filename
stringclasses 3
values | text
stringlengths 9
5k
|
|---|---|
Business_Law_I_Essentials_-_WEB.pdf | stated by the seller. Therefore, the sales contract is based, in part, on the understanding that the goods or
services being supplied by the seller will conform to the description, or any sample, that has been provided.
There are myriad ways in which the seller can make statements as to the characteristics of the goods.
Here are a few examples of express warranties:
“Wrinkle-free shirt”
“Lifetime guarantee”
“Made in the USA”
“This orange juice is not from concentrate”
“24k gold”
There is not a specific way that words must be formed to make an express warranty valid. Importantly, the
sales contract does not need to explicitly state that a warranty is being intended. It is enough that the seller
asserts facts about the goods that then become part of the contract between the parties. However, the courts
do apply a reasonableness test of reliance upon warranties. Puffery, or language used to bolster sales, is
lawful, and the consumer is required to apply reason when evaluating such statements. For example, buyers
are expected to use reason when judging seller claims such as “this sandwich is the best in the world.”
Obvious sales talk cannot ordinarily be treated as a legally binding warranty.
A breach of the warranty occurs when the express warranty has been found to be false. In such
circumstances, the warrantor is legally liable just as though the truth of the warranty had been guaranteed.
The courts do not accept as a defense:
•
Seller claims the warranty was true.
•
Seller claims due care was exercised in the production or handling of the product.
•
Seller claims there is not any reason to believe that the warranty was false.
Implied Warranties
In certain circumstances where no express warranty was made, the law implies a warranty. This statement
means that the warranty automatically arises from the fact that a sale was made. With regard to implied
warranties, the law distinguishes between casual sellers and merchant sellers, with the latter held to a higher
standard, given that they are in the business of buying or selling the good or service rendered. For example,
unless otherwise agreed, goods sold by merchants carry an implied warranty against claims by any third party
by way of trademark infringement, patent infringement, or any other intellectual property law infringement.
This type of warranty is known as the warranty against infringement. Another implied warranty provided by
merchant sellers is the warranty of fitness for normal use, which means that the goods must be fit for the
ordinary purposes for which they are sold.
It is important to note that if express warranties are made, this does not preclude implied warranties. If an
express warranty is made, it should be consistent with implied warranties, and can be treated as cumulative, if
such a construction is reasonable. If the express and implied warranties cannot be construed as consistent
and cumulative, the express warranty generally prevails over the implied warranty, except in the case of the
implied warranty of merchantability, or fitness for purpose.
92
Chapter 8 Sales Contracts
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Breaches of Warranty
If the buyer believes that there has been a breach of the implied warranty of merchantability, it is their
responsibility to demonstrate that the good was defective, that this defect made the good not fit for purpose,
and that this defect caused the plaintiff harm. Typical examples of defects are:
•
Design defects
•
Manufacturing defects
•
Inadequate instructions on the use of the good
•
Inadequate warning against the dangers involved in using the good.
Specific Examples of Goods Under the Warranty of Merchantability
Type
Description
Second-
hand
goods
The UCC treats warranties arising for used goods in the same way as warranties arising for
new goods, but second-hand products tend to be held to a lower standard on the warranty of
merchantability.
Buyer-
designed
goods
The same warranties arise for mass manufactured goods as for goods that have been
specified or made to order for the buyer. However, in this case, no warranty of fitness for
purpose can arise since the buyer is using his or her own decisions, skill, and judgment when
making the purchase.
Food
and
drink
The sale of food or drink carries the implied warranty of being fit for human consumption.
Table 8.3
The buyer might intend to use the goods purchased for a different purpose than that for which it was sold. In
this case, the implied warranty holds only if the buyer relies on the seller’s skill or judgment to select the
product, the buyer informs the seller at the time of purchase of his or her intention for the use of the good,
and the buyer relies on the seller’s judgment and skill in making the final choice. If the seller is not made
aware of the buyer’s true intention, or does not offer his or her skill and judgment in aiding the sale, then
warranty of fitness for a particular purpose does not arise. For this reason, it is common for vendors to include
provisions in the average terms and conditions of sale with regard to the true and intended purpose of use.
Warranty of Title
By the mere act of selling, the vendor implies a warranty that the title is good and that the transfer of title is
lawful. In addition, the act of the sale creates a warranty that the goods shall be delivered free from any lien of
which the buyer was unaware. In some circumstances, the warranty of title can be excluded from the contract
documents. For instance, when the seller makes the sale in a representative capacity (e.g. as an executor of an
estate), then a warranty of title will not arise.
Chapter 8 Sales Contracts
93 |
Business_Law_I_Essentials_-_WEB.pdf | Remedies to Buyers under the UCC
Remedy
Description
Cancel the
contract
The UCC allows buyers to cancel the contract for nonconforming goods and to seek
remedies that give them the benefit of the bargain.
Obtain cover
Buyers are allowed to substitute goods for those due under the sales contract. However,
substitutes must be reasonable, acquired without delay, and obtained in good faith.
Obtain
specific
performance
If the goods are unique or a legal remedy is inadequate, the seller may be required to
deliver the goods as identified in the contract.
Sue
Buyers are entitled to consequential and incidental damages if there is a breach of
contract. They may also be able to obtain liquidated damages (damages before the breach
occurs) or punitive damages.
Table 8.4
Assessment Questions
1. What is a sales contract?
2. All of the following are features of sales contracts except:
a.
Consensual.
b.
Bilateral.
c.
Cumulative.
d.
Principal.
3. What source of law governs sales contracts?
a.
Common Law.
b.
The Uniform Commercial Code.
c.
Statutory Law.
d.
Federal Law.
4. What is the definition of a good?
5. Distinguish a shipment contract from a destination contract.
6. What is a warranty in a sales contract?
7. Describe the difference between an express and implied warranty.
94
Chapter 8 Sales Contracts
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | 8. Examples of a defect in a breach of the implied warranty of merchantability, include all of the following
except:
a.
Design defect.
b.
Manufacturing defect.
c.
Inadequate instructions.
d.
Product defect.
9. The following are possible remedies to buyers under the UCC:
a.
Cancel the contract.
b.
Obtain Cover.
c.
Sue.
d.
All of the above.
10. What is a breach of warranty?
Endnotes
Kubasek, N., Browne, M. N., Dhooge, L. J., Herron, D. J., Williamson, C., & Barkacs, L. L. (2015). Dynamic business
law. McGraw-Hill Education.
Kubasek, N., Browne, M. N., Dhooge, L. J., Herron, D. J., Williamson, C., & Barkacs, L. L. (2015). Dynamic business
law. McGraw-Hill Education.
Chapter 8 Sales Contracts
95 |
Business_Law_I_Essentials_-_WEB.pdf | 96
Chapter 8 Sales Contracts
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Chapter Outline
9.1 Employment, Worker Protection, and Immigration Law
9.2 Labor Law
9.3 Equal Opportunity in Employment
Introduction
Learning Outcome
•
Analyze various laws governing employer/employee relationships.
9.1
Employment, Worker Protection, and Immigration Law
Compared to other countries in the West, stringent and extensive employee protections came fairly late to the
United States. Up until 1959, for example, employers had the right to fire a worker without giving any reason.
This concept, which was was known as at-will employment, was applicable in all states. The concept of at-will
employment does, however, continue today, and all employees are considered to be at-will unless they are
employed under a collective bargaining agreement, or under a contract for a set duration. Employers can still
fire employees for any reason, but they cannot be fired for illegal reasons, as set out in the U.S. or state
constitutions, federal law, state statutes, or public policy. In this section, some of the main employee rights
and company responsibilities will be introduced.
Figure 9.1 (Credit: rawpixel/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))
9
Employment and Labor Law |
Business_Law_I_Essentials_-_WEB.pdf | Figure 9.2
Employees have various rights in the workplace and companies have various responsibilities
toward them. (Credit: Raw Pixel/ pexels/ License: CC0)
Health and Safety
Workers have the right to be safe at work, and companies have responsibilities to employees in the event that
they are harmed while undertaking work on behalf of the employer. The Occupational Safety and Health
Act, passed in 1970, is the main legislative action that governs health and safety in the workplace. The Act
established the Occupational Safety and Health Administration (OSHA), which is a federal agency whose
role is to “assure safe and healthy working conditions for working men and women by setting and enforcing
standards and by providing training, outreach, education and assistance.” Private employers and federal
government agencies are all covered under OSHA protection, although the self-employed and workers at state
and local governments in most states are not covered. OSHA has adopted thousands of regulations to enforce
the Occupational Safety and Health Act. It imposes a number of record-keeping and reporting requirements
on private employers. In addition, employers are required to inform employees of their health and safety
rights by posting appropriate notices in the workplace.
Type of
OSHA
Standard
Description
Example
Specific
Duty
Standards
Standards that apply to specific types of work,
procedures, work conditions, and equipment
Safe handling of compressed gas
cylinders
Table 9.1
98
Chapter 9 Employment and Labor Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | General
Duty
Standards
Standards that apply to all employers and that impose
a duty to protect workers from known hazards
Standards pertaining to indoor air
quality and workplace violence
Table 9.1
Workers’ Compensation Acts help employees claim compensation for injuries that occur on the job. States
require employers to either purchase workers’ compensation insurance, or have the ability to self-insure
against compensation claims. Workers’ compensation insurance covers a range of different injuries, including
physical injuries, mental illnesses that can be shown to be employment-related, and stress.
Under the terms of the Acts, a Workers’ Compensation Agency is established at the state level to provide
judicial and administrative services to help in the resolution of claims for compensation. In the event of a
claim, a three-step process is put into place:
1.
The worker files a claim with the agency.
2.
The agency establishes the legitimacy of the claim.
3.
If the injury is determined to be legitimate, compensation benefits are paid accordingly.
It is important to note that workers’ compensation is understood to be an exclusive remedy. This term means
that workers cannot sue the employer in court for further damages beyond that which is paid out under the
compensation claim. An exception is made when the employer intentionally injures the worker, however.
Furthermore, workers have the right to sue any third party involved in the cause of the injury to recover
additional damages.
Case Insight
In the case Chad A. Kelley v. Marsha P. Ryan, Administrator, Ohio Bureau of Workers’ Compensation, and Coca-
Cola Enterprises, Chad A. Kelley attended a team-building event held by his employer, Coca-Cola, to celebrate
the launch of a new product. All employees attending the event were required to canoe down a river, which
Kelley, with colleagues, achieved without incident. Employees waiting on the river bank began to splash one
another, and according to witnesses, Kelley said that it would take more than some splashing to get him wet.
Consequently, several colleagues tried to throw Kelley into the water, which led him to sustain neck injuries.
The Ohio Bureau of Workers’ Compensation denied Kelley’s claim for benefits, however, arguing that Kelley
had instigated “horseplay” that removed the incident from the scope and course of employment. In 2009, an
appellate court ruled that this conclusion was incorrect and that the employer was, in fact, responsible. Kelley
was entitled to the compensation.
Fair Labor Standards Act
The Fair Labor Standards Act (FLSA) sets out provisions that delineate fair labor and unfair labor. There are
three main categories covered in the Act:
1.
Child labor
2.
Minimum wage provisions
3.
Overtime pay requirements
The FLSA prohibits oppressive child labor as well as the shipping of goods produced by firms that make use of
Chapter 9 Employment and Labor Law
99 |
Business_Law_I_Essentials_-_WEB.pdf | oppressive labor. The FLSA sets the minimum age for non-agricultural work as 14. However, there are some
exceptions. People under the age of 14 who are classed as minors may deliver newspapers, perform
babysitting or chores around the home, and can work in businesses owned by their families, as long as the
work is not deemed to be hazardous. In addition, minors may perform in television, radio, movie, or theatrical
productions. Once an employee becomes 18, child labor regulations no longer apply.
Under the terms of the FLSA, employees in covered industries, with the exception of apprentices and students,
must be paid the federal minimum wage. Congress is responsible for reviewing the level of the minimum
wage on a periodic basis and raising it to compensate for increases in the cost of living caused by inflation. In
2009, Congress raised the federal minimum wage to $7.25 an hour. This increase was the first in almost a
decade (although in 2014, President Obama signed an executive order that increased the minimum wage to
$10.10 for those employed on new federal contracts).
FLSA also mandates that employees who work more than 40 hours in a week should receive overtime pay that
is equal to at least one and one-half times their regular wage for every additional hour worked. Four
categories of employees are excluded from this provision, however: executives, administrative employees,
professional employees, and outside salespersons.
Family and Medical Leave Act
The Family and Medical Leave Act (FMLA), enacted in 1993, guarantees all eligible workers up to 12 weeks of
unpaid leave during any 12-month period for family and medical emergencies. The FMLA applies to all public
and private employers with 50 or more employees, covers employees who have worked for the employer for at
least one year, and applies to employees who have worked at least 25 hours a week for each of 12 months
prior to the leave. The events that qualify workers for leave are:
•
The birth of a child
•
The adoption of a child
•
The placement of a foster child in the employee’s care
•
The care of a seriously ill spouse, parent, or child
•
Any serious health condition that prevents the worker from being able to perform any of the essential
functions of the job
Once the employee returns to work, he or she must be restored to the same or equivalent position. Social
Security benefits also provide benefits to certain employees and their dependents. The types of benefits that
fall under Social Security regulations include disability benefits, Medicare benefits, survivors’ benefits, and
retirement benefits.
Ending Employment
There are are also several regulations that cover workers who are terminated or who lose their employment.
These are summarized in the following table.
Regulation
Description
Table 9.2
100
Chapter 9 Employment and Labor Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Consolidated
Omnibus
Budget
Reconciliation
Act (COBRA)
Mandates that employees who are terminated must be provided with the opportunity
to continue to participate in group health insurance, so long as they agree to pay the
group rate premium. The employer is required to notify employees of their COBRA
rights.
Employee
Retirement
Income
Security Act
(ERISA)
This Act covers any pension plan offered by employers to their workers, and is designed
to prevent abuses and fraudulent use of those plans. Under the terms of ERISA,
employers are required to keep certain records pertaining to the plans, and to report on
those records at regular intervals. The Act also provides for vesting, which occurs when
an employee has a nonforfeitable right to receive pension benefits.
Unemployment
compensation
Unemployment compensation programs are paid to those who become temporarily
unemployed, and are funded by employers through employment taxes. Workers who
quit voluntarily or who are terminated for bad conduct are not eligible for
compensation. In addition, in order to qualify for the benefits, applicants must
demonstrate that they are available for work.
Table 9.2
Immigration Law
There are vast areas of immigration law that are applicable to employment. The U.S. Citizenship and
Immigration Service (USCIS) administers a range of different immigration programs that enable U.S.
employers to employ foreign national workers. For example, under the EB-1 visa, U.S. employers can employ
foreign nationals who have extraordinary ability for certain types of work. Under the terms of the
Immigration Reform and Control Act (IRCA), employers are required to examine evidence of employees’
identity and complete mandatory paperwork for each employee. There are serious financial and criminal
penalties for employers who knowingly hire undocumented workers.
9.2
Labor Law
Labor relations is the general term used to describe the relationship between employers and employees, as
well as governance of that relationship. It refers to the micro-level interactions that take place between
workers and individual managers, as well as the macro-level relations that occur between the external
institutions that are tasked with governing such relations. This understanding of labor relations acknowledges
the fact that there is a plurality of interests that must be taken into account in the processes and procedures of
negotiation, bargaining, and dispute settlement relating to the workplace. It also recognizes that employees
and employers’ representatives are fundamental to the process of industrial relations, and that the state plays
a key role in the development of labor laws, the regulation of collective bargaining, and the administration of
disputes. There has been considerable flux and development in the nature of U.S. labor over the past century.
However, the most substantial changes have occurred since the 1950s. Changes have been particularly evident
in the role that the state has been expected to play in employment relations between workers, their
representatives, and their employers. This section introduces some of the key milestones in labor relations in
the United States, and describes the role played by trade unions in governing the relationship between
Chapter 9 Employment and Labor Law
101 |
Business_Law_I_Essentials_-_WEB.pdf | employers and employees.
What Is a Trade Union?
A trade union, or labor union, is an organized group of workers who come together to lobby employers about
conditions affecting their work. There currently are around 60 unions representing 14 million workers across
the United States. Unions are organized according to the type of work that workers do. For example, the
American Federation of Teachers is the labor union for teaching personnel, while the the International
Association of Fire Fighters covers fire fighters. Many unions in the United States are organized as local
unions. This type of union is a locally (i.e., company or region) based group of workers who organize under a
charter from a national union. For example, Affiliated Property Craftspersons Local 44 is the Los Angeles union
of entertainment professional craftpersons, chartered under the International Alliance of Theatrical Stage
Employees.
Timeline of Developments in Labor Law
•
1886. The American Federation of Labor was formed in Columbus, Ohio. This group was a national
federation of labor unions who came together to bolster their power in industrial unionism. The AFL was
the largest union grouping in the United States well into the twentieth century. However, the Federation
was craft-dominated, such that only craft workers like artisans and silversmiths were allowed to belong.
•
1932. The Norris-LaGuardia Act was passed. This Act prohibited yellow-dog contracts, or contracts that
prevented workers from joining labor unions. In addition, federal courts were barred from issuing
injunctions to prevent groups of workers from engaging in boycotts, strikes, and picketing.
•
1935. The Congress of Industrial Organizations was established. This establishment extended the union
movement because it allowed semi-skilled and unskilled workers to become members.
•
1935. The Wagner Act, or National Labor Relations Act, was passed. This Act is the major statute of
United States labor law. The Act established that employees have the right to form, assist, and join labor
organizations, to engage in collective bargaining with employers, and to engage in concerted activity to
promote those rights.
•
1947. The Labor-Management Relations Act, also known as the Taft-Hartley Act, imposed restrictions on
the power of labor unions. It made changes to union election rules and outlined and provided remedies
for six unfair practices by labor unions (see box below).
•
1959. The Labor Management Reporting and Disclosure Act, or Landrum-Griffin Act, was passed, which
regulates the internal affairs of trade unions, as well as their officials’ relationships with employers. All
union members are granted equal rights to vote for candidates, take part in membership meetings, and
nominate candidates for office.
•
1988. The Worker Adjustment and Retraining Notification (WARN) Act requires that employers with more
than 100 employees give workers at least 60 days notice before engaging in layoffs or plant closings.
Amendments
of the Taft-
Hartley Act
Description
Table 9.3
102
Chapter 9 Employment and Labor Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | 1
Protects employees from unfair coercion by unions that could lead to discrimination
against employees.
2
States that employers cannot refuse to hire prospective workers because they refuse to
join a union. This amendment also grants the employer the right to sign an agreement
with a union that requires the employee to join the union before the employee’s 30th day
of employment.
3
Unions must bargain in good faith with employers.
4
Prevents unions from engaging in secondary boycotts.
5
Prevents unions from taking advantage of either employers or members. For example,
unions cannot charge members excessive membership dues or cause employers to pay
for work that has not been performed.
6
Grants employers the right to free speech. Expressed opinions about labor issues do not
constitute unfair labor practices, as long as the employer does not threaten to withhold
benefits from, or engage in, retribution against the worker.
Table 9.3
The National Labor Relations Board
The National Labor Relations Board (NLRB) was established to administer, interpret, and enforce the terms of
the National Labor Relations Act. It has jurisdiction over all workers, except for government employees and
employees in the transportation industry, who are governed under a separate statute (The Railway Labor Act).
Other workers not covered by the NLRB include agricultural workers, confidential employees (employees who
develop or present management’s position or who have access to confidential information related to
bargaining employees), independent contractors, and those employed by a spouse or a parent. The NLRB has
three main functions:
1.
To monitor the conduct of unions and employers during elections to determine whether employees wish
to be represented by a union
2.
To remedy and prevent unfair labor practices by unions or employers
3.
