Lecture Notes for Legal Environment of Business, 9th Edition

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Legal Environment
of Business
Ninth Edition
Henry R. Cheeseman
Instructors Manual
(Download only) for Legal
Environment of Business
Revised by: Jeffrey Penley

1
Chapter 1
Legal Heritage and the Information Age
What is the meaning of “It’s the law”?
I. Teacher to Teacher Dialogue
One of the most common dilemmas facing instructors of business law is the issue of topic
choice. By the very nature of the subjects we teach, the breadth of materials is so wide that
choosing what to focus on in the limited classroom time we have with our students can be a most
daunting task. This problem is especially complicated when the topics we are dealing with are all
of deep interest and can stand alone as separate courses.
In this chapter, for example, we are asked to introduce students to topics ranging from the
definitions and purposes of law to how our system affects business decisions, to some of the most
important provisions found in the United States Constitution. Any one of these subparts can
provide the raw materials for an entire course at the law school level. Our job must start with a
self-evident, but sometimes forgotten, point: this is not law school. We are here not to train future
lawyers but rather students who need to know enough about these issues to recognize that they
are issues. The technical legal problems they may be facing later will ultimately need to be
resolved using law and other practitioners.
The plus side of this dilemma is that because we have such a diverse menu to select from,
we are able to pick and choose our areas of emphasis. For example, if your particular teaching
and research interests lie in the area of ethics and the schools of jurisprudential thought from
which they are derived, then by all means, run with it! Rather than trying to be all things to all
people, it is better to focus your efforts on your strengths. This does not mean that you can short-
change the other material. All key objectives of the chapter should be fully outlined and
incorporated in both your lecture and materials outline. But if you have a particular interest and
expertise in, for example, the Law and Economics School of jurisprudential thought, then use
them as focal points of comparison in the evolutionary process that seeks to distinguish the older
schools of jurisprudence from newer approaches to these issues. In any event, remember that
philosophical studies of what law is and what its role is in the larger scheme of things have
always posed questions virtually impossible to answer. This chapter represents attempts by great
thinkers to answer the unanswerable. It would be far too presumptuous for us to think that we can
teach, in a few hours, what the great philosophers of the world have tried to do over hundreds of
years. Perhaps this is an early lesson in what wisdom is really all about: the more we know of
history, the more we know of our own limitations. If we can get that point across, the course is off
to a good start!
II. Chapter Objectives
1. Define law.
2. Describe the flexibility of the law.
3. List and describe the schools of judicial thought.
4. Learn the history and development of American law.
5. List and describe the sources of law in the United States.
6. Describe the doctrine of stare decisis.
7. Describe how existing laws are being applied to the digital environment and how new
laws are being enacted that specifically address issues of the information age.
8. Learn what critical legal thinking is and how to apply it to analyzing legal cases.

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9. Learn how the material, cases, and lessons of this book will apply to your future career.
III. Key Question Checklist
 What is law?
 Once you have identified the kind of societal expectation of behavior, what standard of
behavior is most appropriate? Does law codify the standard? Do one or more of the
schools of jurisprudence support the standard?
 What are the sources of law in the United States?
 What bodies of law and/or ethical standards apply?
 How would you apply these standards to the facts?
IV. Chapter Outline
The first chapter objective is an introduction to the historical underpinnings of jurisprudential
thought. This would include not only the functions of law listed in the summary, but also an early
opportunity to introduce the role of ethics based on the various schools of jurisprudence
discussed.
Introduction to Legal Heritage and the Information Age
Businesses that are organized in the United States are subject to its laws. They are also subject to
the laws of other countries in which they operate. Businesses organized in other countries must
obey the laws of the United States when doing business here. In addition, businesspeople owe a
duty to act ethically in the conduct of their affairs, and businesses owe a responsibility not to
harm society. This chapter discusses the nature and definition of law, theories about the
development of law, and the history and sources of law in the United States.
What Is Law?
 Law consists of rules that regulate the conduct of individuals, businesses, and other
organizations within society.
 It is intended to protect persons and their property against unwanted interference from
others.
 Law forbids persons from engaging in certain undesirable activities.
 It is often, but not always, fair.
 Law must be flexible.
Definition of Law – According to Black’s Law Dictionary, “Law, in its generic sense, is a body
of rules of action or conduct prescribed by controlling authority, and having binding legal force.
That which must be obeyed and followed by citizens subject to sanctions or legal consequences is
a law.”
Functions of the Law
 Keeping the peace – e.g., making certain activities crimes
 Shaping moral standards – e.g., enacting laws that discourage drug and alcohol abuse
 Promoting social justice – e.g., enacting statutes that prohibit discrimination in
employment
 Maintaining the status quo – e.g., passing laws preventing the forceful overthrow of the
government
 Facilitating orderly change – e.g., passing statutes only after considerable study, debate,
and public input
 Facilitating planning – e.g., well-designed commercial laws allow businesses to plan
their activities, allocate their resources, and assess their risks

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 Providing a basis for compromise – e.g., approximately 95 percent of all lawsuits are
settled prior to trial
 Maximizing individual freedom – e.g., the rights of freedom of speech, religion, and
association granted by the First Amendment to the U.S. Constitution
Fairness of the Law – Overall, the United States legal system is one of the most comprehensive,
fair, and democratic systems of law ever developed and enforced. However, some misuses and
oversights of our legal system, including abuses of discretion and mistakes by judges and juries,
unequal applications of the law, and procedural mishaps, allow some guilty parties to go
unpunished.
Flexibility of the Law – U.S. law has evolved and grown as a reflection of changes in society,
technology, and commerce. The same general principles that established the foundation of our
nation still exist; however, legal modifications exhibit the flexibility and maturity of our system
to be able to adapt to the changing commercial, social, and ethical environments.
Critical Legal Thinking: Brown v. Board of Education
This section discusses the United States Supreme Court’s rejection of the “separate but equal”
doctrine that endorsed separate schools for black children and white children.
Schools of Jurisprudential Thought
 Natural Law School – Postulates that law is based on what is “correct” and that law
should be based on morality and ethics
 Historical School – Believes that law is an aggregate of social traditions and customs
 Analytical School – Maintains that law is shaped by logic
 Sociological School – Asserts that law is a means of achieving and advancing certain
sociological goals
 Command School – Believes that law is a set of rules developed, communicated, and
enforced by the ruling party
 Critical Legal Studies School – Maintains that legal rules are unnecessary and that legal
disputes should be solved by applying arbitrary rules based on fairness
 Law and Economics School – Believes that promoting market efficiency should be the
central concern of legal decision making
Global Law: Command School of Jurisprudence of Cuba
In 1959, Fidel Castro led a revolution in Cuba. What followed was a communist/socialist
government that expropriated and nationalized much private property, and installed a command
economy and system of jurisprudence. Economic productivity fell substantially in Cuba as a
result, with major shortages of essential goods and services. Cuba is now permitting limited free-
market measures, but approximately 90 percent of workers are still government employees.
History of American Law
When the American colonies were first settled, the English system of law was generally adopted
as the system of jurisprudence. This was the foundation from which American judges developed a
common law in America.
English Common Law
 Law developed by judges who issued their opinions when deciding a case
 The principles announced in these cases became precedent for later judges deciding similar
cases
 The English common law can be divided into cases decided by the:

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 Law courts
 Chancery (Equity) courts
 Merchant courts
Landmark Law: Adoption of English Common Law in the United States
Common law is discussed in this section. In the United States, law, equity, and merchant courts
have been merged. Most U.S. courts permit the aggrieved party to seek both legal and equitable
orders and remedies.
Global Law: Civil Law System of France and Germany
Romano-Germanic civil law system is the model for countries adopting civil codes. The Civil
Code and the parliamentary statutes that expand and interpret it are the sole sources of law in
most civil law countries. The adjudication of a case is the application of the code or the statutes to
a particular set of facts. In some civil law countries, court decisions do not have the force of law.
This is in contrast to Anglo-American common law, where laws are created by the judicial system
and through congressional legislation.
Sources of Law in the United States
In the more than 200 years since the founding of the United States and the adoption of the English
common law, U.S. lawmakers have developed a substantial body of law. The sources of modern
law in the United States include the federal and state constitutions, federal treaties, federal and
state statutes, local ordinances, executive orders, regulations and orders of administrative
agencies, and judicial decisions.
Constitutions
 The U.S. Constitution establishes the federal government and enumerates its powers
 Powers not given to the federal government are reserved to the states
 State constitutions establish state governments and enumerate their powers
Treaties – The president, with the advice and consent of the Senate, may enter into treaties with
foreign governments.
Federal Statutes – Statutes are written laws that establish and enforce certain courses of conduct.
Congress enacts federal statutes, while state legislatures enact state statutes. Federal statutes are
organized by topic into code books. This is often referred to as codified law. Federal statutes can
be found in these hardcopy books and online.
State Statutes – State legislatures enact state statutes. Such statutes are placed in code books.
State statutes can be assessed in these hardcopy code books or online.
Contemporary Environment: How a Bill Becomes Law
The U.S. Congress is composed of two chambers, the U.S. House of Representatives and the U.S.
Senate. Thousands of bills are introduced in the U.S. Congress each year, but only a small
percentage of them becomes law. First, a bill must be sponsored by a member of the U.S. House
of Representative or the U.S. Senate. It is then referred to the appropriate committee for review
and study. Bills that receive the vote of a committee are reported to the full chamber, where they
are debated and subjected to vote. If the bill receives a majority vote from the full chamber and a
subsequent second chamber, it is then forwarded to the U.S. president. The bill becomes law
when it is signed by the president.

