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Chapter 11 Business Organizations 253
Sole Proprietorships 255
Partnerships 258
Corporations 260
Limited Liability Companies 269
Bankruptcy 273
Concluding Thoughts 276
Endnotes 277
Index 335
ors
TERENCE LAU
Terence Lau is a professor of business law in the Management/Marketing Department at the School of Business Administration,
University of Dayton (UD). He served as the 2006 Supreme Court Fellow at the Supreme Court of the United States. Prior to joining
UD, he was in-house counsel to Ford Motor Company in Detroit and Director for Governmental Affairs for ASEAN to Ford Asia-
Pacific in Bangkok. He holds a JD from Syracuse University.
LISA JOHNSON
Lisa Johnson is a professor at the University of Puget Sound School of Business and Leadership. She holds a J.D. with a certificate in
Environmental and Natural Resources Law from the Northwestern School of Law of Lewis and Clark College, a PhD from Portland
State University in Public Affairs and Policy, an MPA with a focus on international environmental policy from Indiana University,
and an MFA from Pacific Lutheran University. She is a Fellow at the Oxford Centre for Animal Ethics. From 2015- 2017, she was the
Nat S. and Marian W. Rogers Professor.
A work of this scope would not be possible without the cooperation, collaboration, and support of many. We relied on the fine opin-
ions, encouragement, wisdom, guidance, and good thoughts of people too numerous to mention here, though we wish to name a
few in particular.
For version 3.0, we specifically would like to thank Vicki Brentnall, Digital Content Manager, for supporting this project and its
continued success. We know that her work, and the work of all of the fine professionals at FlatWorld, is instrumental in the produc-
tion and distribution of top quality learning materials. We remain impressed by the FlatWorld team and its commitment to placing
high quality content into students' hands. We see this goal represented in every contact we have had with them. This team does
more behind the scenes than we could possibly know. We wish to thank the copyeditors, who help ensure a reader-friendly final
product.
We also wish to thank our students. Without your questions, insights, occasional confusion, and good energies, this book would
not have been possible. We learn from you every time that we come to class. You have inspired us to see how this important topic
can be taught in a challenging, yet engaging manner.
Thank you to the reviewers who offered careful readings and suggestions for improvement during different incarnations of this
book. Four of these reviewers reviewed the original proposal and all chapters. A special thank you for devoting so much of your time
to this work:
• Teressa Elliott, Northern Kentucky University
• Catherine Neal, Northern Kentucky University
• Lamar Odom, Our Lady of the Lake University
• Mary Sessom, Cuyamaca College
A fifth reviewer reviewed the proposal and the majority of the chapters. Thank you for lending your expertise and time:
• Stephen Yoder, University of Alabama at Birmingham
Ten additional reviewers reviewed the proposal and a single chapter. Thank you for your good thoughts and for sharing your ideas
with us. We appreciate your time and guidance:
• Wade Chumney, Georgia Institute of Technology
• Warren Hemmer, Lewis and Clark Community College
• Ernest King, University of Southern Mississippi
• Trinidad Leon, St. Ambrose University
• Vicki Luoma, Minnesota State
• Sharlene McEvoy, Dolan School of Business, Fairfield University
• Marisa Pagnattaro, University of Georgia
• Donna Sims, Central Connecticut State University
• Paul Weinstock, Ohio State University
• Eric Yordy, Northern Arizona University
Finally, we thank our professional colleagues at the University of Dayton and the University of Puget Sound for providing us the
good space in which to undertake this important work, as well as colleagues at the Academy of Legal Studies of Business. Your col-
legiality and friendship continue to make academia a most enjoyable profession, and we look forward to many years and future edi-
tions to come.
Welcome to version 3.0 of The Legal and Ethical Environment of Business! We are delighted that you are using this textbook to serve
as your guide to learn about how our legal system shapes and informs the decisions that business professionals make daily. Collect-
ively, we have taught this course for twenty-eight years to over two thousand students. When we set out to write the first version of
this book, we knew from our experience that students tended to view text offerings in business law and ethics as largely dry and ir-
relevant. We wanted to change that for the students who were using our book. We realize that students demand an engaging and
lively delivery of educational materials. We know that interaction, multimedia, multitasking, bite-size content, and twenty-four-
hour cycles are the norm for processing and learning. The challenge for legal environment textbooks, as we see it, is to meet the
needs of the current generation while maintaining the academic integrity and rigor that this core course demands.
The sheer volume of information to be covered makes the legal environment of business one of the denser courses for the busi-
ness undergraduate. Review the Table of Contents of most legal environment textbooks, and they read like the first-year curriculum
at a major law school. (The first-year curriculum in law school usually includes Contracts, Torts, Criminal Law, Constitutional Law,
Civil Procedure, and Property). It's also one of the few business courses grounded in the humanities, which can make the subject
even more challenging if you are taking the course at the same time you are taking statistics, macro- or microeconomics, and ac-
counting. This textbook, therefore, begins by removing some of the topical areas typically found in a legal environment textbook,
such as antitrust and labor relations. Of the topical areas we retain, we have condensed and streamlined the presentation of material
to ensure that every page is relevant, engaging, and interesting to you. Our textbook is intentionally shorter in length compared to
other texts, with much greater emphasis on application of the concepts presented to real-life experiences and examples.