To establish rules interpreting the NLRA
Chapter 9 Employment and Labor Law
103 |
Business_Law_I_Essentials_-_WEB.pdf | Figure 9.3
Under the terms of the National Labor Relations Act, employees have the right to strike as part of
their efforts to secure better working conditions. (Credit: Geralt/ pixabay/ License: CC0)
Organizing a Union
For a union to be formed and organized, the union must identify an appropriate bargaining unit. This term is
used to describe the group of workers that the union is looking to represent. Under the terms of the
inaccessibility exception, employees and union officials have the right to engage in union solicitation on the
firm’s property if they cannot otherwise access employees to communicate with them. The next stage is to run
an election. There are three types of elections:
•
Consent election. This election is held when there are not any substantial issues under dispute between
the union and the employer. Both parties agree to waive the pre-election hearing.
•
Contest election. This election is for a union that is contested by the employer. The NLRB is required to
supervise this kind of election.
•
A decertification election is held when employees indicate that they wish to vote out the union or join
another.
In order to try to bolster their power, elected unions often attempt to install a union security agreement. This
agreement pertains to the extent to which the union can demand that employees join the union, and whether
the employer will be required to collect fees and dues on behalf of the union. A closed shop is a workplace
where union membership is a requirement for employment. A union shop is a place of employment where the
employee is required to join the union within a specified number of days after being hired. An agency shop is
a workplace that does not require the employee to join the union, but where agency fees to the union must be
paid. Union security agreements are the outcome of collective bargaining agreements.
Collective Bargaining
Collective bargaining involves the union and the employer negotiating contract terms. The outcome is known
as a collective bargaining agreement. The types of terms that are usually negotiated are wages and salaries,
104
Chapter 9 Employment and Labor Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | hours, and the terms and conditions of employment. If union members dispute working conditions, unfair
labor practices, or economic benefits, they have the right to participate in a cessation of work activities, known
as a strike. There is a mandatory cooling off period of sixty days before a strike can commence. Some
collective bargaining agreements include no-strike clauses. Although strikes are permitted according to the
NRLA, some strikes are illegal:
•
Violent strikes
•
Sit-down strikes
•
Wildcat (unauthorized) strikes
•
Intermittent, or partial strikes
In addition to striking, union members have the right to picket. This process involves walking in front of the
employer’s premises with signs that advertise the strike and the union’s demands. Picketing is lawful as long
as it does not:
•
Involve violence
•
Prevent customers from entering the premises
•
Prevent non-striking workers from entering the premises
•
Prevent the business from receiving deliveries or pickups
Secondary boycott picketing occurs when the union pickets the employer’s customers or suppliers. This type
of picketing is legal if it is product picketing, but illegal if the picket is directed against a neutral business.
9.3
Equal Opportunity in Employment
A Landmark Case
In 1982, the financial services company Price Waterhouse announced a vacancy for the position of partner.
Ann Hopkins, an employee of the company at the time, applied, but after an assessment, was passed over.
Hopkins sued the company, arguing that she had billed more than $34 million in consulting contracts for the
firm, far more than any of the other 87 candidates, who were all male. In rejecting her application, the partners
at the company argued that Hopkins was “too macho” and that she should “walk more femininely, talk more
femininely, dress more femininely, wear makeup, have her hair styled and wear jewelry.” In the landmark legal
suit that followed, Hopkins was awarded $371,000 in back pay, and Price Waterhouse was forced to make her a
partner.
Laws Governing Equal Opportunity in Employment
Employees are protected in the workplace by a number of laws enacted at both the federal and state levels.
Federal laws are usually considered to be the minimum level of protection, and state laws can provide
employees with more, but not less, protection. In this section, the major laws pertaining to equal opportunity
are discussed.
Civil Rights Act of 1964 – Title VII (Amended By the Civil Rights Act of 1991)
The Civil Rights Act provides broad provisions pertaining to citizens’ civil rights. Title VII of the Civil Rights Act
deals with discrimination in employment. It bans employers from discriminating against employees in their
hiring, firing, and promotion practices on the basis of sex, national origin, color, religion, or race. All employers
Chapter 9 Employment and Labor Law
105 |
Business_Law_I_Essentials_-_WEB.pdf | who are engaged in commercial activity and who employ 15 or more employees for 20 consecutive weeks in a
year are covered by the Act. The Act also sets out the two main ways in which discrimination can be proven:
disparate treatment and disparate impact.
Disparate treatment means that the employee believes that he or she has been discriminated against on the
basis of one of the protected classes set out in the CRA. Proving that the employer engaged in disparate
treatment is a three-step process:
1.
The employee (plaintiff) is required to demonstrate a prima facie (accepted as correct unless proven
otherwise) case of discrimination.
2.
The employer (defendant) must show legitimate, non-discriminatory business reasons for undertaking
the action.
3.
The employee must demonstrate that the reason given by the employer is a mere pretext.
A trier of fact, usually a jury, will use the evidence presented to determine whether discrimination did in fact
occur. If the jury finds for the employee-plaintiff, damages can be awarded, such as what occurred in the
landmark Ann Hopkins case, described in the opening box. If the jury finds for the employer-defendant, no
damages are assessed.
Damages Permissible Under Title VII of the CRA
Up to two years of back pay
Compensatory damages
Punitive damages
Remedial seniority
Costs (e.g., attorney fees and court costs)
Court orders (e.g., reinstatement)
Table 9.4
Disparate impact cases are cases of unintentional discrimination. This type of case occurs when the employer
engages in a practice that has a disproportionately injurious impact on a protected class. Disparate impact
cases are difficult to prove. The burden of responsibility is on the employee-plaintiff to statistically establish
that the action impacts the protected class. The defendant can avoid liability by demonstrating that the
practice is a business responsibility. The burden of proof then shifts to the employee to prove that the alleged
business necessity is a mere pretext. These steps were established in Griggs v. Duke Power Co. Duke Power
required all job applicants to have a high school diploma and to reach a certain minimum score on a
professional intelligence test. Willie Griggs, the plaintiff, established that the rule was racially discriminatory
because only 12 percent of black men in the state had high school diplomas (compared to 34 percent of white
men), and only 6 percent of blacks had passed similar intelligence tests, compared to 58 percent of whites.
Duke Power tried to argue that the provisions were necessary to upgrade the quality of the workforce, but the
court did not agree that this defense was an adequate business-related justification, and the plaintiff was
successful.
106
Chapter 9 Employment and Labor Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Figure 9.4
Employees are protected against discrimination by employers by a number of laws enacted at
both the federal and state level. (Credit: Wokandapix/ pixabay/ License: CC0)
Sexual harassment is also protected under Title VII. This type of harassment is defined as unwelcome sexual
advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature. Two types of
sexual harassment are recognized. Quid pro quo occurs when a manager makes a sexual demand on a
worker, and this demand is perceived as a condition of employment. Actions that create a hostile work
environment are another type of sexual harassment. These issues have been used in cases of discrimination
based on race and religion as well as sex. Since the 1997 case Oncale v. Sundowner Offshore Services Inc., it
has been established that sexual harassment undertaken by a member of one sex against a member of the
same sex is actionable under Title VII. In some limited circumstances, employers may also be liable for
harassment of employees by non-employees, e.g., customers. The employer is liable if it does nothing to
prevent and remedy harassment targeted at one of its employees. The Pregnancy Discrimination Act of 1987
expanded the definition of sex discrimination to include discrimination based on pregnancy, childbirth, or
medical conditions related to the same.
Defenses to Title VII Claims
Defense
Description
Table 9.5
Chapter 9 Employment and Labor Law
107 |
Business_Law_I_Essentials_-_WEB.pdf | The Bona
Fide
Occupational
Qualification
Defense
(BFOQ)
Using this defense, the employer can discriminate if it is deemed to be necessary for the
performance of the job. Necessity, however, must be determined on the basis of actual
qualifications, rather than stereotypes about the abilities of a certain class. For example,
an employer is not expected to hire a man as a model for women’s clothes. Hires on the
basis of sexual privacy are covered under BFOQ. However, there are no BFOQs for
discrimination on the basis of race or color.
The Merit
Defense
This defense is used when decisions pertaining to hiring or promotion are made on the
basis of the results of test scores. However, tests must be validated in accordance with
professional standards and must be manifestly related to job performance.
The Seniority
Defense
System
This defense system occurs when employees are given preferential treatment because of
their length of tenure. As long as the system does not have its genesis in discrimination,
and is not used to discriminate and applies to all persons equally, it is lawful.
Table 9.5
The Equal Pay Act
The Equal Pay Act (EPA) is a United States federal law that seeks to equalize the salaries and wages paid to
employed women with the levels paid to men for work of an equal nature and quantity. The Act amended the
Fair Labor Standard Act of 1938 and was a key element of President F. Kennedy’s New Frontier program. Under
the terms of the EPA, women and men performing jobs that demand “equal skill, effort, and responsibility, and
which are performed under similar working conditions” must be paid the same. The Act protects the rights of
both sexes. An individual who seeks to establish a case under the Act must demonstrate that:
1.
An employer pays one sex more than another
2.
Both sexes perform an equal amount of work that demands equal levels of skill, effort and responsibility
3.
Working conditions for both sexes are equivalent
An employer that is accused of discrimination under the EPA can present one of four affirmative defenses. An
employer may legally pay employees of one sex more than another sex if wages are based on a system of
seniority, a system of merit, a system that distinguishes payment on the basis of quality and quantity of
production (e.g., certain piece rates), or if payment is differentiated on “any other factor other than sex.” Of
these four defenses, the “factor other than sex” defense has been invoked most frequently and has been the
subject of intense debate and controversy. Critics have argued that this defense enables employers to
fabricate other reasons for the wage gap.
Americans with Disabilities Act
The Americans with Disabilities Act (ADA) prevents employers from discriminating against workers on the
basis of their physical or mental disabilities. In addition, employers are required to make reasonable
accommodations to known disabilities, as long as such accommodations do not impose an undue burden on
the business. To bring a successful ADA claim, the plaintiff is required to demonstrate that he or she:
•
Has a disability
•
Suffered an adverse employment decision because of that disability
108
Chapter 9 Employment and Labor Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | •
Was otherwise qualified for the position
ADA is enforced in a similar way to Title VII, and remedies for ADA violations are also similar.
Age Discrimination Act
Passed in 1967, this Act prohibits employers from making discriminatory employment decisions against people
age 40 or older. This Act applies to all employers with 20 or more employees.
Assessment Questions
1. What does At-Will Employment mean?
2. Employers are required provide a work environment that is safe and healthy for their employees by which
law?
a.
FLSA.
b.
WCA.
c.
OHSA.
d.
FMLA.
3. How many weeks of unpaid leave does the Family Medical Leave Act guarantee to eligible workers?
a.
12.
b.
16.
c.
25.
d.
40.
4. What regulation protects employees who are terminated from their employment?
a.
COBRA.
b.
ERISA.
c.
Unemployment Compensation.
d.
All of the above.
5. The Fair Labor Standards Act (FLSA) covers which category?
a.
Child Labor.
b.
Minimum wage.
c.
Overtime pay.
d.
All of the above.
6. Explain the term labor relations.
7. What is a trade union?
8. What is the function of the National Labor Relations Board?
a.
To monitor the conduct of the unions and employers during union elections.
b.
To remedy and prevent unfair labor practices by unions or employers.
c.
To establish rules interpreting the NLRA.
d.
All of the above.
Chapter 9 Employment and Labor Law
109 |
Business_Law_I_Essentials_-_WEB.pdf | 9. _____ is a place of employment where the employee is required to join the union within a specified number of
days after being hired.
a.
A closed shop.
b.
A union shop.
c.
An agency shop.
d.
A secure shop.
10. Which of the following practices are illegal?
a.
Picketing.
b.
No strike clause.
c.
Sit-Down strike.
d.
A secure shop.
11. Explain Title VII of the Civil Rights Act of 1964.
12. How do you prove a disparate impact case?
13. The following is valid defense under Title VII:
a.
Quid Pro Quo.
b.
No Merit Defense.
c.
BFOQ
d.
All of the above.
14. To bring a successful claim under the Americans with Disability Act (“ADA”), the plaintiff must prove all of
the following except:
a.
He or she suffered an adverse employment decision because of a disability.
b.
The disability was not a mental disability.
c.
He or she was qualified for a position.
d.
He or she has a disability.
15. The Age Discrimination Act only applies to employers with 20 or more employees.
a.
True.
b.
False.
Endnotes
Blanpain, R., & Bisom-Rapp, S. (2014). Global Workplace: International and Comparative Employment Law Cases
and Materials. Wolters Kluwer Law & Business.
Cheeseman, H. (2016). Business Law. Boston: Pearson Education.
Robinson, T. (2011). “The Top 10 Bizarre Workers’ Comp Cases for 2010.” LexisNexis Legal NewsRoom.
Retrieved from: https://www.lexisnexis.com/legalnewsroom/workers-compensation/b/workers-
compensation-law-blog/posts/the-top-10-bizarre-workers-comp-cases-for-2010
Cheeseman, H. (2016). Business Law. Boston: Pearson Education.
Feldacker, B. S., & Hayes, M. J. (2014). Labor guide to labor law. Ithaca: Cornell University Press.
Rutherglen, G. (2016). Employment Discrimination Law, Visions of Equality in Theory and Doctrine. West
Academic.
110
Chapter 9 Employment and Labor Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Woloch, N. (2018). Because of Sex: One Law, Ten Cases, and Fifty Years That Changed American Women’s Lives
at Work by Gillian Thomas. Labor: Studies in Working-Class History, 15(1), 128–129.
Chapter 9 Employment and Labor Law
111 |
Business_Law_I_Essentials_-_WEB.pdf | 112
Chapter 9 Employment and Labor Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Chapter Outline
10.1 Administrative Law
10.2 Regulatory Agencies
Introduction
Learning Outcome
•
Define the role of administrative bodies and regulation in the governmental rulemaking process.
10.1
Administrative Law
Administrative law is also referred to as regulatory and public law. It is the law that is related to
administrative agencies. Administrative agencies are established by statutes and governed by rules,
regulations and orders, court decisions, judicial orders, and decisions.
Agencies are created by federal or state governments to carry out certain goals or purposes. Federal agencies
are created by an act of Congress. Congress writes out a law called an organic statute that lays out the
purpose and structure of the agency. The agency is charged with carrying out that purpose, as described by
Congress. Organic statutes are utilized to create administrative agencies, as well as to define their
responsibilities and authority.
Figure 10.1 (Credit: JamesDeMers/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))
10
Government Regulation |
Business_Law_I_Essentials_-_WEB.pdf | Figure 10.2
Both federal and state legislators create agencies to fulfill a specific purpose, usually related to
protecting the public from a potential threat. (Credit: kbhall17/ pixabay/ License: CC0)
Industrialization
Administrative agencies have been around almost since the founding of the United States. However,
industrialization had a big impact on the development of administrative laws. As people moved from farms
and rural areas to cities to find work and raise families, the economy changed. It became more complex. As a
result of this economic change, the government saw a need to expand its regulation to protect and support
the public. In the 20th century, the number of agencies expanded very quickly with the addition of the Food
and Drug Administration (FDA) to regulate food and medication, the Federal Trade Commission (FTC) to
regulate trade, and the Federal Reserve System (FRS) to regulate banks. These are just a few of the agencies
created to regulate industries. Ultimately, this expansion occurred in response to the complexity of the
economy.
114
Chapter 10 Government Regulation
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Figure 10.3
Industrialization increased the number of administrative agencies in the United States. (Credit:
Chevanon Photography/ pexels/ License: CC0)
Everyday Impact
Administrative law impacts the public on a daily basis. Administrative law is basically the delegated power
granted to administrative agencies to carry out specific functions. Government agencies endeavor to protect
the rights of citizens, corporations, and any other entity through administrative laws. Administrative agencies
were developed to protect consumers and the community. As a result, they are present in all aspects of life,
including medicine, food, environment, and trade.
One well-known federal agency is the Food and Drug Administration (FDA). The FDA was created to protect the
public’s health. The agency’s responsibilities are very broad. The agency fulfills its role by ensuring the safety
and effectiveness of drugs consumed by people and animals, biological products, medical devices, food, and
cosmetics. Specifically, the FDA regulates the things that the public consumes, including supplements, infant
formula, bottled water, food additives, eggs, some meat, and other food products. The FDA also regulates
biological items and medical devices, including vaccines, cellular therapy products, surgical implants, and
dental devices. This federal agency began in 1906 with the passing of the Pure Food and Drugs Act.
Chapter 10 Government Regulation
115 |
Business_Law_I_Essentials_-_WEB.pdf | Figure 10.4
The Food and Drug Administration (FDA) oversees the safety and effectiveness of medication.
(Credit: Rawpixel/ pexels/ License: CC0)
EpiPens are automatic injection devices that deliver lifesaving medication that can save an individual in the
event of exposure to an allergen, like a bee sting or peanuts. The United States faced a shortage of EpiPens, so
in 2018, the FDA took action to address this issue. The FDA approved the extension of EpiPen expiration dates
for four months on specific lots of the EpiPen. This extension impacted both the public and the organization
that produces EpiPens. In the same year, the FDA approved the first generic EpiPen. The new generic version
will be produced by a pharmaceutical company that has not previously produced the EpiPen. These two
actions impact consumers by increasing the supply of lifesaving EpiPens.
Another well-known agency is the Federal Trade Commission (FTC). The FTC was formed in 1914 when
President Woodrow Wilson signed the Federal Trade Commission Act into law. The goal of the agency is to
protect the consumer, encourage business competition, and further the interests of consumers by
encouraging innovation. The FTC works within the United States as well as internationally to protect
consumers and encourage competition. The agency fulfills this role by developing policies, partnering with law
enforcement to ensure consumer protection, and helping to ensure that markets are open and free. For
instance, management and enforcement of the Do Not Call List is part of the FTC’s consumer protection goals.
The FTC protects consumers from unfair or misleading practices. Phone scams are a common issue. Scammers
go to great lengths to trick the public into donating to false charities, providing personal information, or giving
access to financial information. The FTC is aware of these issues and has put rules in place to punish scammers
and educate the public. The FTC created a phone scammer reporting process to help collect information about
scammers so that they can be prosecuted. The agency also collects information about scammers and creates
educational materials for the public. These materials are designed to help consumers identify possible phone
scammers, avoid their tactics, and report their activities.
A complete list of U.S. government agencies can be found at https://www.usa.gov/federal-agencies/a
(https://www.usa.gov/federal-agencies/a) .
116
Chapter 10 Government Regulation
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | 10.2
Regulatory Agencies
The power of administrative agencies comes from the executive branch of the government. Congress passes
laws to carry out specific directives. The passing of these laws often creates a need for a government agency
that will implement and carry out these laws. The government is not able to perform the work itself or manage
the employees who will do the work. Instead, it creates agencies to do this. Assigning this authority to
agencies is called delegation. The agencies have focus and expertise in their specific area of authority.
However, it is important to note that Congress gives these agencies just enough power to fulfill their
responsibilities.
Although administrative agencies are created by Congress, most administrative agencies are part of the
executive branch of the government. The executive branch of government of the United States is headed by
the president of the United States. Administrative agencies are created to enforce and administer laws, and
the executive branch was created to oversee administrative agencies. Administrative agencies conduct exams
and investigations of the entities they regulate. As a result of being part of the executive branch of
government, the leaders of administrative agencies are generally appointed by the executive branch.
Figure 10.5
Most administrative agencies are housed in the executive branch. The president of the United
States appoints leaders to administrative agencies. (Credit: Aaron Kittredge/ pexels/ License: CC0)
Administrative agencies also have responsibilities that mirror the responsibilities of the judicial branch of
government. Administrative law judges (ALJ) have two primary duties. First, they oversee procedural aspects,
like depositions of witnesses related to a case. They have the ability to review rules and statutes and review
decisions related to their agencies. They also determine the facts and then make a judgment related to
whether or not the agency’s rules were broken. They act like a trial judge in a court, but their jurisdiction is
limited to evaluating if rules established by certain government agencies were violated. They can award
money, other benefits, and punish those found guilty of violating the rules.
