CASES AI{D MATERIALS

F'OR USE IN

FIL

185

LEGAL, ETHICAL AI\D SOCIAL ENVIRONMENT OF BUSINBSS

PART OI\E

- Introduction,
Pages

Legal Process & Ethics

| - 12

DR. ERIC T. RUUI)

Instructional Assistant Professor

College of Business

Illinois State [.Iniversify

Spring,2010

Michelle D. Green
Legal Environment of Business

Flagiello v. The Pennsylvania Hospital

477 Pa.486,2O8 A. 2d 193 (1965)

Facts: Mary Flagiello, while a paying patent of the Pennsylvania Hospital, was caused to fall and break her ankle through the negligence of two hospital employees. The Flagiellos brought suit against the hospital and the two employees for this loss. The hospital claimed it was not responsible on the bass of the doctrine of charitable immunity. This doctrine says that charitable institutions are immune from suit due to negligence. The trial court dismissed the complaint, and the Flagiellos appealed to the
Pennsylvania Supreme Court.

lssue: Should the doctrne of charitable immunity be overruled?

Judqment: Yes.

Reasonins: Historically, hospitals have been immune from suit under the doctrine of charitable immunity. Justice Musmanno, however, feels that this doctrine has now lost its justification. The Court said that since Mary Flagiello was paying for her stay at the hospital, she was not recevng charity and that the hospital was, in fact, operating as a business in the legal sense of the term, and thus, subject to the obligations of a business.
The court stated that stare decisis does not bind the court if injustice would result. The court also said that legislation was not required to change prior judge-made law. The decision ended the use of the charitable immunity doctrine, at least as it applied to charitable hospitals.

The &rviro.nrnen of Busness

Z.

INTRODUCTION TO THE LECAL ENVIRONMENT

OF

BUSINESS

19

The cosrson law is just a: binding aoy statute, because in the final analysis it is what judges do that 1s determines the nature of the law- The following decision illustrates both the concept of stare'declsis and the natue of the cosrmon law.

417 Pa. .l{16,208 A.2d 193 (1965)

Mary Flagiello was a paying patient in the pennsylvania Hospital, a charitable

insli.utio1uough

to fall and fracture her ankte. Th_at

more hospital expenses. Mrs. Flagiello and her husband (th ptainkffs) brught suit.for their loss against the hospital and the two ernployees wh a[egedly."ri"a F: *t".y.The hospital (the defendanr) daimed thaiit was not respo;ibe for the injuries on the basis of an ancient common-law doctrine called charitable inmuniry- That doctrine provides that cJraritable (eleemosynary) institutions are i.srmure from suit for their own negligelg" 9r the negrigene of iet employees- The trial court dismissed rhe complaint filed by the Flagiellos, and the Rgittos appealed the decision to the Perusylvania Suprerre Court.
Musmanno, f ustice The hospital has not denied that its negligence caused Mrs. Flagiello's injuries. It merely anhe was to remain n the hospital to be cured of the ailment with which she entered the hospital, but she had to continue to pay that rate for the perod she was compelled. to remain in thg hospital as a result of iniuries caused by the hospital itself. P say that a person who pays for what he receives is still of charity is self-contradiction in terms- -the-object ln the early days oipublic accommodation for the ill and the rnaimed, chari was exercised in i pure and pristine_sense- Many goo men and wornen, litjeral in purse and generous in Joul, set up houses to heat the poor and homeless victims of diseae and iniury. They ma.de no $-u.g." for this care- . _ . The wealthy nd tfe s called middle class were treated in their homei where usually there could be found better facilities than could be had inihe hospitals. Charity in the biblical serse prevailed. Whatever the law my have been regarding charitable institutions in the past it does not reet the-conditons of t99"y. . . - Hoipitals today are growing into tiqhty edifices in brick, ltone, glas and arble;"many of the maintain large staffs; they-use the best equipment that scence can devise; rhey 6lize the mosf mbdern methods in devoting themseives to the noblest purpose of man, that of helpng one,s stricken brother. ut hey do all this on a business basis, submitting invoices for

the negligence of two employees of the hospiial she was caused iniury in tumcaused a longer hospital stay and