We believe that the concepts of business law must be illustrated with real-life examples in order to be meaningful to you. The
textbook contains dozens of these examples to help you understand and apply the material. We have also included practice work-
sheets in each chapter to help you apply your understanding of the material to real-world scenarios. We've also included a section
called Practical Ethical Action in each chapter, where we present an ethical dilemma related to the subject matter and challenge you
to think about how you would act in a similar situation. We hope you'll work through these Practical Ethical Action cases so that
you'll fully appreciate how relevant and high-impact the legal environment of business is when it comes to the operation of busi-
nesses everywhere.
You can't avoid having to learn the rules of law. We strongly believe, however, that merely memorizing the law won't serve you,
your future employers, or society. Faith in our capitalist corporate structure has been shaken by waves of scandal, from the greed ex-
hibited by Enron to the arrogance demonstrated by Lehman Brothers to the incompetence displayed by General Motors and
Chrysler. We assume that the business professionals in charge of those failed institutions all knew the law. In order to achieve profit-
able success that also delivers long-term value to all stakeholders, we believe you have to understand the reason for the law. More
than anything else, it is this practical wisdom that we hope to impart to you. Our textbook is therefore designed to help you first un-
derstand the materials through the use of key learning objectives, then assimilate the material through the use of lively and interest-
ing examples, and finally reinforce the material through key terms, key takeaways, and exercises.
We are passionate about teaching, and we hope that passion shines through in our textbook. If we can ignite that same passion
in you for the legal environment, then we consider our task complete. We hope you enjoy this textbook, and we encourage you to
contact us directly if you have any feedback for future editions.
4 THE LEGAL AND ETHICAL ENVIRONMENT OF BUSINESS VERSION 3.0
_ _( ~ A e I E R ]_ _ _ _ _ _ _ _ _ _ __
LEARNING OBJECTIVES
After read ing this chapter, you should be able to understand the nature and sources of law,
and the concept of the ru le of law and how it affects business. At t he conclusion of t his
chapter, you should be able to answer the following questions:
1. What is the law?
2. Where does our law come from?
3. What is a rule of law?
4. How is the law relevant to business?
5. How does the study of the legal environment of business create a founda-
tion for future business courses?
You might be wondering what the law has to do with you. You try to follow the rules. You don't get into any
trouble. You want to engage in honest deal ings in business. Besides, you can always hire an attorney if you need
legal help.
Here's how. The law dictates virtually every aspect of a business's operations, including its creation and
operations, its treatment of workers, and its duties to consumers, the environment, and society. Moreover, the law
also provides avenues for t hose with real or imagined claims against the business to proceed against it. As a
businessperson, minimizing liabil ity exposure-both of the business and personally-is essential. A sol id
understanding of the legal environment can help you minimize liability exposure, and prepare you to navigate the
regulatory environment of your particular industry. While it is true that you can always hire an attorney to help with
legal issues, it is quite impracticable to have an attorney's input on every decision that must be made.
Besides the basic considerations of the need to operate lawfully, knowledge about resolving legal disputes, the
best ways to minimize liability exposure, and the effects of their business practices on others are important for
businesspeople to possess. Sometimes having a legal answer to a problem isn't enough. Additionally, we also want
to consider what it means to do business fairly. Fair to whom? Fair to shareholders? Fair to employees? Fair to the
consumers who will purchase a business's products? Through which ethical lens will these issues be
contemplated? Of course, trade-offs are a part of business. To increase shareholder profits, for example, labor costs
may need to be reduced by using cheaper labor. If employees are paid less, they may be less well-off, but
shareholders may be happier. Often in business, just acting in accordance with the law isn't enough to satisfy the
notion of fairness. For that reason, it's important to consider not just what the law says, but why the law exists. This
inquiry leads us to consider associated public policy. Questions of fairness also lead businesspersons to consider the
perceptions of their business practices that others might have. A good perception can help a business succeed in
the long-term, but a bad perception might invite scorn, exclusion, or even litigation.
One recent example of a coll ision of law, public policy, fairness, and questions of perception can be seen in
business responses to marriage equal ity, both before and after marriage equality was recognized as a civil right by
the U.S. Supreme Court.[l l Before the U.S. Supreme Court issued this sign ificant opinion, several states recogn ized
6 THE LEGAL AND ETHICAL ENVIRONMENT OF BUSINESS VERSION 3.0
that same-sex marriage was lawful, and prohibited discrimination based upon sexual orientation. Regard less of this
fact, some businesses that operated within those states decided to discriminate by withholding services from
same-sex couples who attempted to hire them including florists/21wedding cake decorators/31and photographers.
4
[ 1Those businesses discovered, however, that discrimination is unlawful, and such unlawful behavior can carry stiff
financial penalties.
In these cases, we see legal positions that clash: Some argued that businesses that operated in accordance
with their owners' religious beliefs wherein the religion did not agree with same-sex marriages should be permitted
to refuse to engage with customers who were hiring them for services. Others argued that their free speech rights
were infringed upon if they were not permitted to refuse service. In a nutshell, these cases raised conflicts between
ostensible First Amendment rights (e.g. freedom to exercise religion, free speech) and basic civil rights.
Reflect on how these conflicts might arise in your chosen field or industry. How can you create business
practices and pol icies that do not conflict with law, are not perceived by others as unfair or abusive, and permit
your business to move forward as a well-regarded entity in the community? To answer these questions, you need
to have an understand ing of what it means to have a right, as well as who or what has those rights. The study of
law can help you understand what that means. Civil rights are intertwined with the legal environment of business.