Chapter 10 Government Regulation
117 |
Business_Law_I_Essentials_-_WEB.pdf | Federal Agencies
Well-known federal agencies include the Federal Bureau of Investigations (FBI), Environmental Protection
Agency (EPA), Food and Drug Administration (FDA), Federal Trade Commission (FTC), Federal Election
Commission (FEC), and the National Labor Relations Board (NLRB). These agencies were created to serve
specific purposes. For instance, the FBI was created to investigate federal crimes. A federal crime is one that
violates federal criminal law, rather than a state’s criminal law. The EPA was created to combine federal
functions that were instituted protect the environment. The NLRB was created to carry out the National Labor
Relations Act of 1935.
The goal of federal agencies is to protect the public. The EPA was created in response to concerns about the
dumping of toxic chemicals in waterways and about air pollution. It began when the Cuyahoga River in Ohio
burst into flames without warning. President Richard Nixon presented a plan to reduce pollution from cars,
end the dumping of pollutants into waterways, tax businesses for some environmentally unfriendly practices,
and reduce pollution in other ways. The EPA was created by Congress in response to these environmental
concerns and President Richard Nixon’s plan. It is given the authority and responsibility to protect the
environment from businesses, so that the people can enjoy a clean and safe environment.
As mentioned in the previous section, the Federal Trade Commission (FTC) was created to protect the
consumer. It investigates and addresses activities that limit competition between businesses. The organization
enforces antitrust laws that prevent one organization from restraining competition or seeking to maintain
full control over a market. In December of 2006, the FTC ruled on the merger of America Online, Inc. (AOL) and
Time Warner, Inc. The FTC decided that the joining of these two companies would limit the ability of other
organizations to compete in the cable internet marketplace. The FTC ordered the merged company, AOL Time
Warner, to do certain things that permitted competitors to engage, including opening its system to
competitors’ internet services and not interfering with the transmission signal being passed through the
system. Doing so prevented the large company from shutting out its competitors. These are just a few
examples of administrative agencies that were created to protect the community from business activities that
could negatively impact the environment or the consumer.
118
Chapter 10 Government Regulation
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Figure 10.6
Although administrative agencies have a great deal of power, they are bound by the concept of
due process at is described in the U.S. Constitution. (Credit: wynpnt/ pixabay/ License: CC0)
Agency Structure
Administrative agencies are made up of experts, and they are trusted by Congress to identify the agency
structure that best serves their specific goals. Thus, each agency is structured differently.
The FTC is a well-known agency and is organized into bureaus. Each bureau is focused on an agency goal. The
three bureaus are consumer protection, competition, and economics. The Bureau of Consumer Protection
focuses on unfair and deceptive business practices by encouraging consumers to voice complaints,
investigate, and file lawsuits against companies. It also develops rules to maintain fair practices and educates
consumers and businesses about rights and responsibilities. The Bureau of Competition focuses on antitrust
laws and, by doing so, supports lower prices and choices for the consumer. And, lastly, the Bureau of
Economics concentrates on consumer protection investigation, rulemaking, and the economic impact of
government regulations on businesses and consumers.
Administrative Procedure Act (APA)
These agencies are not unrestrained in their operations. First, there are due process requirements created in
the Constitution. Rules must be reasonable and based on facts. Second, rules cannot violate anyone’s
constitutional rights or civil liberties. Third, there must be an opportunity for the public to voice its support, or
lack of support, for a rule. In 1946, the Administrative Procedure Act (APA) was enacted. Under the APA,
agencies must follow certain procedures to make their rules enforceable statutes. The Act set up a full system
for the execution of administrative law by administrative agencies for the federal government. Although
agencies have power, government agencies must still act within the structures in place, including the
Constitution, span of authority, statutory limitations, and other restrictions. The APA outlines roles, powers,
and procedures of agencies. It organizes administrative functions into rulemaking and adjudication.
Chapter 10 Government Regulation
119 |
Business_Law_I_Essentials_-_WEB.pdf | Assessment Questions
1. What is administrative law?
2. Administrative agencies are created by:
a.
The president.
b.
The judicial branch.
c.
The Constitution.
d.
Congress.
3. The FDA stands for:
a.
The First Drug Administration.
b.
The Federal Drug Administration.
c.
The Food and Drug Administration.
d.
The Food and Diet Administration.
4. Explain the goal of the Federal Trade Commission.
5. How does the FDA fulfill its role?
6. Who appoints leaders to run administrative agencies?
a.
The President.
b.
Congress.
c.
The judges.
d.
None of these are correct.
7. The process of assigning authority to administrative agencies is called:
a.
An assignment.
b.
A directive.
c.
A passing.
d.
A delegation.
8. What’s the role of an Administrative Law Judge (ALJ)?
9. The Bureau of Economics concentrates on all but the following:
a.
Consumer protection investigation.
b.
Rulemaking.
c.
Lower prices for consumers.
d.
Economic impact of government regulation.
10. Explain the purpose of the Administrative Procedure Act (“APA”).
Endnotes
FTC Approves AOL/Time Warner Merger with Conditions. (December 14, 2000). Federal Trade Commission.
Retrieved from: https://www.ftc.gov/news-events/press-releases/2000/12/ftc-approves-aoltime-warner-
merger-conditions.
Johnson, C. Y., & McGinley, L. (August 16, 2018). “FDA Approves First Generic Version of EpiPen.” The
120
Chapter 10 Government Regulation
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Washington Post. Retrieved from: https://www.washingtonpost.com/news/to-your-health/wp/2018/08/16/fda-
approves-first-generic-version-of-epipen/?utm_term=.04ace0ebeaa6.
Phone Scams. Retrieved from: https://www.consumer.ftc.gov/articles/0076-phone-scams.
The Origins of EPA. EPA: United States Environmental Protection Agency. Retrieved from: https://www.epa.gov/
history/origins-epa.
What is Administrative Law? Tech Policy Lab, University of Washington. Retrieved from:
https://www.youtube.com/watch?v=ow5hZmU7Yfw.
Aguirre, D., & Von Post, R. (December 05, 2013). “Culture’s Critical Role in Change Management.” Strategy
Business. Retrieved from: https://www.strategy-business.com/blog/Cultures-Critical-Role-in-Change-
Management?gko=a3f98.
Mungei, V., et al. (February 22, 2012). “The Role of Education and Training to the Success of TQM
Implementation.” Teamwork and Employee Empowerment. Retrieved from: http://tqmgroups.blogspot.com/p/
role-of-education-and-training-to.html.
Napierala, B. (June 22, 2012). “Five Important Factors in Total Quality Management.” Five Important Factors in
Total Quality Management. Retrieved from: http://aboutthree.com/blog/five-important-factors-in-total-quality-
management/.
Stid, D., & Kramer, K. (N.d). “The Effective Organization: Five Questions to Translate Leadership into Strong
Management.” The Bridgespan Group. Retrieved from: https://www.bridgespan.org/insights/library/
organizational-effectiveness/the-effective-organization-five-questions.
Chapter 10 Government Regulation
121 |
Business_Law_I_Essentials_-_WEB.pdf | 122
Chapter 10 Government Regulation
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Chapter Outline
11.1 History of Antitrust Law
11.2 Antitrust Laws
Introduction
Learning Outcome
•
Analyze the tenets of antitrust laws in the United States.
11.1
History of Antitrust Law
What if the two largest manufacturers of soft drinks, Coca Cola Co. and PepsiCo, merged? It is likely that the
mega-company that resulted would dominate the soft drink industry, squeezing out all of the other smaller
competitors.
Figure 11.1 (Credit: witwiccan/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))
11
Antitrust Law |
Business_Law_I_Essentials_-_WEB.pdf | Figure 11.2
Without antitrust laws, the shelves would have fewer products for consumers to choose from.
Image: Beverages, Bottles, Shelf. (Credit: igorovsyannyko/ pixabay/ License: CC0)
In the late 1800s, concern over this kind of merger, as well as other attempts by large companies to create
monopolies or to control the market, led state and federal lawmakers to take steps to reduce the risks
associated with this type of practice.
Business Trusts
During the late 1800s, the United States became concerned about the development of corporate monopolies
dominating the manufacturing and mining industries (Jurist, n.d.). The end of the Civil War marked the
beginning of large advances in industrialization. Many large companies formed, especially in the oil and steel
industries, which were two industries that the country was beginning to heavily rely on. Manufacturing and
distributing companies grew at a fast pace in a wide variety of industries, ranging from sugar to beef to
tobacco (West, n.d.). The problem was that the growth occurred so rapidly that supply exceeded demand. This
outcome increased competition, and many companies sought to reduce the number of competitors through
forms of restraint of trade such as price-fixing, monopolies, and mergers (West, n.d.).
124
Chapter 11 Antitrust Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Figure 11.3
The oil industry expanded quicker than demand, causing companies to try to remove
competition. (Credit: 15299/ pixabay/ License: CC0)
Some of the competitors were larger and more powerful than others, and they sought to limit the competition
in the market by taking steps to reduce the number of smaller companies who were trying to compete with
them (Federal Trade Commission, n.d.). Some of the larger companies banded together to create business
trusts. A business trust is a trust agreement that allows businesses to maintain profits as beneficiaries, but
legal ownership and management of the company’s property is maintained through the power of trustees
(West, n.d.). These trusts allowed businesses that were members of the trust to grow larger, as they
cooperated with one another and shut out other competitors (West, n.d.).
Unfair Business Practices
Companies tried to create situations that would drive some competitors out of business while solidifying their
own share of the market. This effort resulted in mergers and consolidation practices that placed the largest
share of the industries under the control of just a few, thereby increasing their power. Since the trusts were
able to fix prices and could afford to take some losses, they would drive prices down until competitors were
forced out of business because they could not afford to operate at the lower rates (West. n.d.).
The markets began to consolidate under just a few companies because the smaller competitors continued to
go out of business. The smaller competitors could not compete with the pricing and other practices that the
trusts allowed the cooperative businesses to maintain. This design restricted free trade practices for both
businesses and consumers. The few businesses in the trust, in turn, became more powerful, thus prompting
the government to look for measures to control the situation (Federal Trade Commission, n.d.). The
government determined that laws needed to be created to prevent this form of trade restriction.
Chapter 11 Antitrust Law
125 |
Business_Law_I_Essentials_-_WEB.pdf | Rule of Reason
Unfair business practices did not reside solely with business trusts. Issues also occurred in agreements
between competitors, contracts entered into between sellers and buyers, and practices that created or
maintained cartels, monopolies, and mergers (West, n.d.). There were no specific laws that regulated these
practices, so the courts were not entirely sure how to deal with them. Initially, courts seemed to swing both
ways, both accepting and condemning certain forms of restraint of trade. Rulings were not consistent from
state to state, and guidelines needed to be established. The guiding condition seemed to be whether or not
the restraints prevented other merchants from entering the market (West, n.d.).
The courts used the rule of reason as the standard. The rule of reason explored the goal of the contract,
which was considered either naked restraint or ancillary restraint. Naked restraint occurs as contracts
promote a general restraint of competition. If the restraint was created with a goal of long-term impact
without boundaries, it was considered to be a naked restraint (West, nd.). Ancillary restraint occurs as the
restriction is limited in time and geography (West, n.d.). With ancillary restraint, the restraint would be short-
term and limited in scope. The courts tended to frown upon naked restraint, but were less consistent with
ancillary restraint. Initially, there did not seem to be a comprehensive common law applied similarly from state
to state (West, n.d.). This problem was concerning enough to warrant a solution, and in 1890, the first antitrust
law was enacted (Jurist, n.d.).
Antitrust Laws
Antitrust laws regulate economic competition in an effort to maintain fair trade practices (West, n.d.). They
were created to prevent the restraints on trade created by trusts and other large company practices. These
restraints often resulted in price-fixing, control of production, and control of geographical markets (Jurist,
n.d.). Many states recognized these outcomes as a threat to fair business practices. The federal government
also recognized this issue and developed antitrust laws in 1887 as a result of a Standard Oil trust that was
formed. The Standard Oil Trust occurred as oil companies transferred their stocks to a trustee to create a more
powerful block of oil companies that prevented other oil companies from effectively competing with them
(West, n.d.).
The first antitrust law created was the Sherman Antitrust Act in 1890, which became the basis for subsequent
antitrust laws (Jurist, 2013). The Sherman Act was a good start, but it was not comprehensive enough to
prevent trusts, and large companies continued to exert strong control over industries. At the turn of the
century, a few large companies controlled almost half of all of the nation’s manufacturing assets (West, n.d.).
It became evident that more legislation was necessary. President Theodore Roosevelt dubbed himself a
“trustbuster,” and he began a campaign to create more effective legal endeavors (West, n.d.). Additional
antitrust acts were passed in 1914, including the Clayton Act and the Federal Trade Commission Act. These acts
are still in effect, and since 1914, they have been amended by Congress to continue to expand upon and
solidify the coverage. It is estimated that antitrust laws save consumers millions of dollars a year, as they
prohibit business practices that unfairly raise prices on goods and services (United States Department of
Justice, n.d.).
Conclusion
The original purpose of antitrust legislation, i.e., to foster competition that results in lower prices, more
products, and more equal distribution of wealth between producers, remains relevant today (West, n.d.). Yet,
large companies still seek advantages in trade and work to put competitors out of business. It is important to
126
Chapter 11 Antitrust Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | maintain unrestrained trade and prevent the few from having too much power over the many.
Sources
Federal Trade Commission (n.d.). The antitrust laws. Retrieved from: https://www.ftc.gov/tips-advice/
competition-guidance/guide-antitrust-laws/antitrust-laws.
Jurist (2013). History of antitrust laws. Retrieved from: https://www.jurist.org/archives/feature/a-history-and-
the-main-acts/.
United States Department of Justice (n.d.). Antitrust laws and you. Retrieved from: https://www.justice.gov/
atr/antitrust-laws-and-you.
West’s Encyclopedia of American Law (n.d.). Antitrust law. Retrieved from: >http://iris.nyit.edu/~shartman/
mba0101/trust.htm.
11.2
Antitrust Laws
Antitrust legislation was designed to prevent unfair restrictions on trade and to maintain equal opportunity for
trade for businesses and consumers alike. Throughout the history of antitrust laws, legislation has become
more comprehensive and structured to keep up with the business practices of larger corporations that
continue to seek advantages and control through trade practices.
What Do Antitrust Laws Do?
Antitrust laws were created to prevent unlawful mergers and business practices that could lead to restraint of
trade by others (Federal Trade Commission, n.d.). The laws themselves are somewhat general to allow the
courts the ability to make decisions on these practices, based on changing times and markets (Federal Trade
Commission, n.d.). The three main antitrust laws that are in effect have been in effect for over 100 years and
through many changes in society—from an industrial age to a technological age, and the changing markets
they represent. The federal government created and enforces these three main antitrust laws:
•
The Sherman Antitrust Act
•
The Clayton Act
•
The Federal Trade Commission Act
Each state has its own antitrust laws that pertain to trade practices within each separate state, but federal laws
are able to reach beyond the states to interstate trade.
The Sherman Antitrust Act
The Sherman Act was passed in 1890 and focused on trade restraints that were considered unreasonable
(Federal Trade Commission, n.d.). This Act did not prohibit all forms of trade restraint, since the courts did not
see temporary limited restraints as an issue at the time. A partnership agreement that limited trade to certain
areas for certain partners was considered acceptable. The courts deemed some trade restrictions as
unreasonable, such as price fixing (Federal Trade Commission, n.d.). In some cases, the violation was so
apparent that the violation was considered prima facie, or so evident that it automatically satisfied the
unreasonable standard (Jurist, 2013).
Chapter 11 Antitrust Law
127 |
Business_Law_I_Essentials_-_WEB.pdf | The Sherman Act prohibits all contracts and interactions that unreasonably restrain foreign trade and trade
between states (United States Department of Justice, n.d.). This prohibition does not mean that companies
cannot lower prices on goods in an effort to outsell the competition. Doing so would be considered fair
competition and trade. However, when a company is able to suppress the ability of others to compete through
some intentional unfair business practice, such as forming agreements with competitors to set prices, it is
considered a violation.
Figure 11.4
Competitive pricing is a normal part of business until it involves unfair trade practices. (Credit:
pixabay/ pexels/ CC0)
The Act is a criminal statute, meaning that violation of this Act would result in criminal penalties. Mergers or
other actions that would create agreements to fix prices or bids or allocate customers are considered criminal
felonies (The United States Department of Justice, n.d.). Violations of the Sherman Act could lead to penalties
of up to $100 million for larger corporations and up to $1 million for individuals (Federal Trade Commission,
n.d.). Those convicted could also face up to 10 years in prison. If the amount gained by the conspirators, or the
amount lost by the victims of the crime, is over $100 million, the fine could be increased to twice the amount
gained by the conspirators or lost by the victims—whichever is greater (Federal Trade Commission, n.d.).
The Sherman Act did have limitations. It did not provide clear and specific language, which left the courts to
make decisions on a case-by-case basis, without any consistent precedent on which to rely (West, n.d.).
Precedent occurs as courts make rulings in certain cases, and those rulings are followed in subsequent cases.
This lack of precedent left many larger companies in control of their restraint of trade practices, and new
legislation seemed necessary.
The Clayton Act
The Clayton Act was passed in 1914. The Clayton Act is a civil statute rather than a criminal statute, meaning
that it carries civil penalties rather than prison sentences (United States Department of Justice, n.d.). It
primarily focuses on unfair mergers and acquisitions (Jurist, 2013). This Act sought to create more specific
language to help the courts reduce unfair trade practices. As such, it established four acts as illegal, but not
128
Chapter 11 Antitrust Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | criminal, meaning that they would be tried as civil matters. The four acts are (West, n.d.):
•
Price discrimination, which occurs as the same product is sold to different buyers at different prices
•
Exclusive dealing contracts, which require buyers to purchase only from one business and not
competitors
•
Corporate mergers, which result in the acquisition of competing companies
•
Interlocking directorates, which are boards of competing companies with common members sitting on
each of the boards
The four acts would only be considered illegal when they create monopolies or substantially lessen
competition (West, n.d.). Unions were excluded from mention in the Clayton Act, as Congress did not wish to
treat human labor as a commodity (West, n.d.). This Act was still broad enough to rely on the courts for
interpretation and decisions on a case-by-case basis.
The Clayton Act was amended in 1976 to require companies planning larger mergers and acquisitions to notify
the government in advance and seek authorization (Federal Trade Commission, n.d.). This amendment also
provides individuals who are victims of these practices with the ability to sue for triple damages after harm is
established (Federal Trade Commission, n.d.).
The Federal Trade Commission Act
The Federal Trade Commission Act (FTC Act), also passed in 1914, focuses on unfair methods of competition
and deceptive acts or practices that impact commerce (West, n.d.). All acts that violate the Sherman Act also
violate the FTC Act (Federal Trade Commission, n.d.). The FTC Act works to fill in the gaps of the unfair practices
by condemning all anticompetitive behaviors not otherwise covered in the other federal antitrust laws (West,
n.d.).
Chapter 11 Antitrust Law
129 |
Business_Law_I_Essentials_-_WEB.pdf | Figure 11.5
The Federal Trade Commission was created to oversee fair trade practices. (Credit: Clker-Free-
Vector-Images/ pixabay/ License: CC0)
The FTC Act is only enforceable by the Federal Trade Commission (FTC), which was created as a result of this
Act (Jurist, 2013). The FTC implements the Act’s provisions, and the FTC and the U.S. Department of Justice
(DOJ) are the federal agencies responsible for prosecuting violators in either civil or criminal proceedings,
depending on the act violated. One remedy that the FTC or DOJ can seek is divestiture, which forces the
company to give up one or more of its operating functions (West, n.d.). Another remedy is dissolution, which
would terminate the right of a partnership to exist (West, n.d.).