nounces that

injury- is a wrong; and for the redreis of everv wrong thee is a remedy: wrofE is a violation of on.s righ 1 and 6or the vindication of every right there is a reme'y.,, On what basis then, may a hospital, which expects and receives compensation for its iervices, demand of the law that it be excuse_d from responding io damages for iniuries tortiously inflicted by it! emplyees on pay_ ing patients? There is not a person or estalishrnent in all civilization that is not reQuired ro meet his or its financial obligations, there is not a person or establishment that is not ca$ed upon by the law to render an accounting for harm visited by him or it on innocenf victims. By what line of reasoning, then, can any insti_ tution,_operating commercially, expect the law to insu_ late it ffom its debts? . . The hospital in this case . . . replies to rhat question with various answers, some of which are: it is an ancient rule that charitable hospital have never been required.to.recompense patients who have been iniured through the negligence of their employees; the rte of starc dccisis forbids that charirable hospitats be held li_ able . _ . ; if rhe rule of charitabe immunity is to be dis_ carded, this must be done by the State Legislature; and that sinc hospitals serve the public, theie is involved here a mater of public policy which is not within the iurisdicrion of the courts. Whatever Mrs. Flagiello received in the pennsylvania Ho_spital was not bestowed on her gratuitouslf. She paid 524-50 a lll rattrer substantiaf fee for holpital services in 1965.-Ed.l for the services she was to re_ ceive. And she paid this amount not only for the period

therefore, owed no duty of care to its patient. It declares in effect that it can do wrong and still not be liable in damages to the person it has wronged. lt thus urges a momentous exception to the generic proposition thiat n law there is no wrong without a rernedy.iron the earliestdays of.organized society it became apparent that society could never becorne a success unlesj the collectivity of mankind guaranteed to every member of soci_ ety a remedy.for a_palpable wrong inflicted on him by another member of that society. In 184,* Justice Storrs of the Supreme Court of Connecticut crystallized into epiErmmatic language that wise concet, as follows: -n

it is an eleemosynary insttution, nd,

. Fajling to hold back bth rho.,ef,elming reasons of ru.dimentary-ustice for abolishing the doct;ine, and

ty rmmunity doctrine is to undergo mutation the only surteon capable of performing the-operation is the Legislature. We have seen howeier that the controverted rute is not the creation of the Lesislature. This Court fashioned it, and. what it put toseiher_ it can dismantte.

services rendered-and properly so. And if a hospital functiois ai a business insdrution, and receiving money for what it offers, it must Py tr.gl"S be a business establishmnt al in meeting obligations it ' incurs in running that establishment. One of th-ose inescapable obligations is that it must exercise a proper de. gree of care for its parients, and, to the extent itrai t fals in that care, it should be liable in damages as any other commercial firm would be liable- _ . lf there was any iustification for the charitable immunity doctrine when it was first announced, it has lost that iustifica tion today. - . The appellee [Hospitall . . . insist[s] that if the char-

the rising tide of out-of-stare repudiaion of the doctrine,

2A THE LEGAL PROCESS

the defendant Hospital . . . fallfsl back for defense tq the bastion of starc dccks. lt s inevitable and proper While age adds venerabteness to moral principles and some physical obiects, it occasionally biomes necessary and it is notsacrilegious to do so, to scraPe away the moss of the years to study dosely the thing which is being accepted as authorittive, inviolable, and untouchable. The Supreme Court of Mic|igan and sagaciously in the case ol WIlams o. City of Detrcil. . . that

But it would not comport with wisdom to insist thal, should the shoals rise in a heretofore safe course and rocks,emege to encumber the passage, the ship should nonethetess pursue the original cours, merelibecause it presented no hazard in the pasu The principl o starc dccsis does not demand that we fotlow p-recedents which sNpwreck iustice. 'Stare dccsis is not an ion mold into which every utterance by-aCourt-regardless of circumstances, parbe poured, and, where, like wet concrete, it must acquire an unyielding rigidity which nothing later can
ties, economic barometer and sociological

that they should do so- Withoutstarc dcisi, there wold be no stability in our system of iurisprudence. Starc dccisis clannels the law. [t erects lighthouses and flies-thesignals o-f safety. The ships of iuriprudence must follow that well-defined channel which,-over the years, has been proved to be secure and trustworttry.

