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.

Legal Heritage and the Information Age
2
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

Chapter 1
3
 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:

Legal Heritage and the Information Age
4
 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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Chapter 1
5
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.

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Legal Heritage and the Information Age
6
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.

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Chapter 1
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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.”

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Legal Heritage and the Information Age
8
 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
12
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.

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