Business Law Exam 1 Study Guide 31 Questions

Chapter 1 Business and Its Legal Environment 7 Questions

Law- Rules of conduct established by the government of a society to maintain, harmony, stability,
and justice
o May impose duties or confer rights
o Sanctions for noncompliance
Jurisprudence- study of law and legal ethics through learning about different schools of
jurisprudential thought in each school to make a judicial decision
o How judges apply law to specific dispute depends in part on their philosophical approaches to
laws
Positivist school- Judge with positivist leanings would usually defer to existing law rather
than use legal reasoning to find new law
Natural Law School- judge using natural rights that everyone is entitled to, what is
right and just
Historical School- judges strictly follow decisions made in past cases
Legal realism- given that all judges have different beliefs they will bring different
reasoning processes to the same case
Positivist schools
o Positive Law- comprised of the written laws of a given country or society
Provides bright lines for conduct
Provides order and structure for society, but it ignores natural rights
Valid Laws must be obeyed regardless of whether they are just in a situation
o Issued by the Government
Ex. Statues, judicial decisions, administrative agency rules
Natural Law School- Philosophers: Aristotle, Thomas Jefferson
o Natural Law- assumes that law, rights and ethics are based on universal moral principles
inherent in nature that people can discover through intelligence or reason
o One of the oldest and most significant schools of jurisprudential thought
o Defines law in terms of justice- what is fair, right & just according to individuals own
sensibilities.
o Recognizes the existence of natural rights
o Weakness: lack of agreement on what is just due to different beliefs and ideas of justice
o Ex. Civil rights activists, whistle blowers, civil disobedience
Historical School- legal thought emphasizes the evolutionary process of law by concentrating on
the origin and history of the legal system
Legal Realism- based on the idea that law is just one of many institutions in society and that it is
shaped by social forces and needs
Many laws may be applicable to a single business transaction
Primary Sources of American Law
o 1. U.S. and State Constitutions
Define the form and basic principles of government and create individual protections
o 2. Statutes
Statutory Law- laws passed by congress and state legislatures
Model statutes are not law until adopted by states
Ex. Uniform Commercial Code (UCC)- set of rules governing commercial
transactions
o Adopted by all fifty states and U.S. territories

Ordinances- laws passed by municipal governments to govern matters not covered by

federal or state law
Ex. Zoning ordinances
o 3. Administrative Regulations
Administrative Law-rules, orders, and decisions of administrative agencies
Administrative Agency- federal, state, or local government agency established to perform
a specific function
Ex. FDA and FCC
o 4. Case Law and Common Law Doctrines- judge made law
Case Law- judicial interpretations of constitutions, statutes and regulations announced in
prior court decisions
Also includes judge-made law based on common law doctrines in areas not covered
by statutes or regulations
Ex. Torts and contracts
Common Law- based on English legal tradition meaning rules generally applied in all of the
courts in the country
o Judges establish common law through written opinions that are binding on future decisions of
lower courts in the same jurisdiction
o Typically addresses situations not covered by statutes
o Historical distinction between courts of law and courts of equity are no longer applicable in
the American judicial system
o Legal Remedies vs. Equitable remedies
Common law- based on doctrine of precedent, which requires that judges decide current cases
based on the legal principles and decisions established within their jurisdiction in previous cases
with the same or similar facts
o General legal principles that evolved over time through court decisions
Stare Decisis( to stand by that which is decided)- legal doctrine based on precedent that makes
law more stable and predictable
o Cornerstone of both the American and English legal system
Binding Precedent vs. persuasive precedent
U.S. common law is derived from written court decisions opinions, generally from appellate
courts
Legal Reasoning- reasoning process used by judges in deciding what law applies to a given
dispute and then applying that law to specific circumstances in a case
IRAC Method- basic steps in legal reasoning
o Issue- lay out facts and identify issues
o Rule- apply rules to case
o Application- how the rules of law apply to the particular facts and circumstances of this case
o Conclusion- what conclusion should be drawn
Legal controversies rarely clear-cut
Restatements of the Law- ruling based on previous rulings, summarizes common law rules
followed by most states
Substantive Law- define, describe, regulate, and create legal rights and obligations
o Rules that govern people relations with each other
o Ex. Contracts, torts, property
Procedural Law- establish the processes for enforcing the rights established by substantive law
and settling disputes

o Rules of Legal administration

o Ex. Procedures for filing civil lawsuits, statutes of limitation for bringing legal actions

Civil Law- rules that define and regulate the rights and duties that exist between persons and
between persons and their government, as well as relief when they are violated
o Compensatory objective
o Legal remedies- compensatory damages, punitive damages, nominal damages
Remedies- Legal means used to recover a right or redress a wrong
o Equitable remedies- injunction, specific performance
o Plaintiff may be a private party or a government
o Burden of proof- preponderance of the evidence (more than 50%)
Criminal Law- Rules designed to protect and vindicate societys interest with respect to the
individuals
o Punitive Objective
o Goals of punishment: retribution, restraint, deterrence, rehabilitation
o Plaintiff is national, state or municipal government, which is represented by a prosecutor,
district attorney or attorney general
o Burden of Proof: beyond a reasonable doubt (a higher burden of proof than required for civil
cases)
Double Jeopardy clause of the 5th Amendment- nor shall any person by subject for the same
offence to be twice put in jeopardy of life or limb- prevents a government from prosecuting a
defendant more than once for the same criminal offense
o Not applicable to new trial due to mistrial or hung jury
o A State and the federal government could both prosecute someone for an act that violates
different state and federal statutes without subjecting the defendant to double jeopardy
o Not double jeopardy if a trial in a civil lawsuit is based on the same wrongful act that was
prosecuted as a crime by the state
Finding Statutory Law- Laws are collected in a publication titled United States Statutes at Large
o Citation- reference to a publication in which a legal authority can be found
o U.S. Code- compilation of all federal statutes organized into 50 titles that are grouped by
broad subjects
Ex. 11 U.S.C. 109
11 is the title number 109 is the section number
Annotated version cites relevant cases
o State Codes (annotated)
Tennessee Code Annotated (T.C.A.)
o Code of Federal Regulations (C.F.R.)- compilation of rules and regulations issued by Federal
administrative agencies (updated annually)
Organized into 50 titles
Citation ex. 26 C.F.R.1.183
Rules and regulations are initially published in the Federal Register (published every
government business day).
Finding Common Law
o Common Law is comprised of published court opinions
o Courts that typically issue written opinions: U.S. Supreme Court, federal district courts,
federal court of appeals, state supreme courts and state appellate courts
o Reporters- Chronological sets of books containing opinions for courts by region/state/court

o Case citations tell you where to find a particular case including name of parties, reporter

where case is published, court, and date

Ex. Berger v. city of Seattle, 512 F. 3d 582 (9th Cir. 2008).
Computer Based Legal Research
o Private subscription services- Lexis and Westlaw
o Internet (free services): Library of congress, Findlaw.com, Law school databases

Chapter 2 The Court System 9 Questions

Sources of Law- U.S. constitution is Americas social compact
o Federalism- form of government where lawmaking authority is divided between two
sovereigns (Federal and State governments)
o Constitution provides that Federal government has the power to make laws in enumerated
area (interstate commerce); all other powers are reserved to the states
Ex. Of reserved area in police power- power to legislate for health, safety and welfare
of the states citizens
o Legislature (federal and state)
o Administrative agencies (federal and state)
o Courts (federal and state systems)
Case law and common law are judge-made law
52 separate court systems (1 federal, 50 states, and D.C.)
Article III of U. S. constitution establishes the Supreme Court and gives Congress power
to create other inferior federal courts
Judiciarys Role- courts interpret laws and apply them to specific cases filed in the courts
Judicial Review- process by which the Supreme Court determines whether statutes passed by
Congress and actions of the executive branch are constitutional
o Provides a check of power on the legislative and executive branches
o Not in the constitution but establish after the Supreme Court case Marbury v. Madison (1803)
Judicial Requirements: A court must have jurisdiction in order to hear a case and render an
enforceable judgment
o State where a lawsuit is filed is the forum state
o
Jurisdiction- the authority of a court to hear and decide a specific action
o To have jurisdiction the court must have jurisdiction over the subject matter of the dispute
AND either over the defendant, personal jurisdiction or over the property involved in the
lawsuit
In personam jurisdiction- personal jurisdiction over any person or business that resides in a
certain geographic area, within the states borders when process is served on them, or consent to
courts authority
o Ex. State trial court normally has jurisdictional authority over residents or businesses of a
particular state, such as a county or district
o Long Arm Statute- personal jurisdiction over certain out-of-state defendants based on the
activities that took place within the state
Must meet a minimum contact requirement to justify the jurisdiction
o Ex. Mastondrea v. Occidental- where the plaintiff was injured at a Mexican hotel sued the
hotel and its owners (both foreign companies) in a NJ state court
Ruling: NJ court had personal jurisdiction due to NJs long arm statue, the defendants
contract and marketing activities met the sufficient minimum contacts requirements
In rem jurisdiction- jurisdiction over property that is located within its boundaries

o Ex. Ownership disputes in Florida where both parties live in other states

Subject Matter Jurisdiction:

Courts of General (unlimited) jurisdiction- can decide cases on wide range of issues
o Ex. State trial courts and federal district courts
Courts of Limited jurisdiction- can only hear cases involving specific matters
o Ex. State- probate court, juvenile court
o Ex. Federal Bankruptcy Court, Tax Court
Original Jurisdiction vs. appellate jurisdiction- 1st time hearing original jurisdiction wins, appeal
get appellate Jurisdiction
Probate Courts- state courts that handle only matters relating to the transfer of a persons assets
and obligations after that persons death, including issues relating to the custody and guardianship
of children
Bankruptcy Courts- handle only bankruptcy proceedings, which are governed by federal
bankruptcy law
Federal Court Jurisdiction- Constitution limits the types of cases over which the federal courts
have subject-matter jurisdiction
o Federal Courts have exclusive subject matter jurisdiction on certain cases
Ex. Copyrights, patents, admiralty, bankruptcy, military, federal crimes
o Federal Courts will have personal jurisdiction over a defendant if the state in which the
federal court sits would have personal jurisdiction over the person
o Federal Courts can hear criminal cases for violations of federal criminal laws and civil cases
o Federal courts may only hear cases involving a federal question or there is diversity of
citizenship
o Federal Question- cases that involve rights or obligations of a party that are created or defined
by the U.S. constitution, a treaty or a federal law
o Diversity of Citizenship- plaintiff and defendant are citizens of different states and the
amount in controversy is greater than $75,000
o
Concurrent Jurisdiction- when both the federal and state courts have the power to hear a case
o Ex. Cases involving federal laws, contract and tort cases where there is diversity of
citizenship, employment discrimination cases
o When concurrent jurisdiction exists a party may choose to bring a suit in either a federal or
state court
Exclusive Jurisdiction- when cases can be tried only in federal courts or only in state courts
o Federal exclusive jurisdiction exists in: federal crimes, bankruptcy, and most patent and
copyright claims, and suits against the United States
o State exclusive jurisdiction exists in: divorce and adoption claims
Venue- the most appropriate location for a trial
Standing to Sue- Plaintiff must have a significant stake in case in order to sue, the party must
have suffered a legal injury
Justiciable controversy- controversy that is real and substantial, as opposed to hypothetical or
academic
o Requirement to go to court
State Court Systems- consist of several levels or courts
o 1. Local trial courts of limited jurisdiction
Ex. Small Claims Court with a limit on the amount of up to $25,000 in Tennessee
Ex. General Sessions court with a limit of $27,000

 Ex. Municipal court and Juvenile

o 2. State Trial courts of general jurisdiction
Questions of fact- focus of trial courts where the determine what really happened in

regard to the dispute being tried

Ex. Did the party actually burn the flag
Chancery Courts- or equity courts historically heard lawsuits where legal damages
(money) were not adequate
Chancery and Circuit Court generally have concurrent jurisdiction over most civil
matters, so civil lawsuits can be filed in either
Superior (circuit) courts appeals are conducted in state courts of appeals
Most lawsuits are filed here
o 3. State court of appeals (intermediate appellate courts)
3 or more judges review the record of the case on appeal and then determine whether the
trial court committed an error
Question of Law- focus of appellate courts concerning the application or interpretation of
the law
Ex. Is flag burning protected in your 1st Amendment right to free speech
o 4. States highest court(state supreme court)- review proceedings conducted in the trial court
based on court record to determine validity
Decisions of each states highest court on all questions of state law unless overturned by
the U.S. Supreme Court
Decisions are final on questions of state law
3 of 5 Supreme court justices for Tennessee are women
o Federal Court System- Divided into 3 tiers
o 1. U.S. district Court (Trial courts of general jurisdiction)- Federal equivalent of state trial
courts with general jurisdiction
94 U.S. Districts
Federal judges nominated by the president and confirmed by the Senate
Must retire or be impeached to leave office
o 2. U.S. courts of appeals(intermediate court of appeals)- hear appeals from the federal district
courts located within their respective judicial circuits
Consist of 13 Circuits
Tennessee is in the 6th circuit located in Cincinnati
Most cases are final but appeal to the U.S. Supreme court is possible
o 3. United States Supreme Court- highest court in the United States
Consist of 9 Justices (1 Chief Justice and 8 associated justices)
Final arbiter of the Constitution and federal law
Writ of certiorari- order issued by the Supreme Court to lower courts requiring them to
send its record of the case for review
Rule of 4- must have 4 of the 9 justices approval to issue a Writ
Typically cases involving important constitutional decisions
In rare cases the court will overturn its own prior decision
Attorney- acts as his or her clients advocate, presenting the clients view of the facts in a way as
to convince the judge or jury that this version is correct
o Pro Se Alternative- clients are allowed to represent themselves
o Attorney will be appointed by the court in criminal cases if the defendant cannot afford one
Cannot be appointed in Civil cases
Attorney Fee Arrangements vary:

o Hourly- standard arrangement typically costing between $175- $300 an hour

o Fixed Fee- typically with Wills, POA( power of attorney)
o Contingent fees for plaintiff council- personal injury cases where attorney will receive a

percent of the gains ranging from 25% to 40%

Not permitted in criminal cases
o American Rule- each pay own attorney
o English Rule- Loser pays for attorney
o A contract may stipulate who pays the legal cost in the event of a dispute
o Certain Statutes allow successful plaintiffs to recover legal fees from defendant
Rules of Civil Procedure- Substantive law governs the legal rights of parties, procedural laws
govern how lawsuits are conducted
Federal Rules of Civil Procedure- procedural laws that govern lawsuits conducted in federal
courts
o Rule 1- shall be construed and administered to secure the just, speedy, and inexpensive
determination of every action
Each state has its own rules of civil procedure governing lawsuits in state courts
Steps in a Civil Lawsuit:
1. Cause of Action- Facts that indicate that a party has been legally wronged and is entitled to
have a court provide a remedy
o Standing- must be a party who has directly suffered a legal wrong
o Acts as a control on the amount of litigation
o Statute of Limitation- can bar a lawsuit that is not commenced within time period specified
by Law
Torts- 1 Year
Contracts- 4-6 Years
Property actions- up to 20 Years
o Plaintiff bears burden of proof >50%
o Must have subject matter jurisdiction and personal jurisdiction
2. Complaint filed- short and plain statement of the claim showing that the plaintiff is entitled to
the relief sought
o Pleading- consist of the complaint and the answer
o Includes: facts, alleged violations by the defendant, injuries suffers, request for relief, demand
for jury trial
3. Defendant Served- Defendant receives the summons
o Summons- notice prepared by the plaintiff and issued by the court to inform a defendant that
he has been sued
o States a date you must respond by and must be properly served or the case will likely be
dismissed
4. Defendant Answers- defendant responds to the complaint by filing an answer in the required
time period
o Admits or denies allegations and places any counterclaims and affirmative defenses
o Failure to file an answer will likely result in a default judgment
5. Discovery- process by which parties search for information from the other party relevant to the
case
o Depositions- sworn testimony by either party or witness
o Interrogatories- parties write answers to questions to aid their attorney
o Request for admissions, documents, or other information related to the case

6. Pretrial Conference to address scheduling matters

7. Motions e.g. - Motion for Summary Judgment- same as the motion for judgment but allows for
supported evidence such as testimony
8. Trial, Verdict, and judgment
o Trial takes place with or without a jury depending on request by either party
Right to a jury in civil cases depends on the court and the matter and whether requested
by either party
Voir Dire- attorney may challenge a juror for the belief that they are biased
Opening arguments, then plaintiff presents his case, then defendant presents his defense
to the plaintiffs charges
o Verdict- after judge instructs jury prior to deliberations of limitations
Additur- judge increases damages reward
Remittitur- decreases damages reward
o Judgment- entry of the verdict by the judge in the court records
o Motion for a new trial- granted only if the judge is convinced that the jury was in error but
does not believe that it is appropriate to grant judgment for the other side
9. Appeals and res judicata- Post-Trial Matter
o Appeals- referral of case to higher courts for review upon the application
Appellate court may affirm or reverse the lower court decision or remand the case to the
lower courts for further action such as a rehearing
o Res Judicata- doctrine for civil lawsuits baring subsequent litigations over the same dispute
that has already been litigated
Collecting the Judgment:
o Judgment creditor (successful plaintiff) must collect from the judgment debtor (losing
defendant)
o Judgment Proof defendants- they do not have money to pay if they lose
These cases often not even brought to trial cause their wont be any material gain
o Taking judgment debtors property
Exempt property (defined by state law) cannot be seized
Writ of execution- court authorized seizure of debtors nonexempt property by sheriff to
sell it and then turn proceeds over to creditor
Writ of garnishment- directs an employer to withhold a percentage of debtors wages
which will then be remitted to the creditor
o Consumer Protection act of 1968- limits amount of wage garnishments
o Judgment creditor may put a lien on judgment debtors real property by recording the
judgment
o Bankruptcy filing by judgment debtor may discharge the obligation, making it noncollectible
o Fraudulent Transfers- illegal to transfer property of debtors to third parties to avoid payment
of creditors

Chapter 3 Alternative and Online Dispute resolution 4 Questions

Litigation Considerations:
o Substantial pre-trial and trial cost
o Time consuming
o Processes handled by attorney
Leaves plaintiff feeling left out of the legal process
o Settlement Discussions often occur late in the process (after discovery)

o Appeals can extend litigation beyond the trial

o Collection on judgment can be difficult

Alternative Dispute Resolution (ADR)- any means of settling a dispute outside of court
o ADR can take place either before or after lawsuit is filed
o Advantages: higher success rate, speedier, less expensive, direct involvement of parties to
reach a solution, confidential, applicable for most civil matters, sanctioned by federal and
state courts
Three types:
Negotiation- simplest form of ADR, parties come together with or without attorneys, where the
parties air their differences and try to reach a settlement
o More likely to reach a favorable agreement if each party comes prepared
o Mini-trial- private proceeding in which partys attorney briefly argue their partys case before
the other party
o Early neutral Case evaluation- a neutral third party evaluates each parties strengths and
weaknesses and forms a basis for negotiating a settlement
o Facilitation- third party assists parties in reconciling their differences
Mediation- oldest form of ADR, in which a mediator works with both sides in a dispute to
facilitate a resolution
o Essentially a form of assisted negotiation
Advantages: greater chance of collection, and each party agrees on the mediator
Disadvantages: Mediator will charge a fee, informality and absence of third party referee,
and no time line so could be time consuming
Mediator- 3rd party who tries to facilitate a resolution by listening to each parties side
separately and then jointly and not imposing a solution
There are requirements by the state to be a mediator, typically a lawyer
Arbitration- Formal method of ADR, parties present their arguments and evidence before an
arbitrator at a hearing and the arbitrator imposes a resolution
o Arbitrator- third party or panel of experts that hears parties arguments in arbitration then
imposes a resolution
o Process: submission, hearing, award
Parties may jointly select an arbitrator (or panel of arbitrators), subject to the arbitration
provision in an existing contract
Arbitration hearing is run like a trial, but with simplified rules of evidence and limited
discovery
Arbitrators decision (known as an award) is final and binding on the parties case
(unless the parties have specifically agreed upon non-binding arbitration- which is rare)
Losing party may appeal the award to a court
Disadvantages: result is unpredictable, must make decision on rules rather than what is
fair, can be as expensive as litigation, and no discovery stage
Federal Arbitration Act (FAA)- provides the means for enforcing the arbitration
procedure that the parties have established for themselves
Sec. 04 a party may petition a federal district court for an order compelling
arbitration where this a contractual agreement to arbitrate disputes
Buckeye Check Cashing, Inc. v. Cardegna (2006)
Rule: a challenge to the validity of a contract as a whole, and not specifically to an
arbitration clause contained in the contract, must be resolved by an arbitrator