Exemptions
There are limitations on antitrust laws that have been introduced over the years. These include:
•
Labor – A labor union can organize and bargain within the bounds of antitrust laws, as long as it does not
combine with a nonlabor group.
•
Agriculture and Fisheries – Collective co-ops of agricultural groups or fisheries can form, as long as they
do not engage in restraint of trade.
•
Foreign Trade – Companies can join forces in cooperative activities involving foreign trade exports, as
long as trade within the United States is not restrained.
•
Cooperative Research and Production – Small businesses can cooperatively work together on research
130
Chapter 11 Antitrust Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | joint ventures.
In essence, exemptions are allowed, as long as they do not act to restrain trade in the United States (West,
n.d.). Once restraint of trade becomes a factor, the practices are no longer exemptions and are subject to
antitrust laws.
Conclusion
The three main antitrust laws, namely the Sherman Act, the Clayton Act, and the Federal Trade Commission
Act, all work to prevent unfair trade practices that can substantially harm free competition. They also work to
protect consumers from practices that would control pricing or the ability to buy or engage in services. They
prevent companies from taking actions that would allow them to become too big or too powerful, thus
controlling how, and what, consumers and other businesses can do.
Assessment Questions
1. All of the following are forms of restraint of trade that company might use to reduce competition except:
a.
Monopolies.
b.
Oversupply.
c.
Price-fixing.
d.
Mergers.
2. What is a Business Trust?
3. Distinguish between naked restraint and ancillary restraint.
4. What was the first antitrust law enacted?.
a.
The Clayton Act.
b.
The Federal Trade Commission Act.
c.
The Antitrust Act.
d.
The Sherman Act.
5. What was the original purpose of antitrust legislation?
6. What recourse does the FTC have if an individual or company engages in an unfair trade practice?
a.
Consent order.
b.
Administrative complaint.
c.
Litigation.
d.
All of the above.
7. Each state has its own Antitrust law.
a.
True.
b.
Fasle.
8. Which of the following is not prohibited by the Sherman Act?
a.
Temporary limited restraints.
b.
Temporary restraints.
c.
Naked restraints.
d.
Ancillary restraints.
Chapter 11 Antitrust Law
131 |
Business_Law_I_Essentials_-_WEB.pdf | 9. Which of the following are possible penalties for violation of the Sherman Act?
a.
Up to $100 million for corporations and individuals.
b.
Up to $100 million for individuals.
c.
Up to $100 millions for corporations.
d.
None of these are correct.
10. Which of the following are considered illegal by the Clayton Act?
a.
Price discrimination.
b.
Exclusive dealing contracts.
c.
Corporate mergers.
d.
All of the above.
11. The following are exempt from antitrust laws:
a.
Small businesses.
b.
Coops.
c.
Labor unions.
d.
Agriculture groups even if they engage in restraint of trade.
12. When was the Federal Trade Commission established?
a.
1912.
b.
1914.
c.
1916.
d.
1920.
13. The following are bureaus of the Federal Trade Commission except:
a.
Bureau of Unfair Trade Practices.
b.
Bureau of Consumer Protection.
c.
Bureau of Competition.
d.
Bureau Economics.
14. What is the mission of the Bureau of Competition?
15. Explain the Wheeler-Lea Act.
Endnotes
Sources
Federal Trade Commission (n.d.). The antitrust laws. Retrieved from: https://www.ftc.gov/tips-advice/
competition-guidance/guide-antitrust-laws/antitrust-laws.
Jurist (2013). History of antitrust laws. Retrieved from: https://www.jurist.org/archives/feature/a-history-and-
the-main-acts/.
United States Department of Justice (n.d.). Antitrust laws and you. Retrieved from: https://www.justice.gov/
atr/antitrust-laws-and-you.
West’s Encyclopedia of American Law (n.d.). Antitrust law. Retrieved from: http://iris.nyit.edu/~shartman/
mba0101/trust.htm.
132
Chapter 11 Antitrust Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Chapter Outline
12.1 Unfair Trade Practices
12.2 The Federal Trade Commission
Introduction
Learning Outcomes
•
Analyze laws pertaining to unfair trade practices and the agency that scrutinizes them.
12.1
Unfair Trade Practices
The term “unfair trade practice” describes the use of deceptive, fraudulent, or unethical methods to gain
business advantage or to cause injury to a consumer. Unfair trade practices are considered unlawful under the
Consumer Protection Act. The purpose of the law is to ensure that consumers have the opportunity to make
informed, rational decisions about the goods and services they purchase.
Unfair trade practices include false representation of a good or service, targeting vulnerable populations, false
advertising, tied selling, false free prize or gift offers, false or deceptive pricing, and non-compliance with
manufacturing standards. Alternative names for unfair trade practices are “deceptive trade practices” or
“unfair business practices.”
Section 5(a) (https://www.federalreserve.gov/boarddocs/supmanual/cch/ftca.pdf) of the Federal Trade
Commission Act prohibits “unfair or deceptive acts or practices in or affecting commerce.” Per the rule, unfair
practices are those that cause, or are likely to cause, injury to consumers, those that consumers cannot avoid,
and those in which the benefits of the product or service do not outweigh the deception. Deceptive practices
are defined as those in which the seller misrepresents or misleads the consumer, and the misleading practice
Figure 12.1 (Credit: Carol M. Highsmith collection/ wikimedia/ Attribution 2.0 Generic (CC BY 2.0))
12
Unfair Trade Practices and the Federal Trade Commission |
Business_Law_I_Essentials_-_WEB.pdf | is substantial.
The Federal Trade Commission (FTC) is a federal agency that enforces consumer protection laws. Consumers
may seek recourse for unfair trade practices by suing for compensatory or punitive damages. Plaintiffs do not
have to prove intent. Showing that the practice itself was unfair or deceptive is sufficient.
Figure 12.2
The Federal Trade Commission (FTC) enforces consumer protection laws. (Credit: U.S.
Government/ wikimedia/ License: Public Domain)
Unfair Trade Practices and Examples
Product Guarantees and False Endorsements
Companies must be prepared to honor product guarantees. For example, if a product is advertised with a 50
percent money-back guarantee, then that must be provided to customers who meet the requirement(s)
attached to the guarantee. Similarly, companies may not create false endorsements and testimonials about
their products.
Unfair Advertising
False advertising includes the misrepresentation of a product, service, or price. It may be more expansively
defined to include unfair sales strategies, such as advertising one item and then selling another item in its
place, e.g., one that is higher priced, lower quality and/or less in demand. This method is most commonly
134
Chapter 12 Unfair Trade Practices and the Federal Trade Commission
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | referred to as “bait and switch.” Additional examples of unfair advertising include incorrect pricing, fake
endorsements, deceptive guarantees, making false statements, and providing descriptions that exaggerate
the performance of the product or service.
Taking Advantage of Customers
The FTC also pays particular attention to business ventures that target vulnerable populations. For example,
some telemarketing efforts employ intense pressuring tactics to target seniors and people who don’t speak
English.
E X A M P L E 1 2 . 1
For months, Ivan had searched for just the right window curtain to match the décor of his new high rise
condo. Finally, while browsing through Amazon, he saw two gray velvet curtains that featured a damask
pattern, with taupe and gold accents and specks of ice blue glitter accents. He could not have designed a
more perfect color palette for the window treatments if he tried. Moreover, the velvet blackout touch was
just what he needed. Excited, he hit the “Buy Now” button and waited a couple of days for his order to
arrive. When it did, what a huge disappointment! He could see, if he stared long and hard enough, how
someone with a vivid imagination might consider the curtain to be an abstract interpretation of what was
advertised. However, most people would see that the product was not at all close to what was advertised.
The velvet was closer to linen, the damask pattern was closer to swirls, and the taupe and gold accents with
specks of ice blue were closer to silver and purple, with specks of mauve. After running a Google reverse
image search of the original product photo, he saw it featured in an interior design magazine. When Ivan
looked up the product endorsements and reviews, he saw that all of the reviewers had only posted reviews
for that particular seller’s products, and that they had posted nothing but glowing reviews for each of the
products. It was clear to Ivan that the seller was guilty of false advertising, as well as faking endorsements.
Ivan has enough information to submit a consumer complaint to the Federal Trade Commission.
E X A M P L E 1 2 . 2
Devin is involved in the telemarketing of spy gadgets, such as bugs and bug detectors. He has had a lot of
trouble finding a market for these products. One day, he speaks with an older citizen who asks him about
the benefits of the bug detector. Devin starts to knowingly make unsubstantiated claims that there have
been news reports that home bugging is on the rise. His false claims works like a charm. Spooked, the
elderly customer buys the most expensive bug detector product. Seeing his success, Devin purchases a
report of households in his geographic selling area that are headed by people over the age of 70. Over the
next few months, his sales increase at an explosive rate. When he is recognized by management for his
leading sales numbers, they also inquire about the secret to his success as they seek to replicate it in
training materials for other sales professionals. When Devin proudly explains his tactics, he is terminated by
the company. The company calls the customers impacted by his false claims, explains that there was a
misrepresentation by one their sales associates regarding the scope of known bugging activity, allows them
to keep their bug detectors, and refunds them the money they spent purchasing the products. The sales
associate engaged in unfair trade practices, but the company took appropriate steps to correct it.
Chapter 12 Unfair Trade Practices and the Federal Trade Commission
135 |
Business_Law_I_Essentials_-_WEB.pdf | Misrepresenting a Product
At times, the FTC may be quite technical in its definition of certain terms. For this reason, companies should be
very clear about their usage of various phrases and words. For example, the word “new” may only be used to
refer to a product that is less than six months old. Other terms may be the subject of debate or litigation, such
as whether a lotion will actually “rejuvenate” skin or whether a tablet will actually “cure” baldness. Indeed, a
sweater should not be called “wool” unless that is its complete composition. There are many examples, so it is
important for businesses to have an understanding of the FTC’s rules on this topic.
Giving Misleading Price Information
The FTC sanctions misleading price information as an unfair trade practice. Examples of misleading price
information include false sales in which a “limited time offer” might actually be available forever, or running a
“Going Out of Business” sale without any plans to go out of business while advertising that items are
discounted, although the prices have not changed.
Failing to Disclose Pertinent Information
Merchants must disclose facts that would reasonably influence the consumer’s decision to make a purchase.
Withholding pertinent information from customers may be viewed by the FTC as equal in severity to the
process of using overtly incorrect or deceptive information. For example, sellers should always disclose the full
price of their products or services before accepting payment for them.
12.2
The Federal Trade Commission
The FTC was created in 1914 to address the problem of monopolies and trusts. Following the Civil War, a wave
of consolidation and growth among companies triggered increased public debate. Through handshake
agreements, issuance of stock, and pooling arrangements, companies could fix prices and outputs, thus
effectively stopping competition and raising consumer prices. A substantial number of mergers gave control
over key industries to small groups of businesses. Where companies did not merge, other arrangements were
made to have a similar effect. Conglomerates controlled most of the relevant industries that produced
household necessities. Goods used in production were also the product of highly concentrated trusts, such as
the United States Steel Corporation and the International Paper Company. Concerns about industrialization
and a changing economy, with shifting norms for personal lives, triggered antitrust sentiment.
E X A M P L E 1 2 . 3
A brick and mortar store has an online promotion for a “buy one, get one” offer for the season’s hottest
new phone, stating that the offer is only available on Black Friday. The store opens at 5:00 a.m., and
customers start lining up with their sleeping bags in tow the evening prior to the morning opening time.
After customers almost stampede one another, they learn that they will have to also purchase a phone plan
that is inflated by 100% of its regular price to qualify for the deal. Nowhere in the literature or promotions
was the phone plan, or its over-inflated price, mentioned as a requirement to get the buy one get one free
phone deal.
136
Chapter 12 Unfair Trade Practices and the Federal Trade Commission
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Figure 12.3
The Federal Trade Commission prevents monopolies, like that of U.S. Steel in the early 20th
century. (Credit: Bruce McAllister/ wikimedia/ License: Public Domain)
The perceived unfairness and fears caused by the consolidation of businesses created strong anti-business
sentiment and increasing cries for price controls to be considered as a remedy for heavily concentrated
industries. These organizations posed economic and social problems that became a large social concern. In
response, the Federal Trade Commission (FTC) was created with broad powers to investigate and propose
formal recommendations to companies about their competitive practices. The FTC did not formally have a
consumer protection mission until the passage of the Wheeler-Lea Act in 1938. This act gave the FTC the power
to combat false advertising for any foods, drugs, medical devices, or cosmetics.
In addition to the Wheeler-Lea Act, subsequent amendments to the FTC Act, as well as judicial respect toward
the agency, broadened the power and jurisdiction of the FTC.
Today, in addition to its original antitrust roots, the FTC enforces consumer protection laws.
Bureaus of the FTC
Several bureaus now stand in support of the FTC’s efforts.
Bureau of Consumer Protection
The Bureau of Consumer Protection protects consumers against unfair trade practices. Bureau attorneys
enforce consumer protection laws issued by the FTC. In addition to enforcement actions, the Bureau’s
functions include investigations and consumer and business training. Unfair trade practices in advertising and
marketing are a main focus, as well as privacy, financial products and practices, and identity protection. The
Bureau also manages the United States National Do Not Call Registry and investigates telemarketing fraud.
Chapter 12 Unfair Trade Practices and the Federal Trade Commission
137 |
Business_Law_I_Essentials_-_WEB.pdf | Bureau of Competition
The Bureau of Competition’s purpose is to eliminate and prevent “anticompetitive” business practices related
to the enforcement of antitrust laws. The FTC and the Department of Justice share responsibility for
enforcement of antitrust laws.
Bureau of Economics
The Bureau of Economics supports the Bureau of Competition and Bureau of Consumer Protection by
providing subject matter expertise regarding the economic impacts of FTC legislative activity.
FTC Activities
The FTC investigates issues raised through a number of sources, including consumer, business, and media
reports. If the FTC concludes that there was unlawful conduct, it may seek several forms of recourse. These
include the pursuit of voluntary compliance through a consent order, the submission and filing of
administrative complaints, or the initiation of a federal action and litigation.
The FTC has the power to create rules regarding widespread industry practices. Rules created in this fashion to
address systemic issues are called trade rules.
Assessment Questions
1. Define unfair trade practices.
2. All of the following are considered unfair trade practices except:
a.
Targeting vulnerable populations.
b.
Charging extremely high prices.
c.
False advertising.
d.
False representation of a good or service.
3. What is a bait and switch?
4. Describe the role of the Federal Trade Commission.
5. The following are examples of a company giving misleading price information except:
a.
Advertising “Limited Time Offer” when the offer is available forever.
b.
Advertising “Going Out of Business” when the company plans to stay in business.
c.
Advertising the product as “New” when the product is more than 6 months old.
d.
Advertising “Buy One, Get One” without informing consumers that they must buy another product or
service to get the deal.
Endnotes
The Consumer Protection Act: Unfair Trade Practices. Retrieved from: https://www.ftc.gov.bb/library/
2003-06-13_unfair_trade_practices.pdf.
Lumen Learning. (n.d.). Business and the Legal Environment. Retrieved from:
138
Chapter 12 Unfair Trade Practices and the Federal Trade Commission
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | https://courses.lumenlearning.com/buslegalenv/chapter/27-3-unfair-trade-practices/.
Holt, W. S. (2010). Federal trade commission: Its history, activities and organization. Gale Ecco, Making Of Mode.
About the FTC. (2018, July 17). Retrieved from: https://www.ftc.gov/about-ftc.
Consumer Information, Federal Trade Commission. (n.d.). Retrieved from: https://www.consumer.ftc.gov/.
Federal Trade Commission, USA.gov. (n.d.). Retrieved from: https://www.usa.gov/federal-agencies/federal-
trade-commission.
Statutes Enforced or Administered by the Commission. (n.d.). Retrieved from: https://www.ftc.gov/
enforcement/statutes.
Chapter 12 Unfair Trade Practices and the Federal Trade Commission
139 |
Business_Law_I_Essentials_-_WEB.pdf | 140
Chapter 12 Unfair Trade Practices and the Federal Trade Commission
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Chapter Outline
13.1 Introduction to International Law
13.2 Sources and Practice of International Law
Introduction
Learning Outcome
•
Explain international law and its role in business.
13.1
Introduction to International Law
In 1945, President Harry Truman stated, “When Kansas and Colorado have a quarrel over the water in the
Arkansas River they don’t call out the National Guard in each state and go to war over it. They bring a suit in
the Supreme Court of the United States and abide by the decision. There isn’t a reason in the world why we
cannot do that internationally” (Cheeseman, 2016, p. 903). Customs, which vary among global communities
and international organizations, are a primary reason why the world cannot pursue such an answer to trade
and commerce dealings. The priorities and aims for Chinese businesses differ from those of Brazil. Each of
those two countries have radically different business perspectives from the United States. For this reason,
international law utilizes customs, treaties, and organizations to guide relationships among nations, with the
goal of allowing each country as much leverage as possible over its own business dealings.
Figure 13.1 (Credit: geralt/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))
13
International Law |
Business_Law_I_Essentials_-_WEB.pdf | Figure 13.2
International laws are based on customs, treaties, and organizations that guide partnerships
among nations. (Credit: GDJ/ pixabay/ License: CC0)
International Law
International law relates to the policies and procedures that govern relationships among nations (Clarkson,
Miller, & Cross, 2018). These are crucial for businesses for multiple reasons. First, there is not a single
authoritative legislative source for global business affairs, nor a single world court responsible for interpreting
international law (Cheeseman, 2016, p. 903). There is also not a global executive branch that enforces
international law, which leaves global business affairs particularly vulnerable.
Secondly, if a nation violates an international law and persuasive tactics fail, then the countries that were
violated, or international organizations tasked with overseeing global trade, may act. Often these actions use
force to correct the offenses and may include economic sanctions, severance of diplomatic relations, boycotts,
or even war against the offending nation (Clarkson, Miller, & Cross, 2018, p. 439).
The purpose of international laws is to permit countries as much authority as possible over their own
international business affairs, while maximizing economic benefits of trade and working relationships with
other nations. Since many countries have historically allowed governance by international agreements when
conducting global business, there exists an evolving body of international laws that facilitate global trade and
commerce.
142
Chapter 13 International Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | U.S. Constitutional Clauses
There are two important clauses in the U.S. Constitution related to international law. First, the Foreign
Commerce Clause enables Congress to “regulate commerce with foreign nations” (Cheeseman, 2016, p. 904).
This clause permits U.S. businesses to actively negotiate and implement taxes or other regulations as they
relate to international commerce. However, businesses cannot unduly burden foreign commerce. For
example, General Motors, which is based in Michigan, cannot suggest that the state impose a 50 percent tax
on foreign-made automobiles sold in the state, while not imposing the same tax on U.S.-made vehicles.
Michigan can, however, impose a 10 percent tax on all automobile sales in the state to offset the costs of
foreign trade and commerce.
The second important clause related to international law is the Treaty Clause, which states that the president
has the power “by and with the advice and consent of the senate” to create treaties with other nations
(Clarkson, Miller, & Cross, 2018, p. 440). This clause restricts treaties to federal authority, meaning that states
do not have the power to enter a treaty with another nation. For example, the United States and Mexico can
sign a treaty to reduce trade barriers between both nations, but the state of Texas cannot sign a treaty with
Mexico to reduce trade barriers between Texas businesses and Mexico. Additionally, any treaties established
with other countries become U.S. law, and any conflicting law is null and void.
Primary Sources of International Law
International customs, treaties, and organizations are the primary sources of international law (Clarkson,
Miller, & Cross, 2018, p. 439).