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Ordinances – State legislatures often delegate lawmaking authority to local government bodies,
including cities and municipalities, counties, school districts, water districts, and such. These
governmental units are empowered to adopt ordinances. Ordinances are also codified.
Executive Orders – The executive branch of the government (the U.S. president) is empowered
to issue executive orders.
Regulations and Orders of Administrative Agencies – Administrative agencies are created by
the legislative and executive branches of government. They may adopt administrative regulations
and issue orders that regulate the conduct of covered parties.
Judicial Decisions – When deciding individual lawsuits, federal and state courts issue judicial
decisions. In these written opinions, a judge usually explains the legal reasoning used to decide
the case. These opinions often include interpretations of statutes, ordinances, and administrative
regulations and the announcement of legal principles used to decide the case.
Priority of Law in the United States – The U.S. Constitution and treaties take precedence over
all other laws, followed by federal statutes and federal regulations. Federal law takes precedence
over conflicting state law, which has precedence over local laws. Similarly, state constitutions
take precedence over state statutes and regulations.
Doctrine of Stare Decisis – Based on common law tradition, past court decisions become
precedent for deciding future cases. Lower courts must follow the precedent established by higher
courts. All federal and state courts in the United States must follow the precedents established by
U.S. Supreme Court decisions. Adherence to precedent is called the doctrine of stare decisis (“to
stand by the decision”). The doctrine of stare decisis promotes uniformity of law within a
jurisdiction, makes the court system more efficient, and makes the law more predictable.
Law in the Information Age – The electronic age arrived before new laws were written that
were unique and specific for this environment. Courts have applied existing laws to the new
digital environment by requiring interpretations and applications. In addition, new laws have been
written that apply specifically to this new environment. The U.S. Congress has led the way,
enacting many new federal statutes to regulate the digital environment.
Critical Legal Thinking
Critical thinking in law courses, referred to as critical legal thinking, is significant because in the
law there is not always a “bright-line” answer. The need for critical thinking is especially
important in solving legal disputes.
Defining Critical Legal Thinking
Critical legal thinking is a method of thinking that consists of investigating, analyzing, evaluating,
and interpreting information to solve a legal issue or case.
Socratic Method – The Socratic method is a process that consists of a series of questions and
answers and a “give-and-take” inquiry and debate between a professor and students.
IRAC Method – The IRAC method is used to examine a law case. IRAC is an acronym that
stands for issue, rule, application, and conclusion. The process is dictated by four questions:
1. (I) What is the legal issue in the case?
2. (R) What is the rule (law) of the case?
3. (A) What is the court’s analysis and rationale?

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4. (C) What was the conclusion or outcome of the case?
V. Key Terms and Concepts
 Administrative agencies—Agencies (such as the Securities and Exchange Commission
and the Federal Trade Commission) that the legislative and executive branches of federal
and state governments are empowered to establish.
 Administrative rules and regulations—Used by administrative agencies to enforce
statutes. These rules and regulations have the force of law.
 Analytical School—School of jurisprudence maintaining that the law is shaped by logic.
 Bills—Many bills are introduced each year in the U.S. Congress, from which only a few
eventually become law.
 Brown v. Board of Education—A landmark Supreme Court case in which a unanimous
decision reversed prior judicial precedent and held that the “separate but equal” doctrine
violated the Equal Protection Clause of the Fourteenth Amendment to the U.S.
Constitution. The decision led to the banning of school segregation.
 Chamber—The U.S. Congress is composed of two chambers, the U.S. House of
Representatives and the U.S. Senate.
 Civil Law—A code of laws applicable to Romans. Also known as the Romano-Germanic
civil law system.
 Code book—Federal statutes are organized by topic into code books.
 Codified law—Federal statutes that have been organized into code books.
 Command School—School of jurisprudence that believes that the law is a set of rules
developed, communicated, and enforced by the ruling party rather than a reflection of the
society’s morality, history, logic, or sociology.
 Committee—Bills from either of the two chambers of the U.S. Congress are reviewed
and studied by an appropriate committee. The committee may reject the bill, report it to
the full chamber for a vote, not act on it, or send it to a subcommittee for further study.
 Conference committee—A committee made up of members of both the U.S. House of
Representatives and the U.S. Senate.
 Constitution of the United States of America—The supreme law of the United States.
 Court of Chancery (equity court)—Court that granted relief based on fairness.
 Critical Legal Studies School—School of jurisprudence that proposes legal rules are
unnecessary and are used as an obstacle by the powerful to maintain the status quo.
 Critical legal thinking—A method of thinking that consists of investigating, analyzing,
evaluating, and interpreting information to solve a legal issue or case.
 English common law—Law developed by judges who issued their opinions when
deciding a case. The principles announced in these cases became precedent for later
judges deciding similar cases.
 Executive branch (president)—A branch of the U.S. government that has the power to
enforce the law.
 Executive orders—An order issued by a member of the executive branch of the
government.
 Federal statute—Written laws, enacted by the U.S. Congress, that regulate foreign and
interstate commerce.
 French Civil Code of 1804 (the Napoleonic Code)—One of the models used by countries
that adopted civil codes. In most countries adhering to a civil law system, the civil code
and parliamentary statutes are the sole sources of law.

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 German Civil Code of 1896—One of the models used by countries that adopted civil
codes. In most countries adhering to a civil law system, the civil code and parliamentary
statutes are the sole sources of law.
 Historical School—School of jurisprudence that believes the law is an aggregate of social
traditions and customs that have developed over the centuries.
 IRAC method—A method used to examine a law case. “IRAC” stands for issue (What is
the legal issue in the case?), rule (What is the law pertaining to the case?), application
(What is the court’s analysis and rationale?), and conclusion (What was the conclusion or
outcome of the case?).
 Judicial branch (courts)—A branch of the U.S. government that has the power to interpret
and determine the validity of the law.
 Judicial decision—A decision about an individual lawsuit issued by federal and state
courts.
 Jurisprudence—The philosophy or science of law.
 Law—That which must be obeyed and followed by citizens, subject to sanctions or legal
consequences; a body of rules of action or conduct prescribed by a controlling authority
and having binding legal force.
 Law and Economics School (Chicago School)—School of jurisprudence that believes
that promoting market efficiency should be the central goal of legal decision making.
 Law courts—Courts that developed and administered a uniform set of laws decreed by
the kings and queens after William the Conqueror; in this system of jurisprudence, legal
procedure was emphasized over the particular merits of a case.
 Law Merchant—Rules based on based on common trade practices and usage that were
applied by merchants around England and Europe, during the Middle Ages, to solve
commercial disputes. Also known as the “law of merchants.”
 Legislative branch (Congress)—A branch of the U.S. government that has the power to
enact the law.
 Merchant Court—The separate set of courts established to administer the “law of
merchants.”
 Moral theory of law—Theory proposing that the law should be based on morality and
ethics.
 Natural Law School—School of jurisprudence postulating that the law is based on what
is “correct.”
 Order—A decision of an administrative agency.
 Ordinance—Laws enacted by local government bodies, such as cities and municipalities,
counties, school districts, and water districts.
 Precedent—A rule of law established in a court decision. Lower courts must follow the
precedent established by higher courts.
 Romano-Germanic civil law system—Legal system dating back to 450 BCE when Rome
adopted the Twelve Tables, a code of laws applicable to the Romans. Commonly known
as civil law.
 Sociological School—School of jurisprudence asserting that the law is a means of
achieving and advancing certain sociological goals.
 Socratic method—A process that consists of a series of questions and answers, and a
give-and-take inquiry and debate between a professor and students.
 Stare decisis—Latin for “to stand by the decision.” Adherence to precedent.
 State constitution—Constitution that establishes the legislative, executive, and judicial
branches of state government and the powers of each branch.
 State statute—Statute enacted by state legislatures and placed in code books.

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 Statute—Written law enacted by the legislative branch of the federal and state
governments that establishes certain courses of conduct to which covered parties must
adhere.
 Subcommittee—Studies bills sent by the committee. After review, the subcommittee may
either let the bill expire or report it back to the full committee.
 Treaties—Compacts made between two or more nations.
 U.S. Congress—Branch of the government that creates federal law by enacting statutes.
 U.S. House of Representatives—One of two chambers of the U.S. Congress.
 U.S. Senate—One of two chambers of the U.S. Congress.