Courts generally enforce arbitration agreements contained in contracts however, courts

may invalidate or modify certain provisions in consumer contracts that are oppressive for
consumers
NCR Corp. v. Korala Asoc. Ltd. (6th cir. 2008)
Rule: under federal law, any doubts concerning the scope of arbitrated issues should
be resolved in favor of arbitration
Provisions in contracts my require that all disputes be submitted to arbitration instead of
litigated
Clauses in contracts may specify choice of arbitrators and/or location of hearing, and
may exclude some matters from the arbitration requirements
Widely used in banking, credit, brokerage, employment, and purchase agreements.
Almost always used in labor union contracts
Arbitration in Employment Agreements:
o Mandatory arbitration clauses in employment contracts are generally enforceable
o Some courts have overturned provisions in employment contracts requiring the parties to split
costs when an employee cannot afford to pay arbitration cost
Setting Aside Arbitration Awards:
o If a losing party appeals an award to a court, the court will not review the merits of the case,
but will only determine whether a valid award exist- and if so the court will order the parties
to comply with the award
o Possible grounds for invalidating an award:
Public policy and illegality
Defects in the arbitration process (ex. Fraud, bias)
o Winning party may ask court to compel the other party to comply with the award
Federal and State Courts support ADR because it means less cases for them to try
Court-Annexed Arbitration- main difference is that rulings here are not final and either party can
reject the reward
o If the reward is rejected the case will proceed to court and begin de nuvo, as though no
arbitration had taken place
Summary Jury Trial- mock trial that takes place in a courtroom before a judge and jury
o Verdict is only advisory
o Goal is to let each party see how they will fair in a real trial
Forum-Selection Clause- designates the jurisdiction (court or country) in which any dispute
arising under the contract will be litigated
Choice-of-law Clause- allows parties to choose a particular state law to govern their arbitration
agreement
If ADR is successful a written settlement agreement will follow
If ADR fails then litigation will follow
Chapter 5 Constitutional Law 7 Questions
Confederal Government- form of government that was established immediately after the
Revolutionary War
Federal Form of Government- national government and the states share sovereign power
o Constitution sets out specific powers that can be exercised by the national government with
the rest being reserved to the states under the 10th amendment
Police powers- broad right of state governments to regulate private activities to protect or
promote the public order, health, safety, morals, and general welfare
Separation of powers among the three branches

10

Federalism- allocation of power between federal and state government

Checks and Balances- system that allows each branch to limit the actions of the other two
branches, thus preventing any branch from exercising too much power
o Legislative branch can enact laws but they must be approved by the executive branch
(president)
o Executive branch sets foreign policy but must have consent of senate to enact treaties
o Congress determines federal jurisdiction, president appoints federal judges, but the judicial
branch can rule their actions unconstitutional
Articles of Confederation- 7 Articles
Article 1: Legislative Power- Formed Congress (house and senate), rules for the passage of
legislation, and enumerated powers(taxing and spending money)
Article II: Executive Power
Article III: Judicial Power- vested in the Supreme Court and such inferior courts as the Congress
may ordain and establish
o Jurisdiction of Federal Courts- cases under the constitution, U.S. laws and treaties, citizens of
different jurisdiction(diversity jurisdiction) and cases with foreign officials and governments
Article IV- Relations among the States
o Privileges and Immunities Clause- prevents states from imposing unreasonable burdens on
citizens of another state
Substantial reason required for a state to treat nonresidents differently from its own
residents
o Full Faith and Credit Clause- ensures that judicial decisions (judgments) of a state will be
honored and enforced in all states
Applies to civil matters
Ex. Rights established under deeds, wills, contracts
Article V- Amendment Process
Article VI Supremacy Clause- constitution, laws, and treaties of the United States are the
supreme Law of the Land
o When there is direct conflict between federal and state law the state law is invalid
o Preemption- congress chooses to act exclusively in an area in which federal and state
governments have concurrent powers
Article VII- Ratification of Constitution
Interpretation of the Constitution
o Constitution is amended and/or its meaning changed by USSC Decisions:
Some provisions lack clear meaning due to obscure or ambiguous language
Social changes
o U. S. Supreme Court interprets and provides meaning to the Constitution
o Doctrine of judicial review- courts are permitted to declare actions by other government
entities to be unconstitutional, and therefore unenforceable
Article I Section 8- congress has the power to lay and collect taxes, duties, imposts, and excises,
including the power to make all laws necessary and proper for carrying into execution the
foregoing powers, and all other powers vested by this constitution in the Government of the U.S.,
or any department or Officer thereof
o Primary source of revenue
o Also given the power to spend to pay debts and provide for the common defense and general
welfare
o Congress may make conditions that states must meet to get funding

11

Ex. Highway funds for speed limits and DUI level

Article 1 Section 8 Commerce Clause- gives congress the power to regulate commerce with
foreign nations, among several states, and with Indian tribes
o May promote any objective they deem worthwhile, so long as it does not violate the Bill of
Rights
o Commerce power further expanded to permit congress to legislate regarding intrastate matters
affecting interstate commerce
Ex. Authority for legislation prohibiting racial discrimination
o Recently USSC cases have curbed congresss use of the commerce power by invalidating
federal laws regulating and/or criminalizing certain intrastate actions
Ex. Lopez (1995) fed laws banning guns in school was struck down because had nothing
to do with commerce
o Also covers commerce with activities that substantially affect interstate commerce
Ex. Gibbons v. Ogden- Ruled that that commerce within the states could also be regulated
by the national government as long as the commerce substantially affected commerce
involving more than one state
Article 1 Section 10- prohibits states from certain actions
Bill of Rights(1791)- first ten amendments that embody a series of protections for the individual
against various types of interference by the federal government
o Over time the Supreme Court incorporated most of these rights into protections against
certain state actions found in the 14th Amendment
o Though incorporation most of the Bill of Rights now apply to the states and the 14th
amendment equal protection guarantee applies to the federal government
o 1st Amendment- freedoms of religion, speech, and the press and the rights to assemble
peaceably and petition the government
o 4th Amendment- Prohibits unreasonable searches and seizures of persons or property
o 5th Amendment- due process guarantee, prohibits self incrimination and double jeopardy, and
right to jury, and fair payment for property taken by government
o 8th Amendment- prohibits excessive bail and fines as well as cruel and unusual punishment
o 10th Amendment- Powers neither delegated to the federal government nor denied to the states
are reserved to the states and to the people
Under Federal Law possession of Marijuana is illegal but under some states medical
Marijuana is legal
Supreme court ruled state laws that allow the use of medical marijuana do not
insulate the users from federal prosecution
th
14 Amendment- equal protection guarantee gives protection from state and federal government
o No protection from private activities only government ones
Limits on Government Actions:
o Even though the government is acting within its powers, it cannot enact laws that violate the
Bill of Rights, which are independent checks
o Constitutional protection of individual rights only protects people against government activity
(not private activity).
Public Function Doctrine- extend constitutional protections to cover private entities deemed to be
government actors
o Ex. TSSAA case- court ruled TSSAA was a government actor but its actions did not violate
1st Amendment
Commercial Speech- increases the flow of consumer info and promotes free competition and
economic efficiencies, has some protection but not as much as noncommercial speech

12

o
o
o
o

Subject to intermediate Scrutiny

Ex. Advertising and marketing
Ex. Some restrictions such as cigarette companies not allowed to advertise
Bad Frog Brewery, Inc. v. New York State Liquor Authority- NY denied approval for a beer
label them deemed as vulgar display
Rule: NY denial was invalid because they were not making a substantial effort to advance
a valid state interest
Unprotected Speech- speech that violates criminal laws is not constitutionally protected
o Ex. Threatening speech, pornography, fighting words, or speech that harms others good
reputation
1st Amendment:
o Establishment Clause- prohibits the government from establishing a state-sponsored religion,
as well as from passing laws that promote religion or that show a preference to one religion
over another
Ex. Praying in school and using government scholarships for religious schools
blue laws- make use of some commercial speech illegal on Sunday
Rules legal due to need for a day of rest to promote the health and welfare of workers
o Free Exercise Clause- guarantees that no person can be compelled to do something that is
contrary to his or her religious beliefs
Government can act when religious practices violate public policy or endanger public
welfare
Ex. Employers must make reasonable accommodations to an employee who needs
certain days off for his or her religion
Belief must be religious in nature and sincerely held by employee
th
4 Amendment- right of people to be secure in their persons, houses, papers, and effects
o Search Warrant- order from a judge or other public official authorizing the search and seizure
of items based on probable cause
To get a search warrant there must be probable cause
Exceptions come when the items sought are likely to be removed by the time a warrant
can be obtained
Ex. Police officer having probable cause the automobile has evidence of a crime
Ex. U.S. v. Moon- tried to get evidence of his files suppressed since they did not have a
search warrant
Rule: search warrant was not needed since the defendant volunteered the files
o Probable Cause- must have trustworthy evidence that would convince a reasonable person
that the proposed search or seizure is more likely justified than not
o Warrants not required for businesses when: seizure of spoiled or contaminated food, or in
highly regulated business such as liquor, guns, and strip mining
th
5 Amendment- no person shall be compelled in any criminal case to be a witness against himself
o Extends only to natural persons so corporations and partnerships can no plead the fifth, but a
sole proprietor can
o Property- real or personal property or an entitlement to a benefit
Ex. Disability benefits, professional licenses, income from tenured job
o Liberty- physical freedom or Bill of Rights freedoms, or various fundamental freedoms
Ex. Right to have children, practice a profession
o Takings Clause- prohibits the federal government form taking private property for public use
without just compensation

13

o Due Process Clause- Consist of aspects in procedural and substantive

Procedural- requires that any government decision to take life, liberty, or property must

give person proper notice and a fair trial or hearing before the government can deprive
the person of life, liberty or property
Substantive- focuses on the content or substance of legislation
Laws limiting fundamental rights must be based on a compelling state interest
o Ex. Speech, privacy, religion, interstate travel, marriage
Laws limiting non-fundamental rights require only a rational basis
Violating Due Process involves: deprivation of life, liberty, or property, by a government
without due process of law
14th Amendment- may not deny to any person within its jurisdiction the equal protection of the
laws
o Provides a check against arbitrary and unjustified government discrimination against
classifications of individuals, groups, or activities
o Equal Protection Clause- government cannot enact laws that treat similarly situated
individuals differently
Standards of Review- when laws are challenged under the constitutions individual rights
provisions, the restrictions are evaluated using these tests:
o Strict Scrutiny- law must be necessary to achieve a compelling government purpose and must
use the lease restrictive means to accomplish it
Highest standard- applied to protections in Bill of Rights and other fundamental rights
o Intermediate Scrutiny- law must be substantially related to an important government interest
and restrictions must be narrowly tailored
Ex. Commercial Speech restrictions, discrimination cases, legitimacy
o Rational Basis test- law must be rationally related to a legitimate government purpose
Almost impossible for a law to fail, most lenient generally applied to matters of economic
or social welfare
Ex. Law prohibiting certain cart venders might be legitimate if they say to help traffic in
certain areas
Ex. Law prohibiting unemployment benefits to people under five feet tall would be illegal
16th Amendment Authorized the current Income Tax system we have
Privacy Rights- fundamental right not expressly found in the constitution, but derived from 1st,
3rd, 4th, 5th, 9th, 14th, amendment according to the USSC interpretations
o Laws and policies affecting privacy are subject to the strict scrutiny (compelling interest) test
o Federal Privacy Act (1974)- protects against misuses of personal information obtained by
federal agencies
o Health Insurance Portability and Accountability Act (HIPAA)- defines and limits
circumstances in which an individuals protected health information may be used or
disclosed
o Patriot Act- allows government officials to monitor internet activity and to gain access to
personal financial information and student information without prior proof of any
wrongdoing

Chapter 6 Administrative Law 4 Questions

Administrative Agencies- non-legislative, non-judicial government lawmaking body
o Created by federal and state governments but only worry about federal
o Sometime referred to as the fourth branch of the U.S. government because of their power
o Agencies regulate many areas of business, and the cost of compliance is significant

14

o Article I of the U.S. Constitution authorizes Congress to delegate such powers to

administrative agencies
Administrative Law- consists of legal rules that define the authority and structure of
administrative agencies
o Sources of Law include:
o Enabling statues of administrative agencies
o Administrative Procedures Act
o Rules issued by administrative agencies
o Court decisions reviewing the validity of agency actions
Enabling Legislation- how administrative agencies are created, specifying the name, purposes,
functions, and powers of the agency being created
o Enabling statute- defines an agencies legal authority
Ex. Federal Trade Commission Act of 1914- that give the Federal Trade Commission
authority to prohibit unfair methods of competition or deceptive trade practices
Types of Agencies:
o Federal Executive agencies- cabinet departments of the executive branch, which were formed
to assist the president in carrying out executive functions, and the sub-agencies within the
cabinet departments
Ex. Occupational Safety and Health Administration is a sub-agency within the U.S.
department of labor
o Independent Regulatory Agencies- outside of major executive departments, and thus do not
report directly to the president
Ex. Federal Trade Commission and SEC
Enabling Statute- how congress creates federal agencies which grants three times of
authority/powers
o Legislative authority- make regulations in a particular area
o Judicial Authority- for agency to hear cases dealing with agency subject matter
o Executive power- to administer the statute and related rules and regulations and to investigate
violations
Administrative Procedure Act (APA) 1946- establishes procedural requirements for federal
agencies in their rulemaking, adjudication, and enforcement functions
o In response to criticism that agencies were out of control, and it standardized federal agency
procedures
o Provides for due process in hearings before federal agencies and provides for judicial review
of agency decisions
Rulemaking- formulation of new regulations or rules
Notice-and-comment rulemaking- involves 3 basic steps:
o 1. Notice of the proposed rulemaking- agency publishes a notice of the proposed rulemaking
proceedings in the Federal Register
States where and when the proceedings will be held, the agencys legal authority for
making the rule, and terms or subject matter of the proposed rule
Must make certain info available to the public such as scientific data underlying the
proposal
o 2. Comment Period- ample time given for persons to comment in writing on the proposed
rule
Purpose to give interested parties time to express their views
The agency does not have to respond to all comments but it must respond to significant
comments that bear directly on the rule

15

The Agency responds by modifying the rule or accompanying the final rule with a
statement on why they did not make the change
o 3. The Final rule- drafting the final rule and publishing it in the Federal Register
Must contain a concise general statement on basis and purpose that describes the
reasoning behind the rule
Can make some changes in light of the public comments but cannot be to radically or will
have to start the process over
Rules are final unless overturned by a court then later included in the Code of Federal
Regulations
Legislative Rules- substantive in that they affect legal rights
o These are administrative laws and have full force and effect of law
Interpretive rules- simply declare policy and do not affect legal rights or obligations
o Exempt from the APA requirements and are not directly legally binding
Agency Regulation are expected to be known by all persons that are applicable to their activities
o Regulation is binding on persons and entities regardless of their actual knowledge of what is
in the regulation or the hardship resulting from innocent ignorance of the regulation
Agency Enforcement- enforces by identifying violators and pursuing civil remedies against them
in a proceeding held by the agency
Investigation- takes place after the final rule in effect, where they monitor companies
compliances with the law
o Inspection- how agencies gather info from companies usually through on-site inspections
with the companies compliance
Ex. Inspecting an underground mine, safety test on equipment, and measuring factory
emissions
o Subpoena ad testificandum- to testify is an ordinary subpoena compelling a witness to
appear at an agency hearing
o Subpoena duces tecum- bring it with you compels an individual or organization to hand
over books, papers, records, or documents to the agency
To determine if an agency is abusing power they consider the following:
Purpose of the investigation
Relevance of the information
Specificity of the demand for testimony or documents
Burden of the demand on the party from whom the info is sought
o Searches- Agencies dont need a warrant if is a highly regulated industry, hazardous
operations, and emergency situations
Ex. Firearms, liquor, coal mines, and waste facilities
Adjudication- process of resolving a dispute by presenting evidence and arguments before a
neutral third party decision maker
o Most actions are resolved without formal adjudication
o Negotiated Settlement- purpose to rectify the problem to the agencys satisfaction and avoid
additional proceedings
Consent Decrees- alleged violator does not admit guilt, but agrees to take certain actions
to settle issues in the agencys complaint
Appealing to firms- avoid appearing uncooperative and avoid the expenses from future
proceedings and appeals
Appeals to Agency- conserve their own resources and avoid formal actions
o Formal Complaints- issued if negotiations fail, public document with possible press
conference

16

Leads to a hearing before an administrative law judge if a settlement is not reached

Firm then responds and if a settlement is not reached the case will adjudicated
Administrative Law Judge (ALJ)- presides over the hearing and has the power to administer
oaths, take testimony, rule on questions of evidence and make determinations of fact
o ALJ is typically a neutral employee of the agency who is not involved in the investigation or
prosecution of the complaint
Hearing Procedures- can be informal with people in a conference room, or can be formal
resembling a trial
o Agencies hold hearings to resolve disputed matters, where the hearings is a trial-like
arbitration proceeding before an administrative law judge
o Prior to the hearing the parties may conduct discovery
o Agency is the prosecutor at the hearing and has the burden of proof
o Parties introduce evidence, witnesses, and arguments to support their case
o Initial order- decision on the case by the Administrative Law Judge
o Final Order- same as the initial order if nobody appeals or the ruling after the case has been
appealed
Judicial appeals- courts grant significant weight to an agencys judgment because of the agencys
expertise, this deference especially applies to factual questions
o Ex. Chevron case- the USSC considered whether courts should defer to an agencys
interpretation of the law, and held that courts should defer to an agencys reasonable
interpretation of the law as well as facts
APA: Judicial review gives courts power to invalidate agencies actions that are arbitrary,
capricious, and abuse of discretion, or not in accordance with the law
o Criteria for what makes agencies rules arbitrary and capricious:
Failed to provide a rational explanation for its decision
Changed its prior policy without justification
Considered Legally inappropriate factors
Entirely failed to consider a relevant factor
Rendered a decision plainly contrary to the evidence
o Ex. Fox Television Studios v. FCC- court found that the FCCs new policy of fleeting
expletives failed to provide a reasoned analysis for departing from prior policy.
Rule: in favor of Fox and court vacated the FCCs order
Limitations of Agency Powers:
o Judicial Controls- in addition to the judicial review of agency decisions; agencies are also
subject to the following judicial doctrines
Exhaustion Doctrine- requires that a regulated party use all of its potential administrative
remedies before going to court
Ripeness Doctrine- parties must show that they have a standing to sue and that there is an
actual controversy
o Executive Controls- President appoints federal officers and can veto enabling legislation by
congress
o Legislative Controls- creates and funds the agency, can investigate the agency to make sure
they are implementing laws created, and can freeze enforcement before regulations take
effect
Freedom of Information Act(FOIA) 1966- requires the federal government to disclose certain
records to any person or entity on written request
o Purpose is to give transparency to what federal agencies are doing by granting access to
information agencies have in their possession

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o Nine exemption: ex. Trade secrets, information related to nation defense matters

Government in the Sunshine Act(1976)- requires every portion of every meeting of an agency to
be open to public observation
o Closed meetings are authorized in a limited number of instances
o Actions taken at unauthorized closed meeting will be invalid
o Adequate notice of meetings must be given to the public

18

Business Law Exam 2 Study Guide

Chapter 9 Contract Formation
13 Questions on Ch. 9/10
Contract- a promise or set of promises for the breach of which the law gives a remedy, or the
performance of which the law in some way recognizes a duty
o Play a vital role in the market economy by providing stability, predictability, and certainty for
buyers and sellers in the marketplace by giving parties confidence that their bargained-for
exchanges will be enforceable
o May be created by words in formal writing or through oral agreement express contracts
o Implied contracts- may be inferred by actions of the parties
o Contract law- deals with the formation and enforcement of contracts
o Governed primarily by state common law (court opinions) as modified by state statutes such
as the Uniform Commercial Code (UCC)
UCC, Article 2 only covers contracts for the sale of goods
o Other state statutes may govern other specific types of contracts (e.g. real estate)
Promise- manifestation of the intention [of a party] to act or refrain from acting in a specified
manner
Objective theory of contracts- courts adhere to when enforcing contract to determine whether a
contract has been formed
o A partys intention to enter into a contract is judged by outward, objective facts as interpreted
by a reasonable person- rather than secret intention (E.g. what a party said, how they acted, or
appeared, circumstances surrounding the transaction)
Ex. Lucy v. Zehmer illustrates how courts apply this theory
Defendant asserted that he was joking when he agreed to sell his farm, was rejected by
the court
Valid Contracts must meet 4 requirements to be formed:
o 1. Agreement- mutual assent to a bargain
Reached through the process of offer and acceptance
o 2. Consideration
Something of value given or promised (such as money) to convince a person to make a
deal; the consideration must be bargained for.
Promise of a gift not a contract because no consideration is given
o 3. Contractual Capacity- legal ability to enter into a contractual agreement
Intoxicated persons and the insane have limited capacity to contract
Although minors can enter into contracts, they are generally able to avoid it at their
election
o 4. Legality- propose of the contract must be to accomplish a legal goal and not against public
policy
Defenses to enforceability- even when all four requirements are met it may not be enforceable if
one of these requirements are not met:
o Genuineness of assent- consent must be genuine and voluntary ( no fraudulent inducement,
duress, or undue influence)
o Form- contract must comply with any law that requires it to be in a specified form
Ex. Each state has a statue of Frauds that requires certain types of contracts to be in
writing
Offer- first step in making a contract where one party makes an offer to another
o Offeror- party making offer
o Offeree- party receiving offer
o Once the offer is accepted the offeror is bound to a contract