Figure 13.3
Three distinct components are sources for how international law is understood, defined, and
interpreted around the world. (Modification of art by BNED Credit: CC BY NC SA)
These three components work together to guide how nations understand, define, and interpret international
laws that govern global business affairs.
International Customs
Customs are general practices between nations that guide their business relationships. According to the
Chapter 13 International Law
143 |
Business_Law_I_Essentials_-_WEB.pdf | Statute of the International Court of Justice, international customs are “accepted as law” (Clarkson, Miller, &
Cross, 2018, p. 439). While customary international law (CIL) is not written, nor does it require ratification to
become binding, CIL nonetheless provides guidelines for how nations conduct business affairs (Bradley &
Gulati, 2010, p. 204). One example of a custom is the international protection of ambassadors. For thousands
of years, ambassadors have been protected while serving diplomatic missions. For this reason, countries
protect foreign ambassadors with the understanding that any harm caused to ambassadors would be a
violation of international law.
International Treaties
Treaties and other agreements between nations are authorized and ratified by the countries that acknowledge
their legality. There are two different types of agreements: bilateral, which is formed by two nations; and
multilateral, which is formed by several nations. The Peru-United States Trade Promotion Agreement is an
example of a bilateral agreement. It was signed in 2006, ratified by Peru the same year, and ratified by the
United States in 2007. This bilateral agreement is considered beneficial to the United States because it
improves access to Peruvian goods, while promoting security and democracy in the South American country.
The North American Free Trade Agreement, or NAFTA, is an example of a multilateral agreement. It was
ratified in 1994, when Mexico joined the previous trade agreement between the United States and Canada. In
September 2018, the Trump administration successfully completed re-negotiations with Mexico and Canada
that lasted over one year. Among other aims, these negotiations worked to increase auto industry wages for
workers in Mexico and modify pharmaceutical regulations with Canada.
International Organizations
International organizations are comprised of officials who represent member nations that have established a
treaty to oversee shared interests, including trade and commerce. The U.S. participates in more than 120
bilateral and multilateral organizations around the world. International organizations adopt resolutions that
standardize behavior and create uniform rules related to trade and commerce. Two of the most significant
international organizations established in the twentieth century that significantly impact U.S. trade and
commerce are the United Nations and the European Union.
United Nations
The United Nations (UN) was created as a multilateral treaty in 1945. The UN’s organizational goals include
maintaining global peace and security, promoting economic and social cooperation, and protecting human
rights, especially related to women and children (Cheeseman, 2016, p. 905). The UN General Assembly
includes representatives from each member nation. As of 2018, the UN acknowledges 195 sovereign states,
with all but two participating as full members. These two, Palestine and the Vatican City, are classified as
“observer states.” Six additional countries are not UN members, but are recognized as a country by at least
one UN member country: Abkhazia, Kosovo, Northern Cypress, South Ossetia, Taiwan, and Western Sahara.
The UN Security Council includes five permanent members and 10 countries selected by the General
Assembly to serve two-year terms. The five countries that hold permanent membership are China, France,
Russia, the United Kingdom, and the United States (Cheeseman, 2016, p. 558). This Council is primarily
responsible for overseeing global peace and security measures. The World Bank is a UN organization, financed
by contributions from developed countries and headquartered in Washington, D.C. Its primary functions
144
Chapter 13 International Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | include providing money to developing countries to fund projects that relieve suffering, including building
roads and dams, establishing hospitals, developing agriculture, and other humanitarian efforts. The World
Bank provides both grants and long-term low interest rate loans to countries, often granting debt relief for
outstanding loans (Cheeseman, 2016, p. 559).
The United Nations Commission International Trade Law is one of the most important international
organizations to date, establishing the 1980 Convention on Contracts for the International Sale of Goods
(CISG), which will be discussed further in the next section.
European Union
The European Union (EU) is a regional international organization that includes many countries in Europe. It
was established to create peace across the region and promote economic, social, and cultural development
(Cheeseman, 2016, p. 561). As of 2018, there are 28 countries affiliated with the EU, although the United
Kingdom has begun steps to withdraw its membership. Additionally, Macedonia is actively seeking a path
toward EU membership, although as of September 2018, the country’s citizens remain divided. The EU
organization has established a treaty for its members that creates open borders for trade among member
nations, especially for capital, labor, goods, and services. The impact on U.S. commerce is significant, as the EU
represents more than 500 million people and a gross community product that exceeds that of the United
States, Canada, and Mexico combined (Cheeseman, 2016, p. 561).
Sovereignty
National sovereignty defines a nation. While clearly defined borders and independent governments also set
parameters for a nation, sovereignty is an important legal principle that allows nations to enter negotiated
treaties with other countries and honor territorial boundaries. It is among the most important international
law principles, thus greatly impacting international trade and commerce.
Since the 1800s, most established nations allowed for absolute sovereignty among the global community.
However, by the 1940s, that allowance was significantly reduced, as countries revisited sovereignty in light of
globalization, transportation, and communication advances, and the rise of international organizations
(Goldsmith, 2000, p. 959). Consequentially, doctrines of limited immunity were created that established
guidelines for how countries may prosecute, or hold foreign nationals accountable, during international trade
and commerce dealings.
A doctrine of sovereign immunity states that countries are granted immunity from lawsuits in courts of
other countries (p. 569). Although the United States initially granted absolute immunity to foreign
governments from lawsuits in U.S. courts, in 1952, the United States adapted federal law to qualified immunity,
which is the immunity regulation adopted in most Western nations. This law led to the Foreign Sovereign
Immunities Act of 1976, allowing U.S. governance over lawsuits against other nations in the United States in
either federal- or state-level courts. Simply stated, a foreign country is not immune to lawsuits in the United
States when the country has waived its immunity, or if the commercial activity against which the lawsuit is
intended causes a direct effect in the United States.
13.2
Sources and Practice of International Law
International law is primarily governed by customs, treaties, and organizations that influence how laws are
understood, interpreted, and enforced around the world. Since there is not a central court to enforce
Chapter 13 International Law
145 |
Business_Law_I_Essentials_-_WEB.pdf | international law, each country utilizes its own courts to settle disputes. Collective action, reciprocity, and
shaming are three examples of non-legislative methods that influence trade when enacted against nations
that violate international law.
Figure 13.4
International laws are enforced through positive and punitive measures that seek to uphold the
global integrity of trade and commerce among all nations. (Credit: qimono/ pixabay/ CC0)
Sources of International Law
The sources of international law are customs, treaties, and organizations, as discussed in the previous section.
These three components work synergistically to influence how the international community facilitates
business trade and commerce. More importantly, international law is enforced when a country violates the
principles set forth by globally shared customs, treaties, and organizations.
One of the most important governing documents for international law is the United Nations Convention on
Contracts for the International Sale of Goods (CISG), which was established in 1980. This law governs
contracts of countries that have ratified it as the priority contract for trade. By January 2018, 84 countries had
adopted CISG, including the countries that account for more than two-thirds of all global trade. Those
countries include the United States, Canada, China, Japan, Mexico, Argentina, Brazil, and most European
countries. The CISG is enforced whenever international transactions occur without the presence of written
contracts to govern those transactions. There are limits to the CISG, however, as the CISG does not apply to
consumer sales or contracts for services (Clarkson, Miller, & Cross, 2018, p. 376).
International Principles and Doctrines
There are three significant principles that help establish and enforce international law: the Principle of Comity,
the Act of State Doctrine, and the Doctrine of Sovereign Immunity.
The Principle of Comity states that nations will defer to the laws and decrees of other nations when those
laws are consistent with their own, essentially upholding reciprocity between nations with similar laws. For
example, a U.S. court will most likely uphold a business contract as valid even if it was drafted in England, since
the United Kingdom’s legal procedures are consistent with U.S. procedures (Cross & Miller, 2018, p. 216).
The Act of State Doctrine is a law applicable in England and the United States. It states that these two nations
146
Chapter 13 International Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | will not pass legal judgement on public acts committed by a recognized government if those acts occur within
that government’s own territory (Cross & Miller, 2018, p. 216). For example, the United States will not file a
lawsuit against Petrobras, a Brazilian oil company, alleging price fixing, since the act of pricing oil occurs in
Brazil, which is a nation that holds control over its own natural resources.
The Doctrine of Sovereign Immunity, which was introduced in the previous section, states that foreign
nations are immune from U.S. jurisdiction when certain circumstances are applied. However, there are
exceptions to this law. If a foreign country conducts commercial business activity in the United States and an
entity in the United States files a lawsuit against the foreign business, then the foreign state is not immune
from U.S. jurisdiction (Cross & Miller, 2018, p. 216).
International Law Enforcement
One of the most important considerations for international business is understanding that companies
operating in foreign nations are subject to the laws of those nations (Cross & Miller, 2018, p. 212). When
international laws are violated, disputes are often resolved through the legal systems within individual nations.
Most countries have either common law or civil law systems. Common law systems operate independently by
developing their own rules that govern areas of business law, such as torts and contracts. The United States
has a common law system. One-third of all people in the world live in nations in which common law is
practiced. Civil law systems base their legislation on Roman civil law, which utilizes statutory codes as the
primary source of law (p. 212).
Common Law
Civil Law
Australia
Malaysia
Argentina
Indonesia
Bangladesh
New Zealand
Austria
Iran
Canada
Nigeria
Brazil
Italy
Ghana
Singapore
Chile
Japan
India
United Kingdom
China
Mexico
Israel
United States
Egypt
Poland
Jamaica
Zambia
Finland
South Korea
Kenya
France
Sweden
Germany
Tunisia
Greece
Venezuela
Table 13.1
Impact on International Trade
There are three international law enforcement methods that can radically impact trade: collective action,
Chapter 13 International Law
147 |
Business_Law_I_Essentials_-_WEB.pdf | reciprocity, and shaming.
Collective action occurs when businesses work collectively to strengthen their resources and achieve a
shared goal. In February 2018, the UN Conference on Trade and Development Secretary-General argued that
collective action can be one of the most effective methods for protecting international trade in the current
global climate. Due to recent trade restructuring from the United States and the United Kingdom (pending its
withdrawal from the EU), collective action was promoted as a way to “harness energy that will not fragment
the [international trade] system” (UNCTAD, 2018). By leveraging nations to defend “rules-based multilateral
trading systems as a force for creating inclusive prosperity,” the Secretary-General promoted collective action
as the primary way to assure continued international peace and economic viability for generations to come.
Reciprocity is central to international trade and at the core of CIL. It happens most commonly in international
business exchanges as countries lower import duties, or other trade barriers, in exchange for mutual
arrangements extended by the other country. Reciprocity can be beneficial to the nations involved, or it can be
punitive. In 2016, presidential candidate Donald Trump campaigned for an international trade climate that
would produce fairer options for the United States. Since his inauguration, he has increasingly pressured the
global community by imposing taxes on imports from Canada, China, the EU, and Mexico, each of which has
retaliated in reciprocity. In 2018, China accused the United States of launching the “largest trade war in
economic history,” of which the final global impacts remain largely unknown (BBC, 2018).
Shaming is a deliberate attempt to negatively impact a state, regime, or governmental leader’s reputation by
publicizing and targeting violations of international laws, including customary norms, treaty breaches, and
violations of organizational expectations (Gopalan & Fuller, 2014, p. 75). However, shaming is not viewed as
particularly effective without more concrete measures to accompany it (Klymak, 2017). A recent research study
conducted by the Department of Economics in Dublin, Ireland, found that there is no evidence to suggest that
there has been a decrease in the imports of goods to the United States from countries where foreign goods
are likely produced by child and forced labor. Despite media coverage and the International Labour
Organization’s coverage that routinely shames certain nations for producing goods by child or forced labor,
those goods are nonetheless regularly imported for international sale.
Assessment Questions
1. What is International law?
2. The following are clauses in the U.S. Constitution that relate to international law.
a.
Treaty Clause.
b.
Foreign Commerce Clause.
c.
Both a and b.
d.
Neither a nor b.
3. Explain the European Union.
4. What is the Doctrine of Sovereign Immunity?
5. The UN Security Council is made up of:
a.
5 members and 10 countries.
b.
10 members and 5 countries.
c.
10 members and 10 countries.
d.
5 members and 5 countries.
148
Chapter 13 International Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | 6. Sources of international law include:
a.
Customs, treaties, and laws.
b.
Customs, treaties, and edict.
c.
Treaties, laws, and edicts.
d.
Customs, treaties, and organizations.
7. Explain the principle of comity.
8. Compare and contrast common law systems vs. civil law systems.
9. How many countries have adopted the United Nations Convention on Contracts for the International Sale of
Goods (CISG)?
a.
74.
b.
84.
c.
94.
d.
104.
10. All of the following are international law enforcement methods except:
a.
Collective action.
b.
Reciprocity.
c.
Shaming.
d.
All of the above.
Endnotes
Bradley, C. A., & Gulati, M. (2010). Withdrawing from international custom. The Yale Law Journal, 120, 202–275.
Cheeseman, H. (2016). Business law: Legal environment, online commerce, business ethics, and international issues
(9th ed.). Boston, MA: Pearson Education.
Cheeseman, H. (2016). Legal environment of business: Online commerce, business ethics, and global issues (8th
ed.). Boston, MA: Pearson Education.
Clarkson, K. W., Miller, R. L., & Cross, F. B. (2018). Business law: Texts and cases (14th ed.). Boston, MA: Cengage
Learning.
Goldsmith, J. (2000). Review: Sovereignty, international relations theory, and international law. Stanford Law
Review, 52(4), 959–986.
BBC. (2018, September 18). US-China trade row: What has happened so far? BBC News. Retrieved from:
https://www.bbc.com/news/business-44529600.
Clarkson, K. W., Miller, R. L., & Cross, F. B. (2018). Business law: Texts and cases (14th ed.). Boston, MA:
Cengage Learning.
Cross, F. B., & Miller, R. L. (2018). The legal environment of business: Texts and cases (10th ed.). Boston, MA:
Cengage Learning.
Gopalan, S., & Fuller, R. (2014). Enforcing international law: States, IOs, and courts as shaming reference
groups. Brooklyn Journal of International Law, 39(1), 73–158.
Klymak, M. (2017). The trade impacts of naming and shaming of forced and child labor. Trinity Economic
Papers, 1–41. Retrieved from: http://www.tcd.ie/Economics/TEP/2017/tep1517.pdf.
Chapter 13 International Law
149 |
Business_Law_I_Essentials_-_WEB.pdf | UN. (2018, February 19). Collective action is key to defending trade, Geneva dialogue hears. UN Conference on
Trade and Development News. Retrieved from: https://unctad.org/en/pages/
newsdetails.aspx?OriginalVersionID=1669.
150
Chapter 13 International Law
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Chapter Outline
14.1 Liability Under the Securities Act
14.2 The Framework of Securities Regulation
Introduction
Learning Outcome
•
Describe the Securities Exchange Act of 1934 and its impact on business.
14.1
Liability Under the Securities Act
As explained in the previous section, many companies were initially irritated by the creation of the Securities
Exchange Act of 1934, as it created a myriad of legal responsibilities and potential liabilities that impacted their
business models. Companies came to recognize that they needed legal counsel and internal systems in place
to ensure that they were in compliance. The liabilities for not complying with the Securities and Exchange Act
of 1934 include not only monetary fines, but also civil penalties, and in some cases, criminal proceedings.
Insider trading is one violation that can result in criminal charges.
Insider Trading
While laws vary from country to country, insider trading can be understood by what the SEC defines as the
“buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the
basis of material, nonpublic information about the security.” The word fiduciary comes from the Latin word
Figure 14.1 (Credit: Sam Valadi/ flickr/ Attribution 2.0 Generic (CC BY 2.0))
14
Securities Regulation |
Business_Law_I_Essentials_-_WEB.pdf | for trust and refers to someone who is charged with the responsibility to act in the best interest of the other
party. In the case of businesses, fiduciaries are expected to act in the best interests of their investors.
However, they are often aware of information that the public is not. This knowledge has important
implications as addressed by Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, which
prohibits the purchase or sale of securities on the basis of "material nonpublic information,"; meaning
information of any kind that would impact the market price of securities that has not been disclosed to the
public, i.e., insider information. The directors, large shareholders, and officers of companies frequently have
access to nonpublic information that could affect the future value of a security. While an individual, as
opposed to an entire company, is often charged as an insider trader, such charges can affect the entire
company’s reputation, putting it in a negative light and eroding investor trust.
One instance of insider trading that received widespread media attention involved Martha Stewart, who in
2003 became the subject of legal scrutiny after selling her shares in the pharmaceutical company ImClone.
Following the advice of her broker, David Bacanovic, Stewart sold all of her shares of ImClone before it lost 16
percent of its value. Bacanovic represented ImClone CEO Sam Waksal, who was selling $5 million of his
ImClone shares. While Bacanovic claimed he did not know why, he shared this information with Stewart. As it
turned out, the FDA had not approved ImClone’s primary pharmaceutical product, Erbitux, which was a
setback that only insiders were privy to. Stewart avoided a $45,673 loss by selling her shares before the public
announcement. Even though Stewart may not have known exactly why ImClone would go down in value, the
court decided that her decision to act upon her broker’s suggestion constituted a wrongdoing. Stewart’s role
as a public figure was also relevant to this decision, as explained by SEC’s Director of Enforcement Stephen M.
Cutler, who said, “It is fundamentally unfair for someone to have an edge on the market just because she has
a stockbroker who is willing to break the rules and give her an illegal tip. It’s worse still when the individual
engaging in the insider trading is the Chairman and CEO of a public company.”
Figure 14.2
Insider trading can result in criminal conviction and possibly jail time. (Credit: Suzy Hazelwood/
pexels/ License: CC0)
Insider trading is not always illegal. In certain instances, individuals in possession of insider knowledge can
disclose their trading activity to the SEC. However, disclosure alone is not enough to make trading on the basis
of insider information legally acceptable. Another instance in which the officers of publicly held companies can
152
Chapter 14 Securities Regulation
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | legally transact securities involves pre-arranged trading plans. For example, SEC Rule 10b5-1 permits
executives at public companies to transact securities so long as it is arranged in good faith beforehand to take
place on certain predetermined future dates and involves pre-set amounts. So long as these criteria are
followed, they are granted safe harbor. Safe harbor, in this context, refers to exemption from insider trading
charges for compliant pre-arranged equity trades.
Schedule 13D
In 1968, the Williams Act amended the Securities Exchange Act of 1934 so that investors could have advance
warning of possible corporate takeovers. If someone (individual/corporation) becomes the beneficial owner
of more than 5% of a company’s stock, that entity must file a Schedule 13D with the SEC within 10 days of
purchase. A beneficial owner is anyone with “voting and investment power over their shares.” There are a few
exceptions that apply, such as qualified institutional investors—large investors who are deemed to have
sophisticated knowledge of securities such that they do not need the same level of protection as general
investors. Insurance companies, state employee benefits plans, and investment companies are examples of
qualified institutional investors who are allowed to report their holdings at the end of the calendar year.
Insider Transactions
Corporate insiders are those officers, directors, and beneficial owners who own more than 10% of a class of
securities, registered under Section 12 of the Securities Exchange Act of 1934. Corporate insiders must file a
statement of ownership with the SEC to be in compliance, and as of August 27, 2002, the SEC implemented
new rules that shortened the time period to report insider transactions. It is important for a company to have
internal controls and a system to ensure their corporate insiders are reporting their trades in a timely fashion.
Companies that do not implement and enforce compliance procedures can become liable for the actions of
their employees who fail to follow the law.
Reporting Requirements
Publicly owned companies that meet certain size requirements are called reporting companies, and per
Section 13(a) of the Securities Exchange Act of 1934, they must file periodic disclosures. The purpose of these
disclosures is to help investors make educated decisions regarding how to invest their money. These reports
include information about a company’s line of business, corporate officers and directors, and financial
statements.
