S. Constitution is known as the supreme law of the land. (Credit: lynn0101/ pixabay/ License: CC0)

American Common Law As discussed in the previous section, the United States follows the common law legal tradition of English law. Judges in the Common Law system help shape the law through their rulings and interpretations. This body of past decisions is known as case law, which is used by judges to inform their own rulings. In fact, judges rely on precedent, i.e., previous court rulings on similar cases, when determining the ruling in their own cases.

An example of how case law works is the case of the State v. Wayfair Inc. (2017 SD 56, 901 N.W.2d 754 (S.D. 2017), cert. granted, 138 S. Ct. 735 (2018)), in which the South Dakota Supreme Court held that a state law requiring internet retailers without an in-state physical presence to remit sales tax was unconstitutional. Unless this ruling is overruled by the United States Supreme Court, then it becomes part of the case law and precedent set in that state, and it will be followed by subsequent rulings when similar cases are filed.

Federal Law The Constitution empowers federal law making by giving Congress the power to enact statutes for certain limited purposes, like regulating interstate commerce. Federal law preempts conflicting state and local laws. However, federal preemption is not without limits, insofar as states each have their own constitution and are considered sovereign. Therefore, federal law may only preempt state law if it is enacted within the limited powers that are enumerated and granted to Congress in the Constitution.

Broad interpretations of the Constitution’s Commerce and Spending Clauses have expanded the reach of federal law into many areas. Indeed, its reach in some areas, such as aviation and railroads, is now so broad that it preempts virtually all state law. In others areas, such as family law, lawmaking continues to be left to the

6 Chapter 1 American Law, Legal Reasoning, and the Legal System

This OpenStax book is available for free at http://cnx.org/content/col30149/1.5

states. Finally, a number of powerful federal and state laws coexist in areas such as antitrust, trademark, employment law, and others.

Statutes When a bill becomes a federal law, it is assigned a law number and prepared for publication by the Office of the Federal Register (OFR) of the National Archives and Records Administration (NARA). Public laws are also given legal statutory citation by the OFR and are incorporated into the United States Code (USC).

Regulations Laws differ from regulations in that laws are passed by either the U.S. Congress or state congresses. Regulations, by contrast, are standards and rules adopted by administrative agencies that govern how laws will be enforced.

Federal agencies often enjoy broad rulemaking authority when Congress acts to grant them this power. Called “regulations,” these agency rules normally carry the force of law, as long as they demonstrate a reasonable interpretation of the relevant statutes. For example, the Environmental Protection Agency (EPA) has established regulations for businesses and their emission and disposal of pollutants to protect the environment. The EPA has the authority to enforce these regulations when a business violates them, and such enforcement is usually done by fining the company or by using other means.

The Administrative Procedure Act (APA) enables the adoption of regulations, which are codified and incorporated into the Code of Federal Regulations (CFR). Federal agencies frequently draft and distribute forms, manuals, policy statements, letters, and rulings. Though these may be considered as persuasive authority by the courts, they do not carry the same force as law. In other words, if a person or business questions a regulation of a government agency, saying it is unconstitutional, and that party is successful in proving it, then the regulation is not enforced and the agency will need to revise it or remove it.

State Law America, as diverse as its fifty states, is also governed by fifty different state constitutions, state governments, and state courts. Each has its own legislative, executive, and judicial branches. States are empowered to create legislation that is related to matters not preempted by the federal Constitution and federal laws. Most cases involve state law issues and are litigated in state courts.

Local Law In addition to federal and state law, municipalities, towns or cities, and counties may enact their own laws that do not conflict with state or federal laws.

As demonstrated, American law does not draw from one source alone; instead, it is derived from many sources.

1.3 Important Business Laws and Regulations

Business law is a very expansive area of the law. It primarily addresses issues related to the creation of new businesses, which arise as existing companies deal with the public, government, and other companies.

Chapter 1 American Law, Legal Reasoning, and the Legal System 7

Business law consists of many legal disciplines, including contracts, tax law, corporate law, intellectual property, real estate, sales, immigration law, employment law, bankruptcy, and others.

Figure 1.4 Contract law is just one type of law that businesses need to be concerned about. (Credit: edar/ pixabay/ License: CC0)

As noted, business law touches upon a number of other legal areas, practices, and concerns. Some of the most important of these, which are discussed in this section, are disputes and dispute settlement, business ethics and social responsibility, business and the United States Constitution, criminal liability, torts, contracts, labor and employment law, Unfair Trade Practices and the Federal Trade Commission, international law, and securities regulation. Though they are discussed in much more depth in later chapters, the following gives a brief overview.

Disputes and Dispute Settlement In addition to the federal court and individual state systems, there are also a variety of mechanisms that companies can use to resolve disputes. They are collectively called alternative dispute resolution (“ADR”), and they include mediation, settlement, and arbitration. Many states now require companies to resolve legal disputes using ADR before the initiation of any lawsuit to encourage speedy resolution, cost and time containment, and reduced judicial dockets. Traditional litigation remains an option in most cases if other efforts fail or are refused.