Bilateral Contracts- two people exchange promises: a promise for a promise

o Offeree can accept the offer by promising to perform some act, such as make a payment or
provide services
Promise- declaration that something will or will not happen in the future
o Once the offer is accepted, it cannot be revoked by the offeror
o Provides more protection to offeree because all it takes to accept the offer- and bind the other
party to a contract- is to make a return promise (do not have to perform the act in order to
accept the offer
o When in doubt about what type of contract it is, there is a presumption that the offeror
intended a bilateral contract
o Ex. Sally offering someone $50 for their text book
o Formal Contract- require a special form or method of creation (formation)
o Informal Contracts- typically no special form required, all other contracts
Unilateral Contracts- offeror makes a promise, and asks for a return act by the offeree: a promise
for an act
o Ex. If you cut my grass ill pay you $50
o Offeree can accept the offer only by completing the requested act therefore, the contract is
formed only when the contractual act is performed by the offeree
o Offer cannot be revoked once performance has begun
Express Contract- state completely in words(may be oral or written); parties explicitly agree on
all important terms of their agreement
Implied-in-fact contract- implied contract, inferred from the parties conduct, not from anything
written or said
o Based on a legal doctrine that allows a judge to impose a contract between parties where a
contract did not exist
o Purpose is to prevent unjust enrichment, if a party accepts a benefit, then payment equal to
the reasonable value of the benefit is required- even though there was no contract between the
parties
o Requirements:
Plaintiff furnished some service/property to defendant
Plaintiff expected to be paid for service/property, and defendant knew or should have
known payment was expected
Defendant had a chance to reject the services/property and did not
Void Contract- a contract that does not exist at law( no contract at all), so it cannot be enforces
e.g. contract with illegal purpose, party lacked legal capacity, no consideration
Voidable contract- contract where one party has the right to avoid or rescind the contract
however, the party with such right may choose to perform the contract
o Ex. Where one party is a minor, party induced to enter contract by fraud
o Minors can enter contracts but they have the option to rescind in which case is unenforceable
against the minor
Unenforceable contract- valid contract that is unenforceable by a court because of a legal defense
against it (such as not complying with a statute of frauds)
Executed contract- contract that has been fully performed by both parties
Executory contract- contract that has not yet been performed by one or both parties
Agreement- (or mutual assent) by the parties as to the terms of a contract is a required
o Two components: an offer by one party and acceptance by the other

o Once there is agreement a contract is formed, provided that the other required elements

(consideration, capacity, and legality) are satisfied

Offer- made by one party (offeror) to another party (offeree)
o Indication of what the offeror will do or refrain from doing and what he wants in return from
the offeree
o Communication of an offer gives the offeree the power to form a binding contract by
accepting the offer
o Requirements:
1. Offeror must intend to become bound by the offer
Intent of the part of the offeror is determined by a persons words and actions and
not by their secret, unexpressed thoughts or feelings( objective theory of contracts
2. Terms of the offer must be reasonable certain and definite
3. Offer must be communicated to the other party, who then has the power to accept and
bind the offeror
o Not offers:
Offers mad in anger, jest, or undue excitement are usually not offers
Expressions of opinions, statements of intention, and preliminary negotiations are not
offers
Ex. Advertisements such as catalogues are not offers, they are treated as invitations to
negotiate or invitations to make an offer
Preliminary agreements- in some cases may be held as contracts
o Ex. Basis technology Corp v. Amazon.com Inc.- terms of proposed settlement sent by one
party via email and approved by opposing party were held to be binding even though the
parties could not reach a settlement
Definiteness of Terms- second requirement for an effective offer that
o Essential terms includes:
Identification of the parties
Object or subject matter of the contract
Consideration to be paid
Time of payment, delivery, or performance
o If an essential term is missing a court may refuse to enforce the contract
Ex. Baer v. Chase- implied-in-fact contract was not found by the court because the
compensation terms were not definite enough
Termination of offers- offers may be terminated by actions of a party (revocation rejection or
counter offer) or by operation of law
o Revocation- offeror may revoke an offer any time before acceptance
Revocation is effective when offeree receives offerors revocation
Some offers may be irrevocable( options contracts, doctrine of promissory estoppel)
o Rejection- offeree refuses the offer, then the offer ends
Offer cannot be effectively accepted after it has been rejected
o Counteroffer- offeree rejects the offer and makes a new offer
Offerees alteration to the original offer constitute a counteroffer
Common law mirror image rule vs. UCC
o Operation of Law- offer may be terminated for the following reasons
Time lapse- based on time for acceptances stated in offer
If offeror does not state how long the offer is open, then a reasonable time
Death or incompetence of offeror or offeree- triggers termination of offer
Destruction of essential subject matter

Supervening illegality of the proposed contract

Ex. Hiring a hitman
Acceptance of offer- voluntary act by the offeree that shows agreement to the terms of the terms
of the offer
o Can accept by word or act
o Must be unequivocal- non new conditions or terms can be added
o Upon acceptance, the offer and acceptance are merged into a binding contract (provided the
other contract elements are satisfied
o Offer must be accepted by offeree alone
o To accept an offer, the acceptance must be made in the same way, and within the timeframe,
that the offeror requests that acceptance be made
o Silence is generally not acceptance
Exceptions: trade customs and previous dealings
Under federal law, unordered goods delivered via USPS may be treated by recipients as
gifts, and do not have to be returned or paid for
o Acceptances adding to or varying from offer may be a rejection, depending on whether the
common law or the UCC governs
UCC Art. 2 applies to contracts for the sale of goods the common law rule exactness rule
applies to other agreements
o Common Law exactness rule mirror image rule- terms as stated in the acceptance must
exactly mirror the terms in the offer; changes are treated as a rejection and a counteroffer
o UCC Article 2- governs only sale of goods, modifies the common law mirror image rule for
acceptances
Under the UCC, as long as there is a definite expression of acceptance, a contract is
formed on the original terms, even if the acceptance contains additional or different terms
i.e. offeror has the option to accept or reject the additional terms proposed by the
offeree
o An acceptance is effective when sent via an authorized method(deposit in a mailbox), if
method is not indicated by offeror, then any reasonable method is acceptable
o Once an offer is accepted, the offer cannot be revoked because the contract has been formed
Consideration- both sides to the contract are giving something to the other party that has been
bargained for, makes agreement binding
o Something of legal value given in exchange for a promise
o Offeror and offeree must bargain for and give up something of legal value in order to make
the others promise or act enforceable
Promise of a gift not a contract because there is no consideration
o Consideration for a promise must be either detrimental to the promisee or beneficial to the
promissor
o As long as the consideration is bargained for by the parties the value of the consideration
usually wont be questioned by a court
o Generally, consideration takes the form of money, property, or services but can be in other
forms such as a promise not exercise a legal right
Ex. Right to sue, right to engage in a legal activity
Ex. Hamer v. Sidway uncle offered to pay nephew $5,000 if he would not drink or use
tobacco till he was 21 but he died before his nephew turned 21 and the executor of the
estate refused to pay
Rule- court rules nephew won

o A waiver of any legal right by one party at the request of another party is a sufficient

consideration for a promise (even if the waiver does not benefit the requesting party)
Adequacy of consideration- fairness of the bargain- courts rarely question so long as the
consideration has been bargained for by the parties
o Law does not protect a person from entering into an unwise contract
In rare cases, a court may find that a contract was unconscionable because excessive
payments are required by an individual
Preexisting Duty- a promise to do something you are already obligated to do is not consideration
o Typically occurs where there was a previous contract
Contracts that are invalid due to illegality:
o Contrary to a statute governing the subject matter of the contract(e.g. criminal laws, usury
laws, gambling prohibitions)
o Contrary to public policy
Contracts in restrain to trade (covenants not to compete)
Unconscionable contracts or clauses- highly unfair contracts
Exculpatory Clauses- releases a party from liability in the event of monetary or physical
injury no matter who is at fault
Voluntary Consent- genuineness of assent, lack of voluntary consent is a defense to the
enforceability of a contract
Circumstances voluntary consent may be lacking:
o Mutual (bilateral) mistake regarding a material fact- contract can be rescinded by either party
o Unilateral mistakes- regarding a material fact- contract is enforceable unless (i) other party
knew or should have know there was a mistake or (ii) mistake was due to substantial math
error, and made inadvertently without gross negligence
o Fraudulent misrepresentation- of a material fact; intent to deceive; innocent party justifiable
relies on the misrepresentation
o Non-fraudulent misrepresentation- no intent to deceive is required
Innocent- person makes a statement they believe to be true but actually misrepresents
material facts
Guilty only of innocent misrepresentation not fraud
Negligent- failure to exercise reasonable care in uncovering or disclosing the facts or
does not use skill or competence required
o Undue Influence- one party can greatly influence another party overcoming there free will
Ex. Cases with minors and elderly where a guardian is present
o Duress- forcing another party to do something including entering into a contract
Statute of Frauds- requires that contracts dealing with certain subjects be written and signed by
the person against whom enforcement is sought in order for the contract to be enforceable
o Most states have a statute of frauds
o Contract must be signed by the person to be charged with the contractual obligation (i.e. the
defendant)
o Even though it is a valid contract, a contract that violates the SOF is an unenforceable
contract
o SOF prevents persons from trying to fraudulently prove the formation of contracts dealing
with important, costly complex matters
o Writing must identify the parties and subject matter, indicate that a contract exists, and state
the essential terms
o Contracts that fall under the SOF requirement for a signed writing include:
Transfers of interest in real estate (including long-term leases)

Sale of goods priced over $500

Guaranty contract- where one person guarantees the debt of another
Contracts that cannot be completed within one year- starting on date contract was formed
Promises in consideration of marriage

Chapter 10 Contract Performance, Breach, and Remedies

Discharge- performing the duties required by the contract
o Failure to perform is a breach of contract
The contract comes to an end when both parties fulfill their respective duties by performing the
acts they have promised
Other ways a party may be discharged from contractual duties include:
1. Failure of a condition- possible future event, the occurrence or nonoccurrence of which will
trigger the performance of a legal obligation or terminate an existing obligation under a
contract( ex. House sale contingent on appraisal/financing)
o Contractual obligation contingent on the occurrence of a future event
o If a required condition is not satisfied, the parties are released from their obligations, unless
the condition is excused(as in the case where a party who does not want to perform tries to
ensure that a condition wont be satisfied) or waived by the party whose performance is
contingent on the condition
2. Material breach by the other party- promissor fails to give substantial performance
o Breach- nonperformance of a contractual duty by a party to a contract
o If no time for performance is stated, then a reasonable time is assumed
o If a material breach occurs, the non-breaching party is excused from performing their
obligations under the contract and may sue the breaching party for damages
o A minor breach may suspend the non-breaching partys obligation but not excuse them,
however it does entitle them to sue
o Anticipatory Repudiation- treated as a material breach (even though the time for the
performance has not expired), and the non-breaching party can sue for damages immediately
instead until waiting for the performance deadline
Ex. Football player sued for not showing up
Ex. Not delivering lumber could be sued
o Non-breaching party may sue for one of the following to enforce a right to compensate for
injuries
Remedies at low- monetary damages
Equitable remedies- usually not awarded unless money damages are not adequate
Rescission and restitution
Specific performance of a contract
Reformation of the contract
Recovery based on implied-in-fact contract
3. Agreement of the parties
4. Operation of law
Damages- goal of monetary damages in contract cases is to compensate non-breaching party for
their loss on a bargain
Types of Monetary damages:
o Compensatory damages- relate to direct losses of the non-breaching party and is the most
common type of damages awarded

Ex. In Breach involving failure to deliver goods, compensatory damages would be the
difference between contract price and market price for replacement goods
o Consequential (special) damages- foreseeable losses related to the contract breach (loss of
profits)
Relate to special circumstances beyond just the contract and are hard to prove, and if
damages are awarded they would be in addition to any compensatory damages
To be award plaintiff must prove defendant was aware or should be aware that the breach
would cause the injury party additional loss(burden of proof)
Hadley v. Baxendale Defendant wins due to the fact that to be liable for
consequential damages defendant must reasonable foresee the loss (in this case loss
profits due to shutdown of mill)
o Punitive damages- designed to punish or deter future conduct, and generally are not available
for mere breach of contract
o Nominal damages- awarded where there is no financial loss to plaintiff
o Mitigation of damages- when breach of contract occurs, the innocent injured party is held to
a duty to reduce the damages he or she suffered
Ex. If I a tenet moves out before end of lease the landlord is required to make a
reasonable effort to find another tenet to replace them and lessen the cost to the tenet. If
he doesnt then damages awarded may be reduced
o Liquidated Damages- contract provides specific amount to be paid as damages in the event of
future default or breach of contract
Types of Equitable remedies:
o Rescission- contract is canceled and the parties are restored to the original position that they
occupied prior to transaction
o Restitution- both parties must return goods, property, or money previously conveyed to each
other
o Reformation- contract is reformed or rewritten to reflect the parties true intentions
o Specific Performance- performance of the act promised by the breaching party in contract
Only granted if money damages are not adequate to compensate non-breaching party
Rarely awarded in sale of goods cases, but typical in contracts for sale of land
Not an available remedy in contract for personal services

Chapter 12 Torts
11 Questions
Tort Law- designed to compensate those who have suffered a loss or injury due to another
persons wrongful act
o Primarily state common law governs tort actions
o Liability is imposed for conduct that unreasonably interferes with the interests of another
party, even if the conduct was accidental
Tort- civil wrong (not arising from a breach of contract) against persons or property
o Breach of a legal duty owed to another that causes harm or injury
o Torts are private wrongs whereas crimes are public wrongs
o People owe duties of care to other persons, and they also owe a duty to society not to commit
crimes
o Civil action filed by an injured party
Criminal law- objective is to protect the public
o Criminal action is prosecuted by the state
Damages awarded in tort actions:

1. Compensatory Damages- compensate or reimburse a plaintiff for actual loss and make them
whole for these loss or return them to their prior position
o Special(economic) damages- compensate the plaintiff for quantifiable monetary loss
Compensatory damages must be reasonably certain, but future damages can be estimated
Ex. Medical expenses, lost wages and benefits(now and future)
o General( non-economic) Damages- compensate individuals not companies for nonmonetary
aspects of the harm suffered such as pain and suffering
2. Punitive Damages- to punish the wrongdoer and deter others from similar wrongdoing
Only appropriate when defendants actions were particularly egregious or reprehensive
and very rare
Not awarded in negligence cases, unless there is gross negligence
Cant be grossly excessive; must be reasonable in proportion to the compensatory
damages (less than 10X)
Tortfeasor- one committing the tort
Intentional tort- tortfeasor intended to commit an act, the consequences of which interfere with
the personal or business interest of another in a way not permitted by law
o Evil or harmful motive not required
Negligence Torts- occurs when the defendants actions were unreasonably careless or unsafe
Strict Liability Torts- (liability without fault) do not depend on the degree of carefulness or fault
of the defendant, but are established when a particular action causes damage
Product liability torts- arise from manufacturing or selling defective products
Intentional Tort types of Victims:
1. Persons:
o Assault- intentional, unexcused act that creates in another person a reasonable apprehension
of immediate harmful or offensive contact
Intent is to cause the harmful or offensive contact or the apprehension of such contact
Fear not required just apprehension of immediate contact
Ex. Stalking or threatening someone
o Battery- intentionally causing of an actual bodily contact that is harmful or offensive
Intent is to cause the contact or the apprehension of the contact
Physical injury does not have to be intended or incurred
Ex. Actually doing the act that was threatened
o Defenses to Assault and Battery:
Consent- whether the person consented to the act that was alleged
Self-defense- individual was defending their life or physical well-being
Defense of others- acted to protect others who were in real or apparent danger
Defense of property- reasonable force can be used in attempting to remove intruders from
ones home as long as it is not likely that it will cause death or great bodily injury
False Imprisonment- intentional confinement or restraint of another persons activities without
justification, can be for any period of time if against their will
o Victim must be aware of the confinement when it happens
o Can be accomplished by physical barriers, restraints, or threats of physical force
o shopkeepers privilege- allows merchants to detain a suspected shoplifter in a reasonable
manner for a reasonable period of time while the matter is investigated, provided there is a
reasonable basis for suspicion
Defamation- wrongfully hurting a persons good reputation
o Libel- committing defamation in writing

 General damages available

o Slander- committing defamation orally
o Slander Per Se- exceptions to burden of proof
Statement that another person has a loathsome disease
Statement that another committed improprieties in a profession or trade
Statement that another has committed a serious crime
Statement that a person has engaged in serious sexual misconduct
o Elements of defamation claim:
Statement about a persons reputation, honesty, or integrity that is untrue
Must be punished(communicated in some way) to a third party
Special damages must be proven for slander except for slander per se
General damages are presumed as a matter of law in cases of libel
o Defenses to defamation:
Truth is an absolute defense to a defamation charge
Privileged speech(absolute or qualified)- even if all elements are satisfied, defendant may

not be liable if he enjoys a privilege (immunity)

Absolute privilege- judicial proceedings; legislative debate
Qualified privilege- good faith statements with limited publication to persons with a
legitimate interest in the communications
o Ex. Discussing an employee with managers
Statements about public figures are generally not actionable unless made with actual
malice( knowledge of falsity or reckless disregard of the truth)
Invasion of Privacy- violating someones right to solitude and privacy
o Acts that qualify as invasion of privacy:
1. Appropriation of identity- using someones identity for commercial purposes without
permission
2. Intrusion into an individuals affairs or seclusion- invading someones home or
searching their computer without authorization
3. False light- publication of information that puts a person in a false light
4. Public Disclosure of private facts that an ordinary person would find objectionable
o Defenses: matter published is of public or general interest; consent to publication
Appropriation- use of another persons name, likeness, or other identifying characteristic for
commercial purposes, without permission and for the benefit of user
o Often arise in context of photos used in advertising
o Public figures have the right to sue anyone who uses their likeness for commercial purposes
without consent
The fight to ones likeness is inheritable if decedent specifically provided of it in his will
o Exception exists for parody and satire, celebrity imitator performers are exempt for
appropriation claims under some state laws (e.g. Nevada)
Ex. SNL skits
Fraudulent Misrepresentation- Intentional deceit for personal gain, that leads someone to believe
in a condition that is different from the condition that actually exists
o Accomplished through false or incorrect statement
o Can occur in inducing a party to enter a contract or concealment of material facts
o Elements of Misrepresentation:
1. Misrepresentation of fact or conditions they know are false
2.Intent to induce another party to rely on the misrepresentation
3. Justifiable reliance on the misrepresentation by the deceived party

4. Damages suffered as a result of that reliance

5.Causal connection between the misrepresentation and the injury suffered
Business tort- wrongful interferences with the business rights of others
Wrongful interference with a Contractual relationship elements:
o 1. A valid enforceable contract must exist between two parties
o 2. A third party must know that this contract exists
o 3. The third party must intentionally induce a party to the contract to breach the contract
Ex. Hiring a employee who has another employment contract
o Case: Pennzoil v. Texaco- Pennzoil accused Texaco of interfering with their contract with
Getty Oil by making an offer to buy them
o Rule: Pennzoil won and ultimately settled for 3 Billion
Negligence Torts- tortfeasor neither wishes to bring about the consequences of the act nor
believes that they will occur
o Risk must be foreseeable it that a reasonable person engaging in the same activity would
anticipate the risk and guard against it
Plaintiff must prove the following for a negligence action:
o 1. Defendant owed a duty of care to the plaintiff
Duty of care- people are free to act as they please so long as their actions do not infringe
on the interest of others
There is no duty for rescue, therefore if you see an injury about to happen and you
dont act then you are not guilty of negligence
Reasonable person standard- societys judgment of how an ordinarily prudent person
should act
Landowner must exercise reasonable care to protect people from harm on their property
Must protect tenants and their guest from harm in common areas
Certain Professionals are held to a higher standard of care based on their knowledge of
the particular profession
Malpractice- essentially professional negligence
Ex. Accountant being not familiar with GAAP
Business Invitees- persons invited to come on to the premises by retailers and other firms
Must use reasonable care to protect these people
Ex. If you slipped on the floor of a business when a sign was not up then you would
have a negligent case
o 2. Defendant breached that duty-if the tortfeasor has not acted in accordance with the
appropriate standard of care
Standard is what an ordinary, reasonable, prudent person would do in the same situation
But professionals are held to standard applicable with profession
o 3. Plaintiff suffered a legally recognizable injury
Must have suffered some loss, harm, wrong, or invasion of a protected interest
Compensatory damages are the norm and must be reasonably certain
Punitive damages only in cases of gross negligence
o 4. Defendants breach caused that injury
Must prove both for causation of an injury:
Causation in fact- injury would not have occurred without the defendants act
Use the but for test
Proximate Cause- connection between an act and an injury is strong enough to justify
imposing liability