•
Form 10-K. Form 10-K, also known as the annual report, contains audited financial statements. Audited
financial statements have been reviewed by one or more CPAs who are not affiliated with the company
and who provide an objective opinion about whether or not the financial statements, such as the balance
sheet, income statement, statement of changes to retained earnings, and cash flow statement, conform
with accounting standards known as the Generally Accepted Accounting Principles (GAAP). When the
Securities Exchange Act of 1934 was first passed, most companies’ annual reports contained only the bare
minimum amount of information. However, over time, companies came to view their annual reports as a
way to not only comply with SEC requirements, but also to attract new investors and impress securities
analysts, or financial professionals who study various industries to make recommendations on whether a
security should be bought, held, or sold. Today, many annual reports contain not only the required facts,
Chapter 14 Securities Regulation
153 |
Business_Law_I_Essentials_-_WEB.pdf | but also compelling narratives that detail the company’s mission and strategic goals. The annual reports
of certain companies—for example, Berkshire Hathaway, written by Warren Buffett and Charlie
Munger—provide not only their opinions on their own operations, known as the management
discussion, but also their thoughts on the economy overall. The Form 10-K is a large responsibility for a
company because it must disclose the company’s analysis of its financial conditions, potential market
risks, internal controls, legal proceedings, defaults, and other information that is deemed important for
investors to make sound investment decisions.
•
Form 10-Q. Form 10-Qs are quarterly unaudited financial statements that contain financial information.
Since they are unaudited, they are less expensive and time-consuming for the company to prepare;
however, investors do not have the additional assurance that they have been analyzed by a neutral CPA.
•
Form 8-K. Certain events require the company to file a Form 8-K, such as a change in the company’s
officers, mergers, or declarations of bankruptcy. These are required to be filed within four business days
with the SEC.
•
Proxy Statements. Proxy statements are documents that the SEC requires that shareholders of
companies with securities registered under Section 12 of the Securities Exchange Act of 1934 receive to
allow them to vote on issues that will be decided at a stockholder meeting. This process is commonly
applied when voting for directors or deciding corporate actions. Even shareholders who own just one
share of a company receive proxy statements; thus, the process of sending out these statements is a
large undertaking for companies. While some companies still use the mail to deliver proxy statements,
others send a “Notice of Internet Availability of Proxy Materials” to shareholders a minimum of 40 days
before the shareholders’ meeting.
Ongoing Responsibilities
Businesses must stay current with changes in securities laws that impact their liabilities and responsibilities.
The Exchange Act allows the SEC to make new laws, like it did in 2000 with Regulation FD, which stands for “fair
disclosure”. In 2013, the SEC started to allow the use of social media channels, in certain circumstances, as a
means of distributing information to shareholders.
Summary
These two sections have provided an overview of some of the most important points of the Securities
Exchange Act of 1934. Considering the sheer number of exceptions and complexities, coupled with today’s
rapidly changing technological and political climates, a successful company needs competent legal counsel to
help it navigate the compliance requirements of the SEC. While certain illegal actions can be due to malicious
intent, such as insider trading, this situation is not always the case; a corporate insider can fail to comply
simply because he or she is not aware of the nuances of the law.
14.2
The Framework of Securities Regulation
The Securities Exchange Act of 1934
In 1929, the United States stock market crashed and lost $25 billion, which would be approximately $319 billion
today. The Stock Market crash of 1929 was one cause of the American Great Depression of the 1930s, which
caused the failure of nearly half of American banks and created unemployment rates of almost 25 percent by
154
Chapter 14 Securities Regulation
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | 1933. These dire economic conditions created the need for breadlines, quite literally, hungry people who
waited in line at charitable and government organizations for loaves of bread, and shanty towns, or areas
where families who had lost their homes lived in cloistered tents on the outskirts of cities. Farmers could not
even afford to harvest their crops.
Figure 14.3
Florence Owens Thompson and her children were living on frozen vegetables and birds they
killed in this famous photograph taken in 1936 in California. (Credit: Dorothea Lange/ wikimedia/ License:
Public Domain)
It was amid this social and economic unrest that Congress passed the Securities Exchange Act of 1934. Signed
by President Franklin D. Roosevelt, the Securities Exchange Act of 1934 recognized that the stock market crash
of 1929 was caused by wild speculation, large and sudden fluctuations, and manipulations involving securities.
An article in the 1934 California Law Review described the condition of the market at the time by writing,
Chapter 14 Securities Regulation
155 |
Business_Law_I_Essentials_-_WEB.pdf | “Artificial prices of securities were the rule rather than the exception.… The result was vast economic power,
with all that implies in a democracy, in the hand of men whose ethical standards were substantially those of
gangsters.”
Roosevelt wanted to enact legislature to try to prevent this wild speculation in securities from happening again
and to restore the public’s faith. He recognized that stock market crashes would not only destroy wealth in
securities markets, but they were also instrumental to the financial security of the nation as a whole. The
passing of the Security Exchange Act of 1934 was not only a reaction to the market crash, but it also
represented a broad shift in the social and economic paradigms and legal frameworks of the United States.
Previously, the United States had largely followed a laissez-faire economic policy. Laissez faire, as popularized
by Scottish economist Adam Smith and British philosopher Herbert Spencer, describes an economic
philosophy that markets function best when left to their own devices, i.e., without, or with minimal,
government involvement or regulations. The rejection of laissez faire was part of a larger social shift that
opposed the long hours, unsafe working conditions, and child labor that had become commonplace as a result
of the Industrial Revolution.
The SEC
Section 4 of the Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) to
enforce its ongoing mission. The SEC is an independent agency of the United States federal government. It
regulates securities laws and regulations. The first chairperson of the SEC was Joseph P. Kennedy, the father of
President John F. Kennedy. The SEC is led by five presidentially appointed commissioners and has five
divisions: Division of Corporation Finance, Division of Investment Management, Division of Trading and
Markets, Division of Enforcement, and Division of Economic and Risk Analysis.
The SEC also oversees self-regulatory organizations (SROs), or private organizations that create and enforce
industry standards. These organizations are allowed to “police” themselves, but are subject to compliance
with SEC regulations. The various well-known securities exchanges such as the New York Stock Exchange
(NYSE), the National Association of Securities Dealers Automated Quotation System (NASDAQ), and the
Chicago Board of Options are SROs. Per Section 12(g), companies with total assets exceeding $10 million and
with 500 or more owners of any class of securities must register with the SEC unless they meets exemption
requirements.
The SEC makes new laws in response to emerging technologies. For example, Title III of the Jumpstart Our
Business Startups (JOBS) Act of 2012 was added, and in it, Section 4(a)(6) allows crowdfunding, or raising
small amounts of money from many people to fund a venture or project, usually over the internet.
Crowdfunding transactions are exempt from registration as long as the amount raised does not exceed
$1,070,000 in a 12-month period.
Secondary Markets
The Securities Exchange Act of 1934 governs secondary markets, or what is typically referred to as the “stock
market.” In contrast to the primary market, which involves the initial sale of a security, such as through an
initial public offering (IPO), secondary markets involve subsequent buyers and sellers of securities. One key
difference is that primary market prices are set in advance, while secondary market prices are subject to
constantly changing market valuations, as determined by supply and demand and investor expectations. For
example, when Facebook initiated its IPO in May of 2012, the price was $38 per share, and technical issues on
the NASDAQ complicated the offering. After the IPO, the stock traded sideways, meaning that it stayed within
156
Chapter 14 Securities Regulation
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | a range that did not indicate strong upward or downward movement. However, Facebook has gone on to
trade at values more than four times its initial IPO valuation, due to investor beliefs and expectations. Not all
stocks go up in value after their IPO; some vacillate between highs and lows and frustrate investors with their
unstable valuation swings.
Figure 14.4
Stocks on the secondary market fluctuate in value. (Credit: 3844328/ pixabay/ License: CC0)
Reporting Requirements
The Securities Exchange Act of 1934 created numerous reporting requirements for public companies. The
purpose of these requirements was transparency, that is, keeping the public up to date and informed of
changes that might impact securities prices. Public companies with securities registered under Section 12 or
that are subject to Section 15(d) must file reports with the SEC. Section 12 requires the registration of certain
securities and outlines the procedures necessary to do so. Information required by Section 12 includes the
nature of the business, its financial structure, the different classes of securities, the names of officers and
directors along with their salaries and bonus arrangements, and financial statements. Section 15 requires
brokers and dealers to register with the SEC. Individuals who buy and sell securities are considered traders,
and therefore, are not subject to filing under Section 15. Section 15(d) requires registered companies to file
periodic reports, such as the the annual Form 10-K and the quarterly Form 10-Q. These reports will be
explained in detail in the next section of this chapter. The SEC Commission makes these reports available to all
investors through the EDGAR website to help them make informed investment decisions.
Registration Requirements
The Securities Act of 1933 required companies initiating securities offers and exchanges to register with the
SEC, unless they met exemption criteria. Section 5 of the Securities Exchange Act of 1934 built upon this
foundation and made it unlawful to transact on unregistered exchanges and specifically extended this
regulation to the usage of the mail and interstate commerce. 15 U.S. Code § 78f states that exchanges must
not only register with the SEC, but they must also have rules that “prevent fraudulent and manipulative acts
Chapter 14 Securities Regulation
157 |
Business_Law_I_Essentials_-_WEB.pdf | and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the mechanism of a free and open market
and a national market system, and, in general, to protect investors and the public interest …”
Blue Sky Laws
When the Securities Exchange Act is discussed, blue sky laws are often mentioned. In 1911, Kansas bank
commissioner J.N. Dolley became concerned about what he called “swindles,” in which investors at the time
lost money by investing in “fake mines” or “a Central American plantation that was nine parts imagination.”
Therefore, he lobbied for the first “comprehensive” securities law in the United States because, as he phrased
it, these investments were backed by nothing except the blue skies of Kansas. So, state-level securities laws
aimed to combat fraud are called blue sky laws. The SEC does not have jurisdiction over activities within states
and does not enforce blue sky laws.
Figure 14.5
In addition to the Securities Exchange Act of 1934, blue sky laws provide an additional state-level
layer of legal protection for the public. (Credit: Elia Clerici/ pexels/ License: CC0)
Assessment Questions
1. Explain a laissez-faire economic policy.
2. The following are examples of self-regulatory organizations that the SEC oversees:
a.
The New York Stock Exchange.
b.
The National Association of Securities Dealers.
c.
The Chicago Board of Options.
d.
All of the above.
158
Chapter 14 Securities Regulation
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | 3. Which types of companies must register with the SEC?
a.
Companies with over 500 or more owners.
b.
Companies with total assets of $10 million.
c.
Companies with total assets exceeding $10 million and with 500 or more owners.
d.
None of the above.
4. Explain Blue Sky laws.
5. Distinguish between primary markets and secondary markets.
6. Define insider trading.
7. All of the following are considered reports required by the Securities Exchange Act of 1934 except:
a.
Form 8k.
b.
Form 10 k.
c.
Form 10Q.
d.
All of the above.
8. Corporate insiders include officers, directors, and beneficial owners who own _____ % of a class of securities
registered under Section 12 of the Securities Exchange Act of 1934.
a.
5.
b.
10.
c.
15.
d.
20.
9. Explain Schedule 13D.
10. What’s the purpose of Proxy Statements?
Endnotes
Fischel, D. R. (1981). Secondary Liability under Section 10 (b) of the Securities Act of 1934. California Law
Review, 69(1), 80–111.
Hanna, J. (1934). The Securities Exchange Act of 1934. California Law Review, 1–29.
Horwitz, B., & Kolodny, R. (1977). Line of business reporting and security prices: An analysis of an SEC
disclosure rule. The Bell Journal of Economics, 234–249.
Jaffe, J. F. (1974). Special information and insider trading. The Journal of Business, 47(3), 410–428.
SEC charges Martha Stewart, Peter Bacanovic with illegal insider trading. U.S. Securities and Exchange
Commission. Retrieved from: https://www.sec.gov/news/press/2003-69.htm.
Myers, M. (1994). Rhetoric Hewn by Audience and History: The Evolution of the Annual Report as a Business
Document. Retrieved from: https://files.eric.ed.gov/fulltext/ED370138.pdf.
What’s the deal with Regulation M. Latham & Watkins Capital Markets Group. Retrieved from:
https://www.lw.com/thoughtLeadership/regulation-m-guide-faq.
Engle, E. (2006). What you don’t know can hurt you: human rights, shareholder activism and SEC reporting
requirements. Syracuse Law. Review, 57, 63.
If you had invested right after facebook’s IPO (FB, TWTR). Investopedia. Retrieved from:
Chapter 14 Securities Regulation
159 |
Business_Law_I_Essentials_-_WEB.pdf | https://www.investopedia.com/articles/markets/081415/if-your-would-have-invested-right-after-facebooks-
ipo.asp.
Macey, J. R., & Miller, G. P. (1991). Origin of the blue sky laws. Texas. Law Review, 70, 347.
Payne, W. (1911) How Kansas drove out a set of thieves. The Saturday Evening Post, 184, 23.
Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers. (n.d). U.S. Securities and Exchange
Commission. Retrieved from: https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm#_ftn1.
Soifer, A. (1987). The Paradox of Paternalism and Laissez-Faire Constitutionalism: United States Supreme
Court, 1888–1921. Law and History Review, 5(1), 249–279.
Suddath, C. (October, 2008). The crash of 1929. Time. Retrieved from: http://content.time.com/time/nation/
article/0,8599,1854569,00.html.
What we do. (n.d). U.S. Securities and Exchange Commission. Retrieved from: https://www.sec.gov/Article/
whatwedo.html.
White, E. N. (1990). The stock market boom and crash of 1929 revisited. Journal of Economic perspectives, 4(2),
67–83.
160
Chapter 14 Securities Regulation
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Chapter 1
1. b
3. a
5. a
7. d
9. What is the supreme law of the land? The federal constitution is the supreme law of the land. What are
statutes? Laws enacted by Congress or a state legislative body. What are ordinances? Laws enacted by local
legislative bodies. What are administrative rules? Laws issued by administrative agencies under the authority
given to them in statutes.
11. The term “unfair trade practices” is broadly used and refers to any deceptive or fraudulent business
practice or act that causes injury to a consumer. Some examples include, but are not limited to, false
representations of a good or service including deceptive pricing, non-compliance with manufacturing
standards, and false advertising. The FTC investigates allegations of unfair trade practices raised by consumers
and businesses, pre-merger notification filings, congressional inquiries, or reports in the media and may seek
voluntary compliance by offending businesses through a consent order, administrative complaints, or federal
litigation.
13. c
15. b
Chapter 2
1. a
3. The process by which parties with nonidentical preferences allocate resources through interpersonal activity
and joint decision making.
5.
The Thomas-Kilmann Conflict Mode Instrument (TKI) is a questionnaire that provides a systematic framework
for categorizing five broad negotiation styles. It is closely associated with work done by conflict resolution
experts Dean Pruitt and Jeffrey Rubin. These styles are often considered in terms of the level of self-interest,
instead of how other negotiators feel. These five general negotiation styles include:
Forcing. If a party has high concern for itself, and low concern for the other party, it may adopt a competitive
approach that only takes into account the outcomes it desires. This negotiation style is most prone to zero-
sum thinking. For example, a car dealership that tries to give each customer as little as possible for his or her
trade-in vehicle would be applying a forcing negotiation approach. While the party using the forcing approach
is only considering its own selfinterests, this negotiating style often undermines the party’s long-term success.
For example, in the car dealership example, if a customer feels she has not received a fair trade-in value after
the sale, she may leave negative reviews and will not refer her friends and family to that dealership and will
not return to it when the time comes to buy another car. Collaborating.
Collaborating. If a party has high concern and care for both itself and the other party, it will often employ a
collaborative negotiation that seeks to maximum the gain for both. In this negotiating style, parties recognize
that acting in their mutual interests may create greater value and synergies.
Compromising. A compromising approach to negotiation will take place when parties share some concerns for
both themselves and the other party. While it is not always possible to collaborate, parties can often find
certain points that are more important to one versus the other, and in that way, find ways to isolate what is
most important to each party.
7. a
9.
E-mediation can be useful in situations where the parties are geographically far apart, or the transaction in
dispute took place online. Ebay uses e-mediation to handle the sheer volume of misunderstandings between
Answer Key
Answer Key
161 |
Business_Law_I_Essentials_-_WEB.pdf | parties. Research has shown that one of the benefits of e-mediation is that it allows people the time needed to
“cool down” when they have to explain their feelings in an email, as opposed to speaking to others in person.
In addition to technological advancements, new findings in psychology are influencing how disputes are
resolved, such as the rising interest in canine-assisted mediation (CAM), in which the presence of dogs is
posited to have an impact on human emotional health. Since the presence of dogs has a positive impact on
many of the neurophysiological stress markers in humans, researchers are beginning to explore the use of
therapy animals to assist in dispute resolution.
11. c
13. In binding arbitration, the decision of the arbitrator is final, and except in rare circumstances, neither party
can appeal the decision through the court system. In non-binding arbitration, the arbitrator’s award can be
thought of as a recommendation: it is only finalized if both parties agree that it is an acceptable solution.
15. c
Chapter 3
1. Acceptable levels of behavior for each individual who makes up the organization.
3. b
5. a
7. The earliest published book about the topic is Corporate Responsibility of the Businessman, published in 1953.
This book introduced the concept of companies giving back as a form of investment in the future. This idea
came from a generation that had survived some of the hardest times in our world and wanted to make it a
better place for generations to come.
9. d
Chapter 4
1.
The authority of the federal government to regulate interstate commerce has, at times, come into conflict with
state authority over the same area of regulation. The courts have tried to resolve these conflicts with reference
to the police power of the states.
Police power refers to the residual powers granted to each state to safeguard the welfare of their inhabitants.
Examples of areas in which states tend to exercise their police power are zoning regulations, building codes,
and sanitation standards for eating places. However, there are times when the states’ use of police power
impacts interstate commerce. If the exercise of the power interferes with, or discriminates against, interstate
commerce, then the action is generally deemed to be unconstitutional. The limitation on the authority of
states to regulate in areas that impact interstate commerce is known as the dormant commerce clause.
In using the dormant commerce clause to resolve conflicts between state and federal authority, the courts
consider the extent to which the state law has a legitimate purpose. If it is determined that the state law has a
legitimate purpose, then the court tries to determine whether the impact on interstate commerce is in the
interest of the citizens of the state, and will rule accordingly. For instance, an ordinance that banned spray
paint, issued in the city of Chicago, was challenged by paint manufacturers under the dormant commerce
clause, but was ultimately upheld by the U.S. Court of Appeals because the ban was intended to reduce graffiti
and related crimes.
3. d
5. c
7. c
9. a
Chapter 5
1. White collar crimes are characterized by deceit, concealment, or violation of trust. They are committed by
business professionals. They generally involve fraud, and the employees committing the crimes are motivated
by the desire for financial gains or fear of losing business standing, money, or property. Fraud is the
162
Answer Key
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | intentional misrepresentation of material facts for monetary gain. This type of crime is not dependent on
threats or violence.
3. d
5. The Foreign Corrupt Practices Act prohibits bribery payments by U.S. companies to foreign government
officials with an intent to influence foreign business results. One example of bribery would be a situation in
which a pharmaceutical company offers special benefits to individuals who agree to prescribe their
medications.
7. b
9. d
Chapter 6
1. Torts are wrongs committed against others who suffer some form of damage as a result.
3. d
5. a
7. b
9. a
Chapter 7
1. A contract is defined as an agreement between two or more parties that is enforceable by law.
3. d
5. b
7. d
9. If a person lacks the mental capacity to enter a contract, then either he or she, or his or her legal guardian,
may void it, except in cases where the contract involved necessities. In most states, mental capacity is
measured against the “cognitive standard” of whether the party understood its meaning and effect.