Reflect on the legal recognition of marriage equality as a civil right. If a business violates a person's civil
rights-regard less of whether that person is an employee or a customer-our legal system provides a forum and
process to redress that harm. Moreover, public opinion about a business that violates a person's civil rights is likely
to be poor, and that will have very real consequences for that business.
On the other hand, a business that operates within the boundaries of law and operates with a strong
comm itment to ethics is likely to be unimpeded by legal and public image problems that are easy to avoid.
Additionally, learning about law can help you recognize the reach and limits of our legal system. In other
words, a person studied in law will be able to recognize when the government has overreached, because a person
who understands the structure of our system of government and the sources from which it draws its authority will
be able to identify what it is our lawmakers are permitted to do as a legitimate exercise of power, and what types of
things lie outside of those powers. The exercise of government power through lawmaking is also a participatory
As you th ink about these questions and the many other questions that will arise during your study of the legal
environment of business, try to set aside any fixed ideas that you have already formulated about law and the legal
system. Many students who are new to the study of law find themselves sharply swayed by a particular type of
fiction that has grown around the legal system. Specifically, many students find that they harbor a sense of
repugnance to law or suspicions about the legal system, because they have heard that frivolous lawsu its are
brought by a litigious public waiting to pounce at the smallest sl ight, along with money-grubbing attorneys
waiting to cash in. We ask that you set aside those and any other preconceived notions that you may harbor about
the law and the legal system. The law is a dynamic, sophisticated field. Frivolous lawsuits are not permitted to
advance in our legal system, and most attorneys are committed to justice and fairness. They work hard to protect
their clients' legal interests and simply do not have the desire or the time to pursue frivolous claims. Indeed, there is
no incentive for them to pursue such claims, because our legal system does not reward such behavior. Often,
CHAPTER 1 INTRODUCTION TO LAW 7
people form their opinions about the law and the legal system from various mass med ia sources. However, keep in
mind that our media outlets are in the business to make money. Often, they will focus on a particular fact of a case
and sensational ize it, rather than diligently relay all known facts and the legal questions presented by those facts.
Why? Because the first approach sells, but the latter approach is generally too technical to hold the interest of large
numbers of people. So, if you have learned about the legal system from "the news," or from surfing the Internet,
then remember that you have on ly gl impsed a small, often distorted, piece of the puzzle.
Most people want to conduct themselves and their business dealings within the parameters of the law. Even if
we are very cynical, barring any other compunction to behave well, we can see that it makes the most economic
sense to do so. Following the rules of the game saves us money, time, and aggravation, and it preserves our
So if most people recognize that they have an incentive not to run afoul of the law, why are there so many
legal disputes? There are many reasons for this, such as the fact that many of our laws are ambiguous, and
reasonable people may disagree about what is "right." Additionally, legal injuries happen even under the best of
conditions, and the aggrieved parties need a method to press their claims to be compensated for their damages.
A common theme in the study of the legal environment is responsibility. Much of our legal wrangling seeks to
answer the questions, "Who is responsible, and what should be done about this injury?" Additionally, and perhaps
more importantly for business, is the concern of how to limit liability exposure in the first place. A solid
understanding of the legal environment of business should help limit the risk of liability and thus avoid legal
disputes. Moreover, it should help you recogn ize when you need to contact your attorney for assistance in defining
the contours of the law, which are the rules of the game. The law provides continuity and a reasonable expectation
of how things will be, based on how they have been in the past. It provides predictability and stability.
This book does not teach you how to practice law or to conduct legal research. That is the work of attorneys.
Legal research is a sophisticated method of research that seeks to determine the current state of the law regard ing
narrowly defined legal issues. Legal research helps guide our behavior to help us comply with the rules of the
game. When you need an answer regarding a specific legal issue, you wil l contact your attorney, who will research
the issue, inform you of the resu lts of that research, and advise you of the decisions you must make with respect to
that issue.
The goals of this book are practical. Try to conceptualize your study of the legal environment of business as a
map by which you must navigate your business dealings. We want to teach you how to read this map so that you
are able to understand the law and how it affects your business and your life. An understanding of the law can help
you to avoid serious missteps, which can prospectively and proactively limit your legal liability. This is far better than
being in constant reactionary mode. Simply stated, planning can avoid or minimize liability exposure. Simply
reacting to legal issues after they have arisen can be costly. As you have probably heard, ignorance of the law is no
This chapter provides an overview of the legal system. We begin with a discussion of what the law is, and then
we turn our attention to the sources of law, the ru le of law, the reasons why rule of law is important to business,
and how law affects business disciplines such as management, marketing, finance, and accounting. The chapter
concludes with a discussion of the link between rule of law and economic prosperity.
8 THE LEGAL AND ETHICAL ENVIRONMENT OF BUSINESS VERSION 3.0
KEY TAKEAWAY
Law is a dynamic and ever-changing field that affect s everyone, bot h in their individual capacit ies as people
and in their business interactions. Studying the legal environment of business helps us understand how to
reduce liabi lity risks, identify legal problems that require an attorney's assistance, and identify the li nks
between business and the law.
1. WHAT IS LAW?
LEARNING OBJECTIVES
1. Understand the meaning of jurisprudence and how its study can lead to greater understanding
of our laws and legal system.