Defendants carelessness must be close in time and space to have caused plaintiffs
damages
Harm suffered must have been foreseeable
Ex. Palsgraf v. Long Island Railroad Co.- plaintiff was injured when fireworks exploded
that a rider was carrying after RR attendant pushed him into the train so he would make
it.
Rule- Defendant won because there was no way to foresee this event happening
Defenses to Negligence Torts:
1. Assumption of Risk- voluntarily enters into a risky situation, knowing the risk involved, will
not be allowed to recover
o Knowledge of risk and the voluntary assumption of the risk are required for this defense
Ex. Driver entering a car race knows there is a risk of being injured or killed
2. Superseding Cause- unforeseeable event breaks the causal connection between the wrongful
act and an injury to another
o Ex. You hit someone on your bike causing her injury, but while she waits a plane crashes
nearby causing her serious burns. You would be liable for the bike injuries but not the plain
injuries
3. Contributory negligence (minority rule)- plaintiffs own carelessness partly caused his injuries
then he is barred from recovering any damages from defendant
Old and majority of states have adopted the comparative negligence rule
4.Comparative negligence (majority rule)- enables both the plaintiffs and the defendants
negligence to be computed and the liability for damages to be distributed accordingly
Ex. A plaintiff who is 35% at fault could recover 65% of the damages
50% rule- if plaintiff is more than 50% at fault then they cannot receive any damages
Only some states have this
Res ipsa loquitur- the facts speak for themselves presumption of the defendants negligence,
leaving the burden of proof with the defendant
o Occurs only in events where damage or injury is one that does not ordinarily happen without
negligence
o Event must be within the defendants power to control and must not be due to any voluntary
action or contribution on the part of the plaintiff
Ex. Getting sick from drinking a soda that had a rat in it cause the bottler had to be
negligent for the rat to get in it
Negligence per se- in or of itself- individual violates a statute or an ordinance providing for a
criminal penalty and the violation causes another to be injured
o Injured person must prove:
o 1. That the statute clearly sets out what standard of conduct is expected, when and where it is
expected and of whom it is expected
o 2. He or she is in the class intended to be protected by the statute
o 3. Statute was designed to prevent the type of injury that he or she suffered
o Ex. Statute against inattentive driving and an inattentive driver causes multiple car wreck.
The driver is found guilty he could then be sued by the injured party under Negligence per se
Danger invites Rescue Doctrine- person who is injured while going to someone elses rescue
can sue the person who caused the dangerous situation
Good Samaritan Statutes- persons who are aided voluntarily by others cannot turn around and sue
the good Samaritan for negligence

Dram Shop Acts- tavern owner or bartender may be held liable for injuries caused by a person
who becomes intoxicated while drinking at the bar or who was already intoxicated when served
by the bartender
Social Host statute- holds persons having parties responsible for intoxicated guest that cause
others injury on their way home
Strict Liability- defendant liable for harm even though no negligence is shown, liability is
imposed on the defendant as a matter of public policy
o Ex. Liability for defective products
o Abnormally dangerous activities involve a high degree of risk that cannot be completely
protected against even with reasonable care
o Highly hazardous activities are allowed because their social value outweighs their hazard
Theory that the cost of damages should be borne by the party that benefits economically
from the activity
o Keepers of wild animals are strictly liable for any harm caused by the animals
o Manufacturers and sellers of harmful or defective products due to the fact:
Can spread the cost throughout society by increasing prices
Since they profit from their production activities, the cost of related injuries should be
treated as an operating cost

Chapter 25 Property Rights 7 Questions

Property- rights that people have with respect to something, not the thing itself
o Gives the owner the right to possess, control or transfer property
o Long-standing custom in the U.S. and is protected by the constitutions due process and
taking clauses
o Violations may result in civil actions and/or criminal charges
Property Law- generally governed by state law, including some UCC statutes
o Federal law governs trademark, copyright and patent property rights
o Property rights may be restricted by other laws(e.g. zoning, criminal tort)
o Property may be taxed (e.g. real estate taxes, personal property taxes)
Property Title- indicates property ownership
o Title documents are only required for certain property(rules vary by state)
o Deed- written evidence to title of real property recorded in the county where the land is
located
o Title documents for certain items of personal property may have to be registered under state
law (e.g. autos, boats)
Personal Property- (personality)- moveable property, which may be tangible or intangible
o Tangible personal property exists in physical form (chair, computer)
o Intangible personal property represents rights that dont exist in physical form but have a
legal reality (copyrights, trademarks, stocks).
o Sales are relatively easy and require little formality(equipment, furniture clothes)
Real Property- (realty) immovable property- land and everything permanently attached includes
land, building, trees and vegetation, airspace, subsurface (mineral rights), fixture
o Different parties may own the surface rights and the subsurface rights
o A subsurface owner has the right to go on the land to remove minerals, and is strictly liable if
excavation causes surface to collapse
Fixtures- items of personal property that have been permanently attached to real property with
the intent that it will become part of the real property

o Personal property remains the property of the person who puts it on the property, whereas
fixtures become the property of the real estate owner

o Factors to determine whether an item is a fixture include:

Whether the item can be removed without causing material damage to the building or

land
Intention of the party who attached the item
Real Property Transfers- require a deed in which the owner conveys an interest in land to a new
owner
o Requirements for a valid deed:
Names of grantor(seller) and grantee(buyer)
Words of conveyance(I hereby sell) unless otherwise stated, the estate transferred is
presumed to be fee simple absolute
Legally sufficient description
Grantors signature
Delivery of deed to grantee(who should record it)
o Ownership can pass by sale, gift, or bequest. No consideration is required for transfer of deed
o Warranty Deed- greatest protection from title problems(e.g. not really their property, wrong
sq feet measurements)
o Quit Claim deed- quick sale of a deed with little examination
Ex. Grandma giving you her house
o Deeds should be recorded in the country land records to protect claims by 3rd parties
Public property- owned by government or governmental agency( TVA land, UT campus)
Private property rights can be limited by laws (zoning restrictions, taxes, criminal law
restrictions)
o Landowner cannot unreasonable interfere with a neighboring property owners rights
o Case: Biglane v. Under the hill corp.- started a bar in a neighborhood causing loud noises and
people loitering out on the street
o Rule: Plaintiff won one landowner may not use his land so as to unreasonably annoy,
inconvenience, or harm others.
Ownership of real property is a bundle of rights that may include the rights to posses, sell give,
bequeath, lease, or destroy
o Estate- owners legal interest in real property
Type of estate indicates period of time for which the land might be held
o Must know what type of estate you own, because you can only transfer as many rights as you
own
Fee simple estate(fee simple absolute)- gives an owner the greatest aggregation of rights,
powers and privileges possible
o Fee simple is a present possessory estate that has the potential to endure forever
o Can be transferred by owner during life via a deed or to the owners heirs upon death via will
o Creation: A(the owner or granter) conveys Black-acre to B(the grantee or new owner)
Life estate- present possessory estate that ends at the death of some specified individual( life
tenant)
o Creation: A conveys Black-acre to B for life
o When B dies, the land reverts back to A (or to another person named by A or As heirs
o Life tenant can possess, use, and take the fruits/income of the estate, but cannot
waste(damage) the property, life tenant must maintain the property and pay taxes

o Owner of a life estate can transfer the life estate during his life, but the estate terminates at his

death
Slide 14 Example of transfer of fee simple and life estate
Easement- non-possessory right to use someone elses land some limited purpose, but without
taking anything from the property
o Granted by the property owner (grantor) in writing
o Easement cannot be destroyed by the grantor- the easement owner may deed it back to the
owner or abandon it
o Ex. Anna and Sarah own adjacent lots and Anna grants Sarah an easement to build a driveway
across her land so she can access the highway. Is Sarah sells her land, the easement continue
to benefit the new owner. If Anna sells her land, the easement will also continue
Profit- right to take something off another persons land that is part of the land or a product of the
land, such as minerals, crops, and timber
License- revocable right to go onto anothers land to perform a specific act
o May be oral or written and may be revoked by the licensor(owner of the land)
o Ex. Owner givens next door neighbor B a license to park Bs RV in owners side yard for a
couple of days
o Ex. Movie theatre patrons are licensees
Concurrent Ownership- more than one person shares ownership of real property simultaneously
o Form of ownership is established in the deed transferring the property from old owner to new
owners, who get to stipulate how they want to hold the property
3 primary forms of Concurrent ownership of real property:
1. Tenants in common- 2 or more people have title to an undivided interest in realty with each
co-tenant owning a separate and distinct share (%) of the whole property, which has not been
divided among the co-tenants. Shares do not have to be equal
o Each tenant in common can give, sell or devise his individual interest in the realty to another
party
No right of survivorship- inheriting dying tenants share
o Each tenant in common has a right to use the whole property
o Right of partition- judicial order to divide property
2. Joint tenancy- parties hold an undivided interest in property, but upon a joint owners death,
that persons interest passes to the surviving joint tenants
o Right of survivorship- distinctive feature of joint tenancy
Ex. If A and B jointly own house, when A dies B automatically becomes the owner of
100% of the property
o A joint tenant may sell/transfer his interest to a third party making the new owner a tenant in
common with the remaining joint owner
3. Tenancy by the entirety- Form of joint tenancy available only when property is initially
conveyed to a husband and wife, who are considered to hold the property as one person
o Destroyed by divorce- ex-spouses become tenants in common
o Include the right of survivorship
o Neither spouse can transfer his/her interest alone
o Available in Tennessee, but not all states
o Purpose is to protect the family residence or farm from the claims of creditors of one spouse
Ex. Dad is gambling addict and has racked up a lot of debt they cannot come and take the
land of dads part

Leasehold- possessory estate in land that arises when the owner (lessor) agrees to convey the
right to possess and use the property to a lessee (tenant) for a certain period of time
o Tenant has a leasehold estate in the land for the period of time stated in the lease
Lease- contract containing the promises of the lessor and the tenant, where a relationship is
formed in which one person is in lawful possession of real property owned by another
o Lessor( landlord)- owner of property
o Lessee(tenant)- one who occupies the property
o Lease relationship is created by an express contract (oral or written) or implied contract.
Generally leases longer than one year must be written to be enforced under the statue of
Frauds
Tenancy for Years- tenant has a lease that runs for any definite period of time
Periodic tenancy- tenant has a lease of indefinite duration and pays rent annually, monthly, or
weekly.
o Proper notice must be given one period prior to termination
Tenancy at will- lease runs for an indefinite period, and may be terminated by landlord or tenant
at any time( unless statute provides otherwise)
Landlord Tort Liability- landlord has no duty to tenant or tenants invitees for injuries on the
rented premises
o Tenants may be liable for injuries that occur in their rented space
o Landlord generally not liable for dangerous conditions under the exclusive possession and
control of the tenant
o Exceptions: injuries in the common areas under the landlords control, and injuries related to
negligent repairs by landlord
Eminent Domain- governments authority to take private property for public use of purpose
without the owners consent
Taking clause of the 5th Amendment- prohibits the federal government from taking private
property for public use without just compensation
o This protection also applies to state and local government taking of property pursuant to the
14th amendment due process clause
o Takings include:
Government taking by condemnation through power of eminent domain
Government physically occupying private property or authorizing a private party to do
so
Some governmental regulation may also be a taking- but typical zoning laws are not a
taking
A partial taking of property may occur
o Property- land and interests in land, tangible personal property
o Just compensation- owner who is deprived of property must receive just compensation
which is unusually the fair market value of the property taken or the amount by which the
property value has diminished due to a partial taking
o Public Use- taking is unconstitutional unless it is for a public use(which is broadly
interpreted)
o Case: Kelo v. City of New London, CT- city condemned property for use in private
commercial development, the 5th amendments public use requirement was satisfied because
the citys economic development plan served a public purpose

Chapter 14 Intellectual Property 3 Questions

Article I Section 8 of the U.S. Constitution- authorizes congress To promote the Progress of
Science and useful Arts, by securing for limited times to Authors and Inventors the exclusive
Rights to their respective Writings and Discoveries
Intellectual property rights are protected both by common law and federal and state statutes
Trademarks (apple to products)- distinctive mark, motto or device or emblem affixed to goods so
they can be easily identified and distinguished from goods from other manufacturers
Service Marks (apply to services)- similar to trademarks except for services of one company (ex.
Airline logos)
o Use of identical or similar marks by competitors may lead to consumer confusion
o Owner of trademark or service mark is protected in its use by common law and statutes
o Case: Coca Cola Company v. Koke Co. of America(1920)- shows early trademark laws
before Lanham Trademark Act (1946) Coke competitor was prohibited from calling their
product Koke
Trademark/Service mark infringement- occurs when a trademark is copied or used without
consent
o Can be intentional or unintentional
o Trademark owner has a cause of action against an infringer
Trademark/Service mark dilution- occurs if the similar mark reduces the value of the famous
mark or lessen its ability to identify goods and services
o Ex. No dilution of Victorias Secret by Victors Little Secret adult store
o Case: Menashe v. V secret Catalogue, Inc.- Plaintiff sued saying Victorias secrets new line
of panties called SEXY LITTLE THINGS diluted their prior brand they had
o Rule: Defendant won since sexy little things were a suggested mark and that Victorias Secret
had used it prior to the application without complaint so Victorias Secret had priority to the
mark
o Dilution is more likely when the company using mark is a competitor
Ex. Sambucks coffeehouse was held to dilute Starbucks mark
Trademark/Service mark Registration- can be registered with the USPTO or applicable state
agencies
o Registration is not required to sue for infringement, but it does provide proof of when the
mark was first used
o A mark can be registered if it is currently in service or if the applicant intends to put it into
service within six months
o Registration of marks can be renewed
o Marks must be distinctive in order to be registered, generic terms receive no protection
o Trademarks can last indefinitely as long as they are used, regardless of whether they are
registered
Trade Names (business names)- all or part of a businesss name, valuable because it is related to
the businesss products, business, goodwill, or marketing
o May be protected from infringement under common law
o May be protected as a trademark if it is also part of the companys trademark or service marks
Patents (for designs and inventions)- grant from the U.S. Patent and Trademark Office that gives
an inventor the exclusive right to make, use, and sell an invention for 20 years from the date of
the application( designs are good for 14 years)
o 1st person to invent a product or process gets the patent rights- not the first person to file a
patents, but the patent application can be used as evidence to prove the date of invention

o Effective life of a patent may be shorter because of the application approval time, or in the
case of pharmaceuticals, the time for the FDA to approve the drug for use

o Patentable item or process must be novel and not obvious

o Patent infringement is actionable

Copyrights(for literary and artistic work)- intangible property rights granted by federal statute to
an originator or author of certain types of work
o Ex. Literacy, musical works, pictures, film, sound recordings
o Works created after January 1, 1978, are automatically protected for the life of the author plus
70 years
o Works can be registered with the U.S. Copyright Office(but not required for protection)
Copyright Act Protection- work must be original and fixed in a durable medium and fall within
one of these eight categories: literacy, musical, chorographical and dramatic works, pictorial,
graphic and sculptures, films/audiovisual/TV/sounds, computer software and architectural plans
o Expression of an idea can be copyrighted, but not the idea itself
Copyright Infringement- occurs when there is unauthorized copying of a protected work
o Infringers may be subject to criminal penalties and civil damages (actual damages or
statutory damages of $150,000)
o Fair use exception- certain uses are permitted without payment of royalty
Ex. Criticism, news reporting, research, teaching
o When a copyright has expired, the work is said to be in the public domain and can be used
by anybody
Lanham Trademark Act (1946)- incorporates the common law of trademark and provides
remedies for infringement through federal courts
o Prohibits unauthorized use of same or similar marks on competing or related good
Federal Trademark Dilution Act (1995)- amended the Lanham Act to provide for a cause of action
for trademark dilution in cases where the unauthorized use was on noncompeting goods or was
unlikely to confuse
Intellectual Property Durations:
o Patent- 20 years from date of application; 14 years for design patents
o Copyrights- Life of author plus 70 years
For publisher 95 years after date of publication or 120 years after creation
o Trademark(service mark or trade dress)- Unlimited as long as in use and must be renewed
between 5th and 6th year and then ever ten years after

Business Law Exam 3 Material

Chapters 16-18 13 Questions
Chapter 16 Sole Proprietorships and Partnerships
Choosing business Organization- need to be aware of the advantages and disadvantages of
various business forms
Consider:
o Ease and expense of formation and maintenance
o Personal liability of owners to outsiders
o Entitlement to income and assets
o Liability for taxes
o Need for capital
o Continuity of life
Types of Business Organizations:
o Sole Proprietorship
o Unincorporated entities required to file formation documents with the state
General Partnership
Joint venture- a partnership for a limited purpose
Limited Partnership(LP)
Limited Liability partnership (LLP)
Limited Liability company (LLC)
o Corporation- must file formation documents with the state of incorporation
Factors used in comparing Business Entity Forms:
o Formation requirements
o Management
o Sharing Profits
o Liability to third parties
o Taxation
Sole Proprietorship- business form where ownership and control are vested in one person (an
unincorporated business where no separate entity exists)
o Anyone doing business without creating a separate business entity
Sole proprietorship may have employees
May operate under an assumed or fictitious name
o More than 2/3 of U.S. business are sole proprietorships; 99% have less than $1 million of
revenues
o No organization documents required to be filed, but tax registration may be necessary
o Owner is responsible for businesss debts
o No special entity laws govern sole proprietorships; however, other laws affect ownership
and operations
Ex. Employment, tax, common law(contracts, torts), statutes(business licenses)
o Sole proprietor Liability for employees for employee actions
CASE- Garden City Boxing Club, Inc. v. Dominguez,(2006)
Garden City Boxing Club sued Luis Dominguez because his employee installed an
antenna in the wrong place causing them to lose revenue and allowing people to view the
fight for free
Rule- Sole proprietor is personally liable for the actions committed by his employees
within the scope of their employment

o In 2005 20.6 Million individual tax returns were filed that reported nonfarm sole
proprietorship activity, totaling $974.8 billion in gross receipts

o Income from a sole proprietorship is reported on the owners individual tax return
Owner rather than the business pays any tax due on the business income
Business losses can offset other income of the owner (thereby save taxes)
o Advantages of Sole Proprietorships:
Owner is in complete control and is entitled to all profits
Ease of creation and maintenance
Flexibility, convenience of operations
Single level of taxation (owner pays personal income taxes and self-employment taxes on
business profits)

o Disadvantages of Sole Proprietorship

Unlimited personal liability: the owner is personally liable for business losses and debts,
business contracts, and employee torts
Difficult to raise financing (debt is generally the only source for working capital other
than operations)
No continuity after death of owner
Partnership- an association of 2 or more persons to carry on, as co-owners, a business for profit
o Each partner is a co-owner that has joint control over the businesss operations and right to
share in its profits
o Partnerships are recognized as separate legal entities under state law
o Considered a general partnership unless specifically designated as a limited partnership
o Partnerships do not pay federal income taxes- the partners pay individual income taxes on
their share of partnership income (which is reported to them on an information return filed by
the partnership with the IRS
In 2005, 2.9 million partnerships filed information tax returns to report the income on
which their partners had to pay taxes
o Agency Concepts and partnership law:
Each partner is an agent of the partnership for the purpose of conducting the partnerships
business
There may be imputation of liability for the acts of other partners
Each partner is a fiduciary of the other partners
State common law
Uniform Partnership Act (UPA), adopted by all states in some form
Revised Uniform Partnership Act (RUPA): adopted by most states (including TN in
2001)
UPA or RUPA provide the states default rules that govern partnership formation
and operation that apply if a partnership agreement does not provide otherwise
o Ex. All partners share equally in profits and management
Partnership agreement can override most default rules provided by UPA or RUPA
o Court may find that a partnership exists even where one or more parties did not intend to
form a partnership
o The existence of a partnership is an inference of law based on established facts, but no factor
alone is determinative
o Factors courts would use in determining whether a partnership exists:
Profit sharing (creates presumption of a partnership)
Joint ownership of business (but not just joint ownership of property)
Right to manage the business

General Partnership- rights to participate in the control of a business and share in profits are
indicative of a partnership
o Written partnership agreement is not required
o Partners have fiduciary duties to one another, and must account to each other for partnership
property
o Action for an accounting- used to resolve a dispute among partners related to partnership
business or property
Partnership Formation:
o Duration of partnership
Partnership for a term
Partnership at will
o Joint Venture- partnership formed for a specific purpose
Ex. Buy land and develop a retail shopping center
o No express agreement is required for a partnership to exist
o Partnership agreement can be oral, but it is advisable to be written
Partnership Operation: Rights of partners
o In the absence of a partnership agreement (oral or written) state statutes (UPA or RUPA)
govern the partners rights
o Default rules include:
Management of partnership- each partner has an equal say in management
One vote each majority wins, unanimous required for some actions
Partnership interest- equal profits, losses shared as profits shared
Compensation- None
Inspection of the books and records
Partner can demand an accounting of partnership assets or profits to determine value of
each partners share
May occur when other partner(s) suspected of committing fraud or embezzlement, or
any time it is just or reasonable
Duties and Liabilities of Partners:
o Fiduciary duties- partners are fiduciaries and general agents of one another and the
partnership
Duties include duty of care and duty of loyalty
o General agency powers- partners have implied authority to conduct ordinary partnership
business buy man need unanimous consent to sell assets, enter into debt agreements or certain
other activities
o Duty to make contributions to cover losses
o All partners in a general partnership have unlimited personal liability for the partnerships
debts, but the assets of the partnership must be exhausted 1st
o Partnership is liable for the torts committed by the partnerships employees or partners for
acts committed within the scope of their business duties
Partner who commits tort must reimburse the partnership for any damages
o New admitted partner has no personal liability for existing partnership debts and obligations
o Joint Liability- 3rd party may sue all of the partners as a group, but each partner can be held
personally liable for the full amount of the judgment
o Joint and Several separate liability- partners are both jointly and individually liable for the
partnership obligations
3rd party can sue one partner separately or all partners jointly, but may only collect against
personal assets of the partners named as defendants