11. A material breach is when something substantially different from what was expected under the terms of
the contract is delivered, the breach is considered material.
13. Rescission terminates the duties of both parties under the contract, while reformation allows courts to
equitably change the contracts substance.
15. Restitution restores the injured party to status quo or the position they had prior to the formation of the
contract, by returning the plaintiff any money or property give pursuant to the contract.
Chapter 8
1. A sales contract is s specific type of contract is which one party is obligated to deliver to deliver and transfer
ownership of a good to a second party, who in turn is obligated to pay for the good in money, or its equivalent.
3. b
5. A shipment contract occurs when it is the responsibility of the seller to make the shipping arrangements and
to transfer the goods to the common carrier. Under this contract, title passes to the buyer at the time of
shipment, so the buyer bears the risk of loss, even when he or she has not taken possession of the goods. A
destination contract occurs when the seller is required to deliver the goods to a location that is stipulated in
the contract. Under this contract, title transfers when the goods are delivered, but the seller bears the risk of
loss until that time.
7. An express warranty is one in which the seller explicitly guarantees the quality of the good or service sold.
Typically, the vendor provides a statement, or other binding document, as part of the sales contract. In certain
circumstances where no express warranty was made, the law implies a warranty. This statement means that
the warranty automatically arises from the fact that a sale was made.
9. d
Chapter 9
1. Compared to other countries in the West, stringent and extensive employee protections came fairly late to
the United States. Up until 1959, for example, employers had the right to fire a worker without giving any
reason. This concept, which was known as at-will employment, was applicable in all states. The concept of at-
will employment does, however, continue today, and all employees are considered to be at-will unless they are
employed under a collective bargaining agreement, or under a contract for a set duration. Employers can still
fire employees for any reason, but they cannot be fired for illegal reasons, as set out in the U.S. or state
constitutions, federal law, state statutes, or public policy. In this section, some of the main employee rights
and company responsibilities will be introduced.
3. a
5. d
Answer Key
163 |
Business_Law_I_Essentials_-_WEB.pdf | 7. A trade union, or labor union, is an organized group of workers who come together to lobby employers
about conditions affecting their work.
9. b
11. The Civil Rights Act provides broad provisions pertaining to citizens’ civil rights. Title VII of the Civil Rights
Act deals with discrimination in employment. It bans employers from discriminating against employees in their
hiring, firing, and promotion practices on the basis of sex, national origin, color, religion, or race. All employers
who are engaged in commercial activity and who employ 15 or more employees for 20 consecutive weeks in a
year are covered by the Act.
13. c
15. a
Chapter 10
1. Administrative law is also referred to as regulatory and public law. It is the law that is related to
administrative agencies. Administrative agencies are established by statutes and governed by rules,
regulations and orders, court decisions, judicial orders, and decisions.
3. c
5. The FDA was created to protect the public’s health. The agency’s responsibilities are very broad. The agency
fulfills its role by ensuring the safety and effectiveness of drugs consumed by people and animals, biological
products, medical devices, food, and cosmetics.
7. d
9. c
Chapter 11
1. b
3. Naked restraint occurs as contracts promote a general restraint of competition. If the restraint was created
with a goal of long-term impact without boundaries, it was considered to be a naked restraint. Ancillary
restraint occurs as the restriction is limited in time and geography. With ancillary restraint, the restraint would
be short-term and limited in scope. The courts tended to frown upon naked restraint, but were less consistent
with ancillary restraint.
5. The original purpose of antitrust legislation, i.e., to foster competition that results in lower prices, more
products, and more equal distribution of wealth between producers, remains relevant today.
7. b
9. c
11. c
13. a
15. The FTC did not formally have a consumer protection mission until the passage of the Wheeler-Lea Act in
1938. This act gave the FTC the power to combat false advertising for any foods, drugs, medical devices, or
cosmetics. In addition to the Wheeler-Lea Act, subsequent amendments to the FTC Act, as well as judicial
respect toward the agency, broadened the power and jurisdiction of the FTC.
Chapter 12
1. The term “unfair trade practice” describes the use of deceptive, fraudulent, or unethical methods to gain
business advantage or to cause injury to a consumer. Unfair trade practices are considered unlawful under the
Consumer Protection Act. The purpose of the law is to ensure that consumers have the opportunity to make
informed, rational decisions about the goods and services they purchase.
3. Bait and switch is a form of false advertising whereby the company advertises a product or service and then
sells another item in its place.
5. c
Chapter 13
1. International law relates to the policies and procedures that govern relationships among nations.
3. The European Union (EU) is a regional international organization that includes many countries in Europe. It
was established to create peace across the region and promote economic, social, and cultural development.
5. a
7. The Principle of Comity states that nations will defer to the laws and decrees of other nations when those
laws are consistent with their own, essentially upholding reciprocity between nations with similar laws.
9. b
164
Answer Key
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Chapter 14
1. Laissez faire, as popularized by Scottish economist Adam Smith and British philosopher Herbert Spencer,
describes an economic philosophy that markets function best when left to their own devices, i.e., without, or
with minimal, government involvement or regulations.
3. c
5. The Securities Exchange Act of 1934 governs secondary markets, or what is typically referred to as the “stock
market.” In contrast to the primary market, which involves the initial sale of a security, such as through an
initial public offering (IPO), secondary markets involve subsequent buyers and sellers of securities. One key
difference is that primary market prices are set in advance, while secondary market prices are subject to
constantly changing market valuations, as determined by supply and demand and investor expectations.
7. d
9. In 1968, the Williams Act amended the Securities Exchange Act of 1934 so that investors could have advance
warning of possible corporate takeovers. If someone (individual/corporation) becomes the beneficial owner of
more than 5% of a company’s stock, that entity must file a Schedule 13D with the SEC within 10 days of
purchase. A beneficial owner is anyone with “voting and investment power over their shares.” There are a few
exceptions that apply, such as qualified institutional investors—large investors who are deemed to have
sophisticated knowledge of securities such that they do not need the same level of protection as general
investors. Insurance companies, state employee benefits plans, and investment companies are examples of
qualified institutional investors who are allowed to report their holdings at the end of the calendar year.
Answer Key
165 |
Business_Law_I_Essentials_-_WEB.pdf | 166
Answer Key
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | A
abnormally dangerous activity
standard, 67
Acceptance, 88
Act of State Doctrine, 146
actus reus, 59, 59
Administrative law, 113
Administrative Procedure Act
(APA), 119
ADR, 15
affirmative defenses, 108
agency shop, 104
alternative dispute resolution, 15
Ancillary restraint, 126
Antitrust laws , 56, 126
antitrust laws, 118
appropriate bargaining unit., 104
arbitrator, 22
arraignment, 59
Assault, 65
Assumption of risk, 71
at-will employment, 97
attractive nuisance, 69
audited, 153
Avoiding, 17
award, 22
B
bare bones, 25
baseball arbitration, 25
BBC News. , 149
beneficial owner, 153
Bilateral, 85
binding arbitration, 23
blue sky laws, 158
breach, 92
breadlines, 155
Bribery , 57
Brooklyn Journal of International
Law, 39, 149
Business law: Texts and cases ,
149
Business Transactions, 23
business trusts, 125
C
California Law Review, 155
capacity, 78
Carter v. Carter Coal Co, 45
case law, 4, 6
categorical imperative, 21
cause of action, 66
Central Hudson Test for
Commercial Speech., 49
Chad A. Kelley v. Marsha P. Ryan,
Administrator, Ohio Bureau of
Workers’ Compensation, and
Coca-Cola Enterprises, 99
channels, 47
Chaplinsky v. New Hampshire, 49
child labor, 99
Citizens United v. Federal Election
Commission, 9
civil, 151
Civil law systems, 147
civil laws, 59
civil matter, 23
class action lawsuit, 24
closed shop, 104
Closure, 20
Collaborating, 17
Collective action, 148
collective bargaining agreement.,
104
commerce clause, 44
commercial reasonableness., 91
Commercial Speech., 49
Common law systems, 147
common-carrier delivery contract,
90
Commutative, 86
Company credibility lost. , 33
comparative negligence, 71
compensatory, 61
Compromising, 17
conditional sales contract, 90
Confidentiality, 19
Consensual, 85
Consent election., 104
Consequentialist, 20
Consistency of efforts and
partnerships., 37
consistent, 92
Consumer influence., 38
Contest election, 104
Contracting for success, 37
Contracts, 83
contributory negligence, 71
Control, 19
Corporate insiders, 153
Corporate Political Speech. , 48
Corporate Responsibility of the
Businessman, 37
Creativity, 19
crime, 23
criminal, 151
Criminal law , 59
criminal matter, 23
cross state lines, 47
crowdfunding, 156
Crown Castle Inc. et al. v. Fred
Nudd Corporation et al., 86
cumulative, 92
D
decertification election, 104
Defamation, 65
defendant, 19, 64
delegation, 117
deontologist ethics, 20
destination contract, 90
directives, 117
Disparate impact , 106
Disparate treatment, 106
dissolution, 130
distributive, 16
divestiture, 130
doctrine of sovereign immunity,
145
Doctrine of Sovereign Immunity,
147
dormant commerce clause, 46
due process clause, 50
duty of care, 66
duty to aid, 66
dyadic negotiation, 16
E
e-mediation, 22
embezzlement, 55
Employment Discrimination Law,
Visions of Equality in Theory and
Doctrine, 110
encumbrance, 89
Enhanced performance for going
green., 37
entrusts, 88
ethics, 20
European Union (EU), 145
exclusive remedy, 99
Index
Index
167 |
Business_Law_I_Essentials_-_WEB.pdf | Executive compensation rates
during employee layoffs., 33
express warranty, 91
extraordinary ability, 101
F
Fair compensation for
employees., 33
fault, 64
Federal and state constitutions,
44
Federal Arbitration Act, 18
federalism, 44
fiduciary, 151
firm offers, 88
First National Bank of Boston v.
Bellotti, 48
forced-arbitration clauses, 24
Forcing, 17
Foreign Commerce Clause, 143
Foreign Sovereign Immunities Act
of 1976, 145
foreseeability , 67
foreseeable probability of harm,
67
Form 10-K, 153
Form 10-Q, 154
Form 8-K, 154, 154
Fraud , 54
free exercise clause , 49
G
Garnishment, 26
General Assembly, 144
Good faith, 91
Good title, 88
Goods, 86
goods-in-bailment contract, 90
grant of authority, 44
grievance arbitration, 23
Griggs v. Duke Power Co., 106
group negotiation, 16
H
harm , 65
hostile work environment , 107
Houston Chronicle, 34
Hudson Gas & Electric Corp v.
Public Service Commission of
New York, 49, 49
I
illusory, 88
implies, 92
Improved perception by
investors., 37
inaccessibility exception,, 104
industrialization , 114
information, 59
initial, 156
initial public offering (IPO), 156
insider trading, 151
institutional investors, 153
instrumentalities, 47
Insurable interest, 89
integrative, 16
Intentional torts, 65
Interest arbitration, 23
International law, 142
interstate, 54
intrastate, 54
Invasion of privacy , 66
involuntary arbitration, 23
J
Joint Discussion, 20
Joint Negotiation, 20
just compensation, 50
L
Labor, 23
Labor relations, 101
Labor: Studies in Working-Class
History, 111
laissez-faire, 156
Larceny, 55
Lawrence v. Texas, 58
Legal considerations., 34
Libel, 65
Liebeck v. McDonald’s, 61
Liens, 26
litigation, 15
local unions, 102
loss, 89
M
Malicious prosecution, 65
malpractice, 61
management discussion, 154
material nonpublic information,
152
Mediation, 19
mediator, 19
Mediator’s Opening Statement,
20
mens rea, 59, 59
merchants, 86
Miranda v. Arizona, 58
mirror-image rule, 88
misuse, 71
mixed sale, 86
Money laundering , 57
monopolies, 56
N
Naked restraint , 126
National Labor Relations Act, 102
Negative employee relations., 33
Negligence, 65
negotiable, 90
negotiation, 15
NLRB v. Jones & Laughlin Steel
Corp, 45, 45, 45
Nominate, 86
non-binding arbitration, 23
non-negotiable, 90
O
Occupational Safety and Health
Act, 98
Occupational Safety and Health
Administration, 98
offender, 64
offer, 87
Oncale v. Sundowner Offshore
Services Inc., 107
Onerous, 85
Opening Statements of Plaintiff
and Defendant, 20
organic statute , 113
Organic statutes , 113
Organization Behavior and
Human Decision Processes, 15
Outcome goals, 16
output contracts, 88
Ownership, 89
P
pervasive-regulation exception, ,
50
plaintiff, 19, 64
police power, 46
Police power, 46
Ponzi schemes , 55
Poor company reputation., 33
pre-arranged trading plans, 153
precedent, 4, 6, 128
preempted, 44
Pregnancy Discrimination Act, 107
168
Index
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | prima facie, 106, 127
primary market, 156
Principal, 86
Principle of Comity, 146
Private Caucus, 20
privilege against self-
incrimination, 50
probable cause, 49
Procedural due process , 50
Professional behaviors., 35
Property Disputes, 23
Proxy Statements, 154
public law, 113
pump-and-dump , 54
Q
quantity , 87
Quid pro quo, 107
R
Racketeering, 56
rational-basis test., 50
Realty, 86
reasonable person, 66
reasonable standard of care, 66
reasonableness test of reliance,
92
reasonably foreseeable, 67
reasoned, 25
Reciprocity, 148
Recruitment and retention
problems., 33
regulatory, 113
Regulatory ethics., 35
Relational goals, 16
remedies, 65
reporting companies, 153
requirements contracts, 88
res ipsa loquitor, 69
restraint of trade, 124
rule of reason, 126
S
Safe harbor, 153
sales contracts, 85
search warrants, 49
Secondary boycott picketing, 105
secondary markets, 156
Securities and Exchange
Commission (SEC), 156
Security Council, 144
self-regulatory organizations
(SROs), 156
Services, 86
Sexual harassment, 107
Shaming, 148
shanty towns, 155
shipment contract, 90
sideways, 156
simple delivery contract, 89
Slander, 65
Social Security, 100
sovereignty, 145
spam, 57
special relationship, 66
State v. Wayfair Inc., 6
statutes, 63
strict liability, 67
strike, 105
substantial impact, 47
Substantive due process, 50
supremacy clause, 44
T
takings clause. , 50
Talent attraction., 37
tender of delivery, 90
The benevolent halo effect., 37
The legal environment of
business: Texts and cases, 149
Thomas-Kilmann Conflict Mode
Instrument (TKI) , 17
Title, 88
Tort law, 64
tortfeasor, 64
torts, 64
trade fixtures, 86
trade unions, 101
transparency, 157
Treaty Clause, 143
Trinity Economic Papers, , 149
U
UCC, 86
UN Conference on Trade and
Development News., 150
unaudited, 154
unconscionable, 88
Uniform Arbitration Act, 18
Uniform Commercial Code, 86
union security agreement. , 104
union shop, 104
United Nations (UN), 144
United Nations Convention on
Contracts for the International
Sale of Goods, 90
United Nations Convention on
Contracts for the International
Sale of Goods (CISG), 146
United States Constitution, 44
United States v. Lopez, 46
Unprotected Speech. , 49
V
Value-based ethics., 34
vendee, 85
vendor, 85
vesting, 101
Void title, 88
voidable, 78
Voidable title, 88
voluntary arbitration, 23
W
warranty, 91
warranty against infringement.,
92
warranty of fitness for normal
use, 92
warranty of merchantability, 92
White collar crimes , 54
whole, 61
Workers’ Compensation Acts, 99
Workers’ Compensation Agency,
99
Writ of Execution, 26
Y
yellow-dog contracts, 102
Yielding, 17
Z
zero-sum negotiation, 16
Index
169 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | SOU-CCJ230 Introduction to the American Criminal Justice System |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | SOU-CCJ230 Introduction to the
American Criminal Justice System
Alison S. Burke, David Carter, Brian Fedorek, Tiffany Morey, Lore
Rutz-Burri, and Shanell Sanchez
Open Oregon Educational Resources |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | SOU-CCJ230 Introduction to the American Criminal Justice System by Alison S. Burke, David Carter, Brian Fedorek, Tiffany
Morey, Lore Rutz-Burri, and Shanell Sanchez is licensed under a Creative Commons Attribution-ShareAlike 4.0 International
License, except where otherwise noted. |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | Contents
What is an OER textbook?
1
A Bit About Our Collaboration Project
2
Author Bios
3
Goals, Learning Objectives, and Skills
5
Table of Contents
7
Dedication
8
1: CRIME, CRIMINAL JUSTICE, AND CRIMINOLOGY
1.1. Crime and the Criminal Justice System
Shanell Sanchez
11
1.2. Deviance, Rule Violations, and Criminality
Shanell Sanchez
14
1.3. Social Norms: Folkways, Mores, Taboo, and Laws
Shanell Sanchez
16
1.4. Interactionist View
Shanell Sanchez
20
1.5. Consensus View and Decriminalizing Laws
Shanell Sanchez
24
1.6. Conflict View
Shanell Sanchez
27
1.7. The Three C’s: Cops, Courts, and Corrections
Shanell Sanchez
29
1.8. The Crime Control and Due Process Models
Shanell Sanchez
36
1.9. How Cases Move Through the System
Shanell Sanchez
39
1.10. Media Coverage of Crimes
Shanell Sanchez
43 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | 1.11. Wedding Cake Model of Justice
Shanell Sanchez
48
1.12. Street Crime, Corporate Crime, and White-Collar Crime
Shanell Sanchez
51
1.13. Different Types of Crimes and Offenses
Shanell Sanchez
55
1.14. Victims and Victim Typologies
Shanell Sanchez
57
1.15. Victim Rights and Assistance
Shanell Sanchez
60
1.16. "Spare the Rod, Spoil the Child" Myth/Controversy
65
2: DEFINING AND MEASURING CRIME AND CRIMINAL JUSTICE
2.1. Dark or Hidden Figure of Crime
Shanell Sanchez
69
2.2. Official Statistics
Shanell Sanchez
71
2.3. Victimization Studies
Shanell Sanchez
77
2.4. Self-Report Statistics
Shanell Sanchez
79
2.5. Misusing Statistics
Shanell Sanchez
82
3: CRIMINAL LAW
3.1. Functions and Limitations of Law
Lore Rutz-Burri
87
3.2. Civil, Criminal, and Moral Wrongs
Lore Rutz-Burri
89
3.3. Sources of Criminal Law: Federal and State Constitutions
Lore Rutz-Burri
92
3.4. Sources of Criminal Law: Statutes, Ordinances, and Other Legislative Enactments
Lore Rutz-Burri
100
3.5. Sources of Law: Administrative Law, Common Law, Case Law and Court Rules
Lore Rutz-Burri
103
3.6. Classifications of Law
Lore Rutz-Burri
110 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | 3.7. Substantive Law: Defining Crimes, Inchoate Liability, Accomplice Liability, and Defenses