2. Distinguish "law as power," legal positivism, legal realism, natural law, and legal pragmatism.
3. Examine strengths and criticisms of several theories of jurisprudence.
4. Explore examples of several theories of jurisprudence.
Law is a set of rules that are enforced by a government authority. While other important directives and
social norms help us make decisions about what we should and should not do, law sets forth require-
ments. If we ignore the law or do not behave within the boundaries of law for whatever reason, we may
face consequences such as fines, imprisonment, or monetary damages.
Consider the nature of law. We might believe that "the law" is simply the actual words that are
written by human beings. We might also believe that it includes "reading between the lines" to discern
the spirit of the law. Or, we might believe that the law includes concepts that have not been reduced to
written form by human beings, but exists due to some higher power, or simply as an inalienable right
due to human beings simply by virtue of being human beings. Often, people can identify with all of
these different ways of understanding the nature of law, and this understanding might shift based upon
the issue being considered. For example, people who believed that marriage equality should be a civil
right before it was recognized as such may have based their argument upon a belief that the right to
marry whomever one wishes is an inalienable human right. However, that does not mean that people
who based their argument on the belief in inalienable human rights will see that anything or everything
is an inalienable human right. For some things, they will probably believe that the law is simply the ac-
tual words that are written by human beings. For example, people generally believe that the federal tax
code is a valid law. That law is written by human beings, and many people do not try to "read between
the lines" to discern the spirit of that law, nor do they necessarily believe that the ability for the govern-
ment to tax its citizens is bestowed by some higher power or due to some inalienable right. Indeed, if
lawmakers allow for a credit or a deduction, people are generally happy to take it, simply as the law is
written.
But these different viewpoints suggest interesting questions. For example, would you obey a law
that you disagreed with, or would you ignore such a law? Do you believe that what the law actually is
matters as much as who enforces it? Do you think that morality is a part of legality, or do you think
that morality is wholly separate from the law?
Based on the particular theory of jurisprudence to which one ascribes, these questions will gener-
ate different answers. Not only will the answers to these questions differ, but the potential outcomes of
legal disputes can also vary widely, depending on one's perception of what the law is. These differences
highlight fundamental disagreements over the nature of law.
Jurisprudence Jurisprudence is the philosophy of law. The nature of law has been debated for centuries, giving
rise to a general coalescence of ideas to create particular schools of thought. Let's consider some differ-
The philosophy of law.
ent theories of jurisprudence.
CHAPTER 1 INTRODUCTION TO LAW 9
At its most basic interpretation, some believe that law is simply power. Under this interpretation,
color of authority
law is followed because the sovereign issues orders that are backed by threats. Consider tyrannical
rulers who create arbitrary laws or bad laws. If the sovereign has the power to enforce those "laws," Refers to actions ta ken under
then regardless of the "badness'' of the law, it is still law. The Nazis executed six million Jews pursuant the law.
to German law during World War II. Saddam Hussein routinely tortured and executed political op- prisoners of conscience
ponents and minority Sunni Muslims in Iraq under Iraqi law. The military in Myanmar (known eu- According to Amnesty
phemistically as the State Peace and Development Council) imprisoned the democratically elected and International, a prisoner of
Nobel Peace Prize- winning prime minister of the country, Aung San Suu Kyi, under color of author- conscience are "people who
ity. Though Aung San Suu Kyi was released from her long imprisonment in 2010, other prisoners of have been jailed because of
their polit ica l, religious or
conscience and enforced disappearances around the world exist, of course. Those who ascribe to
other conscientiously-held
the idea that law is power often argue that coercion is an essential and necessary feature of law. beliefs, ethnic origin, sex,
color, languag e, national or
social origin, economic status,
Egypt's Disappeared birth, sexual orientation or
other status, provided that
they have neither used nor
Amnesty Int ernat ional video advocated violence." Free
Prisoners of Conscience,
http://www.amnestyusa.org/
our-work/issues/
prisoners-and-people-at-risk/
prisoners-of-conscience
enforced disappearances
An international crime and
human rights violation where
a person is detained by a
state government, and t hat
person's whereabouts are not
revealed to t he detainee's
fa mily, or the govern ment
denies that they were
View t he video online at: http://www.youtube.com/embed/ymHzgXuheRg?rel= O involved.
Let's explore whether the law is nothing more than power. If an armed person robs your store, you will
the draft
very likely hand over whatever it is that he or she wants. The robber has exercised power over you but
has not exercised the law. This is because an armed robber is not the sovereign power. So, in that case, Compulsory military service.
we can see that not all exercises of power equate to exercises of law. Of course, we can also easily find
examples of laws that are backed by the sovereign's power. Consider, for example, a government that
institutes the draft under threat of imprisonment for failing to comply. The sovereign would have the
power to deprive us of our liberty if we did not follow the rules; such a law certainly has the force of
power behind it.
If law is nothing more than power, then the subjects of the law are simply at the mercy of
whomever is in power. In Myanmar, the military ignored the results of democratic elections and placed
Aung San Suu Kyi under house arrest for more than fifteen years to prevent her from taking power.
However, if we look at the U.S. system of government, citizens do not need to feel that they are com-
pletely "at the mercy" of the government. This is because people also have power. People can elect their
government officials, and they can vote "out" government officials who aren't doing a good job. In this
way, those in power are accountable to the people. We can critique the idea that law is nothing more
than power by simply observing that in some systems of government, people are not so helpless vis-a-
vis their government. Additionally, not all law requires the exercise or threat of overt power. For in-
stance, compliance with some laws may be driven more by economic incentives, rather than by force of
power.