"it s the peculiar genius of the comnon law that no legal rule is mandated by the doctrine of starc dccsb

climate-must

ity shudders, and justice recoils before much of what was done'in the past under the name of law- Yet, we are urged to retain a forbidden incongnrity in the law simply because it is old. That kind of reasoning would have retained prosecution for witchcraft, imprisonment for 9ebt and hanging for rninor offenses which today are hardly regarded as misdemeanrs. There is nothing in the records of the courts, the biographies of great iurists or the writings of eminent legal authorities which offers the slightest encouragement to the notion that-lime-pekifies into unchanging jurisprudence a palpable fallacy- As years can give n sturdiness to a decayed tree, so the passing decaes can add no convincin^g flavor to the withered aple of sophistry c-linging to the limb of demonsrrated iriong. Thre are, of course, pflclpls a-nd precepts sanctied by age and no one would think of changrn them, but their iviolability derives not from longevi but from their universal appeal to the reason, the conscience and the experience of mankind. No one, for instance, would think of challenging what was written in Magra Charta, the Habeas Corpus Act or the Bill of Rights f the Constitution of the United SFates- . - -

changeThe history of law through the ages records numerous inequities pronounced by courts because the society of the day sanctioned them. Reason revolts, human-

when that rule was conceived in error or when the times and circusrstances have so changed as to rendei it an instrusent of injustice-" The charitable immunity rule proves itself an instrument of iniustice and nothing presented by the d' fendant - - . shows it to be otherwise- . . A rule tht'has become insolvent has no place in the active market of curent enterprise- When a rule offends against reason, when it is at odds with every precept of natural iustice, and when it crurot be defended on ts own merits, but has to depend alone on a discredited genealogy, courts not only possess the inherent power to repudiate, but, indeed it s required by the very nature of judicial function, to abotish such a rule. Of course, the precedents here recalled do no.t justify a light and casual treatment of the doctrine of stdr dcciss, but they proclaim unequivocally that where iustice demands, reason dictates, equality enioins and fair play decrees a change in judge'made law courts will not lack in determination to establish that.change. The judgments of the Courtbelow ar reversed. . . . Case Discussion Questions

I Dos the tact that Mrc. Flagiello was a paying patient have anything to do with the iesultZ Would the decision have been the same if she had been a charity patient? 2 What is the social and economic effect of this decision? Under the prior rule, who carried the risk of toss of iniury suffered at the hands of a charity? After this case, r+ho carries that risk? Should the issue of the social and econosric effect play a ole in deciding who should win? . 3 ts thee a precedent? Was it followed? 4 Does the new rule of liability announced by the cout apply to all charities, or just charitable hospitals?

Stare Decisis and Interpretaori.

Interpretation of Statutes Even when there is a statute, adrrinistrative regulation. or constitutional provision directly on point, the couts must often step in to interpret the meaning of the words in the statute- This need for interpretation is often difficult for layperson to grasp. Words--eve com-uronly used ones-<ften have several meaning+ and the precise meaning given to a word or phrase may make a great deal of difference in a sucial case. Various phrases in the U.S. Constitution, such as "freedom of speech," "due process,- "Commerce . . - among the several States," and "equal protection of the lawg" re particularly subject to interpretation because of their breadth and vagueness- Many of the cases n this text involve an issue of construction (interpretation) of some statute or consti-

tutional provion.

While the courts have a great deal of latitude in interpreting the words of statutes, there are many "rules of construction," often devised by the coutts themselves, to aid the courts in interpreting legislative acts- It is often said that the goal

TNTRODUCTION TO THE LEGAL ENVTRONMENT

OF

BUSINESS

21,

1 The words of a stahte should-be given their plain and narural meaning unless injustice or absurrdity would result. 2 A statute should be interpreted, if possible, to have a legal and constitutional

3 4

effect Criminal statutes are construed strictly against the govemment. Tax statutes are construed in the manner that imposes the least burden on the
Laxpayer.

