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BLAW 5175 Slide Text

**Business Ethics - 8/15/11** (Chapter 2)

1. Ethics defined and explain major ethical theories 2. Biases and heuristics that distort decision-making 3. Business ethics from stakeholder perspective; current events 4. Business ethics as a source of competitive advantage

What is Ethics Ethics are informal norms of behavior - part of the societal interactive construct (framework) Derivative from ethos, Greek notion of character and deep values that determine the identity and goodness or badness of a person or group. Root word for morality is (Latin) mores, customs and accepted rules of a group or society. Business Law vs. Ethics Law Standards or values established by a society that are enforceable in court or by the state. What we must do. Ethics Standards or values independent of official sanctions. What we should do. Ethical issue - An identifiable problem, situation, or opportunity that requires a person to choose from among several actions that may be evaluated as right or wrong, ethical or unethical. Free Market Ethics Manager responsibility is to increase value of shareholder investment Decisions of whats best for society should be made in the political arena Managers acting for the social good is theft of shareholder resources Utilitarian Ethics Act Utilitarianism - The best ethical course of action is the one that brings the greatest good for the greatest number An action is good if it benefits someone An action is bad if it harms someone Rule Utilitarianism - We ought to adopt moral rules which, if followed by everyone, will lead to the greatest increase in total happiness. Do not examine each decision, but overall rules effect Utilitarianism Consequence (outcome) - based system (Cost - benefit analysis) Fundamental Principle: An action is morally right if it produces the greatest amount of good for the greatest number of people affected by it. Philosophy of Jeremy Bentham (1748-1832) and John Stuart Mill (1806-1873) Parameters of Utilitarian Analysis Effect on all individuals must be considered Tyranny of the majority- should be avoided number intensity Long term effect most important Introspection errors Kantian Analysis Philosophy of Immanuel Kant (1742-1804) Duty - based system Categorical Imperative: Act only according to that maxim by which, you can at the same time intend that it should become universal law. Concept of universalizable action Corollaries of Categorical Imperative 1. We must never act unless we are willing to have our act, or the axiom on which it is based, become universal law. 2. We are obligated to treat every individual as an end and never exclusively as a means. 3. We must act as though we were a person who both makes the law and is bound by the law the person who is both subject and sovereign. That is, we must act in ways consistent with the way we desire others to act.

Kantian Analysis Deontology: Rights and Duties Adherence to universal principles regardless of consequences Respect for life, fairness, truth, keeping promises Moral action should be guided by overriding rights and duties Non-Consequentialist Pursuit of overriding principles is the focus Rawlsian Analysis Theories of John Rawls (1921-2002) Theory of the original position or veil of ignorance Decision maker does not know what his/her status or position in society would be imagine that societal roles were restructured, and that from behind the veil of ignorance, one does not know what role they will be reassigned. Only then can one truly consider the morality of an issue. Mechanism to avoid introspection errors The Market as a Mechanism Influencing The Ethical Character of Business Conduct Adam Smith the invisible hand Discipline of the Market unethical behavior profitable Factors militating against ethical behavior in a free market system Concentration of market power Barriers to Entry Imperfect information Externalities Agency Costs Ethical Theories Well Established Then why are people so vulnerable to unethical behavior Bad intent / greed can explain some but not all Unintentionally biased thinking Incremental changes in behavior Biases and Heuristics Most people subject to heuristics and biases that prevent objectively optimal decision making Non-maximization of utility Patently irrational Numerous limitations on human cognition exist 1. Obedience to Authority People much more likely to take unethical workplace action if commanded to do so by a superior Outrageous acts administering painful shocks (1% / 65% with authority command) 2. Social Proof Everyone else is doing it Line study which line is longer Difficult to contradict stranger group How much greater if pressure to conform from co-workers to employees A more ambiguous decision than line length Strong organizational desire to fit in Unethical actions increase if peers engaging in similar behavior 3. False Consensus Effect False belief that others think the same way we do If we are honest others are honest too Blind following of unethical acts People not good at detecting lies, but believe that they are 4. Overoptimism Divorce rate 50% / surveyed chance 0% Systematic errors in decision-making Irrationally optimistic views of prospects and valuations (Enron) Irrationally optimistic views of legality or ethical-ness of decision 5. Overconfidence