A competing view is that of legal positivism, whose proponents disagree that law is simply legal positivism
power. Legal positivists believe that the law is what the law says. The laws are written, human-made
A belief that the law is
rules. The law is not drawn from any source higher than human beings. Legal positivists do not try to w hatever the sovereign says
read between the lines. They may disagree with the law as it is written, but they will acquiesce to the it is. The law is written,
sovereign power and follow the law as it is written. They reject the belief that subjects of a law have an human-made rules.
individual right to disobey a law that they happen to oppose, providing that the law is from a legitimate
source. Positivists believe that law is wholly separate from any consideration of ethics. This simply
means that a question of ethics will be a different analysis than a question of law. Moreover, they do not
believe in intrinsic rights, but instead, believe that rights are created by law, and law is written by hu-
man beings.
Legal positivists do not believe that law is simply power, because they believe that valid law must
be created pursuant to the existing rules that allow the law to be created. In short, the law must be
10 THE LEGAL AND ETHICAL ENVIRONMENT OF BUSINESS VERSION 3.0
created by a legitimate law-creating authority. Under this way of thinking, an arbitrary declaration of
law by a sovereign who did not follow the rules for creating the law would not be viewed as valid law. It
would lack legitimacy. Additionally, legal positivists would not consider any rule or ((law'' created by an
illegitimate ruler as valid law. Consequently, a legal positivist would feel no need to obey an illegitim-
ately created ((law."
Consider the example of the draft again. Some people have a strong moral objection to engaging in
armed conflict with other human beings. However, a legal positivist would most certainly comply with
a law that required compulsory conscription, though he or she might use other legal channels to try to
change the law.
A common criticism of legal positivism is that it prohibits individuals from remaining true to their
own consciences when their consciences conflict with the laws of the sovereign. However, for a positiv-
ist, the subjective belief in the ((goodness" or ((badness" of a law is not relevant for determining what the
law is. The law is what the law says, providing it was created by a legitimate law-creating authority that
has followed the rules for creating the law.
insider trading
One criticism of legal positivism is that it is too limited in its conception of law. For instance, at
least some laws seem to reflect a moral stance. The prohibition against insider trading might be said
The use of nonpublic
information to buy or sell a to encompass the idea of fairness, which is a moral consideration. [s] Likewise, due process might be
stock to make money. said to encompass the ideas of both fairness and a moral position against cruelty. Moreover, not all law
is the result of a sovereign-issued, written rule. For example, international customary law has de-
due process
veloped through customary practices between nation states. It is valid law, but it is not a set of rules
Ensures funda mental fairness handed down from a sovereign ruler or law-creating authority.
and decency in government
actions; levels of due process A different viewpoint is legal realism, which is the belief that the law itself is far less important
vary according to the than the consideration of who is in the position to enforce the law. Like positivists, legal realists believe
property or liberty interest at that law is the product of human making. However, unlike positivists, they believe that the outcome of
stake. any issue that arises under law is dependent on the person, such as a judge, who is in the position to ex-
international customary
ercise power under the mantle of the law. Additionally, realists believe that social and economic con-
law siderations should be brought to bear in legal disputes, which may very well be ((extra" considerations
that are not captured by the written law itself. In short, for a legal realist, knowing who is enforcing the
Law composed of
long-standing international
law is far more important than what the law actually says.
customs or practices that If a realist brought a dispute before a particular judge who was known to be unsympathetic to that
have the force of law. particular type of dispute, the realist would believe that the judge's decision would reflect that leaning.
For example, if a dispute arose under the Clean Water Act, and the defendant was a legal realist who
legal realism believed that the judge was unduly harsh with environmental offenders, the legal realist would not look
to the actual words of the Clean Water Act itself to predict an expected likely outcome. Instead, the de-
A belief that the law itself is
less important than who is in
fendant would view the judge's personal and professional beliefs about water pollution as determinat-
the position to enforce it . ive factors. Similarly, if the plaintiff in the same case was a realist who did not believe that the Clean
Water Act was written very clearly, that plaintiff might hope that the judge would consider the social
importance of clean water to human health, natural environment, and nonhuman animals.
Critics of legal realism point out that those who are in the position to exercise the power of the law
over others should not circumscribe the checks and balances of our system of government by consider-
ing factors outside of legitimate sources of law when making decisions. For instance, they argue that
judges should not use any factors other than the written law when rendering decisions. Legal realists,
however, point out that judicial interpretation not only is necessary but also was contemplated by our
Founding Fathers as a built-in check and balance to our other branches of government.
Natural law Natural law is the idea that humans possess certain inalienable rights that are not the products of
human-made law. Many of the writers of the United States Declaration of Independence and Constitu-
A belief that humans possess
ce rtain inalienable rights that
tion believed in some aspects of natural law granting rights to citizens that no government could take
are not the products of away and with which no government could interfere. Therefore, we can say that natural law differs
human-made law. from both positivism and realism in this important respect. Humans are able to reason, and therefore
they are able to discover moral truths on their own. They are not automatons who require a sovereign
power to tell them right from wrong. Natural law adherents do not reject human-made law. However,
they recognize that human-made law is subordinate to natural law if the two types of law conflict.