5 Statutes that change the common law are strictty construed. 6 Technical words are given their technical meaning. 7 May is permissive, whereas shall or will mears -musL,, 8 statutes should be interpreted as a wholq and all of the pars of the statute
be viewed to determine the intent of a part

should

of the statute.

FIGURE

1.5

Some Basic Rules for the lnterpretation of Statutes

its intent in the statute, or if the legislative record contains tatements of the legislahrre's intent. But often such help is not available, and the courts must rely on other "rules of construction" to determine the true intent of the legislature (sel
Figure 1.5).
When a court interprets a constihtional provision, statute, or administrative regulation, generally that interpretation has the same status in the law as the provisioninterpreted and, thus, becomes a part of the law. Therefore, if the supreme C-ourt inteprets a provision of the u.S. Constitution, the Court's interpretaiion in effect becomes a part of the Constitution until either the Constiturion is amended or the Court changes its mind. If Congress were to pass a starute declaring the Court's interpretation unlawful, that statute would Le of no effect, becaur th. Court's decision had the stahs of the Constihtion itself.

of all statutory construction is to f:rl.d "tfu intent of the legislature," or, in the case of the federal corstitution, "the intet of the fmmeri," effect to that intent. "r,d'6rr" Sometimes that intent is easy to deternine, particularly iittu t"glrtuture d,iscloses

Interpretation and Case Laws sometimes even cases need interpretationIt is at this point that the distinction between the common law and interpretative functions of judicial decisions becomes furzy.k the Flagielto decision (pp. *x-r"),
the court's decision may be read in one of two ways. Eiher the doctrine of charitable imnunity is completely dead, or the doctrine no longer applies to paying patients in charitable hospitals. Sometimes, as in the following case, the courts are required to darify and interpret thei own decisions.

Nolan o. Tifereth Israel Synagogue of Mt. Carmel

425 Pa. 106,227 A.zd 675 O96n Sup. Ct. of pennsylvania

Gertnde Nolan fell on the sidewalk in front of the defendant-synagogue's building,.resulting in personal iniuries. Mrs. Nolan and her husband Uro"-gt t this action the synagogue, charging negligence. The synagogue raised the defense of ",guT"l charrtabe immunity, but the Nolans argued that the Flagiello case had overturned that.doctrine in Perursylvania. The lower court held that-the synagogue was a nonprofit religious organization and was exempt from suit under'thetrine of charitable immtnity. The case was dismissed, and the Norans appeared to the state supreme court.

O'Brien, Justice The opinion of the court below condudes that our decision in Flagreflo abrogated the doc-

trine of charitable immuni only isofar as it related to an action - . . brought by a paying patient in a hos-

22 THELEGALPROCESS
pital. . . . Appellants, on the other hand, contend that Flagello intended to, and did, put an end to the doctrine of charitable immtnity in Perursylvania. To hold thatFlagrello is limited to the extent found t" court below and contended for by the appely lee would produce an anomalous siuaion boerTg or, the barre. We would then be required to say that a paying patient in a hospital could recover for in-ries sustale{ by him as the resulr of the hospital,s negligencq while a nonpaying patient could-srake no such r-ec!v!rI- We would further be requiled to
ated could not, if indeed the organation were set up on the basis of fixed membership dues, as many religious organizations areWe carnot condude that our decision in Flagrello did nothing more than remove the protection of the doctrine fom hoopitals involved in tort litig-ation with paying patients, and therefore, Iest the fact that such
a

situation was involved nFlagello remain

as

asource

of conftrsiory we here hold unequivocally that the

doctrine of immunity of charitable institutions from liability in tort no longer exists in the Coruronwealth of Pennsylvania The judgment of the court below is reversed, and the cause renanded for further proceedings. . . Case Disctssion Questions

cases such as the one at bar involving a religious institution, that a dues-p,^y*g member of the congre, gation could recover while another person not so situ-

monwealth formerly beneficiaries of the doctrine of charitable lnrllunity, only hospitals had lost the protection and all other charitable institutions retaiired i-t- Or, we might be required to say that payment of a fee for servce is the criterion upon which d"ter^ination of who may recover agairst a charitable institution in tort is based, if indeed the decision in Flagizllo is dependent on the cicr:nstance of the plain-t'rff,s having been a payrng patienl Were such conclusion reached, we might be required to hold that in

say that of all of the charitable institutions in the

Com-

I How do the charities in Flagello ard Nolar differ? What relationship betrreen the prties exists in the two cases? What remedies were the taintift requesting? 2 Does this decision change the Ftagiello decision or merely explain it? 3 FollowingNolar, would you advise the local Boy Scout troop to get insurance? Why or why not?