Business Ethics and Social Responsibility In the routine course of business, employees are often required to make decisions. Business ethics outline the ethical model, or framework, that companies expect employees to follow when making these decisions, as well as the behavior that the companies deem acceptable. Sound and ethical decision making can also help

8 Chapter 1 American Law, Legal Reasoning, and the Legal System

This OpenStax book is available for free at http://cnx.org/content/col30149/1.5

companies avoid legal liability and exposure. Typically, an ethics code and/or a code of conduct details a company’s requirements and guidelines, while also serving as a key corporate governance tool.

In addition to business ethics, companies must also consider their social responsibility and the laws related to it, such as consumer and investor protections, environmental ethics, marketing ethics, and ethical issues in financial management.

Business and the United States Constitution Since the start of the 20th century, broad interpretations of the Constitution’s Commerce and Spending Clauses have expanded the reach of federal law into many areas. Indeed, its reach in some areas is now so broad that it preempts virtually all state law. Thus, the Constitution’s Commerce Clause has been interpreted to allow federal lawmaking and enforcement that applies to many aspects of business activity. Additionally, the Constitution’s Bill of Rights extends some protections to business entities that are also constitutionally guaranteed to individuals

For example, on January 21, 2010, in Citizens United v. Federal Election Commission, 558 U.S. 310 (2010), the U.S. Supreme Court heard the issue of whether the government can ban political spending by corporations in candidate elections. The Court ruled that corporations have the same Constitutional right to free speech as individuals, and thus lifted the restrictions on contributions.

Criminal Liability The imposition of criminal liability is one method used to regulate companies. The extent of corporate liability found in an offensive act determines whether a company will be held liable for the acts and omissions of its employees. Criminal consequences may include penalties, such as prison, fines and/or community service. In addition to criminal liability, civil law remedies are usually available, e.g., the award of damages and injunctions, which may include penalties. Most jurisdictions apply both criminal and civil systems.

Torts Within the business law context, torts may involve either intentional torts or negligence. Additionally, companies involved in certain industries should consider the risk of product liability. Product liability involves a legal action against a company by a consumer for a defective product that caused loss or harm to the customer. There are several theories regarding recovery under product liability. These include contract theories that deal with the product warranty, which details the promises of the nature of the product sold to customers. The contract product warranty theories are Express Warranty, Implied Warranty of Merchantability, and Implied Warranty of Fitness. Tort theories deal with a consumer claim that the company was negligent, and therefore caused either bodily harm, emotional harm, or monetary loss to the plaintiff. The tort liability theories that can be used in this context are negligence (failure to take proper care in something), strict liability (imposition of liability without a finding of fault), and acts committed under Restatement (Third) of Torts (basic elements of the tort action for liability for accidental personal injury and property damage, as well as liability for emotional harm).

Contracts The main function of a contract is to document promises that are enforceable by law. The key to an agreement

Chapter 1 American Law, Legal Reasoning, and the Legal System 9

or contract is that there must be an offer and acceptance of the terms of that offer. Sales contracts normally involve the sale of goods and include price terms, quantity and cost, how the terms of the contract will be performed, and method of delivery.

Employment and Labor Law Employment and labor law is a very broad discipline that covers a broad array of laws and regulations involving employer/employee rights and responsibilities in the workplace. This law includes worker protection and safety laws, such as OSHA, and worker immigration laws, such as the Immigration Reform and Control Act, which imposes sanctions on employers for knowingly hiring illegal immigrants. Other notable areas of employment and labor law include, but are not limited to, the National Labor Relations Act, which deals with union and management relations, as well as Equal Opportunity in Employment laws, which provide workers with protections against discrimination in the workplace, e.g., Title VII, the Americans with Disabilities Act, Age Discrimination in Employment Act, and others.

Antitrust Law Antitrust legislation includes both federal and state laws regulating companies’ conduct and organization. The purpose of such regulation is to allow consumers to benefit from the promotion of fair competition. The main statutes implicated by antitrust law are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. These Acts discourage the restraint of trade by prohibiting the creation of cartels and other collusive practices. Additionally, they encourage competition by restricting the mergers and acquisitions of certain organizations. Finally, they prohibit the creation and abuse of monopoly power.

Actions may be brought in courts to enforce antitrust laws by the Federal Trade Commission (“FTC”), the U.S. Department of Justice, state governments, and private parties.

Unfair Trade Practices and the Federal Trade Commission The term “unfair trade practices” is broadly used and refers to any deceptive or fraudulent business practice or act that causes injury to a consumer. Some examples include, but are not limited to, false representations of a good or service including deceptive pricing, non-compliance with manufacturing standards, and false advertising. The FTC investigates allegations of unfair trade practices raised by consumers and businesses, pre-merger notification filings, congressional inquiries, or reports in the media and may seek voluntary compliance by offending businesses through a consent order, administrative complaints, or federal litigation.

Securities Regulation Securities regulation involves both federal and state regulation of securities and stocks by governmental regulatory agencies. At times, it may also involve the regulations of exchanges like the New York Stock Exchange, as well as the rules of self-regulatory organizations like the Financial Industry Regulatory Authority (FINRA).

The Securities and Exchange Commission (SEC) regulates securities on the federal level. Other instruments related to …