CHAPTER 1 INTRODUCTION TO LAW 11
Civil rights activists often rely on natural law arguments to advance their platforms. This is true
today as well as historically. For example, a civil rights advocate might point out that regardless of what
the law "says," discrimination based on race is simply wrong. If the written law allowed racial discrim-
ination, natural law adherents would not recognize the law as valid. Edward Snowden may have relied
upon a natural law perspective, when he violated U.S. law by revealing classified information under the
belief that people had a "right" to know that the government may have overreached its constitutional
authority to surveil its citizens.
https://commons. wikimedia.org!wiki!File:Edward_Snowden-2.jpg
Former NSA employee Edward Snowden tells NBC why he believed he did the right thing by revealing the
NSA's wide-reaching surveil lance program. Watch the video here: https://www.theguardian.com/world/video/
2014/may/29/edward-snowden-nbc-i nterview-video.
© 2016 https://www.theguardian.com/world/video/2014/may/ 29/edward-snowden-nbc-interview-video
Legal pragmatism is another viewpoint. In a nutshell, pragmatists reject the idea of legal formalism
Legal pragmatism
or undue attachment to any theory of jurisprudence at all. They believe that judges, in particular,
should apply a wide range of information to help them decide cases - not simply legal precedent, or any Emphasizes t he context of
disputes or facts, questions
theoretical commitment to a particular way of thinking. Instead, law should be viewed as an instru- the foundations of law, views
ment and as a practice, and the facts of a case should be understood in their context. Judge Richard law as an instrument, and
Posner is a proponent of legal pragmatism. recogn izes that alternative
Each theory of jurisprudence can inform our understanding of legal issues by allowing us to see perspectives are
the same thing from many different perspectives. Moreover, depending on philosophical perspective, unavoidable. See Internet
there may be several possible outcomes to the same legal dispute that are equally supportable. This un- Encyclopedia of Philosophy,
derstanding can help us identify common ground among disputants as well as points of departure in Legal Prag matism
http://www.iep.utm.edu/
their reasoning. leglprag/.
3. Mary knows the police officers who patrol her neighborhood. One night, she drinks too much alcohol
at her friend's house. She decides to drive home anyhow, because she knows that if she was pul led
over by the police, that she will know the police officer who pulls her over. She is certain that any
police officer that she knows wil l not detain her, and will allow her to go home, even though she wi ll
most certainly be violating the law by driving under the influence of alcohol.
4. The Islamic State of Iraq and Syria (ISIS) has attempted to set up a recognized and leg itimate
government, complete with rule of law. Which system of jurisprudence might ISIS demonstrate?
KEY TAKEAWAY
Different theories of jurisprudence inform our understanding of what the law is. Examining legal issues
through t he lenses of different theories of jurisprudence allows us to see how different outcomes can be
defended.
EXERCISES
2. SOURCES OF LAW
LEARNING OBJECTIVES
https://www.supremecourt.gov/about/northandsouthwalls.pdf
Along the north and south walls of the Great Hal l at the U.S. Supreme Court, friezes representing the great law-
givers in history are carved in marble. Among them are Hammurabi, Moses, Solomon, Draco, Confucius,
Muhammad, Napoleon, and one American. Click the link to find out who he is.
People learn about the law their entire lives. But, of course, not all instruction about the "right" way to
be in the world reflects "the law." From caretakers, teachers, community elders, employers, and others
who are in positions of influence, people learn right from wrong, acceptable from unacceptable actions,
and all manner of rules and customs. Some of this guidance is learned through observation and emula-
tion, while other instruction is more formalized. For example, employers often have very firm ideas
about how their employees should comport themselves. Those ideas may be conveyed through employ-
ers' codes of ethics, employee handbooks, or organizational cultures.
Of course, actions that are considered "wrong" or are considered to be inappropriate behavior are
not necessarily violations of the law. They simply may represent social norms. For example, it is gener-
ally not acceptable to ask strangers about their incomes. It is not illegal to do such a thing, but it is con-
sidered impolite. Imagine that you are interviewing for a position that you really want. Can you ima-
gine asking your potential employer how much money he or she makes? It would not be illegal for the
employer to refuse to hire you based on your lack of social skills. However, it would be illegal for the
employer not to hire you based solely on your race.
So what is the difference? One type of "right from wrong'' is based on societal norms and cultural
expectations. The other type of "right from wrong" is based on a source recognized as holding legitim-
ate authority to make, and enforce, law within our society. These two types of rules in our soci-
ety- social norms and laws- are both important frameworks by which people organize their lives.
A Question of Ethics
Airbnb has faced criticism and concern about its business model. In a nutshell, questions about whether the
service that allows people to rent out their homes or rooms in their homes to others in a "home sharing"
scheme has simply al lowed some Airbnb vendors to operate soph isticated short-term rental businesses- on
scale with hotels or motels- without being regulated. This lack of regulation has spurred add itional concerns,
such as whether illegal discrimination has occurred in these settings. Discrimination by businesses- such as
against a person's race or sexual orientation- is not permitted as a matter of law, because such discrimination
is a violation of civil rights. However, in an unregulated business- or a business that is not uniformly regu-
lated- concerns exist about whether such th ings can and do happen. Moreover, the safety of visitors who
rent from people to "sleep on their couch" remains a concern. Airbnb has also purged large numbers of list-
ings prior to making listings avai lable to public regulators. For example, it purported ly dropped 1,500 listings[?]
that appeared to be commercial in nature from t he New York City area before releasing information to the
regu lators there. [BJ
Watch this short video of CEO Brian Chesky discussing Airbnb's desire to be regulated here: httpJ/bloom.bg/
1ProGvu.