Thus, although a decision may constitute binding precedent, it may also require interpretation- And, the lower courts are not bornd by a decision if a new cale is different in its essential facts (e.g., is distinguishabte) from the precedent. InNolan, the trial cort thought that theFlagrlfo decision did not apply io chaitable immunity in contexts other than paying patients in hospitals, and thus ds tinguished the case. But the trial court, as it turned out, was wrong. faI courts are not botnd by dicta, or gratuitous statements in a decision that are not necessay for the final result. For example, many of the statements in the second frrll paragraph of the Nolar decision might be characterized as dicfa, and no kial court is bound by such statements.

Stare Decss and the Organization of the Courts

The oganization of the trial and appellate courts presents some tricky problems in applying the doctrine of stare decisis. Asstme, for example, that congress passs a statute prohibiting any person from killing any -deer, bear, wolf, or other large mammal in federally protected territories."Assume also thatSnith killed a whale in federally protected waters and was charged with a violation of that statute in Federal District Court A (see Figure 1.6). Federal District court A would decide the question of whethe a whale was

the kind of "large mam-mal" intended by Congress, using a variety of rules of conskuction and ultimately looking to the intent of Congress- Assuming that that court convicted Smith, Smith could appeal only to the U.S. Court of Appeals for Circuit l- That court might agree with the lower court and affirm the conviction, or disagree with the lower court and reverse the decision. tf anything further remained to be done in the trial couf, the appellate court would remand the case back to the bial court for further proceedings (see Chater 3, p- g1, for a discussion of appellate procedure). The decision would become precdent for all corrts

38 THELEGALPROCESS
There is a gray area in between the two sets of ethics. For example, it is probably a universal ethic of duty to refrain from telling deliberate lies for selfish PurPoses. On the other hand, exhibiting total honesty or frankness is a laudable but perhaps unreachable goal. Between these extremes are "white" lies, silence when one should speak, and speaking the literal truth while implying something else by tone of voice, gesture, or expression.

The Law and the Ethical Scale

At least in the United States, the law is chiefly concerned with enforcing the ethics of duty and only rarely is concerned with the ethics of excellence. That is not necessarily the case in other nations, where the law may be intimately involved in enforcing the ethics of excellence. In theocratic (church-based) states, for example, the law imposes religious duties, whereas in the Soviet Union the whole purpose of the system, at least in theory, is to create a "perfect" society and ultimately to create Soviet Man, an idealized perfect person. In both cases Professor Fuller might say that the "iron hand of imposed obligation may stifle experiment, inspiration, and spontaneity."

Ethical Problem L: Ethics of Duty and Ethics of Excellence

Following graduation, you have become manager of a local office of a major corporation as *111 ut being active in civic affairs. The local city council is considering assing an ordinance banning smoking in any public place, including any workpiaie in which nonsmokers may be present. In your office there are thirty employee, ten of yvhom smoke cigarettes. The ciiy council has asked you for your personal and professional opinion about the ban on smoking. One of the city councifmembers directly asks you at a public session of the council, "Is this a good law?,, Discussion Questions

1 2 3

Does this law enforce an ethic of duty or an ethic of excellence? If this law is passed, has the moral pointer been moved? Which way? which of the functions of law described in chapter 1 (see p. 8) does this law illustrate? How do you answer the question?

THE NATURE OF ETHICAL DILEMMAS

difficult ethical questions involve ethical dilemmas. An ethical dilemma involves conflicting moral duties, each of which pushes an individual in a different direction. For example, the duty of honesty may conflict with the duty of loyalty, or the duty to obey the law may conflict with the duty to family.
The most

Ethical Problem 2: Ethical Dilemmas

.{s child is dying of a rare blood disease. B, a chemist has discovered a sub stance that may cure that disease. The cure costs $1000 to manufacture, but i

ETHICS AND THE

LAW

39

realizes that she may charge a great deal more for the treatment. A, a poor person, tries to raise the money but succeeds in raising only $3000 of the $10,000 asked by B. A gives the $3000 to B as a "down parment" and is unsuccessful in raising the balance. Finally, in desperation, A begs B to let him have the cure on

credit, but B refuses.