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Chapter 2
Ethics and Social Responsibility of Business
What is “right”?
I. Teacher to Teacher Dialogue
The study of ethics and law has been interwoven from the onset. Both disciplines stress the
moral underpinnings of their respective efforts at defining proper human behavior. In spite of this
long interaction, using business ethics issues as a freestanding chapter in mainline business law
texts is a relatively recent phenomenon. The reasons for this vary, but one of them is, no doubt,
the difficulty many traditional law teachers have had in adapting to the language of philosophers
and other related social scientists. Given the obvious need for more emphasis on ethics training in
all aspects of business education, this increase in emphasis on law/ethics issues has come none
too soon.
In this chapter, the author clearly outlines the key schools of ethical studies and then provides
excellent case examples in which to test the various approaches discussed in the text.
II. Chapter Objectives
1. Describe how law and ethics intertwine.
2. Describe and apply the moral theories of business ethics.
3. Describe and apply the theories of the social responsibility of business.
4. Define public benefit corporation and describe the social purposes served by these
corporations.
III. Key Question Checklist
 When corporate behavior is questioned, which school of ethics would be most
appropriate to examine?
 Is the behavior unethical?
 What standard of ethical behavior should be applied?
 How could the corporate entity have prevented the behavior?
 If you were in a position of judgment to respond, what would you do?
IV. Chapter Outline
The study of ethics revolves around the examination of rules, conduct, and character through a
morally-tinted microscope. That law should be grounded in some sort of morality-based
foundation is self-evident. The goals of all the ethical schools of thought are to identify some sort
of morally-based rationale for human behavior. This rationale may be found in outside sources as
seen in schools of ethical fundamentalism, or in the rule that provides the greatest good to society
as illustrated by utilitarianism. Others such as Kant and Rawls have sought to devise formulas of
behavior based on universal rules or social contract, respectively. In all these systems, a morally-
based methodology is sought as a guidepost for human behavior. If these guideposts are
universally accepted, the odds are very high that they will no longer be advisory, but rather
required by law. The process by which morally-based ethical behavior is first desired, then
expected, and finally mandated is really the evolution of law.
Because so many of our legal and economic activities are conducted in the corporate format,
juristic (law-made) business entities cannot ignore this constant and dynamic tug and pull
between ethics and law. The bottom line in the study of ethics is ultimately personal, and our job

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as teachers is to help students prepare for these ethical challenges in both their professional and
personal lives.
Introduction to Ethics and Social Responsibility of Business
 Businesses organized in the United States are subject to its laws
 They are also subject to the laws of other countries in which they operate
 Business persons owe a duty to act ethically in the conduct of their affairs
 Businesses owe a social responsibility not to harm society
Ethics and the Law
 Ethics – A set of moral principles or values that governs the conduct of an individual or a
group – doing what is right
 What is lawful conduct is not always ethical conduct
 In some situations, the law may permit an act that is ethically wrong
Business Ethics
There do seem to be some universal rules about what conduct is ethical and what conduct is not.
Five major theories of ethics include: (1) ethical fundamentalism; (2) utilitarianism; (3) Kantian
ethics; (4) Rawl’s social justice theory; and (5) ethical relativism.
Ethical Fundamentalism – Persons look to an outside source or central figure for ethical rules or
commands.
Utilitarianism – Dictates that people must choose the action or follow the rule that provides the
greatest good to society. This moral theory does not necessarily ensure the greatest good for the
greatest number of people.
Kantian Ethics – A set of universal rules that establishes ethical duties. The rules are based on
reasoning and require (1) consistency in application and (2) reversibility. Its proponent, Immanuel
Kant, would have people behave according to the categorical imperative “Do unto others as you
would have them do unto you.” Kantian ethics is also called duty ethics.
U.S. Supreme Court Case
Case 2.1 Moral Theory of Law and Ethics: POM Wonderful, LLC v. Coca-Cola Company
Facts: POM Wonderful, LLC (POM) produces and sells a pomegranate-blueberry juice blend
that consists of 85% pomegranate and 15% blueberry juices. The Coca-Cola Company (Coca-
Cola) produces and sells a competing juice blend with a label that conspicuously displays the
words “POMEGRANATE” and “BLUEBERRY.” Coca-Cola’s pomegranate blueberry juice is
actually made of five different juices: 0.3% pomegranate, 0.2% blueberry, 0.1% raspberry, and
99.4% apple and grape juices. POM sued Coca-Cola under Section 43 of the federal Lanham Act,
which allows one competitor to sue another to recover damages for unfair competition arising
from false and misleading product descriptions. The U.S. district court and the U.S. court of
appeals held in favor of Coca-Cola. POM appealed to the U.S. Supreme Court.
Issue: Can a private party bring an unfair competition lawsuit under the Lanham Act against a
competitor that challenges the truthfulness of a food label?
Decision: The U.S. Supreme Court held that POM may proceed with its Lanham Act unfair
competition lawsuit against Coca-Cola and remanded the case for further proceedings.
Reason: The Lanham Act creates a private cause of action for unfair competition through
misleading advertising and labeling.
Ethics Questions: The facts do appear to indicate that Coca-Cola was trying to trick
customers into buying cheaper apple-grape juice by prominently labeling it pomegranate-

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blueberry juice. There is a strong argument to be made that Coca-Cola did not act ethically in
this case.
Rawls’s Social Justice Theory – Moral duties are based on an implied social contract. This
implied contract states, “I will keep the rules if everyone else does.” Fairness is the essence of
justice. Rules are established from an “original position.” This means that the principles of justice
should be chosen by persons who do not yet know their station in society—thus, their “veil of
ignorance” would permit the fairest possible principles to be selected.
Ethical Relativism – Individuals decide what is ethical based on their own feelings as to what is
right or wrong. Thus, there are no universal ethical rules to guide a person’s conduct.
U.S. Supreme Court Case
Case 2.2 Nondisclosure of Evidence: Goodyear Tire & Rubber Company v. Haeger
Facts: The Haegers sued the Goodyear Tire & Rubber Company to recover monetary damages
for injuries they suffered after the family’s motorhome swerved off the road and flipped over. The
plaintiffs alleged that a Goodyear G159 tire on the vehicle caused the accident because the tire
was not designed to withstand the level of heat generated when the tire was used on a motorhome
at highway speeds. The plaintiffs repeatedly demanded that Goodyear turn over internal test
results for the G159, but the company’s responses were both slow and unrevealing in content.
The parties finally settled the case for an undisclosed sum.
Later, the plaintiffs’ lawyer learned that Goodyear had disclosed a set of test results in another
case that had not been disclosed to the plaintiffs that showed that the G159 tire got unusually hot
at speeds between 55 and 65 miles per hour. The plaintiffs sued Goodyear to recover their entire
lawyer’s fees of $2.7 million they expended on their case. The U.S. district court awarded the
plaintiffs this amount of damages, and the U.S. court of appeals affirmed the judgment. Goodyear
appealed to the U.S. Supreme Court, alleging that the award of lawyer’s fees should not be the
entire amount expended by the plaintiffs, but should be limited to an amount determined to be
related to Goodyear’s misconduct.
Issue: Should the plaintiffs recover their entire lawyer’s fees of $2.7 million?
Decision: The U.S. Supreme Court held that the plaintiffs could not automatically recover the
entire lawyer’s fees they spent on the case but could recover the amount of lawyer’s fees caused
by Goodyear’s withholding of evidence.
Reason: The U.S. Supreme Court agreed with the lower court that Goodyear had engaged in a
years-long course of bad-faith behavior, and that the company’s conduct arose to a truly
egregious level. The Court believed, however, that an award of attorney’s fees must be
specifically limited to those fees incurred because of the conduct at issue, and that no such
determination had been made with respect to the $2.7 million award.
Ethics Questions: Although the record does indicate an ethical breach by Goodyear, the U.S.
Supreme Court’s decision appears sound in terms of limiting the award of attorney’s fees to an
amount specifically related to the ethical breach.
Social Responsibility of Business
 Business does not operate in a vacuum
 Decisions made by business have far-reaching effects on society
 In the past, many business decisions were made solely on a cost-benefit analysis
 Such decisions may cause negative externalities for others
 Corporations are considered to owe some degree of social responsibility for their actions
Maximize Profits – The traditional view of the social responsibility of business is that businesses
should maximize profits for shareholders. This view holds that the interests of other

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constituencies, such as employees, suppliers, and residents of the communities in which
businesses are located, are not important in and of themselves.
Critical Legal Thinking: Volkswagen Emissions Scandal
In the early 2000s, Volkswagen produced a new diesel engine, but it was unable to develop one
that met United States environmental standards which limited the amount of nitrogen oxide
(NOx) pollution that an automobile could emit. In order to sell its new diesel cars in the United
States, Volkswagen built into their diesel cars a device and software that could detect when their
diesel automobiles were being tested by equipment of the U.S. Environmental Protection Agency
(EPA). The company’s automobiles were programmed to falsely indicate that their emissions met
EPA standards, when in fact Volkswagen’s diesel engines spewed NOx emissions 40 times
greater than permitted by law.
The U.S. government brought civil fraud and criminal charges against Volkswagen, and
consumers who purchased the affected vehicles—which could not be driven because they
violated emission standards—brought civil class action lawsuits against the company.
Volkswagen eventually agreed to pay $16 billion to settle the class action civil claims, and in a
2017 settlement reached with the U.S. government, Volkswagen pleaded guilty to 3 criminal
counts and agreed to pay $4.3 billion in civil and criminal fines. Six of the company’s executives
were criminally indicted for their participation in the deception.
Moral Minimum – This theory of social responsibility contends that a corporation’s duty is to
make a profit while avoiding causing harm to others. If a business avoids or corrects the social
injury it causes, it has met its duty of social responsibility.
Stakeholder Interest – Under this theory of social responsibility, a corporation must consider the
interests of all stakeholders, including stockholders, employees, suppliers, customers, creditors,
and the local community.
Global Law: Is the Outsourcing of U.S. Jobs to Foreign Countries Ethical?
U.S. companies often outsource the production of many goods that are eventually sold in the
United States, primarily because it is much less expensive to produce goods in foreign countries.
Usually, there are substantial labor cost savings abroad due to lower wages and lax workplace
regulations (for example, occupational safety, workers’ compensation, and fair labor standards
laws). This section questions whether it is ethical for U.S. companies to capitalize on foreign
workers who have few of the legal protections afforded workers in the United States.
Ethics: Sarbanes-Oxley Act Requires Public Companies to Adopt Codes of Ethics
The Sarbanes-Oxley Act of 2002, with its strict enforcement and punishment provisions against
corporate financial fraud, should prompt companies and their officers to be more ethical.
However, the entire corporate culture may need to change before an organization can be more
ethical.
Corporate Citizenship – This theory of social responsibility argues that business has a
responsibility to do well, and is therefore responsible for helping to solve social problems it did
little, if anything, to cause.
Public Benefit Corporations
This is a new form of corporation often referred to as a benefit corporation, B corporation, or B
corp. A public benefit corporation is a for-profit corporation, but with missions additional to the
pure profit motive. Such missions include general-public benefits like considering social issues
and protecting the environment, and can include specific public benefit purposes such as reducing