Given these concerns, what extent is your duty to society as a potential consumer in these transactions? If you
are a vendor (a "host") t hrough Airbnb, is it eth ical to operate a business for rental accommodations wit h fewer
or no regulations, when standard hotels must abide by those regulation? How many rental units or nights
should a vendor be allowed to rent per mont h before standard hospitality regulations apply?
14 THE LEGAL AND ETHICAL ENVIRONMENT OF BUSINESS VERSION 3.0
Social customs may be violated on pain of embarrassment or ostracism. Someone may choose to ignore
social customs, but there are usually negative social or professional consequences to doing so. A person
who violates social customs may be said be a boor, or people may try to avoid that person because his
or her actions and comments make others uncomfortable. However, no legal repercussions follow viol-
ating social customs.
Violations of law are different. Violating the law carries penalties, such as liability or loss of liberty,
depending on the type of violation. While we may generally decide whether or not to conform to social
customs, we are compelled to obey the law under threat of penalty.
Public law Law can generally be classified as public law or private law. Public law applies to everyone. It is
law that has been created by some legitimate authority with the power to create law, and it applies to
Law that applies to everyone.
those within its jurisdiction. In the United States, the lawmaking authority itself is also subject to those
laws, because no one is ((above" the law. If the law is violated, penalties can be levied against the violat-
or. These penalties are imposed from some recognized source of authority, like the judiciary. Of course,
people in the United States may participate in many law-creating activities. For instance, they may vote
in elections for legislators, who, in turn, create legislation. Likewise, if people have a legal claim, their
case may be heard by the judiciary, which in turn may create common law or may provide a new inter-
pretation of a statute.
Private law Not all law is public law. Private law is typically understood to be law that is binding on specific
parties. For instance, parties to a contract are involved in a private law agreement. The terms of the
Law that is legally binding on
parties who agree to it, such
contract apply to the parties of the contract but not to anyone else. If the parties have a contract dis-
as a contract. pute, they will be able to use a dispute-resolution method, such as litigation, to resolve it. This is be-
cause both parties of the contract recognize the judiciary as a legitimate authority that can resolve the
contract dispute. However, regardless of the resolution, the terms of the contract and the remedy for
breach will apply only to the parties of the contract and not to everyone else.
Procedural law Some law is procedural and some law is substantive. Procedural law describes the legal rules that
must be followed. In other words, it details the processes that are legally required. For instance, the U.S.
The legal rules t hat must be
followed by government
government must generally obtain a warrant before searching someone's private home. If the process
officials in the execution of of obtaining the warrant is ignored or performed illegally, then procedural law has been violated. Sub-
law. stantive law refers to the actual substance of the law or the merits of the claim, case, or action. Sub-
stantive law embodies the ideas of legal rights and duties and is captured by our different sources of
Substantive law
law, like statutes, the Constitution, or common law. Laws can have both procedural and substantive
The actual substance of the components, such as the requirement to read the Miranda warnings when a person is subject to cus-
law or the merits of the claim,
case, or action.
todial interrogation.
Another important classification is the difference between civil law and criminal law. (Be careful
with this distinction. Civil law is also a term used to distinguish legal systems from the common law).
Criminal law is law related to conduct that is prohibited by the government. Civil law is all law that is
not criminal law. The differences between civil law and criminal law are many. In criminal law, the vi-
olation of law is an injury to the public. In civil law, the injury is understood to be suffered by the
plaintiff. A criminal charge is prosecuted by the government, while a civil claim is pursued by a
plaintiff. An attorney is provided in a criminal case if the defendant cannot afford one, but in a civil
case, the plaintiff is responsible for providing his or her own attorney. In a criminal case, the burden of
proof is beyond a reasonable doubt, but in a civil case, the burden of proof is merely by a preponder-
ance of the evidence. Penalties for violating criminal law include possible incarceration or even loss of
life. In civil law, however, incarceration and loss of life are never potential penalties. Most civil viola-
tions are redressed through monetary penalties.
The U.S. Constitution created the structure of our federal government. Among other things, it sets
U.S. Constitution
forth the three branches of government. These are the legislative, executive, and judicial branches.
It provides organizational and procedural requirements, defines the boundaries of jurisdiction, The supreme law of the land.
It created t he structure of the
and creates "checks'' on each branch by the other branches. For example, look at the U.S. Constitution
U.S. federa l government.
in Appendix 1. As you can see, in Article II, Section 2 the president is the commander in chief of the
several armed forces, but he does not have the power to declare war. That duty falls to Congress.
The first ten amendments to the U.S. Constitution are known as the Bill of Rights. Some of the Bill of Rights
Founding Fathers did not believe that a Bill of Rights was necessary because the power granted to the
The fi rst ten amendments to
federal government created by the U.S. Constitution was expressly limited. Any powers not expressly t he U.S. Constitution.
granted to the federal government by the U.S. Constitution are reserved to the states. This means that if
the U.S. Constitution does not state that one of the federal branches of government has jurisdiction
over a particular area, then that area falls to the states to regulate.
Despite the limited power granted to the federal government by the U.S. Constitution, as a condi-
tion of ratification, many states insisted on a written Bill of Rights that preserved certain individual
civil rights and liberties. Today, business entities that are treated as legal persons under the law, such as
corporations, enjoy many of these rights and liberties, just as if they were natural human beings.