Variation 1. A burglarizes B's offices and steals the cure. Variation 2. A robs C's store, obtains the money, and buys the cure from B.

Discussion Questions

What ethical notions conflict in these examples? How would you resolve

those conflicts? 2 Is A ethically "wrong" in Variation 1? Variation 2? Ir which case is A more wrong? Is B ethically wrong as well? How? 3 Should the law punish A in Variation 1? I Variation 2? What response should the law make in either case?

bility

In Ethical Problem 2, the ethical duty not to steal conflicts with the ethical duty to save one's child's life. Although the conduct was clearly illegal, a judgment regarding its moral wrongness will depend on whether one finds the duty to obey the law or the duty to save a child's life more important. Hidden in the example is another ethical dilemma. B's talent and work led to the cure in the first place, and by most ethical standards, B ought to be able to profit from that talent and work. Similarly, if B permits A to bulthe cure for less than the price asked, she would set a piecedent for future reductions. But B's conduct obviously conflicts with widely held moal beliefs about the importance of human life and the nature of charity. B, likeA, may be both " right" and twrong" depending on which ethical values are consideredmore important. In determining the moral "righress" of actions in ethical dilemmas, two factors appear to be extremely important in our culture: (1) the motivation or state of mind of the person involved; and (2) the relationship of the parties. Those two factors are often recognized by the law in determining legal guilt and responsias

well.

Motivation and State of Mind

Voluntariness is the basic mental state reguired by both the law and morality as a basis for-guilt. we do not hold a person morally guilty for involuntary acts. we do not blame people for acts performed while-unconscious or insane, or while under compulsion. we also maintain a rough sot of hierarchy of voluntariness, depending on the amount of choice we have in the matter. Asiume for example ttraiX shoo-ts Y. If X is unconscious at the time and the shooting results from an-involuntary twitch of a finge, we would excuse X and call it an nfortunate accident. If X d insane, we would also tend to excuse the conduct, but chances are there would be more guilt attached, or at least we would be more suspicious. If X was intoxicated at the time, we would find him morally guilty, buf perhaps less so than a person who had a clear mind at the time. The more choic a peison has, the mormoral responsibility that person will have.

40 THE LEGAL

PROCESS

.---->

Ethical Problem 3: Voluntariness and Ethical Guilt

After graduation you are made sales manager for a computer firm. You have
been negotiating to sell 150 computers to the ABC Company for quite some time. One night at a cocktail party you meet the purchasing agent for ABC, who has

obviously had quite a lot to drink. During the course of the conversation the purchasing agent orally agrees to the purchase of the computers at a price oaer what you had been asking for the units. You hurriedly scribble the details down on a scrap of paper, and both of you sign the agreement. The next day the purchasing agent calls you, apologizes, and asks that the negotiations go on as if nothing had eve happened.
Discussion Questions

1 Is it unethical for you to insist on payment at the price agreed to at the party? What if your boss promises you a raise if you can make the deal go through at that price? 2 Should the purchasing agent be fired by ABC? Were his or her actions voluntary?

Should a court excuse the purchasing agent and ABC from legal liability on the agreement because the agent was intxiated? Why?