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the company’s carbon footprint, engaging in sustainability efforts, and giving a designated
percentage of the company’s profits to charity.
V. Key Terms and Concepts
 Code of ethics—A code adopted by a company wherein the company sets forth rules of
ethics for the company’s managers and employees to follow when dealing with
customers, employees, suppliers, and others.
 Corporate citizenship—A theory of social responsibility that says a business has a
responsibility to do good.
 Ethical fundamentalism—When a person looks to an outside source for ethical rules or
commands.
 Ethical relativism—A moral theory that holds individuals must decide what is ethical
based on their own feelings as to what is right or wrong.
 Ethics—A set of moral principles or values that govern the conduct of an individual or a
group.
 Ethics and the law—Ethics and the law are intertwined. Sometimes the rule of law and
the rule of ethics demand the same response by a person confronted with a problem.
 Kantian ethics (duty ethics)—A moral theory that says people owe moral duties based on
universal rules such as the categorical imperative “Do unto others as you would have
them do unto you.”
 Law—A set of enforceable standards that establishes a minimum degree of conduct
expected by persons and businesses in society.
 Maximize profits—A theory of social responsibility that says a corporation owes a duty
to take actions that maximize profits for shareholders.
 Moral minimum—A theory of social responsibility that says a corporation’s duty is to
make a profit while avoiding harm to others.
 Public benefit corporation (benefit corporation or B corporation or B corp)—A
corporation that requires its directors and officers to make decisions that accomplish
general-public benefits and stipulated specific public benefits stated in its articles of
incorporation, and to consider stakeholders other than the company’s shareholders, such
as employees, customers, suppliers, and the community, when making corporate
decisions.
 Rawls’s social justice theory—A moral theory that says each person is presumed to have
entered into a social contract with all others in society to obey moral rules that are
necessary for people to live in peace and harmony.
 Sarbanes-Oxley Act of 2002—Makes certain conduct illegal and establishes criminal
penalties for violations.
 Section 406 of the Sarbanes-Oxley Act—A section that requires a public company to
disclose whether it has adopted a code of ethics for senior financial officers.
 Social responsibility of business—Requires corporations and businesses to act with an
awareness of the consequences their decisions will have on others.
 Stakeholder interest—A theory of social responsibility that says a corporation must
consider the effects its actions have on persons other than its stockholders.
 Utilitarianism—A moral theory that dictates people must choose the action or follow the
rule that provides the greatest good to society.

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Chapter 3
Courts, Jurisdiction, and Administrative Law
See you in Court!
I. Teacher to Teacher Dialogues
Twenty-first century technological advances have provided our students with all kinds of instant
access to information. These devices have provided students with a variety of preconceptions.
Among these is the average undergraduate’s notion of how trials are conducted and the role of
attorneys in that process. Invariably these perceptions center on popular television series such as
Law and Order and Better Call Saul. This is not all bad. Current media focus on numerous law-
related issues has generated a whole new wave of public interest in the workings of our legal
system. The downside is that the media has created many myths on the folklore of law and lawyers.
In the world of pop culture, no one knows until the end who really did it until a surprise witness
shows up to identify the bad guy. In more modern versions, the attorney first has a business
relationship with the client and then proceeds to get him or her acquitted. Regardless of the
outcome, the process is always full of glamour and intrigue.
The problem is that a trial rarely resembles the goings on found in the entertainment media.
Trials are long, tedious, emotionally and financially draining processes for all parties concerned. In
many ways, a trial represents a failure by the parties to reach some sort of satisfactory solution of
the issue beforehand. Rarely do the parties actually want to go through a labyrinth of pleadings,
motions, and the like, feeling all the while totally dependent on the sometimes questionable
competence of their attorneys. Unlike the make-believe world of entertainment, the job of an
attorney is to keep his or her client out of court. (This often needs some reinforcement with the
student.) The attorney’s professional advice should anticipate and resolve potential legal problems
before, rather than after the fact if at all possible.
It is against this backdrop that we should try to present a more realistic picture of how our
system works. We can basically start by discussing how few controversies actually get to the trial
stage and how even fewer of those are actually reported in the National Reporter System.
Additionally, a fair amount of time should be spent reviewing the growing trend towards
alternative dispute resolution (ADR). Personal experience examples might be helpful in illustrating
the growing trends towards ADR. To complete the cycle, we can then proceed to itemize the key
steps used in a court trial.
Anyone who has dealt with a large governmental bureaucracy can readily appreciate the
frustrations of trying to get through the maze with sanity intact. The government’s burgeoning
growth of administrative agencies at every level is indeed cause for concern for its constituents.
According to statistics published by the U.S. Congress, the federal government alone has over 2
million civilian employees working as of 2018. In spite of constant calls to reduce the size of
government’s role in the average person’s affairs, that role has grown tremendously as reflected in
these statistics. The media headlines may be focused on the goings on in the capitol, but the real
functions of government are carried out “in the trenches” by this “fourth branch of government”
every day. This chapter seeks to outline the basic ground rules about how the agencies are created,
how they are authorized to act, and what controls have been put in place so as to protect the rights of
both citizens and the government.
The basic function undertaken by these administrative agencies is to carry out the ministerial
functions necessary to the operation of the government. These functions are first authorized by what
are called organic statutes, which create the agency, and enabling statutes, which delegate certain

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powers to the agency to act for the executive, legislative, or judicial branches of government. It is
interesting to note at the outset that the “clean functional lines” of the executive, legislative, and
judicial branches can and do often become quickly blurred when examining the breadth and scope
of administrative agency activities.
Once the existence of the agency is settled upon and its scope of authority is established, you
must then look to see if it is acting within the scope vis-à-vis the particular issue at hand. Remember
the basic assumption here is that the executive branch, legislative branch, or judicial branch has
chosen to designate and delegate a certain portion of its authority to act. This delegation is based on
the presumption that the agency can be expected to have certain levels of expertise, scales of
economy, and attention to detail which could not be readily expected of the policy makers. The next
step is to see if the power in question was in fact truly delegated, and if so, is it being properly
exercised by the agency?
The mechanisms for control of agency powers are relatively sparse given the scope of agency
activity. The key provisions for control of agency powers are found in the executive branch chain of
command and in the overview powers vested in the judiciary. In addition, there have been a number
of specific information access type statutes such as the Freedom of Information Act, Government in
the Sunshine Act, and the Administrative Procedure Act to help persons dealing with these agencies
to get through the labyrinth.
II. Chapter Objectives
1. Describe state court systems.
2. Describe the federal court system.
3. Describe the U.S. Supreme Court and the types of cases it decides.
4. Explain the jurisdiction of federal courts and compare it with the jurisdiction of state courts.
5. Define standing to sue, jurisdiction, and venue.
6. Explain how jurisdiction is applied to digital commerce.
7. Describe administrative agencies and the main features of administrative law.
III. Key Question Checklist
 If the dispute or controversy needs to be resolved in a court of law, which court has
jurisdiction?
 Once jurisdiction is established, was the proper sequence of pretrial steps taken?
 Was the trial sequence properly followed?
 After the trial is completed, are any appeals from the decision applicable?
 Define administrative law.
 List and explain the functions of administrative agencies.
 Describe the provisions of the Administrative Procedure Act.
IV. Chapter Outline
The chapter discusses the federal court system, state court systems, jurisdiction of courts, and
administrative agencies.
Introduction to Courts, Jurisdiction, and Administrative Law
There are two major court systems in the United States: (1) the federal court system and (2) the
court systems of the 50 states, Washington, DC (District of Columbia), and territories of the United
States. Each of these systems has jurisdiction to hear different types of lawsuits.
State Court Systems
Most state court systems include the following:
(1) Limited-jurisdiction trial courts;
(2) General-jurisdiction trial courts;