Each state also has its own constitution, and those constitutions serve essentially the same function
for each individual state government as the U.S. Constitution serves for the federal government. Spe-
cifically, each establishes the limits of the state government's power, creates protections for fundament-
al rights, and establishes the organization and duties of the different branches of the state's
government.
16 THE LEGAL AND ETHICAL ENVIRONMENT OF BUSINESS VERSION 3.0
This dual system of government present in the United States is called federalism, which is a gov-
federalism
ernance structure whereby the federal government and the state governments coexist through a shared
A system in wh ich power is power scheme. State laws may not conflict with federal laws, including the U.S. Constitution. This is
divided between two or
more forms of government.
because the U.S. Constitution is the supreme law of the land.
Statutory law is law created by a legislative body. Congress is the legislative body at the federal
statutory law level. The states also have legislative bodies, most of which are bicameral, like our federal system. The
state legislatures' names vary by state. For instance, in Indiana, the legislature is known as the General
Law created by legislative
bodies. Assembly. In North Dakota, it is the Legislative Assembly. In New York, it is called the Legislature.
Nevertheless, their purposes are the same. They are the legislative branches of their respective state
bicameral governments.
A term used to describe a Congress is composed of a Senate, with 100 members, and a House of Representatives, with 435
legislature in which two members. The writers of the Constitution deliberated and argued over how to compose the legislature,
bodies exist, such as the U.S. and the result is a deliberative body that doesn't always respond quickly to the will of the majority.
Congress, wh ich is composed Since population numbers from the census taken every ten years determine how many House seats a
of the Senate and the House
state receives, smaller states are sometimes disproportionately represented in the Senate. Alaska and
of Representatives.
Delaware, for example, have only one representative in the House, but each has two senators. Senators
serve six-year terms, and members of the House of Representatives serve two-year terms. There are no
term limits for either senators or members of the House. One benefit of having no term limits is that
institutional knowledge and wisdom can be carried forward in perpetuity. One drawback is that elected
officials may hedge their votes on important issues in a calculated way, to bolster their chances for
reelection. If term limits were imposed, then vote pandering would not be a problem, but the Congress
would be forever laboring with many inexperienced lawmakers.
As you can see from "How a Bill Becomes a Law", a bill may be introduced in Congress through
the Senate or through the House of Representatives. Both the House of Representatives and the Senate
have many committees, and these are related to all areas under the purview of Congress to legislate.
After a bill is introduced, it is sent to an appropriate committee in the chamber of the Congress where
the bill originated. If the committee moves forward with the bill, it may (and likely will) modify the bill.
Then, it sends the bill to the house of origination (either the Senate or the House of Representatives)
for a vote. If the bill passes, then it is sent to the other house (again, either the Senate or the House of
Representatives), where it undergoes the same process. If the other house votes to approve the bill, then
the bill goes to the joint committee, which is composed of members of both the House of Representat-
ives and the Senate, where final work is completed. After that, the bill is sent to Congress for a full vote.
If the bill passes, it is sent to the president. If the president signs the bill, then it becomes a statute.
The president may veto a bill. A presidential veto is an executive "check" on the legislative body.
However, if the president vetoes a bill, the legislature can override the veto by a supermajority vote. A
congressional override is a legislative "check" on the executive branch. An example of a congressional
override of a presidential veto is the Justice Against Sponsors of Terrorism Act, which President
Obama vetoed. The bill became law because of a congressional override of that veto. [9] These checks are
built into our U.S. Constitution.
Congress may not act outside of its enumerated powers. Many people wrongfully believe that Congress
can do anything. That is simply not true. Look at Article I, Section 8, of the U.S. Constitution, for the
enumerated powers of Congress. Remember that any power not granted to the federal government by
the U.S. Constitution is reserved to the states. This means that if Congress passed a law in an area that
was actually reserved to the states to regulate, Congress would have acted outside the scope of its
powers. If challenged, the law would be struck down as unconstitutional.
Many U.S. states have state laws that are very different from each other. For instance, in Oregon,
certain terminally ill patients may legally commit suicide under the state's Death with Dignity Act.
However, in many other states, such an act would be illegal.
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alta ja ryöstääkseen teidät matkalla? Hän sijoittaisi teidät johonkin
tyhjään linnaan, jossa voisi asettaa siveytenne koetukselle.
— Niin, hän auttoi kyllä ruhtinasta, mutta viimein hänkin näki asiat
oikeassa valossa ja silloin hän luopui palveluksesta, vieläpä hän,
tuittupäinen mies kun oli, kävi Boguslawin kimppuun. Nuori ruhtinas
oli jo sangen pahassa pinteessä ja pelasti töin tuskin henkensä
Kmicicin käsistä.
— Kmicic oli suuri soturi! — sanoivat useat äänet.
— Ei Kmicic jätä sitä kostamatta, ei hän ole niitä miehiä! Hän käy
kyllä Radziwillinkin kimppuun!
— Olemme.
— Missä on rykmentti?
— Kaatuiko paljon?
— Tykocinin luona.
— Tykocin on valloitettu.
Hetmani pani käden silmien eteen ja alkoi sitten sillä sivellä
otsaansa.
— Mistä pakenitte?
— Drohiczynista.
Tuskin oli Kmicic kuullut tämän, kun hän jo oli ulkona ovesta, ja
tuntia myöhemmin hän nelisti Rokitnoa kohti minkä hevosen
kavioista vain lähti.
— Hän hiipii kuin susi läpi viidakoiden ja puraisee myös kuin susi,
— sanoivat he.