Dissociation of a partner- occurs when a partner ceases to be associated with the partnerships
business. May occur by:
o A partner voluntarily giving notice of intent to withdraw
o Occurrence of event specified in the partnership agreement(such as death)
o By a unanimous vote of other partners
o Upon a dissociation the partnership must either:
Buy out the existing partners interest and continue operating
Terminate the partnership and distribute remaining assets among partners
Partnership Termination- occurs in two stages:
o Dissolution- legal death of the partnership (may be triggered by agreement of by a partner
withdrawal)
After dissolution partners have no authority to conduct partnership business except to:
Complete transactions already begun
Wind up by collecting and preserving partnership assets, discharging liabilities, and
accounting to each partner for their value of his share
o Winding up- collecting and distributing partnership assets
o If liabilities are greater than assets, partners are liable for the losses in the same proportion in
which they shared profits, unless agreed otherwise
o If one partner does not contribute his share to cover losses, other partners are liable for his
share, but they have the right of contribution against the partner who did not pay
Advantages of Partnership:
o Easy to create and maintain
o No state registration required
o Single level of taxation- partnership does no pay federal income taxes, partners report and
pay federal income taxes on their allocated share of partnership income
Disadvantage of Partnership
o Partners are personally liable for contracts, torts, and business debts
o Financing is difficult to obtain( partner contributions or debt are generally the only options)
Chapter 17 Limited Liability companies and Limited Partnerships
Limited Partnership- business form when a partner does not want to take an active role in
management and wants to limit his personal liability to the amount of his investment in the
partnership
o Governed by state law (ULPA or RULPA)
o Must file certificate of Limited Partnership with the secretary of state where it is organized
o Must have at least one general partner (GP) and at least one limited partner(LP)
o Limited partnership does not pay federal income taxes- partners pay taxes on their share of
partnership earnings
General partners of limited partnerships- assume all management duties of the limited partnership
and are personally liable for partnerships obligations (debts)
o Consequently, GPs are often corporations(which means that the individual shareholders of the
GP are not personally at risk for the limited partnerships liabilities)
o GPs manage the partnership in accordance with the partnership agreement, but they have
fiduciary obligation to the LPs
Limited Partners- contribute cash/property to the partnership (their capital contribution), but
they have no management rights
o Do have the right to be informed about the partnership business
o LPs ability to transfer his interest may be restricted

o LPs liability for partnership debts is limited to the amount of the LPs investment however,

this immunity from liability can be lost if a LP takes part in managing

Liability limited to contribution as they do not participate in management
Limited Liability Partnerships (LLPs)- relatively new type of partnership that provides some
limited liability for partners while permitting all partners to participate in management (vs. a
limited partnership where LPs cant be involved in management)
o LLPs were designed primarily for professionals who normally do business as partners in a
partnership and who want protection from malpractice liability of their partners (ex. Doctors,
lawyers, accountants)
o Allow innocent parties to avoid personal liability for malpractice of other partners
o In some states LLP partners are not personally liable for any partnership obligations, whether
arising from contracts, torts or otherwise
o For federal tax purposes, LLPs profits/losses are passed through to the partners, who report
their share of partnership earning on their returns, no entity tax level
o Formation and operation governed by state statute
Must file appropriate form with secretary of state to organize in that state
Company name must include the terms LLP
Annual reports must be filed with the secretary of state where organized (failure to file
annual report may result in loss of LLP status)
Limited Liability Company(LLC)- relatively new and very popular hybrid form of organization
that combines the limited liability of a corporation and the tax advantages of a partnership
o LLCs are created under state law
TN enacted its first LLC statute in 1995, but a new and improved LLC law was adopted
in 2005
o Since 2005, the # of newly-formed LLCs has far exceeded the number of new TN
corporations, LPs, and LLPs (other entities that are required to file with the secretary of state)
o Business name must include LLC
o Owners are called members(not shareholders) and their ownership in the business is called
an interest (not shares)
LLC may have many members or a single member
o Members are not personally liable for the debts of the LLC
LLC Formation:
o Articles of Organization- filed with the secretary of state require the following:
Name of business
Principal Address
Name and address of registered agent
Names of the owners
How the LLC will be managed
o Annual state filing and fees
o Can be expensive to form and maintain
LLC taxation- generally treated as a partnership for federal tax purposes(advantage)
o No federal income tax is paid by the LLC because each members share of the LLCs
income/loss is reported on the members federal tax return
o Single level of taxation(vs. double taxation with corporations)
o Losses can be used to offset members other income
o Some states such as TN, tax LLCs like a corporation instead of a partnership
LLC Management and Operation
o Operating agreement- sets out the rights and obligation of the owners

If an LLC does not adopt its own operating agreement, most LLC statutes proved default
rules for governing
Agreement may be oral but written is recommended and contain provisions relating to
management, meetings, distributions, transfer of membership interests, and other
significant issues
o 2 Options for management, type is selected in Operating Agreement
Member-managed- all of the members participate in management, equal rights/votes on
LLC matters, usually the default rule
Manager-Managed- members elect manager(s) to manage the LLC
Director Managed- members vote on director(s) to manage the LLC
Additional option available in TN
If the operating agreement does not provide otherwise, the default statutory rules
typically provide each member has one vote or votes based on % of ownership
o Generally, a LLC continues in operation even after a member withdraws
o Ability to transfer ownership interests may be restricted by statute unless specifically
permitted by the operating agreement
o LLCs can have members that are individuals, corporations, or partnerships(an advantage over
an S corporation)
Chapter 18 Corporations
Corporation Earn more revenue than all other business forms
Corporations- creature of state statute, an artificial person
o State law governs the formation and operation of corporations
Most state corporation statues follow the Model Business Corporation Act (MBCA) or
the revised MBCA, which are model corporation laws
o Ownership of a corporation is represented by shares of stock
Corporation can have one or many shareholders
o Key advantages- ability to raise capital via sale of stock, continuity of life and limited
liability of owners
o Key disadvantages- double taxation of business income, cost and complexity of formation
and compliance, management constraints
o Corporations authority to act and liability for its actions are separate and apart from the
shareholders
o Shareholders are generally not liable for the debts, contracts or torts of the corporation;
limited liability for shareholders means that all they can lose is their investment in the stock
In certain situations, however the corporate veil of limited liability can be pierced,
holding the shareholders personally liable
Shareholders are liable for any debts they personally guarantee
Shareholders- own the corporation through their ownership of stock
o Can be individuals, trusts, corporations, or any other entity
o Stock may be purchased directly from the company or from other shareholders who want to
sell their shares
o Shareholders may be subject to restrictions in a shareholders Agreement on when and to
whom they can sell their shares
o Shareholders elect board of directors to manage corporation
o Board of directors hires officers to run corporation on a daily basis
o Continuity of life- body of shareholders can change constantly without affecting the
existence of the corporation

o Derivative Action- shareholder can sue the corporation(or its board of directors) and bring

suit for the corporation in some instances

Corporate taxation- Profits (net income) can either be kept by the corporation and used in the
business(Retained Earnings) or distributed to the shareholders (dividends)
o Growth companies often reinvest their earnings to expand the business instead of paying
dividends
o Corporations are taxed on their profits by federal and state governments
o Shareholders are taxed on the dividends they receive from corporations
o Double Taxation- occurs because corporate earnings are taxed at the corporation level and
again at the shareholder level when divided issued
Dividends- distribution of corporate profits or income
o Distributed only if ordered(declared) by the board of directors
o Can be stock, cash, property, or stock of other corporations
o State laws control the sources of funds available for the payment of dividends, which
typically must be paid from retained earnings, net profits and surplus
Domestic corporation- from the states perspective is one that was incorporated there
Foreign Corporation- company doing business in a state other than its home state
o Certificate of Authority- what corporations register for to be able to do business in states
other than their state of incorporation
o Many companies incorporate in Delaware because of its favorable corporation laws, even if
the companies do not plan to operate in Delaware
Most corporations are private, for-profit corporations, but there are others:
o Public corporations- organized by governments to meet governmental purposes
Ex. TVA, AMTRAK
o Nonprofit corporations- typically formed for educational, health, or charity
Ex. Colleges, hospitals, charities
Close Corporations-closely held corporations
o Shares held by a few shareholders, often family members
o More informal management, similar to a partnership
o Restrictions on transfer of shares
o Subject to general corporation laws of the state, unless the state has adopted statutes that relax
certain formalities such as required annual shareholder meeting
S Corporation- regular for-profit corporation that makes a special IRS election that lets it be taxed
like a partnership
o This election lets the corporation avoid double taxation at the federal level
o Shareholders of S-corps report their share of corporate income on their individual tax returns
o IRS restrictions regarding elections- Maximum number of shareholders and type of stock that
may be issued
Professional Corporations(PC)- all shareholders are required to be members of the same
profession
o This legal form does not limit a shareholders liability for his/her own malpractice
Piercing the corporate veil- occurs when a court, in the interest of justice or fairness, holds
shareholders personally liable for corporate acts and/or debts
o May be pierced when the corporation is the alter ego of majority shareholders, and personal
and corporate interest and commingled such that the corporation has no separate identity
o Typically, only occurs with closely held corporations with few owners
o Factors a court considers:

3rd party was misled into dealing with a corporation rather than individual
Corporation never meant to make a profit/solvent, or is under capitalized
Statutory formalities are not followed
Ex. Meetings, elections, resolutions, records
Personal and corporate interests are commingled so that there is no corporate identity
o In re Aqua Clear Tech., Inc. (p. 450)- in a bankruptcy case, a shareholder of Aqua Clear (the
Debtor) formed a new corporation (Discount Water) to take over Debtors assets and business
without payment of any payment or consideration
Discount was held liable for the debtors debts
Corporate Formation steps:
o 1st Step- choose a state in which to incorporate, can only be incorporate in 1 state
May also have to register to do business in other states it operates in
o 2nd Step-Choose and reserve a corporate name with proper suffix
Ex. corporation, Corp Incorporated or Inc.
o 3rd Step Prepare Articles of Incorporation-(Charter in TN) filing for incorporation with the
Secretary of state in the state of incorporation
Includes basic information about the corporation
Incorporators- person who execute the articles, typically owners
o 4th Step File Articles with Registered Agent/Office- specific person in the state authorized to
receive any legal notice and documents from state and/or 3rd parties
Bylaws- written set of rules that govern the internal operations of the corporation adopted
by the corporation
Ex. Election of directors, meetings
Board of Directors- elected by shareholders to govern the corporation
o Votes based on number of shares owned
o Inside Directors- director that is a shareholder and/or an officer
o # of directors set forth in a corporations bylaws
o 1st Set of directors is elected by the incorporators, thereafter shareholders elect
o Term of office is generally for one year
o Directors can be removed for cause(for failing to perform a required duty)
Directors Meetings- are held pursuant to the Bylaws
o Require a quorum of directors to be presents(minimum number of directors to conduct
official corporate business, usually majority)
o Each director generally has one vote
o Directors can make decisions at meetings or by written consent
o Minute Book- Official record of the corp., that include minutes of meeting and written
consents
Rights of Directors:
o Participate- in corporate decisions and inspect corporate books and records
o Compensation- directors fees
o Indemnification- if a director is sued for acts as director, the corporation should guarantee
reimbursement(indemnification) and/or purchase liability insurance to protect the board from
personal liability
Director responsibilities- all management decisions including:
o All major corporate policies
o Appointment and removal of all corporate officers and setting their compensation
o Financial decisions, including whether to distribute dividends, and if so, in what amount

Officers-(CEO, President, CFO) are hired by the board of directors

o Employment relationships are generally governed by contract law and employment law
o Officers may be terminated for cause
o Act as agents for the corporation
o In most states the same person can be both an officer and a director
Officers are employees of the corporation and have fiduciary and loyalty duties
o Directors and officers are fiduciaries of the corporation and owe ethical and legal duties to
the corporation and shareholders
o Duty of Care- Directors/Officers are expected to act in good faith, using prudent business
judgment and in the best interest of the corporation
Failure to do so may subject individual directors or officers to personal liability for
negligence
Make informed and reasonable decisions
Rely on competent consultants and experts
Exercise reasonable supervision for work delegated to officers/employees
Attend Meetings
o Business Judgment Rule- immunizes a director or officer from liability from consequences of
a good-faith business decision that was harmful or unprofitable
BJR applies to protect the director from liability as long as the director took reasonable
steps to become informed about the matter; had a rational basis for his decision and did
not have a conflict of interest
Duty of Loyalty- putting welfare of corporation before personal interests
o Know scenarios to be able to tell if a office is breaking his duty of loyalty
o No competition with corporation
o No taking of a corporate opportunity
o No conflict of interests-must fully disclose any potential conflicts of interest and abstain from
voting on any transaction that may benefit the director/officer personally
If transaction was fair and reasonable, it will not be voidable if approved by majority of
disinterested directors
o No insider trading
o No transaction that is detrimental to minority shareholders
Role of Shareholder- ownership of the corporation through shares owned
o Generally have no right to manage the daily affairs of the corporation, but do so indirectly by
electing directors
o Generally protected from personal liability by the corporate veil of limited liability(losses
are limited to the amount they invested in the corporations stock)
Shareholders power- include approving all fundamental changes to the corporation
o Amending articles of incorporation or bylaws
o Approval of mergers or acquisition
o Sale of all corporate assets or dissolution
o Also elect and remove the board of directors
Shareholder Meetings- must occur at least annually
o Common shareholder entitled to one vote per share
o Articles and bylaws can exclude or limit voting rights of certain classes of stock
o Quorum must be present(shareholders representing more than 50% of outstanding shares
present)
Rights of Shareholders include:

o
o
o
o
o
o
o

To vote
To have a stock certificate
To purchase newly issued stock
To dividends if and when declared by board
To transfer shares, with some exceptions
To proportionate share of corporate assets on dissolution
To file suit on behalf of corporation

Chapter 19 Agency 5 Questions

Agency- legal relationship whereby one party(principal) agrees to have another party (agent) to
act on his behalf, and the agent agrees to so act
o Agency law is largely based on common law(court decisions)rather than statutes
o Agency laws is critical to businesses because agency relationships are pervasive in the
business world
o By using agents, a principal can conduct business in multiple places at the same time
An agent may be authorized to enter into contracts binding the principal
Agent- has a fiduciary duty to act primarily for the principals benefit
o May be either an employee or an independent contractor of the principal, distinction is
very important for determining rights and obligations of party
o Not all employees are agents of their employer, but generally, employees who deal with third
parties are considered agents
Ex. Store managers, Salesperson, Project engineer, CFO
o Ex. An officer of a corporation is an agent, employees are often agents of their employers,
general partners are agents for their partnership, some agents may be hired for specific
transactions, such as selling real estate
Workers are either employees or independent contractors for legal and tax purposes
o Employees- apply to employment laws (social security, tax withholding, workers
compensation, unemployment insurance, employment discrimination laws)
o To ensure compliance with such laws, it is important that agents be properly classified as
either employees or independent contractors
o Employers have the ability to control the details of how an employee carries out his work
o Classifications are important because they establish the parties respective rights and
responsibilities to each other and third parties
o Facts and circumstances determine the legal nature of the relationship rather than the
language of an employment agreement
Control over the performance of the work- key factor
Ex. Manner, location, hours of work
Substance of the relationship-, rather than what the parties call it, determines the legal
relationship that exists
Independent Contractor- , not an employee, hired by an employer to perform some work and
the employer has no control over the details of how the work gets done
o Ex. Software designer, house painter, computer services provider, general contractor and
subcontractor, truck driver who owns his own truck
Factors Considered by Courts
Emp.
I.C.
Does the Employer exercise a great degree of control over the details of
the work?

Yes

No

10

Is the worker engaged in an occupation or business distinct from

Employer?
Is work usually done under Employers supervision?

No

Yes

Yes

No

Does Employer provide the tools?

Yes

No

Has the worker been employed a long time?

Yes

No

Is the worker paid at the end of the job?

Is there a great degree of skill required?

No
No

Yes
Yes

Employers have a financial incentive(e.g., employment taxes) to classify workers as independent

contractors rather than as employees
o State and federal employment laws apply to employees but not to independent contractors
(e.g. Social Security, unemployment compensation, workers comp.)
o Employers owns copyrights for employee-created works within the scope of employment
Misclassification of employees as independent contractors is common, and has caused workers,
state attorneys general, and the IRS to pursue legal actions against employers
o Ex. Microsoft, FedEx Ground
CASE: Alberty-Velez case (1st Cir., 2004), p.480.- Co-host of television show sued station for
discrimination when they terminated her work after she became pregnant
o Not federal law prohibits discrimination against pregnant employees
o RULE- court held that the parties had structured the relationship in a way that supported the
defendants position that plaintiff was an independent contractor
o Read to find factors of Case
Independent contractors- less expensive than employees because:
o No employment taxes or benefit costs
o Generally, no vicarious liability for the torts of independent contractor
o IC owns copyrights in the work they create for principals, unless they agree in writing that it
is work for hire
Agency Relationship- Created by voluntary agreement between the parties, can be created for any
legal purpose
o Principal must have contractual capacity, but an agent does not have to have contractual
capacity since he derives authority from the principal
o Contract entered into by an agent is actually the principals contract
Agency Relationships can be created in 4 ways:
o 1. By agreement Express Agreement- exists when a Principal tells an agent to act on the Principals behalf
either orally or in writing
Implied Agreement- arises from reasonable inference from the conduct of the principal
and agent
o 2. By Ratification- occurs when the principal affirms a persons unauthorized act, thereafter
the principal is bound to the persons act, and the act is treated as if it had been authorized by
the principal from the outset
o 3 Agency by Estoppel- (apparent authority) exists when words or conduct of the Principal
leads a third person to believe that the agent has authority, if the 3rd person acts to his
detriment in reasonable reliance on that that belief, the principal is estopped (prevented)
from denying the agency relationship

11

o 4 Agency by Operation of Law:

Family Situations- Ex. Wife using husbands card to charge groceries
Emergencies- Ex. Railroad engineer contacting medical care on his employers behalf for

injured motorist his by train

Duties of Agents-to- Principals:
o Performance- Duty to use care and skill
o Notification- duty to inform
o Obedience- duty to follow instructions
o Accounting- for funds received by agent
o Fiduciary Duty- loyalty, including duty to act for only one principal, the duty not to profit at
the principals expense, the duty not to act adversely to the principals interests,
confidentiality
Duties of Principal-To-Agent:
o Pay agent in a timely manner for services rendered
o Advance money if the contract provides for it and reimburse ordinary expenses incurred
while performing duties
o Indemnify(compensate) agent for liabilities arising from agents lawful and authorized acts
on the principals behalf
o Cooperation
o Safe working conditions(Duty of Care
Scope of Agents Authority- Principals liability to third parties with whom an agent contracts
depend on the agents authority to action principals behalf, may be actual or apparent
o Actual Authority- can be express or implied, also a principal may ratify an agents
unauthorized act
Express Authority- declared in clear and definite terms, can be oral or written(written
may be required under the equal dignity rule
Ex. P tells A: Sell my ring A has express authority to sell it
Power of attorney must be in writing
o Implied Authority- the authority that an agent has to do what is reasonably necessary to carry
out the express authority and accomplish the objectives of the agency
Ex. If P tells A to sell his ring, then there is implied authority to have the ring cleaned and
appraised, and to advertise the ring for sale
o Apparent Authority- arises from what the principal causes a third party to believe with respect
to an agents authority to act, must be based on the conduct of the principal and not on the
acts of the agent
Ex. P tells T: If you want to buy my ring, see A. P has never authorized A to sell the
ring, however, if T contracts with A to buy it, P is bound by the contract because P created
the impression that A had authority to sell it
o Ratification- occurs when the principal affirms an agents unauthorized act, in such case
principal becomes liable for an act as if had been authorized from start
If no ratification, the principal is not bound by the agents act
o Requirements for ratification
Agent must have acted for an identified principal who subsequently ratified the action
Principal must have knowledge of material facts
Principal must affirm transaction in its entirety
Principal must have legal capacity to authorize the transaction at the time of ratification
and the time of the original contract, since Rat. Is retroactive
Ratification must occur before third party withdraws from deal