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(3) Intermediate appellate courts; and
(4) A highest state court.
Limited-Jurisdiction Trial Courts – Hear matters of a specialized nature
 Traffic courts
 Juvenile courts
 Justice-of-the-peace courts
 Probate courts
 Family law courts
 Courts that hear misdemeanor criminal law cases
General-Jurisdiction Trial Courts – Hear cases of a general nature that are not within the
jurisdiction of limited jurisdiction courts. Testimony and evidence at trial are recorded and stored
for future reference.
Intermediate Appellate Courts – Intermediate courts that hear appeals from trial courts. Review
the trial court record to determine if there have been any errors at trial that would require reversal or
modification of the decision.
Highest State Court – Hears appeals from intermediate state courts.
Business Environment: Delaware Court Specializes in Business Disputes
Delaware has created a special Chancery Court to decide business litigation, with a reputation for
handling corporate matters. Delaware’s laws also tend to favor corporate management, so together
with the Chancery Court, the state has created an environment that encourages incorporation in that
state. Other states are beginning to follow suit and create their own variation of Delaware’s
Chancery Court.
Federal Court System
 Special federal courts
 U.S. district courts
 U.S. courts of appeals
 U.S. Supreme Court
Special Federal Courts – Federal courts that hear matters of specialized or limited jurisdiction.
They include:
(1) U.S. Tax Court—hears cases that involve federal tax laws
(2) U.S. Court of Federal Claims—hears cases brought against the United States
(3) U.S. Court of International Trade—hears civil cases arising out of customs and international
trade laws of the United States
(4) U.S. Bankruptcy Court—hears cases that involve federal bankruptcy laws
(5) U.S. Court of Appeals for the Armed Forces—exercises appellate jurisdiction over members
of the armed services
(6) U.S. Court of Appeals for Veterans Claims—exercises jurisdiction over decisions of the
Department of Veterans Affairs
Contemporary Environment: Foreign Intelligence Surveillance Court
In 1978, Congress created the Foreign Intelligence Surveillance (FISA) Court, which is located in
Washington, DC. The FISA Court hears requests by federal law enforcement agencies, such as the
Federal Bureau of Investigation (FBI) and National Security Agency (NSA), for warrants, called

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FISA warrants, to conduct physical searches and electronic surveillance of Americans or foreigners
in the United States who are deemed a threat to national security.
U.S. District Courts – The federal court system’s trial courts of general jurisdiction
 Most federal cases originate in federal district court
 They are empowered to:
 Impanel juries
 Receive evidence
 Hear testimony
 Decide cases
U.S. Courts of Appeals – The federal court system’s intermediate appellate courts
 These courts hear appeals from the district courts located in their circuit
 These courts review the record of the lower court or administrative agency proceedings to
determine if there has been any error that would warrant reversal or modification of the
lower court decision
 No new evidence or testimony is heard
Supreme Court of the United States
The United States Supreme Court is composed of nine justices who are nominated by the president
and confirmed by the U.S. Senate. The president appoints one as the chief justice who is responsible
for the administration of the Court, while the other eight are considered associate justices.
Contemporary Environment: Process of Choosing a U.S. Supreme Court Justice
The president appoints Supreme Court justices, with the advice and consent of the Senate (majority
vote). This allows a form of balance of power between the executive and legislative branches of the
government.
Jurisdiction of the U.S. Supreme Court – The Supreme Court hears appeals from the federal
district courts and from the highest state courts. Legal briefs are filed, oral arguments are made,
lower court records are reviewed, but neither new evidence nor testimony is heard. The Supreme
Court’s decision is final.
Decisions of the U.S. Supreme Court – The U.S. Constitution gives Congress the authority to
establish rules for the appellate review of cases by the Supreme Court, except in the rare case in
which mandatory review is required. Congress has given the Supreme Court discretion to decide
what cases it will hear. Petitioners file a petition for certiorari asking for the Supreme Court to
review their case. If the court decides to consider the matter, it issues a writ of certiorari. The court
hears about 100 cases each year.
The U.S. Supreme Court can issue several types of decisions:
 Unanimous decision – In this case, all of the justices voting agree as to both the outcome
and the reasoning. Such a decision becomes precedent.
 Majority decision – A decision by the Supreme Court is considered a majority decision if a
majority of the justices agree on the outcome and reasoning. This decision becomes
precedent.
 Plurality decision – A plurality decision is when the majority of the justices agree on the
outcome, but not the reasoning. This settles the case, but does not serve as precedent.
 Tie decision – In this case, the winner in the lower court prevails. This does not serve as
precedent.

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Concurring opinion – When a justice agrees with the outcome of the majority but not the reasoning,
the justice will issue a concurring opinion explaining his or her stand.
Dissenting opinion – Any justice who does not agree with the decision may state his or her opinion.
Contemporary Environment: “I’ll Take You to the U.S. Supreme Court!”
This discusses the process necessary to win a review by the U.S. Supreme Court. Having a case
heard by the nation’s highest court is rare. Each year, approximately 10,000 petitioners ask the
Supreme Court to hear their cases, while fewer than 100 of these cases are accepted for full review
in a particular term.
Jurisdiction of Federal and State Courts
Article III, Section 2 of the United States Constitution sets forth the jurisdiction of federal courts.
Federal courts have limited jurisdiction to hear cases involving a federal question or diversity of
citizenship.
Federal Question – Federal courts have limited jurisdiction to hear cases involving federal
questions with no dollar amount limit.
Diversity of Citizenship – The federal courts have jurisdiction to hear cases involving diversity of
citizenship. Diversity of citizenship occurs if a lawsuit involves (1) citizens of different states or (2)
a citizen of a state and a citizen or subject of a foreign country. The amount in controversy must be
over $75,000.
Jurisdiction of State Courts – State courts hear cases that the federal courts do not have the
jurisdiction to hear. Federal courts may have concurrent jurisdiction with state courts to hear cases
involving diversity of citizenship.
Full Faith and Credit Clause
Under the Full Faith and Credit Clause of the United States Constitution (Article IV, Section 1), a
judgment of a court of one state must be given “full faith and credit” by the courts of another state.
Standing to Sue, Jurisdiction, and Venue
To bring a lawsuit in a court, the plaintiff must have standing to sue, the court must have personal
jurisdiction or other jurisdiction to hear the case, and the case must be brought in the proper venue.
Standing to Sue – The plaintiff must have a stake in the outcome of the lawsuit.
In Personam Jurisdiction – In personam jurisdiction over the person is achieved by the plaintiff
filing a lawsuit with a court and by serving a summons on the defendant. If personal service is
unavailable, notice of the case by mail or publication in newspapers is allowed. Defendants
disputing the jurisdiction of a court may make a special appearance to argue their case, and cannot
be served while making this appearance.
Long-Arm Statute
In most states, a state court can obtain jurisdiction in a civil lawsuit over persons and businesses
located in another state or country through the state’s long-are statute. These statutes extend a
state’s jurisdiction to nonresidents who are not served a summons within the state. The nonresident
defendant in the civil lawsuit must have had some minimum contact with the state such that the
maintenance of that lawsuit in that state does not offend traditional notions of fair play and
substantial justice.

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Critical Legal Thinking: International Shoe Company v. State of Washington
In this case, the United States Supreme Court addressed the question of how far a state can go to
require a person or business to defend him-, her-, or itself in a court of law in that state. The
International Shoe Company was a Delaware corporation that had its principal place of business in
St. Louis, Missouri. In the state of Washington, the company’s sales representative did not have a
specific office but sold the shoes door-to-door and sometimes at temporary locations.
The state of Washington assessed an unemployment tax on International Shoe. International Shoe
made a special appearance in the Washington court to argue that it did not do sufficient business in
Washington to warrant having to pay unemployment taxes in that state.
In its decision, the Supreme Court stated that in order to comply with “traditional notions of fair
play and substantial justice,” due process only requires that a defendant have “minimum contacts”
with a particular state in order for the court of that state to subject the defendant to in personam
jurisdiction. The “minimum contacts” standard is not a “bright-line” test, so if in personam
jurisdiction is challenged in a particular case, the facts of that case will determine whether such
jurisdiction exists.
In Rem Jurisdiction – Courts may have jurisdiction over property found within the state, based on
in rem jurisdiction (“jurisdiction over the thing”).
Quasi in Rem Jurisdiction – Attachment jurisdiction occurs when a plaintiff who has obtained a
judgment attempts to satisfy the judgment by attaching property located in another state.
Venue – The court with the jurisdiction that is located closest to where the incident occurred or
where the parties live should hear the lawsuit. Pretrial publicity may prejudice jurors and may lead
to a request for a change of venue in order to get a more impartial jury. Forum shopping is the
process of looking for a more favorable court without a valid reason, and is frowned upon by most
courts.
Forum-Selection and Choice-of-Law Clauses – Because many business agreements are formed
between people from different states and different countries, many contracts have clauses that
specifically address the state’s or country’s laws that will be applied in case of a dispute, in what are
known as choice-of-law clauses. Additionally, through a forum-selection clause, the parties agree
which court will have jurisdiction over a dispute if one should arise in their course of dealings.
Federal Court Case
Case 3.1 Forum-Selection Clause: Carter’s of New Bedford, Inc. v. Nike, Inc.
Facts: Nike, Inc. is a worldwide seller of shoes, apparel, and other items carrying the Nike brand.
Nike’s headquarters is in Beaverton, Oregon. Carter’s of New Bedford, Inc. is a family-owned retail
clothing and footware business that operates two stores in Massachusetts. Carter’s has sold Nike
products for 28 years. The agreement between Nike and Carter’s is contained in the invoices that
Nike provides to Carter’s, which are agreed to by both parties. The invoice agreements include a
forum-selection clause that requires any claims that Carter’s has with Nike to be brought in Oregon,
not Massachusetts. When Nike notified Carter’s that it was terminating the parties’ business
relationship, Carter’s sued Nike in Massachusetts court alleging that Nike breached its agreement
with Carter’s. Nike argued that any claim Carter’s has against Nike must be brought in Oregon
pursuant to the forum-selection clause and moved to have Carter’s Massachusetts lawsuit dismissed.
The U.S. district court dismissed the lawsuit, and Carter’s appealed.
Issue: Is the forum-selection clause enforceable?
Decision: The U.S. Court of appeals affirmed the district court’s decision that enforced the forum-
selection clause and dismissed Carter’s Massachusetts lawsuit against Nike.