The Law and State of Mind The law generally follows our ethical notions of responsibility, particularly in the law of crimes and the law of torts. Civil law often makes a distinction between negligent and intentional acts (see p. 221). And almost every criminal statute has a mental element that must be proven before the defendant may be convicted of the offense. The prosecutor my be required to show that the defendant acted intentionally, knowingly, or with some specific intent, such as "with intent to defraud." If a statute only requires proof of an intent to commit the act the statute prohibits, the crime in question is said to be a general intent one; but if it requires proof of some other intent, such as assault "with intent to kill" or writing bad checks "with intent to defraud," the crime is known as a specific intent crime, state of mind may also be used as an aggravating or mitigating circumstance. Assault, which only requires proof of "intent to assault," is less aggravated than "assault with intent to kill," for example. Thus, it seems, the more voluntary an act is, the more both our ethical standards and our legal standards impose moral and legal guilt. Motivation and the Law Motive may be defined as the purpose for which an act is performed. Motive has a great deal to do with the amount of moral guilt attached to an act, but it has less to do with legal responsibility. In Ethical Problem 2, A's conduct was perhaps morally excusable because his motive was to save another's life. The same conduct undertaken to obtain some personal benefit, such as to sell the cure on the black market, would have been more morally guilty. The law does not often excuse behavior on the basis of "good motives." Motivation might be taken into account by the judge imposing a sentence as a
matter of " aggravation and mitigation."

ETHICS AND THE

LAW

43

Do you violate any ethical duties to your employer by telling Smith? Do you violate any ethical duties to Smith by not telling her? What ethical notions are in conflict? 3 How should the law react if you tell Smith? What kind of action will your employer probably take? Is it justified? One of the reasons for the distinction between intimate and marketplace ethics is power and the possibility that power will be abused. We expect intimate ethics in certain relationships because the parties are vulnerable to each other, and high ethical standards are a way of guaranteeing that such vulnerability will not be exploited. Friends and family members are vulnerable to each other because of the emotional commitment the parties have to each other. A "false friend"

might exploit that emotional commitment and gain an unfair advantage. Our
society tries to guard against such abuse by imposing very high ethical standards on such relationships. Similarly, employees (technically agents-see Chapter 12) have the power to bind employers to contracts or make the employer liable for torts. As a result, the law tries to insulate the employer from abuses of power by

imposing higher legal duties. Marketplace ethics have traditionally assumed some rough equality of power between the parties, which permits the parties to protect themselves against potential abuses. At the least, persons in a business relationship are forewarned that a different set of ethical standards applies. But if we are involved in an intimate relationship, we expect intimate ethics to apply. The law may not agree, however, as discussed in the following case.

Eaton a. Sontag
387 A.zd 33 (Supreme Court of Maine, 1978)

Mr. and Mrs. Sontag and Mr. and Mrs. Eaton had been good friends for over fifteen years. The Eatons were in the process of developing a campground in Maine and were looking for a purchaser. During numerous social visits the Eatons "sounded out" the Sontags about purchasing the campground, and finally the sontags agreed. The sontags agreed to pay $80,000 for the property-$26,000 down, and the balance over three years. The first summer the camp grossed $400, and the Sontags wrote the Eatons complaining that they had been overcharged by at least $25,000 and claimed that the Eatons had misrepresented the earning potential of the camp. Finally, the Sontags stopped making payments, and the Eatons brought an action seeking
payment of the overdue installments. The Sontags counterclaimed, asking rescission of the contract and a refund of all of the money owed. The Eatons replied that the doctrine of caaent emptor ("let the buyer beware,,, see p. 330) applid to the case. The jury found for the Eatons, and the Sontags appealed. Dufresne, Active Retired Justice The charge .of fraud which the defendants set out to prove againsl the plaintiffs.. 'was thattheEatonsmisrepresenled tothemthat the campste. was a gold mine; lhy had taken in fifteen hundred dollars in five weeks of their first season of operation; there was city water on the prem.ises; the ,So,ntals could live. on the premises year round; also they. failed to disclose that the value, ... . of the campground did not reflect the true value of the property... :l . ..The defendants argue on.appeal that the past assoclation of the parties as social friends for the period of fifteen years raised theirrelationsh.ip in conneciion lvith
duty on the part of the plaintiff vendors to disclose to the defndantvrndees theilaintiff's financial embarrassment ... instead of representingtheoperationasa gold mine opportunity. we disagree." '^ We agee . . . thathe "fiduciary or confidential relation" conept n'hen used in connection with improper influence affeiting the validity of some transaction ws one of broad appliction and tat it embraced not only technical fiduciry relations such as may exist betrven parent and child, guarclian ancl ward,ttorney ancl client, etc., but may also encompass relationships wherein conficlence is atually."posd in another by reason of their

any business transaction between them to one of a confi- social ties. . . . dential nature, and, uncler strch circumstances, the rule [We have held that] "[t]he salient elements clf a confi<tf cazteat entptor did not apply, but rather; there existecl a dertial relation are the-acal placing 9f trust and confi-