12

Contract Liability- Principal will be liable for contract if agent enters a contract with a 3rd person
on principals behalf provided that the agent is acting within his authority, and he discloses the
fact of agency and the principals identity to the third party
o Agent liable on contract if- unauthorized act, nonexistent principal, agent signs contract in
personal rather than representative capacity, fraud
Respondeat superior(let the master answer)- doctrine imposing vicarious liability ( or indirect
liability) on an innocent employer for the wrongs( tort, contract, crimes) of an agent-employee
committed in the course of his employment
o Employee is still liable for his own torts
o Generally, vicarious liability does not apply to acts of independent contractors
Principal conducting business through an agent is responsible for harm caused by the principals
own negligence
o Agents are liable for their own torts regardless of whether the torts were committed within
the scope of their employment
o Respondeat Superior doctrine- principals are legally liable for the torts of their employeeagents committed within the scope of their employment job related
Factors determining whether act is within scope of employment:
o Act is one employee is generally responsible for
o Takes place during working hours
o Part of the employers business
o Similar to act authorized by the employer
o The employer furnished the means or instrumentality of the act
Distinction between frolic and a detour
Liability for crimes:
o Employee Liability- person who commits crime is personally liable for it regardless of
when/where it occurs
Obedience to employers command is no defense
o Employer Liability- if an employer commits a crime he is liable
If employer directs employee to commit crime, the employer may be liable on criminal
conspiracy charges
o Respondeat Superior- employer may be held liable for employee crimes committed within the
scope of employment and for employers benefit
Ex. Shredding subpoenaed documents, lying under oath
Agencies End by:
o Termination- relationship is voluntary so person cannot be forced to work for someone, may
be damages awarded if prior to terms agreed on
o Completion of tasks for which agent was hired
o Death, insanity or physical incapacity of principal or agent
o Bankruptcy of principal

13

Chapter 20 Employment Relationships 7 Questions

Sec. 1: Employment-at-Will- common laws doctrine, either party can end the relationship at any
time for any reason unless an exception applies
o Exceptions to the employment-at will doctrine include:
Employment contract that states condition of termination
Federal and state statutes that prevent the doctrine from being applied
Ex. Employment discrimination laws and whistleblower protection laws
Common law exceptions to the doctrine(e.g. violations of public policy)
Ex. Firing employees who refuse to perform illegal acts
o Implied Contract- courts may find based on employers personnel policy manual or published
notices to employees that provide that employees may only be fired for good cause
o Employees who are wrongfully fired may bring a lawsuit against the employer for wrongful
discharge or retaliatory discharge based on contract, tort, statute, etc
Tennessee Employment-at-will- generally an employer can fire an employee for any reason
except on the basis of employees race, sex, age, religion, color, national origin, or disability
Whistleblowers Law- employer may not take any reprisal against an employee who advises the
employer that the business is in violation of a law and then discloses, threatens to disclose, or
testifies about the violation of law
o TN Exceptions include: Firing because of voting in elections, wage garnishment, exercising
right of association, filling workers compensation claim, jury duty
CASE: Wendeln v. The Beatrice Manor, Inc- plaintiff, who worked for a nursing home reported
patient abuse to the Nebraska Department of Health and Human Services, as required under the
state Adult Protective Services Act
o She filed a retaliatory discharge suit after being fired alleging in part that her discharge was
violation of the states public policy
o RULE- NE Supreme Court upheld jury decision, holding that under NE public-policy
exceptions to the employment-at-will doctrine, an employer may not discharge an at-will
employee for reporting nursing home patient abuse, which is required by state law and was
awarded damages of $79,000
Significant Statutes Affecting Employer-Employee relations:
1900 Workers compensation- state statutes designed to pay workers(or their dependants in case
of death) for work-related injuries, diseases, or death
o Prior to WC laws, injured employees had to sue employers for damages
o Defenses to employer negligence which limited their liability included:
Contributory Negligence
Assumption of Risk
Fellow Servant Rule

14

o Common laws were too harsh making too hard for workers to obtain compensation for
injuries from their employers

o Employers are now insurers of work-related risk such as injuries, diseases, and deaths
o WC laws represent mechanism for imposing human cost on employers who can pass it on to

customers
Features of Workers Compensation Laws:
o Coverage and benefits vary by state
o Injury or illness must be work related
o Certain but limited recovery(amount set by statute)
o Exclusivity of remedy- WC statutes eliminate common law claims against employers for
work-related injuries
Other parties may sue though such as manufacturer of defective equipment or the
landlord
o Independent Contractors are NOT Covered
o Funding (insurance, self-insured, state fund)
o Claims are administrated by state agencies
o Most employees are covered( exclude farm and domestic workers, and federal workers who
are covered by special statutes)
o Mandatory or elective coverage by employers- determined by state law, may be mandatory
with certain number of workers 5+ in TN, but mandatory for construction regardless of
number of employees
1935 Social Security Act- provide minimal income to retirees funded by employer and employee
payroll taxes and administered by Social Security Administration under DOL
o Originally gave no benefits to dependents of deceased workers or disabled worker
Disability benefits started in 1957
Medicare benefits started in 1965
o Retirement Benefits, disability benefits, and survivors benefits
o Factors influencing amount of retirement:
Average yearly earnings during period that Social Security contributions were made
Age of retirement- Normal (full) retirement age is 65-67 depending on year of birth with
a minimum of 62 years with reduced benefits
o Benefits not subject to state or local income taxes but up to 85% subject to federal income
taxes depending on taxpayers total income
o SS payments may not be garnished by the beneficiarys creditors
o SS benefits increase if the cost of living increases
o No means testing for eligibility
Social Security Funding- withheld from employees wages and matching amounts paid by the
employer
o EE and ER each currently pay SS tax of 6.2% of the first $106,800 of wages and Medicare
tax of 1.45% of all wages, with the SS wage base increasing annually
o Taxes paid by self-employed persons on self-employment net income (12.4% for SS and
2.9% for Medicare)
o Recipients often receive SS benefits far in excess of amounts they paid into system with
payments coming from current workers raising much concern
Private Pensions are separate from Social Security
o ER and EE may contribute to private pension plans if they choose
o ER are not required to have pensions, but if they do they do the plans are subject to federal
regulations

15

o Defined Benefit Plans- pension pays stated dollar amount per month for life based on salary
and age and tenure at retirement( perhaps subject to COLAs)

o Defined Contribution Plans- No specific amount of retirement benefits is promised, ER

and/or EE contributions are invested, and the retirees benefit depends on how much the
investment earn (e.g. 401(K))
1938 Fair Labor Standards Act- aimed to eliminate labor conditions that did not allow
employees to maintain minimum living standards and to prohibit oppressive child labor
o Key Provisions:
o Direct emloyees to pay their covered workers minimum wages (currently $7.25/hour) and
overtime pay(1.5 times regular wage) for hours worked in excess of 40 hours per week
o Equal pay for men and women
o Child Labor Rules:
Children under 14 can only do limited types of work
14 and 15 year olds can work in most non-hazardous jobs, subject to limitations on hours
per day and per week(3 hours/day on school days and 8 hours/day on other days)
16 to 18 year olds cant work in hazardous jobs, but arent subject to working times and
hours restrictions
o FLSA covered Workers:
o Businesses with employees involved in interstate commerce (or who work with materials
obtained through interstate commerce)having annual gross sales of at least $500,000
o Certain employers regardless of sales volume
Ex. Construction firms, hospitals, schools
o Workers whose work affects interstate commerce and those producing goods for interstate
commerce
o Federal, state and local governmental agencies
o Certain workers are exempt from FLSA coverage:
Executive, Administrative, and professional employees (workers whose primary duty is
management) are exempt from overtime pay provision
Nonexempt employees must be paid overtime
Exempt employees must be paid at least $23,600 per year($455 per week), be paid on a
salary basis, and perform exempt job duties
o CASE Mims v. Starbucks Corp (2007) Former Starbucks manager sued for unpaid overtime
claiming they spent 70-80% of their time on barista chores
o RULE: Dismissed the claim based on the managerial employee exemptions to FLSA, finding
that his primary duty was management based on the 4 factors; 1) relative importance of their
managerial duties; 2) frequency of discretionary decisions; 3) relative freedom from
supervision; and 4) compensation compared to that of nonexempt workers
o FLSA enforced by wage and Hour Division of the U.S. Department of Labor
State departments of labor enforce state labor laws
o Civil and Criminal consequences for violations
o DOL may bring a lawsuit for back wages or the employees can bring a private suit for
recovery of back wages and attorney fees(2 year statute of limitations)
1970 Occupational Safety and Health Act(OSHA)- aims to keep workplace safe and healthy
for employees and preserve human resources
o Occupational Safety and Health Administration has the authority to issue standards
(regulations), make inspections, and enforce the Act
o Employees may also file complaints for violations of the Act

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o Steps in OSHAs operation: 1. Issue Standards 2. Inspectors conduct visits 3. Citations are

issued for violations 4. Administrative law judge hearing 5. Appeal to OSH review
commission 6. Appeal to U.S. court of Appeals 7. Possible appeal to U.S. Supreme Court
o Criticisms of OSHA:
Too many regulations
Vague Regulations
Detailed regulations about trivial matters
Cost to businesses for compliance
Adversarial attitudes of some administrators
Triviality that may actually hurt real safety concerns
1974 Employment Retirement Income Security Act(ERISA)- federal statute governing most
private employer pension plans to ensure they are managed in a way that protects plan assets for
the benefit of employees
o Does not require employer to provide pension plans but sets standards for plans
o Creates fiduciary duty for plan managers and advisors
o Requires records and reports; sets plan investment restrictions and funding requir.
o Created a federal corporation( Pension Benefit Guaranty Corporation) to guarantee employee
benefits when an employers plan is terminated
E.g. employer goes out of business
o Employee Vesting- employee right to pension benefits that cannot be taken away even if job
is lost
o ERISA requires immediate vesting of employee contributions, and full vesting of employer
contributions after the 1st five years or gradual vesting over a 3-to-7 year period
1985 Consolidated Omnibus Budget Reconciliation Act(COBRA)- federal statute that requires
employers with 20 or more employees to give terminated employees the option to elect to
continue their health insurance for a period of time (generally 18 months) after termination
o Employer not required to provide health benefits but if they do COBRA benefits must be
offered to terminated employees
o Terminated employee has to pay the cost of coverage which may be higher than employees
are required to pay
o 2009 Stimulus Act provides for federal governmental payment of 65% of premiums for the
first nine months for unemployed workers
o No COBRA coverage if the worker is dismissed for gross misconduct
1993 Family and Medical Leave Act- applicable to employers with 50 or more employees, that
requires employers to give employees up to 12 weeks of unpaid leave in a calendar year for
covered family or medical purposes(birth or serious family health condition that requires
immediate care
o Employees do not have to be paid during the leave, but employer must continue health
insurance coverage
o Employees entitled to their jobs back or a similar job when they return
o Not applicable to employees who have worked less than 1 year or worked less than 25 hours
per week in prior year
Sec. 3 Worker Health and Safety
o 2008 fatal workplace injuries: 5,071 (down 10% from 2007)
o Highway incidents 1,149
o Falls 680
o Falling Objects 508
o Most dangerous industries: Construction (969), transportation and warehouse 762

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o Most dangerous occupations: drivers, farmers, pilots/flight engineers, loggers

Unemployment Compensation- every state has program to provide short-term benefits to workers
who become unemployed through no fault of their own
o Applies to employers who have 1 or more employees, or who have a total payroll of more
than $1,500 in any quarter of current or prior year
o No benefits available to workers who quit or fired for a good cause
o Funded by federal and state payroll taxes paid by employers
o Unemployment taxes are computed as a % of payroll(with per employee wage capes); the tax
% varies based on the employers experience rating
o Benefits received are based on employee compensation and vary by state (national average
$300/wk)
o Qualification for benefits may depend on time worked prior to unemployment and recipient
must be actively looking for work will receiving benefits
o Maximum benefit period is typically 26 weeks but may be extended by federal government if
unemployment is high

Chapter 21 Employment Discrimination

4 Questions
Important federal Anti-discrimination laws include:
Equal Pay Act of 1963- forbids pay discrimination against men and women based on gender
o Passed in 1963 as an amendment to FLSA
o Differs from FLSA in that EPA protects administrative, executive, and professional
employees
o Covers all forms of pay
o Plaintiff must show that she/he received lower pay than an opposite gender employee who
performed substantially equal work for the same employer
o Two jobs are substantially equal when they involve:
Equal effort
Equal Skill
Equal Responsibility
Similar Working Conditions
o Defenses (justification for pay differentials):
Seniority
Merit System
Quality of quantity of production
Any factor other than gender (e.g. shift differentials)
Title VII of the Civil Right Act of 1964- for employers with 15 or more employees, prohibits
employment discrimination based on race, color, religion, sex, or national origin
o These protected classes of people have had a history of discriminatory treatment in
employment relationships
o Employers with less than 15 employees may still have liability under state antidiscrimination
laws
o Discrimination means firing, refusing to hire, failing to promote, or otherwise reducing a
persons employment opportunities(e.g. assignments, wages, benefits, working conditions)
because of race, color, religion, sex, or national origin
o Specific prohibitions include:
Sexual Harassment
Discrimination because of pregnancy

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o Covered entities:
All private employers, state and local governments, and education institutions that
employ more than 15 workers
Employment agencies and unions
Federal government, but with different procedures
o Exclusions from coverage include independent contractors
o Act covers all decisions an employer could make that might disadvantage employees because
of their race, color, sex, religion, or national origin
o Race and color discrimination- includes discrimination against African Americans and other
racial minorities such as Eskimos and Native Americans
Courts held that statute also forbids racial discrimination against whites
o Reverse Discrimination- preferential treatment to members of protected classes is illegal,
but some affirmative action programs may be adopted without violating
o Sex Discrimination- discrimination based on employees gender is prohibited
o Title VII does not prohibit discrimination based on sexual orientation
Some states have laws that provide this protection
Currently Congress has rejected Employment Nondiscrimination Acts that would prohibit
employment discrimination based on sexual orientation
o Pregnancy Discrimination- employers cannot discriminate against women because of
pregnancy, childbirth, or related medical condition
o Sexual Harassment- form of discrimination that includes unwelcome sexual advances,
request for sexual favors, and other verbal or physical conduct of a sexual nature when:
Submission to such conduct is a condition of an individuals employment
Submission or rejection of such conduct is used as a basis for employment decisions
affecting an individual
Such conduct has the effect of interfering with ones work performance or creating
intimidating, hostile or offensive work environment
o Categories of Sexual harassment:
Quid pro quo- (this for that) involves a promise of job rewards in exchange for sexual
favors, or threat of punishment for rejection
Hostile work environment- when an abusive environment is created by words or acts
related to ones sex
Ex. Discussing sex, touching, comments on sexual attributes, offensive language,
sexual photos displayed
o National Origin Discrimination- discrimination based on persons country of origin, ancestral
county of origin, or characteristics shared by people of certain national origin
o Religious Discrimination- failure to reasonable accommodate an employees religious
practices, unless it would cause undue hardship
Defense to this would be employer saying he cannot reasonable accommodate the
religious practice without undue hardship
Religious educational institutions are usually immune from Title VII when they
discriminate on basis of religion for jobs in which it is critical
Equal Employment Opportunity Commission (EEOC)- federal agency that enforces Title VII and
other federal employment discrimination statutes
o States have administrative agencies that handle employment discrimination issues
o Individual must file Title VII discrimination charges with the EEOC, which will investigate
and help negotiate a settlement if a violation appears to have occurred

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o Employer may not fire, demote, harass, or otherwise retaliate against an individual for
filing a charge of discrimination

o EEOC may file a lawsuit against an employer on behalf of an employee

o If the EEOC does no litigate the matter, the employee can file a private lawsuit, but only after

receiving a right to sue letter

Procedures for filing a civil lawsuit under Title VII:
o Plaintiff must file a claim with the EEOC within 180 days of the violation and wait for the
right to sue letter from the EEOC before filling a private lawsuit
The EEOC may investigate and choose to bring the lawsuit on behalf of employee
o If the EEOC has not acted within 180 days, the employee has the right to demand that EEOC
issue a right to sue letter, which certifies that the employee has exhausted his administrative
remedies
o Employee must file lawsuit within 90 days after EEOC issues right to sue letter
Both intentional and unintentional discrimination are prohibited under Title VII
Disparate Treatment- intentional discrimination by an employer, where the plaintiff must show
that he was treated differently because of his sex, race, color, religion, or national origin
o 1st Plaintiff must establish a prime facie case (showing all required elements) for
discrimination action, creating a presumption of discrimination
o Then burden of proof shifts to the employer to show that the employment decision was
legitimate and nondiscriminatory (otherwise plaintiff wins)
o If employer provides such proof, plaintiff must show that the challenged employment
decision was actually the result of discrimination and that the employers reason was a
pretext
Disparate Impact- unintentional discrimination where employer practices have the effect of
excluding too many people in a protected class typically from being hired or promoted(e.g. rules
regarding testing, height, weight)
o Plaintiff must establish that a practice has a disparate impact on a protected class (requires a
statistical showing of the impact of the employment practice)
o Employer must show business necessity for the practice
o If Employer makes a convincing argument, plaintiff must show that employers business
needs could have been advanced by less discriminatory practices that the employer failed to
adopt
Defenses to Title VII Claims
o Bona fide occupational qualification- where gender or religion is a genuine qualification for a
particular job(defense is not applicable to race, color, or national origin discrimination
For sex to be a BFOQ, the employer must demonstrate a high correlation between sex
and the ability to perform a job function
o Seniority
o Various merit defenses- system that measures earnings by quality or quantity of production,
provided that system is organized, communicated and neutrally apply
Remedies for Title VII Violations
o Back pay accruing from date two years prior to filing of charges
o Compensatory and punitive damages under certain circumstances
o Attorneys Fees
o Rehiring, reinstatement, retroactive seniority( or front pay if not reinstated)
o Injunctions against defendant
The Age Discrimination in Employment Act- prohibits arbitrary age discrimination against
employees who are 40 years of age or older

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o
o
o
o

Applicable to employers with 20 or more employees

Ensures employees are evaluated on basis of ability rather than age
Prohibits mandatory retirement for non-managerial workers
Charges must be filed with the EEOC before bringing a private lawsuit
The Americans with Disabilities Act- not included
For F/Y 2008, EEOC reported 95,402 individual job discrimination charges against private
employers(a significant increase over the prior year
o Highest categories- Race 35.6% Retaliation 34.3% Sex 29.7% Age 25.8%

Chapter 22 Federal Labor Law 5 Questions

16.1 million union members in 2008 up 428K from 2007
Median weekly earnings of union members is $886, non union workers $691
Union with largest membership: Teachers Union
Employer-Union Tension:
o Employers want the most work done under the cheapest conditions and at the lowest prices
o Workers want highest wages and benefits, best working conditions, and most job security
o Both want to preserve the company (which provides jobs, income, dividends)
Unions were legalized in the late 1800s
o Previously charged with conducting criminal conspiracies
o Union activities has sometimes been prosecuted as an illegal restraint of trade
Norris-LaGuardia Act of 1932- federal law protecting peaceful strikes by limiting the injunction
powers of federal courts
National Labor Relations Act of 1935 (NLRA)- federal law establishing the right of employees
to organize unions, the right of unions to engage in collective bargaining (negotiate contracts for
their members) and right to strike
o NLRA create the National Labor Relations Board (NLRB) to oversee union elections and to
prevent employers from engaging in unfair labor practices (ULP)
o Sec. 7- guarantees employees the right to organize and join unions, bargain collectively
through representation of their own choosing and engage in other concerted activities
o Sec. 8 makes it an unfair labor practice for an employer to interfere with union organizing
efforts, to dominate or interfere with union activities, to discriminate against a union member,
or to refuse to collectively bargain
o Sec. 9- provides that validly recognized union is the exclusive representation of the
employees
Exemptions from the NLRA:

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o Federal, state, and local government employees(but they are allowed to organize under other
laws)

o Agriculture workers, domestic workers, independent contractors

o Workers covered by other acts (e.g. Railway Labor Act)

Labor-Management Relations Act (LMRA) 1947- rewrote the NLRA to make ULP prohibitions
apply to unions as well as employers. It also included:
o Outlaws secondary boycotts -a strike directed against a party other than employer to keep
them from dealing with the employer
o Outlaws closed shops where only union members can be hired
o Preserves union shops- workers are required to join a union within certain period of time after
employment, but union shops may be illegal under stat right-to-work laws (the case in 22
States)
o Gives the President the authority to intervene in labor disputes/strikes for national health or
safety reasons( 80-day injunction)
o Establishes Office of the General Counsel to prosecute ULP and oversee representation
elections
Labor-Management Reporting and Disclosure Act of 1959 (LMRDA):
o Regulates union elections of officers
o Regulates internal operations and business procedures of unions
o Established right of union members
National Labor Relations Board(NLRB)- federal agency headed by a 5 member board
appointed by the president, including a General Counsel (GC), regional directors and ALJs who
oversee enforcement
o Two main functions: 1) prevent and remedy unfair labor practices, and 2) oversee union
representation elections
o GCs office- investigates ULP complaints (approx. 23K/yr).
o Administrative Law Judge- prosecutes violators, who can appeal decisions to NLRB and then
to U.S. Courts of Appeal
o Holds approx. 3,500 representation elections per year
Unfair Labor Practices (ULP)- certain actions that employers and/or unions are prohibited by law
from engaging in (see Ex 22-4 on pg. 566)
o Ex. Of Employer ULPs- interfering with union organizing efforts, dominating or interfering
with a union, discriminating against a union member, refusing to bargain collectively with a
union
o Ex. Of Union ULPs- interfering with employees exercising their labor rights under the
NLRA, encouraging an employer to discriminate against an employee because of union
dispute, refusing to bargain collectively, or engaging in an illegal strike or boycott
Ways to Organize a union:
o By Election- with a Representation Election is the usual way for a union to be recognized as
the exclusive representative of a bargaining unit
Union or employees may petition NLRB for an election when at least 30% of workers
sign authorization cards selecting a particular union( constituting a showing of
interest
A majority vote of workers in the designated bargaining unit is required to win the
election, in which case the NLRB would certify the union
Unions win about half the elections at private employers, and about 85% of elections
among public employers