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Reason: The court concluded that Carter’s did not meet its burden to show that the forum-selection
clause would deprive Carter’s of its day in court. Carter’s failed to persuade the court that
enforcement of the forum-selection clause would make it practically impossible for it to litigate in
Oregon.
Ethics Questions: While it is legal for Nike to contractually require its business affiliates to litigate
against the company only in Oregon, some may question the ethics of such a requirement.
Nevertheless, Nike’s business affiliates are charged with the responsibility of reading the terms of
any proposed contract with Nike, and understanding that a forum-selectin clause is generally
binding as a matter of contract law.
Jurisdiction in Digital Commerce
Today, with the advent of the internet and the ability of persons and businesses to reach millions of
people in other states electronically, particularly through websites, modern issues arise as to whether
courts have jurisdiction in cyberspace. Zippo Manufacturing Company v. Zippo Dot Com, Inc. is an
important case that established a test for determining when a court has jurisdiction over the owner
or operator of an interactive, semi-interactive, or passive website.
Information Technology: Jurisdiction Over an Internet eBay Seller
Odil Ostonakulov, a resident of Tennessee, operates Motorcars of Nashville, Inc. (MNI), a
Tennessee corporation. The company sells used automobiles to residents of 50 states on eBay,
averaging 12-35 cars for sale every day on eBay. Samantha Guffey, a resident of Oklahoma, was the
winning bidder on a used Volvo automobile listed by MNI on eBay. In addition to Guffey, MNI
made sales of vehicles to other residents of Oklahoma. After receiving the automobile, Guffey
determined that the automobile was not in the condition advertised and sued Ostonakulov and MNI
in Oklahoma court alleging that the defendants had committed fraud. The defendants filed a motion
with the Oklahoma court to have the case dismissed, alleging that Oklahoma lacked personal
jurisdiction over the defendants because they did not possess minimum contacts with Oklahoma to
be subject to Oklahoma’s long-arm statute. The trial court dismissed the lawsuit, finding that
Oklahoma lacked personal jurisdiction over the defendants. Guffey appealed.
The Supreme Court of Oklahoma held that Oklahoma possessed personal jurisdiction over the
Tennessee defendants. The court stated, “Internet forums such as eBay expand the seller’s market
literally to the world and sellers know that, and avail themselves of the benefits of this greatly
expanded marketplace. Sellers cannot expect to avail themselves of the benefits of the internet-
created world market that the purposely exploit and profit from without accepting the concomitant
legal responsibilities that such an expanded market may bring with it.” Guffey v. Ostonakulov, 321
P.3d 971 (Supreme Court of Oklahoma, 2014)
Administrative Law
Administrative law is a combination of substantive law and procedural law.
Administrative Agencies – Federal administrative agencies are created by either Congress or the
executive branch, and have broad regulatory powers. State administrative agencies have a profound
effect on business. State administrative agencies are empowered to enforce state statutes. They have
the power to adopt rules and regulations to interpret the statutes they are empowered to administer.
Local governments such as cities, municipalities, and counties create local administrative agencies
to administer local regulatory law.
Cabinet-Level Departments – These are federal departments that advise the president and are
responsible for enforcing specific administrative statutes enacted by the U.S. Congress.

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Powers of Administrative Agencies – The delegation doctrine states that an administrative agency
can be delegated powers to act in the stead of the legislative, executive, or judicial branches. Acts
outside their assigned scope have been declared unconstitutional.
 Rule-making – Statutes have given administrative agencies the power to issue substantive
rules, provided that they follow the procedures established by the APA. They can also issue
rules that interpret existing statutes, as well as statements of policy explaining their
proposed courses of action.
 Judicial authority – Administrative agencies often have the power to adjudicate issues
through administrative procedures, provided the procedural Due Process Clause of the
federal and state governments is followed.
 Executive power – Administrative agencies are usually granted powers of investigation and
prosecution of violations of statutes and administrative rules and orders. They are also
granted subpoena power in order to acquire the necessary information.
 Licensing – In order to enter into certain types of industries, statutes often require licenses
be acquired from administrative agencies.
Landmark Law: Administrative Procedure Act
The Administrative Procedure Act (APA) enacted by the U.S. Congress in 1946, establishes
procedures federal administrative agencies must follow in conducting their affairs. The APA
establishes notice requirements of actions a federal agency plans on taking. It requires hearings to
be held in most cases, and requires certain procedural safeguards and protocols to be followed at
these proceedings.
Administrative Law Judge – Administrative proceedings employ an employee of the agency, an
ALJ, as the sole determiner in each case. They issue an order stating the reason for their decisions,
which become final if not appealed.
Global Law: Judicial System of Japan
Comparatively speaking, there are much fewer lawyers and lawsuits in Japan than in the United
States. Culturally, Japan believes that confrontation should be avoided. In Japan, clients must
usually pay a large, up-front fee (rather than a contingency fee) for lawyers to represent them, and
plaintiffs must pay a court filing fee based on the amount claimed (rather than a flat fee).
V. Key Terms and Concepts
 Administrative agencies—Agencies that the legislative and executive branches of federal
and state governments establish.
 Administrative law—Law that governments enact to regulate industries, businesses, and
professionals.
 Administrative law judge (ALJ)—A judge, presiding over administrative proceedings, who
decides questions of law and fact concerning the case.
 Administrative order—An ALJ’s decision is issued in the form of an administrative order.
The order must state the reasons for the ALJ’s decision. The order becomes final if it is not
appealed.
 Administrative Procedure Act (APA)—An act that establishes certain administrative
procedures that federal administrative agencies must follow in conducting their affairs.
 Administrative subpoena—An order that directs the subject of the subpoena to disclose the
requested information.
 Article III of the U.S. Constitution— Provides that the federal government’s judicial power
is vested in one “Supreme Court.” This court is the U.S. Supreme Court.

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 Associate Justices of the U.S. Supreme Court—The eight other justices apart from the Chief
Justice of the U.S. Supreme Court.
 Cabinet-level federal departments—Federal departments that advise the president and are
responsible for enforcing specific administrative statutes enacted by Congress.
 Change of venue—In certain circumstances, when pretrial publicity may prejudice jurors, a
change of venue may be requested so that a more impartial jury can be found.
 Chief Justice of the U.S. Supreme Court—Appointed by the president and responsible for
administration of the U.S. Supreme Court.
 Choice-of-law clause— A contract provision that designates a certain state’s law or
country’s law that will be applied in any dispute concerning nonperformance of the
contract.
 Circuit—The geographical area served by each U.S. court of appeals.
 Concurrent jurisdiction—Jurisdiction shared by two or more courts.
 Concurring opinion—An opinion that can be issued by a justice of the Supreme Court who
agrees with the outcome of a case but not the reason proffered by the other justices.
 Delaware Court of Chancery—A special court which decides cases involving corporate
governance, fiduciary duties of corporate officers and directors, mergers and acquisitions,
and other business issues.
 Dissenting opinion—An opinion which sets forth the reason why a justice of the Supreme
Court does not agree with a decision.
 District—The geographical area served by a U.S. district court.
 Diversity of citizenship—A case between (1) citizens of different states and (2) a citizen of
a state and a citizen or subject of a foreign country.
 En banc review—A review that can be requested by a petitioner in the U.S. court of appeals
after a decision is rendered by a three-judge panel.
 Exclusive jurisdiction—Jurisdiction held by only one court.
 Executive power—Administrative agencies are usually granted executive powers, such as
the power to investigate and prosecute possible violations of statutes and rules. This often
includes the power to issue an administrative subpoena to a business or person to obtain
information.
 Federal administrative agencies—Agencies created by the federal government to enforce
federal regulatory statutes. Examples include the Food and Drug Administration (FDA), the
National Labor Relations Board (NLRB), and the Equal Employment Opportunity
Commission (EEOC).
 Federal question case—A case arising under the U.S. Constitution, treaties, and federal
statutes and regulations.
 FISA warrant—Empowers a federal administrative agency, such as the Federal Bureau of
Investigation (FBI) or the National Security Agency (NSA), to conduct physical searches
and electronic surveillance of Americans or foreigners in the United States who are deemed
a threat to national security.
 Forum-selection clause (choice-of-forum clause)—Contract provision that designates a
certain court to hear any dispute concerning nonperformance of the contract.
 Forum shopping—Looking for a favorable court without a valid reason.
 Full Faith and Credit Clause—A clause of the U.S. Constitution under which a judgment of
a court of one state must be given “full faith and credit” by the courts of another state.
 General-jurisdiction trial court (court of record)—A court that hears cases of a general
nature that are not within the jurisdiction of limited-jurisdiction trial courts. Testimony and
evidence at trial are recorded and stored for future reference.