Lore Rutz-Burri
113
3.8. Substantive Law: Punishment: Incarceration and Confinement Sanctions
Lore Rutz-Burri
117
3.9. Substantive Law: Physical Punishment Sentences
Lore Rutz-Burri
122
3.10. Substantive Law: Monetary Punishment Sentences
Lore Rutz-Burri
126
3.11. Substantive Law: Community-Based Sentences
Lore Rutz-Burri
129
3.12. Procedural Law
Lore Rutz-Burri
134
4: CRIMINAL JUSTICE POLICY
4.1. Importance of Policy in Criminal Justice
Alison S. Burke
139
4.2. The Myth of Moral Panics
Alison S. Burke
142
4.3. The Stages of Policy Development
Alison S. Burke
147
4.4. Importance of Evidence Based Practices
Alison S. Burke
151
4.5. Re-Evaluating Policy
Alison S. Burke
153
5: CRIMINOLOGICAL THEORY
5.1. What is Theory?
Brian Fedorek
159
5.2. What Makes a Good Theory?
Brian Fedorek
161
5.3. Pre-Classical Theory
Brian Fedorek
163
5.4. Classical School
Brian Fedorek
164
5.5. Neoclassical
Brian Fedorek
167 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | 5.6. Positivist Criminology
Brian Fedorek
170
5.7. Biological and Psychological Positivism
Brian Fedorek
172
5.8. The Chicago School
Brian Fedorek
174
5.9. Strain Theories
Brian Fedorek
176
5.10. Learning Theories
Brian Fedorek
179
5.11. Control Theories
Brian Fedorek
183
5.12. Other Criminological Theories
Brian Fedorek
186
6: POLICING
6.1. Policing in Ancient Times
Tiffany Morey
191
6.2. Sir Robert Peel
Tiffany Morey
193
6.3. Policing Eras
Tiffany Morey
196
6.4. Levels of Policing and Role of Police
Tiffany Morey
207
6.5. Recruitment and Hiring in Policing
Tiffany Morey
224
6.6. Recruitment and Hiring Websites for Future Careers
Tiffany Morey
235
6.7. Police Misconduct, Accountability, and Corruption
Tiffany Morey
244
6.8. Current Issues: Police Shootings
Tiffany Morey
247
6.9. Current Issues: Use of Force and Vehicle Pursuits
Tiffany Morey
250
6.10. Current Issues: Stereotypes in Policing
Tiffany Morey
252 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | 6.11. Current Issues: Accountability
Tiffany Morey
255
6.12. Current Issues: Internal Affairs and Discipline
Tiffany Morey
257
6.13.Current Issues: Body Cameras
Tiffany Morey
260
6.14. Myth: “Police Only Write Speeding Tickets to Harass Citizens and it is Entrapment.”
Tiffany Morey
261
7: COURTS
7.1. Introduction to the U.S. Court System
Lore Rutz-Burri
265
7.2. Jurisdiction
Lore Rutz-Burri
266
7.3. Structure of the Courts: The Dual Court and Federal Court System
Lore Rutz-Burri
269
7.4. Structure of the Courts: State Courts
Lore Rutz-Burri
276
7.5. American Trial Courts and the Principle of Orality
Lore Rutz-Burri
279
7.6. The Appeals Process, Standard of Review, and Appellate Decisions
Lore Rutz-Burri
280
7.7. Federal Appellate Review of State Cases
Lore Rutz-Burri
284
7.8. Courtroom Players: Judges and Court Staff
Lore Rutz-Burri
286
7.9. Courtroom Players: Prosecutors
Lore Rutz-Burri
293
7.10. Courtroom Workgroup: Defense Attorneys
Lore Rutz-Burri
297
8: CORRECTIONS
8.1. A Brief History of The Philosophies of Punishment
David Carter
311
8.2. Retribution
David Carter
313 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | 8.3. Deterrence
David Carter
315
8.4. Incapacitation
David Carter
318
8.5. Rehabilitation
David Carter
321
8.6. Prisons and Jails
David Carter
324
8.7. A Brief History of Prisons and Jails
David Carter
325
8.8. Types of Jails
David Carter
329
8.9. Who Goes to Jail?
David Carter
332
8.10. Growth of Prisons in the United States
David Carter
334
8.11. Types of Prisons
David Carter
336
8.12. Prison Levels
David Carter
339
8.13. Who Goes to Prison?
David Carter
342
9: COMMUNITY CORRECTIONS
9.1. Diversion
David Carter
347
9.2. Intermediate Sanctions
David Carter
349
9.3. Probation
David Carter
352
9.4. Boot Camps/Shock Incarceration
David Carter
357
9.5. Drug Courts
David Carter
359
9.6. Halfway Houses
David Carter
360 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | 9.8. House Arrest
David Carter
362
9.9. Community Residential Facilities
David Carter
363
9.10. Restorative Justice
David Carter
365
9.11. Parole
David Carter
367
9.12. Current Issues in Corrections
David Carter
371
9.13. Current Issues in Corrections: Mass Incarceration
David Carter
372
9.14. Current Issues in Corrections: War on Drugs and Gangs
David Carter
376
9.15. Current Issues in Corrections: Aging and Overcrowding
David Carter
379
9.16. Current Issues in Corrections: Reentry and the Future of Corrections
David Carter
384
10: JUVENILE JUSTICE
10.1. Youth Crime
Alison S. Burke
389
10.2. Juvenile Justice
Alison S. Burke
390
10.3. History of the Juvenile Justice System
Alison S. Burke
392
10.4. Delinquency
Alison S. Burke
396
10.5. Juvenile Justice Process
Alison S. Burke
398
10.6. Due Process in the Juvenile Court
Alison S. Burke
399
10.7. The Juvenile Justice and Delinquency Prevention Act of 1974
Alison S. Burke
402
10.8. Getting Tough: Initiatives for Punishment and Accountability
Alison S. Burke
403 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | 10.9. Returning to Rehabilitation in the Contemporary Juvenile Justice System
Alison S. Burke
407
10.10. The Structure of the Juvenile Justice System
Alison S. Burke
410
10.11. Juvenile Institutions
Alison S. Burke
413
Glossary
417 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | We hope you are as excited about this textbook as we were writing it. This is a free academic resource and
a free textbook that can be printed at low-cost if you prefer paper. Southern Oregon University’s Disability
Resource has reviewed this textbook for accessibility to all students.
Introduction to the American Criminal Justice System is an Open Educational Resource (OER)
https://en.wikipedia.org/wiki/Open_educational_resources that is licensed under the Creative Commons
(CC 4.0) format https://creativecommons.org with support to complete this project from Open Oregon
Educational Resources https://openoregon.org.
This introductory textbook is unique because it was a collaborative effort by all Criminology and Criminal
Justice professors at Southern Oregon University (SOU) in Ashland, Oregon. This textbook will meet the
learning objectives outlined through SOU and as a community college transfer course, as well as cover all
other topics expected to find in an introductory course. This book can be used on a quarter or semester
system, as well as cover topics that may get left out of some introductory texts such as controversial issues in
the criminal justice system. Further, we made it as comprehensive as possible to cover core concepts and areas
in the criminal justice system including theory, policing, courts, corrections, and the juvenile justice system.
Additionally, we created examples that will help make difficult concepts or ideas more relatable. Every
section provides an overview of key terms, critical thinking questions for course engagement, assignments,
and other ancillaries such as multimedia links, images, activity ideas, and more.
Feel free to ask any questions. Email Shanell Sanchez at [email protected] with any specific questions
about the book or any other professor if it is specific to their page.
1 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | A Bit About Our Collaboration Project
This OER could not be possible without the support from many different people. Our financial support came
from a grant through Open Oregon https://openoregon.org.
Dr. Shanell Sanchez wants to personally thank all her colleagues at SOU for taking on this endeavor with
her. The first plan was to adapt and edit an existing OER, but after an exhaustive search of OER’s, we found
there is a dearth of CCJ OER’s. We realized that if we wrote this book, we would be one of the first CCJ
OER’s available. The initial idea seemed a bit overwhelming, but watching it come together was amazing.
Dr. Sanchez had a vision for what an ideal textbook should look like for first-year students and our newest
majors or potential majors, but it was not possible without all of us working together.
Amy Hofer at Linn-Benton Community College served as our grant manager, but she went beyond that.
She has served as an excellent resource, mentor, and helped us find opportunities to present our experiences
at conferences.
Dr. Jeffrey Gayton is our university librarian at Southern Oregon University and helped coordinate this
project from the start of our application to the release of our OER going live.
Brian Stonelake, a professor in the Mathematics department at Southern Oregon University, provided
excellent guidance and insight to us when we were applying for the grant.
Christina Richardson was our student that served as a contributing editor, as well as created our glossary
for this OER. She went through the entire book to pose suggestions, edits, and comments that helped make
the end product better.
2 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | Author Bios
Alison S. Burke, Ph.D., Professor of Criminology and Criminal Justice, Southern Oregon University,
https://inside.sou.edu/criminology/faculty/burke.html
Alison S. Burke is a professor of criminology and criminal justice at Southern Oregon University.
She earned her Ph.D. from Indiana University of Pennsylvania and her MCJ from the University of
Colorado Denver. While in Denver, she worked with adjudicated youth in residential treatment facilities
and group homes. She has published a variety of journal articles and book chapters related to juvenile justice,
delinquency, and gender, and her primary research interests involve women and crime, juvenile justice
and delinquency, and pedagogy in higher education. Her most recent book is titled Teaching Introduction to
Criminology (2019).
David E. Carter, Ph.D., Associate Professor of Criminology and Criminal Justice, Southern
Oregon University, https://inside.sou.edu/criminology/faculty/davidcarter.html
David E. Carter joined the Criminology and Criminal Justice Department in 2008. He received his Ph.D.
from the University of Cincinnati. Dave served in the U.S. Army for 8 years as a linguist prior to attending
school. He has published works in the Journal of Research in Crime and Delinquency in the area of life-
course research, as well as in the Corrections Compendium, where he wrote about U.S. inmate populations.
He also works with local agencies (in a consultative role) providing evidence-based practices and evaluations
for correctional programs in the area of effective interventions and evidence-based programming. At SOU,
Dave has helped facilitate the Lock-In event and annual that provides students with a hands-on experience
of the justice system.
Brian Fedorek, Ph.D., Associate Professor of Criminology and Criminal Justice, Southern Oregon
University, https://inside.sou.edu/criminology/faculty/brianfedorek.html
Brian Fedorek earned his doctorate at the Indiana University of Pennsylvania in Criminology. He has
taught classes in Terrorism, Comparative Criminal Justice, Theories of Criminal Behavior, and introductory
courses. His research interests include media and crime, criminological theory, and criminal violence. He has
served on the board of the Western Association of Criminal Justice.
Tiffany L. Morey, M.S., Instructor of Criminology and Criminal Justice, Southern Oregon
University, https://inside.sou.edu/criminology/faculty/tiffany-morey-m-s.html
Tiffany L. Morey has an almost three-decade career in the law enforcement arena. She retired as a
Lieutenant from a police department in Las Vegas, Nevada. Her expertise is in the law enforcement, crime
scene investigation (CSI), and forensics fields. During her tenure in policing in Las Vegas she worked
in patrol, the crime prevention division, community services, recruitment, special events, problem-solving
unit (first ever unit/substation for her department in a high gang and drug area), undercover prostitution
3 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | and narcotics stings, search warrant service assistance, mounted unit departmental work, CSI (crime scene
investigator), forensics, Sergeant and Sergeant field training program and master trainer, Lieutenant and
Lieutenant field training program, and finally Acting Captain. During this time, she was also chosen and paid
by an independent firm to travel the country and conduct oral board interviews and assessment center testing
and recruiting for law enforcement agencies and fire departments. She developed a ground-breaking class
to assist candidates in the law enforcement hiring process and is now under contract to publish the related
textbook/study guide. Tiffany continues to operate in the field of CSI and forensics as an expert investigator
and witness on violent crime. She also runs a Crime Prevention Through Environmental Design (CPTED)
business, offering citizens and owners of businesses CPTED reviews to ensure the safety of their homes and
buildings. Finally, in her free time, she runs SOAR Wildlife Center (SoarWildlife.org), which is a non-profit
organization, that rehabilitates sick, injured, or orphaned fawns and other baby mammals.
Lore Rutz-Burri, J.D., Professor of Criminology and Criminal Justice, Southern Oregon
University, https://inside.sou.edu/criminology/faculty/rutz.html
Lore Rutz-Burri is a 1982 graduate of Southern Oregon State College (now SOU) with a Bachelors of
Arts degree in Criminology and Political Science. After graduating, she lived in Southern Austria until 1984.
Upon returning to the states, she earned an M.C.J (Master’s degree in Criminal Justice) from the University
of South Carolina. In 1985 she started in a Ph.D. program at the University of Maryland, College Park, but
early on decided she would rather pursue a law degree. In 1989 she graduated “order of the coif” with her
doctor of jurisprudence (JD) from the University of Oregon School of Law. Following law school, Lore
clerked for the Superior Court of Alaska in Fairbanks for one year and then worked for 5 years as a deputy
district attorney in Josephine County, Oregon. There, she prosecuted a variety of crimes, but mostly assault
cases. In 1995, she began teaching criminology and criminal justice at SOU. Since 2015 she has been a
part-time Circuit Court judge in the Josephine County courts. Lore has been married for over 27 years to
her husband, Markus (a Swiss national). They have two sons– Severin (who studied at SOU and majored in
psychology) and Jaston (who studied at U of O and majored in philosophy). She has both case books and
introductory text on criminal law and criminal procedure.
Shanell K. Sanchez, Ph.D., Assistant Professor of Criminology and Criminal Justice, Southern
Oregon University, https://inside.sou.edu/criminology/faculty/dr-shanell-sanchez.html
Shanell Sanchez joined the Criminology and Criminal Justice department at Southern Oregon University
in Ashland, Oregon in 2016. Prior to that, Shanell was an Assistant Professor in Criminal Justice at Colorado
Mesa University in Grand Junction, Colorado. She received her Ph.D. from the University of Nebraska-
Lincoln in Sociology in 2012. Her research and teaching interests are centered around social change and
justice, inequality, and comparative crime and justice.
ALISON S. BURKE, DAVID CARTER, BRIAN FEDOREK, TIFFANY MOREY, LORE RUTZ-BURRI, AND SHANELL
SANCHEZ
4 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | Goals, Learning Objectives, and Skills
There is a dearth of OER textbooks in Criminology and Criminal Justice, which made creating this textbook
all the more exciting. At times we faced challenges about what or how much to cover, but our primary goal
was to make sure this book was as in-depth as the two textbooks we were currently using for our CCJ 230
introduction course. The only way we were willing to undertake this project as if it was as good, or better
than the current books students read. We have had very positive feedback about the required textbooks in
the course but consistently heard how expensive the books were to buy. We also needed to ensure we met
the learning outcomes outlined by SOU for a general education course, as well as the state of Oregon, to
make sure this textbook helps students meet those outcomes.
SOU’s catalog course description for CCJ 230 states this course surveys the functional areas of criminal
justice in the United States. This OER covers law enforcement, criminal courts, sentencing, penal
institutions, and community-based sanctions. It also includes historical and contemporary perspectives on
components of the criminal justice system, as well as the legal and constitutional frameworks in which they
operate.
Learning Objectives
•
Students will increase the breadth of their knowledge and understanding of the American Criminal
Justice System.
•
Students will enhance their critical thinking skills via writing, reading, and discussion.
•
Students will learn the history, functions, responsibilities, processes, and importance of each
component of the criminal justice system.
•
Students will become familiar with research and its relationship to criminal justice policy.
•
Students will use the foundations learned about the American criminal justice system in future CCJ
courses.
Additionally, myths and controversies are incorporated in the course covering the above-noted content areas
in the American criminal justice system. In our experience, this tends to be the most exciting part of the
class. It also helps students build all learning outcomes through assignments, readings, and materials covered
in class. The primary goal when writing this book was to make it easy to read, with fun examples, thought-
5 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | provoking discussion questions, and is accessible to all to ensure that students would read. The content level
targeted first-year students who are taking their first course in Criminology and Criminal Justice, but also as
a general education course for those that may not intend to major. In order to ensure each area has accessible
materials for the course and meets our learning objectives and goals, we have conducted preliminary research
in order to determine our best option is moving forward.
ALISON S. BURKE, DAVID CARTER, BRIAN FEDOREK, TIFFANY MOREY, LORE RUTZ-BURRI, AND SHANELL
SANCHEZ
6 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | Table of Contents
1. Crime, Criminal Justice and Criminology
2. Defining and Measuring Crime and Criminal Justice
3. Criminal Law
4. Criminal Justice Policy
5. Criminological Theory
6. Policing
7. Courts
8. Corrections
9. Community Corrections
10. Juvenile Justice
7 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | Dedication
We dedicate this book to our students at Southern Oregon University, who continuously work hard in our
classes and develop lasting relationships with us. We also dedicate this book to all our partners, children, fur
babies, and friends that supported us in the writing process.
8 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | 1: Crime, Criminal Justice, and
Criminology
Learning Objectives
This section will broadly introduce crime, criminal justice, and criminology. This section is designed to be a
broad overview of what the subsequent chapters will cover in detail. It also demonstrates how the United States
create laws, policies enacted to enforce laws, and the role of the media. After reading this section, students will be
able to:
•
Understand the differences between deviance, rule violations, and criminality
•
Explain the differences between the interactionist, consensus, and conflict views in the creation of
laws
•
Identify the three components of the criminal justice system
•
Discuss the differences between crime control and due process model, and application examples to
each
•
Describe the wedding cake model theory and application examples to each tier
•
Briefly explain the role of the media and how media may spread myths in society
•
Briefly understand the unique role of victims in the criminal justice process
Background Knowledge Probe: The goal here is to assess current knowledge about the criminal
justice system at the start of the course. Each of these topics is covered throughout the course, and they will
often be a controversial topic and topic for debate.
You will indicate whether you know each statement to be True or False, but there is no right or wrong
answer since it is just to assess your background knowledge.
1. Blacks commit more crime than any other racial group.
9 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | 2. The United States has the lowest recidivism rates in the world (return to prison).
3. The death penalty is cheaper than life imprisonment.
4. Politicians shape our thoughts on crime, even if they are inaccurate.
5. Children are most likely to be killed by a stranger.
6. A stranger is most likely to physically harm you.
7. White-collar crime costs our country more every year than street-crime.
8. Juveniles are more violent today than ever before.
9. Immigrants commit more crime than native-born people.
10. Violent crime has risen in the United States over the last 20 years.
ALISON S. BURKE, DAVID CARTER, BRIAN FEDOREK, TIFFANY MOREY, LORE RUTZ-BURRI, AND SHANELL
SANCHEZ
10 |
SOU-CCJ230-Introduction-to-the-American-Criminal-Justice-System-1593030955.pdf | 1.1. Crime and the Criminal Justice System
SHANELL SANCHEZ
Theft as a Child
The first lesson in crime and criminality I remember was when I was in second grade and stole something from
a local drug store. I thought that the bracelet was shiny and perfect. At first, I remember wanting to try it on, but
then I did not want to take it off. I had more questions than my Nana may have been ready to answer about why I
did it and why I could not keep it. I had to take the bracelet back, which hurt because I loved it. Because of guilt or
shame, I told my grandma what I did.
Think about a time in your life that you may have done something similar. Was this first lesson in crime and
criminality from the person you were raised by such as a parent(s) or grandparent(s)? Did they teach you that what
you did was a crime and, hopefully, how to correct this wrong at a young age?
You were probably punished, and they may have consisted of helping out with more chores or losing your
allowance to pay back what you stole.
Imagine all the questions you may have for your parents at the moment: Why was it wrong? What would happen
to me if I did not tell you? What is a crime? Who decides what makes a crime? What happens to me if I commit a
crime and get caught? What is my punishment? Why was it wrong when there were so many polishes there?
Further, I had to help out around the house for the weekend. In exchange for all this, she did not tell my dad
because she knew her punishment was sufficient and to tell him may be excessive. She took a balanced approach to
punishment and I think this is why it was so effective. It was not too strict, it was hard to complete, and I had to
think about what I did.
Most criminologists define crime as the violation of the laws of a society by a person or a group of
people who are subject to the laws of that society (citizens). Thus, crime as defined by the State or Federal
government. Essentially, crime is what the law states and a violation of the law, stated in the statue, would
make actions criminal.
1
1. Lynch, M., Stretesky, P., Long, M. (2015). Defining crime: A critique of the concept and its implication. Palgrave Macmillan: US.
11 |
Subsets and Splits