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o By Agreement- of the employer (rare), when a majority of workers sign authorization

cards the union can ask the employer for formal recognition, however the employer is not
required to recognize a union on this basis
o By order- of the NLRB(rare), they may order the employer to bargain with a union when the
employer has engaged in prohibited actions during a representation election and won the
election
More likely the NLRB would invalidate the election and order a new one
Employee Free Choice Act- controversial pro-labor bill recently introduced in the House of
Representatives in March 2009, but is still in committee
o Purpose to emend NLRA to establish an efficient system to enable employees to form, join,
or assist labor organizations, to provide for mandatory injunctions for unfair labor practices
during organizing efforts, and for other purposes
o Key feature is that it would require the NLRB to certify a union, without an election, if a
majority of the employees signed authorization cards
Bargaining Unit- represent proposed union to a particular employer
o To be appropriate there must be a mutuality of interest among the represented workers, in
addition to the following factors:
Job similarity- skills, qualifications, working conditions
Work-site proximity- not an issue with national unions, where a new local is established
No management employees (supervisors)
Union Elections- supervised by NLRB, where if the union wins the NLRB will certify it and the
employer will have to recognize the union
o NLRB regulates the rights and obligations of employers and workers in the election process:
each side can pursue their objectives, but cannot interfere in the others activities
o If employer commits ULPs and win the election, the NLRB may invalidate the results and
order a new election( or in unusual cases, direct the employer to recognize the union)
o Employers are permitted to state managements legal positions and views to employees
o Laboratory Conditions- how representation elections should be conducted, where employer
can call meetings to express their views, but cannot make treats or intimidate workers
o Employer cannot selectively prohibit union solicitation
o Employees can distribute union materials in non-work areas on employers property during
non-work time
Collective Bargaining Agreement- employer has a duty to negotiate with the union for a contract
for workers, contains many terms governing working conditions and arbitration and no-strike
clauses
o Employer and union are obligated to meet at reasonable times and confer in good faith with
respect to wages, hours and other terms and conditions of employment throughout the terms
of the agreement
o Negotiated terms of employment apply to all workers in the bargaining unit, even if not union
members
o Parties must bargain in good faith
o Refusal to bargain is a ULP and the NLRB may order a party to bargain
o Bargaining is mandatory for some work-related issues, such as hours and wages
o Employers not required to bargain about business relocation if due to change in nature of
operation, but must bargain about economic consequences of such decisions
o For certain privacy-related issues bargaining is mandatory
o CASE- National Steel Corp. v. NLRB p.562- upheld NLRB decision that use of hidden
surveillance cameras is a mandatory subject of collective bargaining

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o Arbitration Clause- requires both parties to settle labor disputes by using arbitration instead
of going to court

o Parties settle on arbitrator decision and award which is binding on both parties
o Courts favor arbitration of labor disputes and will generally not upset an award unless there is

evidence of arbitrator fraud or other misconduct

Strike- work stoppage to pressure employer to reach an agreement when bargaining fails
o Costly to workers and employers
o Right to strike protected by the NLRA, so long as it is peaceful
o Collective Bargaining agreements may contain a no-strike clause that applies during the term
of the agreement
o Striking workers may be replace(unless strike is over an employer ULP
Lockouts- work stoppage by employer

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BLaw Exam 4 Final Study Guide

Ch. 15 Debtor-Creditor Relations and Bankruptcy
Debtor- One who takes out loan or borrows money
Creditor- one who lends money or services
Unsecured Debt- is not tied to any item of property
o Ex. Credit Card debt, medical bills, utilities
o An unsecured creditors only remedy for nonpayment is to sue the debtor and get a
court judgment
o If debtor does not pay the judgment, the creditor may record a judicial lien on the
debtors real property and/or request a writ of execution from the court
o Writ of Execution- directs the sheriff to seize and sell the debtors nonexempt
property at auction, with proceeds paid to the creditor
Secured debt- debt for which the creditor has a lien on specific items of the debtors
property to guarantee payment of the debt
o Ex. Car loan, home mortgage, furniture loan
Lien- claim a creditor(lien holder) has against a debtors property(collateral) to secure
payment of a debt
o Lien must be satisfied(by payment of the debt) before the collateral can be used to
satisfy the claims of other creditors
If the debtor defaults, the secured creditor can generally repossess the collateral to satisfy
the debt without having to get a court order, but must comply with applicable statutes
with required procedures
o Special Rules apply for foreclosing on real property
If the lien holder repossesses and sells the collateral, the proceeds are applied to the debt
o If the sale proceeds are insufficient to satisfy the debt, the debtor generally remains
liable for any deficiency
o Creditor must sue to get a judgment for the deficiency
Consensual lien- what a debtor may grant a creditor on property to induce the creditor to
make a loan
o Some lenders may require a 3rd party to guarantee the debt (and pledge personal
assets)
Security Interest- in personal property arises when a debtor borrows money to purchase
the property and gives the lender the right to repossess the property in the event of default
o Also referred to as a purchase money security interest
o Typical in loan for purchase of cars, furniture, or appliances
o To protect its right in the property against other creditors, a creditor must perfect its
security interest by following statutory procedures for recording it with the state
o Unrecorded or late recorded liens may be superseded by subsequent liens on the
property an may be lost if the debtor files bankruptcy and the trustee voids the
defectively recorded lien
Mortgage- consensual lien, loan in which the borrower puts up the title to real estate as
security for a loan
o Applicable to loans for homes and commercial property

o If borrower doesnt make the mortgage payments when due, the lender can declare
the entire debt due and payable
o If the debt is not paid, the lender can foreclose on the real estate, sell it, and apply
proceeds to reduce the loan
o State laws establish the required procedures for foreclosure sales
o Judicial Foreclosure- required in 21 states where judicial action (a court case) is
required before foreclosure can occur
o Non-Judicial Foreclosure- allowed in other states such as TN so long as pursuant to a
Deed of Trust power of sale clause
o Deed of Trust- requires debtor to be given notice prior to a foreclosure sale
o In TN, notice must be published 3 times in a newspaper, with the first notice at least
20 days prior to the sale
o Right of Redemption- prior to foreclosure sale a debtor has the right to redeem the
property by paying the full amount of the debt plus interest and costs
o Foreclosure sales typically occur at a public auction
o Creditor will usually bid in the amount of the debt, so that the creditor will then own
the property if there are no higher bidders
o Foreclosure sale proceeds go to expenses of sale, creditors with liens on the
property(in descending order of priority), then to the debtor if any funds are left
o If the sale proceeds are insufficient to fully pay the debt, the debtor may still be liable
for the deficiency (depends on state law)
Nonconsensual liens- 3 types of Statutory Liens
o Mechanics Lien- can be placed on real property by a party who provides materials or
services and is unpaid(subject to strict notice and filing/recording procedures)
o Artisans line- possessory lien arising from the failure of a debtor to pay for labor or
materials furnished in connection with repair of personal property
Ex. Auto or jewelry repair
o Judicial liens- arise when a creditor sues a debtor for unpaid debts, and the court
issues a judgment against the debtor ordering the payment of the debts
o To ensure payment the creditor may petition the court for an additional order
permitting the seizure of the debtors assets
Writ of attachment- order the permits debtors property to be taken into custody
before a judgment is issued (not typical)
Writ of Execution- order directing the sheriff to seize debtors real and personal
property located in the county and sell it to satisfy the judgment
o A Judicial lien in the amount of the unpaid judgment can be recorded against real
property
Garnishment- court order directing a third party to turn over property owned by the
debtor for the payment of debts e.g., bank accounts; personal property
Wage Garnishment- court order directing an employer to withhold a portion of debtors
wages for payment to a creditor (e.g., delinquent child support)
o Subject to statutory limits, typically 25% of take-home pay
o CASE: Griffin owed Indian Surgical Specialist a debt and that was not paid after a
default ruling. After 4 Years Indian Surgical tried to garnish Griffins wages

o RULE:Indian Surgical Specialist v. Griffin (IN 2007)p. 365- Earnings of an

independent contractor are subject to garnishment
Debtors Options:
Try to work out a payment plan and/or a debt reduction plan with creditors(composition
agreement); refinance debts; consolidate debts
Try to protect assets by keeping current on secured debt bill payments, even if unsecured
debts are delinquent
If sued for collection, or if foreclosure or repossession proceeding are commenced, filing
for bankruptcy protection may be the best alternative
Bankruptcy- when a debtor is who is unable to pay their bills when due seeks protection
from creditors by filing a bankruptcy petition under the U.S. Bankruptcy Code
Consumer Bankruptcy Factors: Loss of employment, medical bills, divorce, excessive
consumer debt, inability to pay mortgage, failed business, personal guarantee of business
debt, judgment
Bankruptcy Goals- protect debtors by giving them a Fresh start free from creditors
claims and ensure equitable treatment for creditors who are competing for a debtors
assets
o Secured creditors repossess their collateral
o Unsecured creditors share in the debtors assets (if any) in proportion to the unpaid
debt owed to them
Bankruptcy Law- Constitution give Congress the power to establish Uniform laws on
the subject of Bankruptcies throughout the United States (Art. I, Sec. 8)
o Federal Jurisdiction only
o Bankruptcy Code- federal statutes governing bankruptcy
o U.S. Bankruptcy Court- part of the federal district court system
Bankruptcy Code- has 8 chapters, 1,3,and 5 cover definitions and administrative
provision applicable to all cases; the remaining chapters (7,9,11,12, and 13) contain
requirement for different types of bankruptcy filings
o Federal Rules of Bankruptcy Procedure- provide additional procedures and
requirements for bankruptcy filings
Types of Bankruptcy Filings:
o Chapter 7 Liquidation or straight bankruptcy- individual and businesses seeking to
liquidate and have their debts discharged (extinguished)
o Chapter 13 Repayment- individuals with regular incoming seeking to establish a
repayment plan for debts
o Chapter 11 Reorganization- business (some individuals) seeking to organize and
continue operations
Bankruptcy Benefits:
o Automatic Stay- becomes effective the day petition is filed
o Creditors cannot commence or continue most legal actions or attempt to collect debts
or judgments while automatic stay is in effect
Secured creditors may petition the court to lift the stay(generally, where debtor
has no equity in the secured property)
o Discharge of most debts (ch.7)

o Fresh Start- earnings received after the filing date are not subject to creditors prebankruptcy claims (ch.7)
o For Ch. 13 debtors, the opportunity to save house and care (asset subject to secured
debt) by entering into a repayment plan; discharge of remaining unsecured debt at end
of plan
o Ch. 11, an opportunity to reorganize without creditors trying to collect debts(due to
automatic stay)
Bankruptcy Cost:
o Ch. 7 debtors forfeit all nonexempt assets
Exempt assets are defined by state law and the Bankruptcy Code(which permits
state to require that debtors use the state exemptions)
o Filing goes on credit report for 10 years
o Filing Costs (estimates)
Ch.7 &13 court fees $300
Ch. 7 consumer attorney fees $1,200 and up
Ch. 13 attorney fees $3,000 and up
o Chapter 11 very high attorney fees
# of Bankruptcy Filings have been on steady increase
o Decrease significantly after 2005 with new law BAPCPA revision enacted 10/05
Bankruptcy Abuse Prevention and Consumer Protection Act(BAPCPA) of 2005- made it
more difficult for individuals to file Ch. 7 bankruptcy by adding a means test (based on
debtors income) to qualify for filing
o Significantly overhauled the Bankruptcy Code
o If debtor fails the means test he cannot file under Ch. 7, but may be able to file under
Ch. 13 which requires a debt repayment plan
Key changes from prior law
o Mandatory credit counseling within 180 days before filing; completion of financial
management course required for discharge of debt
o Means Test- Eligibility for Ch. 7 filings based on income
o Fewer Automatic Stay protections
o Expanded types of non-dischargeable debts
o 8 Year bar on subsequent Ch. 7 filings
Before BAPCPA, approx. 29% of consumer filings were Ch. 13; this increased in 06 and
07, however in 2009 only 38% of consumer filings were Ch. 13 filings
U.S. Bankruptcy Courts- hear all matters concerning bankruptcies under the authority of
the federal district courts
21 regional U.S. Trustees(Dept. of Justice) oversee the bankruptcy process by monitoring
the conduct of bankruptcy parties and the private Ch. 7 and Ch. 13 trustees
TN had the second highest per capita bankruptcy filing rate for the 12 mo. Ended 6/30/09
o TN: 8.72 filings per 1,000 residents (for all chapters)
o NV: 11.24 filings per 1,000 residents (for all chapters)
TN had the highest per capita rate of Ch. 13 bankruptcy filing for any state 4.35 per 1000
Chapter 7- a fair distribution to creditors of debtors non-exempt property and a fresh
start for the debtor( protects future income and assets from old claims)

o Liquidation bankruptcy, most common form of bankruptcy available to individuals

and businesses (once every 8 years)
o May be voluntary (filed by debtor) or involuntary (filed by creditors if debtor has
unsecured debt of at least $12,300 and is not paying debts as they become due;
usually requires 3 creditors to join in involuntary filing)
o Means Test- Debtor is fails means test and is ineligible for Ch. 7 if:
o Debtors average annual income (measured by looking at prior 6 Months) exceeds the
median income for debtors home state($37,598 for single earner in TN), and
o Debtor projects at least $10,000 in disposable income over the next 5 years
Can still file under Ch. 13
o Most debts are discharged, but secured creditors still repossess their collateral
Ch. 7 Case Process:
o Meet with attorney to determine eligibility and complete forms; complete credit
counseling; pay attorney up front
o Debtor files bankruptcy petition and supporting schedules disclosing all creditors and
assets and other financial information
o Sworn Statement (federal crime to make a false statement)
o Automatic stay become effective (creditor collection effort is temporarily stayed)
o Trustee is appointed; a meeting of creditors is set approx. 30-45 days after filing
o A notice of the meeting of creditors and a Proof of Claim form are mailed by the
Bankruptcy Court to each creditor
o Creditors Meeting- debtor is interviewed by the trustee, and creditors are given the
opportunities to ask the debtor questions
o Trustee examines the debtors schedules and may instruct the debtor to turn over
nonexempt property( alternatively, the trustee may abandon the property to the
debtor if the value is so low it is not worth selling
o If debtor had nonexempt assets of value, the trustee will sell them and distribute the
proceeds to unsecured creditors based on the payment priority system established by
the Bankruptcy Code
o If there are no assets and no unresolved issued with creditors, the trustee typically
will file a No Asset report and close the case within a few months
Upon filing a Ch. 7 petition, an estate in property is formed
The debtors bankruptcy estate includes:
o All property owned by debtor at time of filing(including property of debtor held by 3rd
parties)
o Property transferred in transactions that may be avoided (set aside) by the trustee
Trustee can require that Preferential transfers(payments exceeding $5475 on preexisting debts made within 90 days prior to filing or 1 year for insiders) be turned
over to trustee
o Inherited property and life insurance proceeds to which debtor becomes entitle within
180 days after filing date
Married persons can file jointly or separately, which impacts what property is available to
the trustee

U.S. Bankruptcy Code provides exemptions (property that debtor can retain) from the
bankruptcy estate, but permits state to require its citizens to use the states statutory
exemptions (generally lower)
TN exemptions include:
o Homestead (equity in home): $5,000 individual/$7,500 married couples filing jointly
(vs. $125,000 federal); up to $25,000 for couples 62 or older
o Personal property- $4,000
o Retirement plans- Generally 100%
o Tools of Trade: $1,900
o Disability payments: 100%
o Miscellaneous other exemptions
Trustee Powers- right to get debtors property back from creditors by avoidance powers
o Avoidance Powers- avoiding liens on property subject to a security interest that was
unperfected or not timely perfected; claim property preferentially and/or fraudulently
transferred before bankruptcy filing
o Under the Bankruptcy Code, trustee may avoid fraudulent transfers made within two
years before the bankruptcy petition was filed
Trustee may also proceed under state law for fraud, which may have a longer
statute of limitations
Distribution of Secured Property- debtor must state their intention to surrender, reaffirm
or redeem property subject to secured debt within 30 days after the meeting of creditors ,
or the automatic stay will be lifted
o Reaffirmation of debt is generally discouraged
o Property is typically surrendered to the creditor who can keep or sell property
If Creditor keeps it is in full satisfaction of the debt
If Creditor sells and there is a deficiency, the creditor will have an unsecured
claim against the estate in the amount of the deficiency
Distribution of Unsecured Property- if there are estate funds to be distributed (after
payment of expenses and other amounts owed to the trustee), unsecured creditors are paid
according to priority established under the Code(e.g. family support, admin. expenses,
taxes and in last place general unsecured creditors
o All creditors of one class must be paid before moving to next class of creditors
o Creditor within class receives proportionately if not enough funds to pay in full
Discharge of Debts- under Ch. 7 most debts are discharged(debtor no longer obligated to
pay)
o Discharge- court order prohibiting creditors of the debtor from taking any action to
collect discharged debts
o Usually occurs automatically about 4 months after filing if there is no objection by
the trustee or creditors(granted in 99% of Ch. 7 cases)
o Secured creditors may still enforce valid liens to recover property secured by lien
Non-dischargeable Debts- debts not listed by debtor in the petition and schedules
o Domestic support obligations
o Student loans(discharge based on undue hardship exception is very rare)
o Debts for injuries caused in DUI accident

o Debts for willful and malicious injuries to person or property( but not debts due to
ordinary negligence)
o Certain Tax Claims
o Debts for money, services, or property obtained through false pretenses or false
misrepresentations
o Debt exceeding $550 for luxury goods/services purchased within 60 days of filing
o Cash advances in excess of $825 made within 70 days of filing
Chapter 13- debtor submits a plan (with bankruptcy petition) to repay all or a portion of
his debts over the life of the plan(3 or 5 years) out of disposable income as defined by
the Bankruptcy Rules
o Available to individual debtors who have a regular income and debts that do not
exceed statutory limits
o Plan must pay unsecured creditors at least as much as they would have received had
the debtors assets been liquidated under Ch. 7
o Plan must be approved(confirmed) by the bankruptcy court
Ch. 13Trustee and creditors are given an opportunity to object to the plan prior to
confirmation
o Debtor retains all of his assets (exempt and non-exempt)
o Provides an opportunity for debtor to save home from foreclosure and cure delinquent
mortgage payments over life of plan(must pay current payment when due)
o Plan payments are made regularly to the Ch. 13 trustee who distributes money to
creditors
o Case will be dismissed or converted to Ch. 7 if debtor fails to make plan payments
o Plan must be completed in order for debtor to receive a discharge of remaining
dischargeable debts
Some debts that are non-dischargeable under Ch. 7 may be discharged at the end
of Ch. 13 plan (but not student loans)
Ch. 11 Reorganization- Debtor become debtor in possession and continues to control
the assets and run the business- subject to the oversight of the U.S. trustee and the court
o Available to both businesses and individual debtors
o Individuals do not typically goes this route unless they own and operate businesses or
do not qualify under other chapters, typically voluntary filing
o Expensive to file and operate under, very high failure rate, vast majority converted to
Ch. 7 or dismissed
o Trustee is usually not appointed
o Obtaining post-petition credit is essential to success; may downsize operations; can
assume or reject most contracts as part of reorganization process
o Monthly reports to U.S. trustee and quarterly fees
o Creditors committee appointed by US trustee in larger cases
o Debtors plan of reorganization must be approved by creditors and Bankruptcy court
o Increasingly used as a vehicle for the orderly sale of business assets to owners who
will operate as a new business
o Trend toward prepackaged Ch. 11 bankruptcies, where the creditors have agreed to
the reorganization plan prior to the bankruptcy filing
Greatly reduces time in bankruptcy- only 38 days for CIT