M THELEGALPROCESS
dence in fact by one party in another and
a

great disparity

of position nd infltrcnce between the parties" . . . [court's

emphasisl

[M]ere kinship itself . . . does not establish a confidential relationi often relatiaes are hostile to each other or [E]ven where specific facts tend to show intimate dealings, as between family members or friends, the existence of a confidential relationship remains a question
deal at arnt's length nd act independently and so are held not to haoe been [in] a confidential relation. [court's emphasis]

value and quality of the articles or ProPerty which they have to sell. Everybody knows this, and a buyer has no right to rely upon such statements. . . . Furthermore, it is not fraud for one Party to say nothing respecting any particular aspect of the subject prop-

erty foi sale where no confidential or fiduciary relation

exists and where no false statement or acts to mislead the other are made, as was the case here. . . ' Every man has the right to ask any Price he sees fit for the wares or lands he has to sell and the matter of fixing the price, even for friends who might be interested in their purchase may be predicated upon divers bases one of which may be what he thinks he can get for it from a prospective purchaser. To seek a price commensurate wilh oe's investment in the property would not only be non-fraudulent in itself, but mere good business acumen. Appeal denied. Case Discussion Questions

of fact and need not be imposed by law. If the parties to a transaction are of mature years and in full possession of their faculties, their continuing lifelong relation as [relatives] and friends will not give rise to a confidential relation as a matter of law unless there is evidence of superior intellect or will on the part of the one or the other, or of trust reposed or confidence abused. The evidence here fails to disclose any particular dependence of one party upon the other's judgment for business transactions during their acquaintanceship of fifteen years. That one had developed a reliance on the other in a business way does not appear in this case. . . . That the parties believed in their mutual honesty, sincerity, and truthfulness on account of their social intercourse is not sufficient to constitute a confidential relationship as the term implies in the law. The assertion that the campsite operation is a gold mine was, and should have been understood to be . . . "seller's talk," i.e., "that picturesque and laudatory style affected by nearly every trader in setting forth the attractive qualities of the goods he offers for sale," and this even among friends. But such is not actionable. . . . The law
recognizes the fact that sellers may naturally overstate the

1 Was there a fiduciary relationship here? Is a lifelong friendship enough to create a fiduciary relationship?

2 3

Did the Eatons defraud the Sontags? Did they tell them any lies? Did they fail to tell them anything that they should have told them? Was their conduct unethiShould the courts require relatives and close personal

cal?

friends to announce "this is business" before beginning

arm's length business dealings?

Markelace ethics present other problems. Some persons are naively unaware of the two sets of standards, and others are aware of those standards but are unable to protect themselves because of great differences in power. ln such cases the law has stepped in, either to restrict the power of one side or to "balance the power equation." Consumer protection laws, labor legislation, and securities regulation are examples of situations where the government has softened the rigors of markelace ethics with some of the aspects of intimate ethics, thereby raising the "moral pointer."

VIRTUE ETHICS
TheAristotelian School of philosophy-based on the thought ofAristotle-seems to be making a comeback. As discussed earlier, Aristotle based his ethical thought on the notion of virtues-characteristics of ethical people. Aristotle argued that there were twelve virtues, each of which he found to be a "golden mean" between an excess and a deficiency. If one identified the virtues, (see Figure 2.4, p.33) and then sought to find thai mid-point or golden mean, one would become virtuous-and this is important-would become HAPPY. These virtues were seen not as constraints on behaviot but as part of one's basic personality, and would be admired and revered. WhenAristotle refers to "happiness," he means more than mere creature comforts. His central ethical concept is a unified, all-embracing notion of happinessperhaps better translated as "flourishin g," or " doins we." One should view one's life as a whole and not separate the personal, public, private or business aspects of our lives. Doing what we ought to do-doing our duties, fulfilling our responsibilities and obligations-is what makes a good life.

/z