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Courts, Jurisdiction, and Administrative Law
23
 Highest state court—The highest court in a state court system; it hears appeals from
intermediate appellate state courts and certain trial courts.
 In personam jurisdiction (personal jurisdiction)—Jurisdiction over the parties to a lawsuit.
 In rem jurisdiction—Jurisdiction to hear a case because of jurisdiction over the property of
the lawsuit.
 Intermediate appellate court (appellate court or court of appeals)—An intermediate court
that hears appeals from trial courts.
 International Shoe Company v. State of Washington—A landmark U.S. Supreme Court case
that established the minimum contacts standard.
 Judicial authority—Authority of an administrative agency to adjudicate cases in an
administrative proceeding.
 Judicial review of administrative agency actions—Where an enabling statute does not
provide for review, the APA authorizes judicial review of federal administrative agency
actions.
 License—Many administrative agencies are empowered to issue a license before a person
can engage in certain professions or businesses. For example, the Office of the Comptroller
of the Currency (OCC), a federal government agency, issues charters for national banks.
 Limited-jurisdiction trial court (inferior trial court)—A court that hears matters of a
specialized or limited nature.
 Local administrative agencies—Agencies created by cities, municipalities, and counties to
administer local regulatory law.
 Long-arm statute—A statute that extends a state’s jurisdiction to nonresidents who were not
served a summons within the state.
 Majority decision—A decision of the U.S. Supreme Court where a majority of the justices
agree as to the outcome and reasoning used to decide a case.
 Minimum contact—A nonresident defendant in a civil lawsuit must have had some
minimum contact with the state such that the maintenance of that lawsuit in that state does
not offend traditional notions of fair play and substantial justice.
 Petition for certiorari—A petition asking the Supreme Court to hear one’s case.
 Plurality decision—A decision of the U.S. Supreme Court where a majority of the justices
agree as to the outcome of a case but not as to the reasoning for reaching the outcome.
 Procedural administrative law—Establishes the procedures that must be followed by an
administrative agency while enforcing substantive laws.
 Quasi in rem jurisdiction (attachment jurisdiction)—Jurisdiction allowed a plaintiff who
obtains a judgment in one state to try to collect the judgment by attaching property of the
defendant located in another state.
 Rule of four—The votes of four justices are necessary to grant an appeal and schedule an
oral argument before the Supreme Court.
 Rules and regulations—Adopted by administrative agencies to interpret the statutes that
they are authorized to enforce.
 Service of process—A summons is served on the defendant to obtain personal jurisdiction
over him or her.
 Small claims court—A court that hears civil cases involving small dollar amounts.
 Special federal courts—Federal courts that hear matters of specialized or limited
jurisdiction.
 Standing to sue—The plaintiff must have some stake in the outcome of the lawsuit.
 State administrative agencies—Administrative agencies that states create to enforce and
interpret state law.

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Chapter 3
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 State courts—A separate court system that is present in each state, Washington, DC and
each territory of the United States. It includes limited-jurisdiction trial courts, general-
jurisdiction trial courts, intermediate appellate courts, and a supreme court.
 State supreme court—The highest court in a state court system; it hears appeals from
intermediate state courts and certain trail courts.
 Substantive administrative law—Law that an administrative agency enforces—federal
statutes enacted by Congress or state statutes enacted by state legislatures.
 Substantive rules—Rules issued by an administrative agency that have the force of law and
to which covered persons and businesses must adhere.
 Supreme Court of the United States (U.S. Supreme Court)—The highest court in the land,
located in Washington, DC.
 Tie decision—A Supreme Court decision where the number of votes cast by the justices
leads to a tie and the decision of the lower court is affirmed. It occurs when all nine judges
are not present.
 Unanimous decision—A Supreme Court decision where all of the justices voting agree as to
the outcome and reasoning used to decide a case.
 U.S. Bankruptcy Court—A special federal court that hears cases involving federal
bankruptcy laws.
 U.S. Court of Appeals—The federal court system’s intermediate appellate court.
 U.S. Court of Appeals for the Armed Forces—A special federal court that exercises
appellate jurisdiction over members of the armed services.
 U.S. Court of Appeals for the Federal Circuit—A U.S. Court of Appeals in Washington, DC
that has special appellate jurisdiction to review the decisions of the Court of Federal Claims,
the Patent and Trademark Office, and the Court of International Trade.
 U.S. Court of Appeals for Veterans Claims—A special federal court that exercises
jurisdiction over decisions of the Department of Veterans Affairs.
 U.S. Court of Federal Claims—A special federal court that hears cases brought against the
United States.
 U.S. Court of International Trade—A special federal court that handles cases involving
tariffs and international trade disputes.
 U.S. district courts—The federal court system’s trial courts of general jurisdiction.
 U.S. District of Columbia Circuit—The 12th circuit court, located in Washington, DC.
 U.S. Foreign Intelligence Surveillance Court (FISA Court)—A court located in
Washington, DC that hears requests by federal law enforcement agencies, such as the
Federal Bureau of Investigation (FBI) and the National Security Agency (NSA), for FISA
warrants.
 U.S. Foreign Intelligence Court of Review (FISCR)—If the U.S. Foreign Intelligence
Surveillance Court (FISA Court) denies a government application for a FISA warrant, the
government may appeal the decision to this entity.
 U.S. Tax Court—A special federal court that hears cases involving federal tax laws.
 Venue—A concept that requires lawsuits to be heard by the court with jurisdiction that is
nearest the location in which the incident occurred or where the parties reside.
 Writ of certiorari—An official notice that the U.S. Supreme Court will review one’s case.
 Zippo Manufacturing Company v. Zippo Dot Com, Inc.—An important case that established
a test for determining when a court has jurisdiction over the owner or operator of an
interactive, semi-interactive, or passive website.

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25
Chapter 4
Judicial, Alternative, and E-Dispute Resolution
Why don’t I want to see you in court?
I. Teacher to Teacher Dialogue
Only a small percentage of cases make it to trial. The reality is that most cases settle at some
point in the process. Settling is safer, quicker, and usually less costly. In my practice, I can
remember having several cases settle while the jury was out deliberating.
I try to present a more realistic picture of how our system works. I basically start by
presenting statistics on how few controversies actually get to the trial stage and how even fewer
of those are actually reported in the National Reporter System. In addition, I spend a fair amount
of time reviewing the growing trend toward alternative dispute resolution (ADR). I illustrate the
key identifying features of each method of ADR, and I use both experiential examples, as well as
local statutory enactments, to help illustrate the increasing use of ADR.
Given the reality that litigants may not resolve their dispute through ADR, and that civil
litigation may be inevitable in a particular case, it is important to itemize the key steps used in a
court trial. For those of you who are practicing trial attorneys or who have worked in that arena
before coming to academia, this material gives you an obvious area of focus and further
elaboration. In any event, I always try to use this opportunity to ask students about their own
personal contact with our court system. I do, however, preface these conversations with the
caveat that they need not volunteer information that might be embarrassing, confidential, or
inappropriate.
II. Chapter Objectives
1. Describe how attorneys are compensated.
2. Describe the pretrial litigation process.
3. Define complaint, summons, and answer, and describe the pleading process.
4. Define class action and describe the requirements for bringing a class action lawsuit.
5. Describe the discovery process and the various methods of discovery.
6. Contrast the different types of pretrial motions.
7. Describe the goals and procedures of a settlement conference.
8. Describe the trial process.
III. Key Question Checklist
 Does the dispute or controversy lend itself to an out-of-court resolution?
 If the dispute or controversy needs to be resolved in a court of law, which court has
jurisdiction?
 Once jurisdiction is established, was the proper sequence of pretrial steps taken?
 Was the trial sequence properly followed?
 After the trial is completed, are any appeals from the decision applicable?
IV. Chapter Outline
Introduction to Judicial, Alternative, and E-Dispute Resolution
One objective of this chapter is to familiarize students with the court trial sequence. Litigation is
the process of bringing, maintaining, and defending lawsuits. Because it is often difficult and

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Chapter 4
26
expensive, people turn to various forms of non-judicial dispute resolution, or alternative dispute
resolution.
Attorney Representation
Lawyers most often charge an hourly rate for their services. The fees charged reflect the
attorney’s experience, cost of operations, and the location of his or her practice. Attorneys often
require a client to pay a retainer, a specified dollar amount deposited by the client before the
lawyer proceeds, which is placed in a trust account. The lawyer’s fees are taken from the trust
account as he or she provides hourly services. Fees are also charged for paralegals who work on
the case, for expenses such as copying documents, filing fees with the court, fees for expert
witnesses, and other fees associated with the case or legal transaction.
Where a legal matter is straightforward and well-defined, attorneys often charge a flat fee. This
fee arrangement is often used to draft wills and trusts, form small corporations and limited
liability companies, file simple bankruptcy proceedings, settle uncontested divorces, and the like.
In certain types of cases, attorneys work on a contingency-fee basis. Under this arrangement, the
lawyer receives a percentage of the amount recovered by winning or settling a case.
In criminal cases, the government is represented by a prosecutor. A defendant in a criminal case
can hire his or her own attorney. If the defendant cannot afford an attorney, the government will
provide an attorney to represent the defendant free of charge.
Pretrial Litigation Process
The pretrial litigation process can be divided into the following major phases: pleadings,
discovery, pretrial motions, and settlement conference.