Chapter 23 Consumer Protection

Pros of Consumer Protection- equalizing economic power & protecting honest businesses
Cons of Consumer Protection- Costs of compliance & Caveat emptor doctrine(let the
buyer beware)
Consumer Law- includes all federal and state statutes, agency rules and common laws
that protect the interest of consumers(focus on key federal statutes and FTC regulations)
Federal Trade Commission(FTC)- federal agency established under the federal Trade
Commission Act of 1914(FTC Act)
o Prevents unfair competition including antitrust enforcement pursuant to federal
antitrust laws
o Provides consumer protection
FTC ACT- prohibits unfair or deceptive acts or practices in or affecting commerce
o Gives the FTC authority to regulate most areas affecting consumers, such as
advertising, selling practices, credit matters, by making and enforcing consumer
protection laws and regulations
o Trade regulations benefits consumers by ensuring a competitive market, which results
in lower prices, better service, and higher quality products
Deceptive Advertising- prohibited practice
o Ad is deceptive if it contains a material misrepresentation or omission that is likely to
mislead a reasonable consumer
o Ads must be truthful and not misleading; claims made in ads must be substantiated
o Complaints about deceptive advertising may come from consumers, competitors,
Better Business Bureaus
CASE: Federal Trade Comm. V. QT, Inc., (U.S. 7th Cir. 2008)p. 581- Deceptive claims by
maker of Q-Ray Ionized Bracelet included assertion that it was a miraculous cure for
chronic pain and that use resulted in immediate, significant or complete pain relief
RULE: FTC brought an action against QT, and a federal district court ordered company
to stop its deceptive advertising and pay $16 million to a victims fund
Bait and Switch- selling tactics are deceptive and therefore prohibited
o Ex. Advertising goods/services at a low price to attract buyers then trying to switch
the buyers to more expensive product/service
o Specific sales practices banned(i.e., refusing to show bait item, having inadequate
supply of bait item
FTC actions against deceptive advertising- based on its investigation, the FTC may send
a formal complaint to the advertiser alleging that an ad is unfair or deceptive
o Advertiser may settle the matter with the FTC by entering into a consent agreement,
whereby they agree to take required actions without admitting guilt
o Complaints that are not settled are heard at FTC administrative hearing before an
ALJ, where if the FTC wins it issues a cease & desist order
o Cease & Desist Order(C&D)- requires that the challenged advertising be discontinued
and in some case corrective ads
o Advertiser may appeal FTC administrative actions in Federal Court

o FTC may also pursue a complaint in federal district court to obtain civil penalties and
consumer redress funds
Sales Regulations:Cooling-off period for door-to-door sales
o For purchases over $25, seller must provide buyer with notice that buyer has the right
to cancel the transaction within 3 business days
o Seller must provide buyer with a receipt or contract copy which includes notice about
right to cancel purchase
o Certain Sales are exempt- where buyer 1st contacts seller to visit home for purpose of
repairs or maintenance
Sales Regulations: Restrictions on mail or telephone order merchandise
o Cannot solicit orders through mail unless seller reasonably expects to be able to ship
good within 30 days of receipt of order (or shorter time promised in catalog)
o Must notify customer of shipping delays and new date and give customer the
opportunity to cancel
o Violations may result in FTC administrative hearing, and C&D order
o Court may punish violations with civil penalties of up to $10,000 per violation
Sales Regulations: Telemarketing Rule
o Applies to goods/services sold via interstate telephone calls where marketing initiated
by the seller
o Requires that marketer make certain disclosures prior to payment of customer
E.g. total cost, refund policy, odds of winning contest
o Illegal to misrepresent information to the consumer
o Calls limited to hours of 8a.m. to 9p.m.
o Company must remove consumers name from call list upon request
National Do Not Call Registry is maintained by the FTC
o Applicable to personal phone numbers (cell& home numbers)
o Exemptions: calls from political organizations, charities, and telephone surveyors,
and businesses with whom the consumer has a prior business relationship
Postal Reorganization Act of 1970- unsolicited merchandise sent by U.S. mail can be
kept or disposed of with no obligations
Truth-in-Lending Act- part of the Consumer Credit Protection Act (1968), protects
consumers through its credit disclosure requirements by requiring lenders to fully inform
borrowers about applicable credit terms, which enables consumers to make better
borrowing decisions
o Administered by the Federal Reserve Board, which has authority under the act to
issue regulations; the disclosure rules are found in Regulation Z
o Disclosure of credit terms (clear, conspicuous, and written) including charges to get
the credit
Finance Charge- in $ amount including interest, service fees, points
Annual percentage rate- as % of the loan amount are key disclosures
KNOW THIS:TILA applies to transactions that meet all 4 of the following tests:
o It is a consumer loan- loans to individuals for personal, family or household
purposes(TILS does not apply to business loans
o The loan has a finance charge or will be repaid in more than 4 installments

o The loan is for less than $25,000 OR the loan(of any amount) is secured by a
mortgage on real estate
o The loan is made by someone in the business of offering credit
TILA types of creditors covered:
o Any person or business regularly extending or arranging for credit to individuals
o Banks, S&Ls, retail stores, credit card companies, auto dealers, credit unions
o Hospitals, doctors, physicians, dentists
Types of debts commonly covered- home mortgages, credit cards, installment loans
TILA and Reg. Z cover credit cards
o Cards may only be issued in response to a request or application (or
renewal/substitute) for an accepted credit card
o Accepted Credit Card concept means that only the person who accepts a card is
liable for its use
o TILA limits a cardholders liability for unauthorized use to $50(card lost/stolen)
Credit Advertising covered by TILA- all credit terms must by clearly and conspicuously
stated
TILA penalties (civil and criminal):
o Fines up to $5,000 and/or one year in prison
o Consumers can file a civil sue to recover twice the finance charge(subject to limits)
plus court costs and attorney fees
o Agency enforcement of TILA depends on what type of creditor allegedly violated the
TILA
Equal Credit Opportunity Act(ECOA) of 1974- amendment to the TILA, the ECOA
prohibits credit discrimination based on sex, national origin, race, religion, color, or age
o Also prohibits discrimination against an applicant because his income includes public
assistance funds
o Before this act, it was much more difficult for women to get credit than men
o Act requires lenders to extend credit regardless of gender or marital status
o Applies only to commercial lenders
o Lenders may still reject loan applicants if they are not creditworthy
Electronic Fund Transfer Act of 1978- Sets out liability rules governing EFTs(including
ATM and debit card transactions)
General Consumer Protections:
o Required disclosures to consumers receiving EFT Services
o Limited liability for unauthorized use of card subject to notice requirements
o Errors in statements: written or oral notice required within 60 days receipt of
statement
KNOW THIS Liability for unauthorized charges on Lost/Stolen ATM and Debit cards:
o $50- if cardholder notifies bank within 2 business days after card is lost or stolen
o $500- if cardholder notifies bank within 60 days of the mailing of a statement listing
the unauthorized withdrawals
o Unlimited- if cardholder fails to notify the bank within 60 days after the bank mails a
statement listing the charges

Fair Credit Reporting Act(1970)- purpose is to provide accurate current information

about individual consumers credit history (not applicable to businesses)
o Consumers have right to know their credit information, which may be used in
connection with getting a job, insurance, or credit
o Consumer has the right to know the credit reporting agency that issued the report that
is the basis for the denial of credit, as well as the information lender relied on for
denying credit
o Consumer can demand that the reporting agency make corrections and notify persons
who received the faulty info, agency must investigate disputed info
Fair and Accurate Credit Transactions Act (2003)- established a national fraud alert
system to enable consumers subjected to identity theft to have an alert placed on their
credit files
o Each of the three nationwide credit reporting agencies (Equifax, TransUnion,
Experian) are required to provide individuals with a free credit report every 12
Months upon request
FTC has authorized an online site for making report request:
AnnualCreditReport.com
May still have to pay to obtain ones credit scores
Fair Debt Collection Practices Act- purpose to end abusive, deceptive, and unfair debt
collection practice by debt collectors primarily collection agencies, who are attempting
to collect debts on behalf of someone else( or who have purchased delinquent accounts
for collection)
o Creditors collecting their own debts are exempt from the act (but the act does apply to
a creditors attorney attempting to collect a debt)
o Only personal, family, and household debts are covered- not business debts
o Restrictions on a debt collector contacting a debtor include:
Can contact in person by mail or by phone after 8:00a.m. and before 9:00
May not contact at work if employer disapproves
Must send written notification of amount either before or within 5 days after 1st
contact(validation notice)
Debt collector must stop contacts if debtor request such in writing or if debtor is
represented by an attorney
Cannot contact third parties other than parents, spouse, or financial advisor about
the debt
Prohibits collection practices- cannot harass, oppress, or abuse any person
o Debtor control over application of payments to specific debts
o If the Act is violated, debtor can sue in state or federal courts, or may file complaint
with the FTC
Consumer Product Safety Act (1972)- established the Consumer Product Safety
Commission to protect the public from unreasonable risks of serious injury or death
from thousands of types of consumer products under the agencys jurisdiction
o Ex. Toys, cribs, power tools, cigarette lighter, household chemicals
o Commission sets standards for products and has the authority to ban hazardous
products and order product recalls

Ch. 26 Antitrust and Monopoly

Antitrust Laws- emerged to benefit consumer through increased competition
o In the late 19th century, business trusts were created to consolidate firms and acquire
control in a variety of industries
o Participants transferred their stock in companies to a trustee in exchange for trust
certificates
o Board of trustees- make decisions about the companies businesses that would ensure
that members could operate without competition from other members
o Ex. Rubber, sugar, steel, and oil industries were dominated by trusts
o Trust Anticompetitive actions- included fixing prices, controlling output, and
allocating markets by geographic regions among the members
o Public outcry against trusts(based on belief that the trusts used their market power to
drive small competitors out of business and to raise prices) led to federal antitrust
legislation, which was ultimately used to breakup trust such as Standard Oil (in a
1911 Supreme Court case)
Sherman Act of 1890:
Sec 1- forbids agreements (usually among competitors) that unreasonably restrain trade
o Addresses restraint of trade concerns by forbidding all contracts, combinations
(including trusts), and conspiracies (concerted activity) that unreasonably restrain
interstate and foreign trade
o Violations involves an agreement between 2 or more parties which has the effect of
reducing competition(whereas Sec. 2 violations may only have 1 party)
Sec 2- forbids monopolization- the wrongful acquisition of a monopoly
o Every person who shall monopolize, or attempt to monopolize, or combine or
conspire with any other person or persons, to monopolize any part of the trade or
commerce among the several States, or with foreign nations, shall be deemed guilty
of a felony
o Not every monopoly is illegal- the key factor is how the market power was acquired
and maintained
Antitrust Division of the Department of Justice and the FTC- have authority to enforce
the Sherman Act
o DOJ- can bring criminal proceedings; FTC is limited to civil enforcement actions
o Private parties who are injured by actions in violations of the Act can sue for damages
Treble damages may be awarded to successful plaintiffs
o CASE: AMD vs. Intel- AMD sued Intel for antitrust and patent claims, saying they
violated antitrust laws by rewarding computer making companies that used only Intel
parts and punishing those that did not
o RULE: Intel recently settled by paying AMD 1.25 Billion dollars
o State attorneys general may also sue on behalf of the state (ex. NY filed a lawsuit
against Intel in 11/09)
Criminal Liability- violations involving agreements between competitors in violation of
Sec. 1 of Sherman Act are usually punished as criminal felonies by the Antitrust division
o Target offenses- LCD price fixing scheme, bid rigging, and customer allocation
o Corporations- fines of up to $100 million
o Individuals- fines of up to $1 million and jail sentences of up to 10 years

o Pleas- Guilty, not guilty, nolo contendere (defendant neither admits not denies charge)
Nolo Contendere- plea cannot be used to prove liability in a private plaintiffs
subsequent civil case
Civil Suits- include violations of all the Clayton Act and some Sherman Act violations
o Civil suits may be brought by DOJ, FTC, and by private parties
o Courts have broad injunctive powers:
Dissolution- cease business and sell assets
Divestiture- sell stock of subsidiaries or sell certain assets
Divorcement- separate itself from some functional level of its operations, such as
retailing
Enjoin violators- to refrain from future conduct
o Consent Decree- settlement agreement whereby defendant agrees to remedy the
effects of the alleged anti-competitive behavior, or refrain from such behavior,
without admitting guilt or liability
o Treble damages- private plaintiff may be awarded three times actual damages (to
business or property) plus attorneys fees
Clayton Act of 1914- address specific anticompetitive actions that tend to substantially
lessen competition or create monopoly power:
o Prohibits certain exclusionary conditions in sales/leases transactions
o Prohibits anticompetitive mergers
o Prohibits price discrimination
o Prohibits interlocking directorates
Federal Trade Commission Act of 1914- established the FTC which has broad
enforcement powers to prevent and correct unfair trade practices that harm competition
Robinson Patman Act of 1936- (amendment to the Clayton Act)- aimed at protecting
small producers from being driven out of business by larger competitors more than
protecting consumers
o Defines forms of prices discrimination prohibited by Clayton Act
Sherman Act Sec. 2- monopolization occurs when a firm (i) has monopoly power (high
market share), and (ii) engages in anticompetitive conduct to obtain or maintain its
monopoly power(ex. Intel case allegations)
o Monopoly power- refers to market share in the relevant product and territorial market
o Violation- if the company attempts to either maintain or acquire a monopoly position
through methods that interfere with free trade (anti-competitive conduct)
Company may attempt to show that a practice has a legitimate business
justification
o Monopoly power alone is not illegal under Sec. 2; the defendant must also have an
intent to monopolize, which is normally inferred from the defendants anticompetitive
behavior
Monopoly Power:
o Economic Definition- ability to raise prices above the competitive level for a
sustained time period and to profit by doing so
o Supreme Court definition- power to control prices or exclude competition
o Courts tend to define monopoly power as 70% of total sales in the product market or
territory markets

Product market- product defendant sells plus reasonable substitutes

Territorial Market(geographic market)- region in which a firm can raise prices
without attracting new competitors or losing sale to competitors outside the region
Anticompetitive Behavior- must be related to the willful acquisition of power
o Exclusionary acts- aimed at keeping competitors out(ex. Intel paying Dell rebates
to not purchase AMDs chips)
o Intent to monopolize- difficult to prove, but courts have held that the intent to
monopolize may be inferred from evidence that the firm had monopoly power and
engaged in anti-competitive behavior
o Some anti-competitive acts are specifically addressed in the Clayton Act
o Predatory pricing- sale of products below cost may be anticompetitive
Initially consumers may benefit from low prices, but the pricing scheme may
ultimately lead to a monopoly by driving competitors out of business
o Actions are scrutinized to determine whether they were intended to exclude
competitors and garner monopoly power
Even if unsuccessful, the actions may be illegal if they had a dangerous
probability of success
CASE: United States v. Microsoft Corp 2001- OEM license restrictions and the
integration of Internet Explorer and the Windows operations system constituted
anticompetitive behavior
RULE: Microsoft lost and entered into a settlement agreement that is still being
monitored (in 2010 by the DOJ)
o Per the opinion, monopolization has 2 elements 1) the possession of monopoly power
in the relevant market and 2) the willful acquisition or maintenance of that power as
distinguished from growth or development as a consequence of a superior product,
business, acumen, or historic accident
o In 2003, Microsoft settled a private antitrust suit filed by AOL (Netscape parent) for
$750 million

Ch. 27 Antitrust and Restraint of Trade

Sherman Act Sec. 1- prohibits contracts, agreements or conspiracies in restraint of trade
o U.S. Sup. Court interprets this to mean unreasonable restraints
o Joint action- to restrain trade requires collaboration between two or more partiestypically between rival firms
o Such concerted behavior may be harmful to competition
Ex. Agreements to fix prices, restrict output, allocate markets, or exclude others
competitors
o Such agreements between companies that have significant market power may also be
a violation of Sec. 02 as a conspiracy to monopolize
Not all agreements between rivals unreasonably restrain trade, in some cases, companies
may be able to show that their agreements are beneficial to consumers
Conscious Parallelism-(identical or similar conduct by competitors, such as having the
same prices) alone is insufficient proof of an agreement to engage in illegal conduct
o Factors such as exchanges of information between competitors(pricing and outputs)
and past actions of the parties may indicate illegal actions

Section 1- violations are divided into 2 categories: per se(automatic) and rule of reason,
unless a violation fits into a per se category, it is handled under the rule of reason
o Per se violations- anticompetitive actions that are conclusively presumed to be illegal,
practices that have predictable and pernicious anticompetitive effects they are deemed
unlawful per se
o Rule of reason violations- are illegal only if they actually have an anticompetitive
impact, where courts consider the impact of particular restraints on a case-by-case
basis, and may balance social benefits with potential anticompetitive effects
Most antitrust claims are analyzed under a rule of reason approach
Horizontal restraints- agreements that restrain competition among rival firms operating in
the same market at the same level of operation, some horizontal restraints are per se
violations, and other are tested under the rule of reason
o Horizontal price fixing- concerted action to fix prices by competitors at the same
level(e.g., wholesalers) is a per se violation
Occurs when competitors agree on the prices at which they will buy or sell
products or services
Has the effect of reducing competition among brands of the same type of product
In 2008/9, TFT-LCD screen makers (including LG, Sharp, and Hitachi) charges
criminally for fixing prices on LCD panels fined over $585 million
o Bid rigging- horizontal per se violation, where competitors eliminate competition by
agreeing on who submit the lowest bid
o Horizontal division of markets- by geographic territory, type of customer, or type of
product that reduces competition are per se violation
o Trade association- practices are usually evaluated under the rule of reason
o Group boycotts- joint actions involving a refusal to deal with a particular firm or
firms are per se violation
Vertical Trade Restraints- imposed on the buyer by the seller or vice versa where the
parties to such agreements may not be competing directly with each other, their
agreements may be anticompetitive because of their effect on how each competes with
other firms at their level of operation
o Vertical territorial/ customer restrictions are evaluated under a rule of reason
o Vertical price-fixing(resale price maintenance)- historically was considered a per se
violation, but is now treated as a rule of reason violation
o In 1997(State Oil Co. v. Khan), the US Supreme Court held that maximum resale
pricing agreements would be judged under the rule of reason, but that minimum
pricing was still a per se violation
o CASE: (Leegin Inc. V. PSKS, Inc.) 2007 pg. 667- U.S. Supreme Court reversed its
own nearly 100 year-old precedent to hold that agreements setting minimum resale
prices would be reviewed under the rule of reason because resale price maintenance
does not always tend to restrict competition and decrease output
o Price discrimination- violation of the Robinson-Patman Act where a seller charges
different customers different prices for commodities of like quality and grade, and
such differences are not based on justifiable factors(such as time and transportation
costs)

o Tying arrangement -exists when a seller agrees to sell one product(tying product)
only on the condition that buyer also purchases a different(tied product) product or
service (or agrees not to buy the tied product from any other supplier)
o Considerations of the legality of a tying arrangement include whether:
Tying and tied products are distinct items
Seller requires buyer to buy tied product to obtain the tying product
Seller has market power in the tying product market
Tie-in affects substantial amount of commerce in the tied product market
Clayton Act- a civil statue (with no criminal penalties)passed in 1914 and amended in
1950
o Sec 3- prohibits certain anticompetitive actions related to the sale/lease of goods,
some of which were mentioned in earlier slides
o Sec 8- includes prohibitions on interlocking directorates which bar directors from
simultaneously serving on the boards of rival companies (recent Google/Apple cases).
o Sec 7- prohibits mergers or acquisitions that are likely to lessen competition
All mergers above a certain size require notice to the FTC an Antitrust Division of
DOJ
Forbids acquisition of stock or assets of another business where the effect may be
to substantially lessen competition or tend to create a monopoly
Market concentration- key factors (allocation of market share among the firms in
the relevant product market; size of the merger firms)
Types of mergers: vertical, horizontal, conglomerate
o Horizontal Merger- merger between two or more companies that compete with each
other in the same market
Ex. Whole foods acquisition of Wild Oats
Courts focus on market share/concentration
Other factors: ease of entry into relevant market, economic efficiency, financial
condition of the merging firms
Type of merger most likely to have anti-competitive effect, so gets close scrutiny
by regulators
o Vertical Merger- occurs between a firm and customer or supplier (company at one
stage of production acquires a company at a higher or lower stage of production)
Competitors of either firm lose the opportunity to buy from or sell to one of the
firms
Illegality depends on several factors, including market concentrations, barriers to
entry into the market, and the apparent intent of the merging parties
Less likely than horizontal merger to have anti-competitive effect; rarely
challenged by regulators
o Conglomerate Merger- merger between firms that do not compete with each other
because they are in different markets( not a competitor, supplier, or customer)
May be part of a business diversification plan
Less likely than vertical or horizontal mergers to have serious anti-competitive
effects
Hard-Scott-Rodino Act of 1976- amendment to the Clayton Act that requires all persons
contemplating mergers or acquisitions of voting securities or assets which meet or exceed

jurisdiction limits (generally transactions worth over $64 million) to file notification with
the FTC Commissioner and Antitrust Division of the Department of Justice
o One agency will review the proposed merger for anti-competitive harm
o The parties must wait a designated period of time before consummating a transaction
(usually 30 days- but often shortened)
o The waiting period may be extended if an agency requests additional information
o If the reviewing agency believes that the transaction may substantially lessen
competition, it may enter into a negotiated consent agreement with the company;
request a court injunction to stop the transaction pending an administrative trial
o In FY 2008, 1,726 merger transaction were reported under the HSR Act (22%
decrease from 07)
21 of these were challenged by the FTC, leading to 13 consent decree orders, 2
administrative complaints (and civil lawsuits) and 6 abandoned or restructured
transactions
16 Transactions were challenged by the Antitrust Division of DOJ, leading to 15
consent decrees and 1 restructured transaction
o To secure regulatory approval, parties may agree to divest certain assets, divisions, or
business segments
CASE: Ticketmaster- In early 2009 (which has 70% of the concert ticket market and
owns Front Line management) and Live Nation the worlds largest concert
promoter( which runs over 22,000 events per year and owns 127 theaters) announced
plans to merge
o Merger would combine touring, management and ticketing operations into one
company, which critics claimed would reduce competition and result in increased
prices with combined revenues estimated at $6 Billion
RULE: January 25, 2010, DOJ announced conditions for accepting the merger:
Ticketmaster must divest itself of one of its ticking divisions and license software to a
competitor, in addition, the combined company will have to operate under 10-year antiretaliation provisions to prevent abuse of power over concert tours, artist management,
ticketing and theaters