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Judicial, Alternative, and E-Dispute Resolution
27
Pleadings
The paperwork filed to initiate and respond to a lawsuit is known as the pleadings. These include
the complaint and summons, the answer, and any cross-complaints and replies, as well as
interventions and consolidation requests.
Complaint and Summons – To initiate a lawsuit, the party who is suing (the plaintiff) must file
a complaint in the proper court. A summons is a court order directing the defendant to appear in
court and answer the complaint. The complaint and summons are served on the defendant. This is
called service of process.
Answer – The defendant, the party who is being sued, must file an answer to the plaintiff’s
complaint.
Cross-Complaint and Reply – A defendant who believes he or she has been injured by the
plaintiff can file a cross-complaint against the plaintiff in addition to an answer. The original
plaintiff must file a reply (answer) to the cross-complaint.
Intervention and Consolidation – If other persons have an interest in a lawsuit, they may
intervene and become parties to the lawsuit. This is called intervention. If several plaintiffs have
filed separate lawsuits stemming from the same fact situation against the same defendant, the
court can consolidate the cases into one case if doing so would not cause undue prejudice to the
parties.
Critical Legal Thinking: Statute of Limitations
A statute of limitations establishes the period during which a plaintiff must bring a lawsuit against
a defendant. If a lawsuit is not filed within this time, the plaintiff loses the right to sue. A statute
of limitations begins to “run” at the time the plaintiff first has the right to sue the defendant.
Class Action – A class action occurs when a group of plaintiffs collectively bring a lawsuit
against a defendant.
Class Action Fairness Act (CAFA) – In 2005, the U.S. Congress enacted the Class Action
Fairness Act that gives federal courts jurisdiction to hear class action lawsuits that would
otherwise be heard by state courts. The act is designed to reduce many abuses in class action
lawsuits previously brought in state courts, particularly plaintiffs forum shopping for sympathetic
state courts.
U.S. Supreme Court Case
Case 4.1 Class Action: Tyson Foods, Inc. v. Bouaphakeo
Facts: Tyson Foods, Inc. is a major food processor that operates a pork processing plant in Storm
Lake, Iowa. The plaintiff employees slaughter and trim hogs and prepare the meat for shipment.
Tyson paid these employees for the 40 hours they worked each week, but did not pay them for
time spent donning and doffing their protective gear. The affected employees filed a class action
lawsuit in U.S. district court alleging that Tyson violated the overtime pay requirements of the
Fair Labor Standards Act (FLSA) by not paying them overtime pay for the time spent putting on
and taking off their protective equipment.
Tyson argued that the class should not be certified and that the plaintiffs’ only recourse is to bring
individual lawsuits against Tyson. The U.S. district court certified the class and the jury awarded
$2.9 million in compensatory damages against Tyson for violation of the FLSA. The U.S. court
of appeals upheld the U.S. district court’s decision, and Tyson appealed to the U.S. Supreme
Court.

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Chapter 4
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Issue: Should the class action be certified?
Decision: The U.S. Supreme Court upheld the U.S. court of appeal’s decision to certify the class.
Reasoning: The U.S. Supreme Court noted that before a class is certified, a district court must
find that questions of law or fact common to class members predominate over any questions
affecting only individual members. In the subject case, the Court noted that each employee
worked in the same facility, did similar work, and was paid under the same policy.
Ethics Questions: While some students may argue that the sufficient commonality of interest
requirement for certification of a class action is a legitimate question on appeal in this case, others
may contend that the question is easily resolved by the fact that all employees were affected by
Tyson’s practice of not paying them for the time they spent putting on and taking off their
protective equipment. Arguably, Tyson’s attempt to block the class action certification and
thereby require that the plaintiffs pursue individual lawsuits was simply an attempt by the
corporation to dissuade litigation.
Discovery
A legal process during which both parties engage in various activities to discover facts of the case
from the other party and from witnesses prior to trial. Examples include depositions and
interrogatories.
Deposition – A deposition is oral testimony given by a party or witness prior to trial. The person
giving a deposition is called the deponent.
Interrogatories – Interrogatories are written questions submitted by one party to a lawsuit to
another party.
Production of Documents – One party to a lawsuit may request that the other party produce all
documents that are relevant to the case prior to trial. This is called production of documents.
Information Technology: E-Discovery
Electronic discovery, or e-discovery, is the process whereby relevant electronic documents are
discovered, exchanged, collected preserved, and processed during a lawsuit. Rule 34 of the
Federal Rules of Civil Procedure requires that electronically stored information (ESI) be
produced by the parties in federal court proceedings. Discoverable ESI includes Microsoft Word
documents, Excel spreadsheets, emails, instant messages, text messages, and the like.
Information Technology: Cellphone Texts are Discoverable Evidence in an Automobile
Accident Case
A vehicle driven by Tabitha Antico collided with a truck owned by Sindt Trucking, Inc. Antico
was killed in the accident. The personal representative of Antico brought a civil wrongful death
action against Sindt Trucking. The company denied liability, alleging that Antico was either
solely or partially at fault for the accident because she was distracted by texting or otherwise
using her cellphone while driving. Testimony from two witnesses and responding troopers
indicated that Antico had been utilizing her cellphone at the time of the accident. Sindt made a
motion to the trial court to permit an expert to inspect the cellphone’s data, including text
messages, internet website access history, and other use of Antico’s cellphone on the day of the
accident. The plaintiff countered that the discovery would violate Antico’s privacy rights. The
trial court approved the discovery of the cellphone data, limiting the discovery to the 9-hour
period preceding and including the time of the accident.
The court of appeals affirmed the trial court’s ruling permitting inspection of the cellphone for a
9-hour period on the day of the accident. The court stated, “Petitioner considers the inspection an
improper fishing expedition in a digital ocean. Contrary to petitioner’s argument, privacy rights

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Judicial, Alternative, and E-Dispute Resolution
29
do not completely foreclose the prospect of discovery of data stored on electronic devices.”
Antico v. Sindt Trucking, Inc., 148 So.3d 163, 2014 Fla. App. Lexis 16746 (District Court of
Appeal of Florida 2014)
Information Technology: Social Media Postings and Photographs are Discoverable Evidence
Maria Nucci claimed that when she was in a store owned by Target Corporation, she slipped and
fell on a foreign substance on the store’s floor. Nucci sued Target to recover damages for her
alleged injuries. Nucci claimed that she was seriously injured, experiences pain from the injury,
suffers emotional pain and suffering, and suffers permanent and continuing injuries. After the
incident, Target obtained surveillance videos that showed Nucci carrying heavy items and doing
other physical acts that refute her claim of serious personal injury.
Target served Nucci with a Request for Production of Electronic Media to obtain photographs of
her from her social media accounts for the two years prior to the date of the incident to the
present. The trial court issued an order compelling discovery of the photographs from Nucci’s
social media sites. In upholding the order, the court of appeals stated, “The information sought,
photographs of Nucci posted on Nucci’s social media sites, is highly relevant. If a photograph is
worth a thousand words, there is no better portrayal of what an individual’s life was like than
those photographs the individual has chosen to share through social media.” Nucci v. Target
Corporation, 162 So.3d 146, 2015 Fla. App. Lexis 153 (District Court of Appeal of Florida 2015)
Physical or Mental Examination – In cases that concern the physical or mental condition of a
party, a court can order the party to submit to certain physical or mental examinations to
determine the extent of the alleged injuries.
Pretrial Motions
Pretrial motions like a motion for judgment on the pleadings and a motion for summary judgment
are used to try to dispose of all or part of the lawsuit prior to trial.
Motion for Judgment on the Pleadings – Motion that alleges that if all the facts presented in the
pleadings are taken as true, the party making the motion would win the lawsuit when the proper
law is applied to these asserted facts.
Motion for Summary Judgment – Motion asserting that there are no factual disputes to be
decided by the jury; if so, the judge can apply the proper law to the undisputed facts and decide
the case without a jury.
State Court Case
Case 4.2 Summary Judgment: Wade v. Wal-Mart Stores, Inc.
Facts: Leslie Wade and her two children went shopping at a Wal-Mart store in Savoy, Illinois.
Wade parked her SUV in the Wal-Mart parking lot. At approximately 7:30 p.m., Wade and her
children returned to the SUV with a cart full of groceries. It was a clear, dry night, and the
parking lot was well lit. After Wade unloaded the groceries into the SUV and returned the
shopping cart, her left foot fell into a pothole, causing her to fall and suffer a broken foot. The
pothole was a couple of feet long and a few inches deep. Wade sued Wal-Mart, seeking
compensation for her injuries. Wal-Mart filed a motion for summary judgment, arguing that it did
not owe Wade a duty because the pothole was an open and obvious hazard. The trial court
granted summary judgment in Wal-Mart’s favor, and Wade appealed.
Issue: Should Wal-Mart be granted summary judgment?
Decision: The appellate court affirmed the trial court’s grant of summary judgment in Wal-
Mart’s favor.

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