People tend to rate themselves as well above average in all traits, including honesty Accept own decisions without moral reflection

6. Self-Serving Bias Information you seek out biased Persistence in beliefs long after discredited Confirmation bias ignore contradictory evidence, recall supporting evidence Information you process biased ambiguous document, members of opposing viewpoints tend to interpret document as supporting their view Team biases Tendency to attribute to themselves more than average credit for team successees Less than average responsibility for team failures Judgements invariably affected by their own self-interest 7. Framing Reframing of question can produce a totally different answer People would rather purchase potato chips labeled 75% fat free than 25% fat Decisions framed as win or lose decision making impaired Increased tendency to cut corners win at all costs 8.Incrementalization Decisions influenced by size Big decision vs. incremental decision EX: euthanasia of undesirables Introduced to process gradually Most often not conscious decision to violate ethics Rather slippery slope in tandem with peers Takeaways We are all vulnerable to distortions in information processing and perception Decisions made hastily, without thinking, or under group pressure most vulnerable Distorted decisions can inefficient decisions and unethical decisions Trap for unwary; beginning of digging a hole downward spiral of unethical behavior Ethical Issues in Global Business What ethical standards apply to businesses in a global context All of the previous methodologies and challenges remain Additional difficulty adapting to the varying morals and values of nations in which firms do business. Common Global Ethical Issues Marketing and environmental practices - Nestle: Baby Killers; Coke and Kerala Sweatshop and labor abuse - Wal-Marts Kathy Lee collection (20 hrs/day @ $0.20/hr) Corruption and bribery - Gulf Oil: political contributions to Korea ($4.2 million) - Lockheed: bribes to Middle East ($22 mil) and Japan ($12.5 mil) Challenge #1: Cultural Relativism According to cultural relativism, no cultures ethics are better than any others. The cultural relativists creed - When in Rome, do as the Romans do. The inadequacy of this approach becomes apparent when the practices in question are more damaging than petty bribery or insider trading. Cultural relativism is morally blind. Bhopal Disaster Challenge #2: Ethical Imperialism Ethical Imperialism directs people to do everywhere exactly as they do at home. It is based on the theory of absolutism: There is a single list of truths, They can be expressed only with one set of concepts,

and they call for exactly the same behavior around the world Problems: It clashes with belief that peoples culture must be respected It presumes that people must express moral truth using only one set of concepts. It presupposes a global standard of ethical behavior

Whose Global Ethics The Caux Round Table An international network of business leaders who seek to develop a moral capitalism for a better world Develop principles for firms to follow in the global business environment Develop principles for governments in order to improve transparency and accountability Caux Round Table - Principles for Business Stakeholder Commitment- Responsibilities toward both shareholders and stakeholders; playing a role in improving lives of customers and employees. Honor ones obligations. Society Responsibility - Businesses also should contribute to human rights, education, welfare, and vitalization of the countries in which they operate and the larger global community. Environmental Respect Respect legal environment, natural environment, and political environment. Support liberalization of trade. Stakeholder Analysis Our Future Leaders: The MBA Oath I will act with utmost integrity and pursue my work in an ethical manner. I will safeguard the interests of my shareholders, co-workers, customers and the society in which we operate. I will manage my enterprise in good faith, guarding against decisions and behavior that advance my own narrow ambitions but harm the enterprise and the societies it serves. I will understand and uphold, both in letter and in spirit, the laws and contracts governing my own conduct and that of my enterprise. I will take responsibility for my actions, and I will represent the performance and risks of my enterprise accurately and honestly. I will be accountable to my peers and they will be accountable to me for living by this oath. Do you agree Would you sign a pledge upholding these Harvard MBAs Initially, less than 20% of Harvard MBA students signed this pledge Harvard & MIT student responses It is impossible to uphold the oath and still be responsible to your shareholders. I dont think anyone here plans to go to prison. I feel that ethics is a really fuzzy subject. We trust our integrity and our education Being ethical is not something you learn from signing a piece of paper. You have to be a little bit of an a**hole sometimes. My favorite We want to earn your trust by our actions, not because we sign a piece of paper. Questions Remain Yet, one student says: I dont think anyone here is going to behave in an unethical or illegal manner. Is ethics fuzzy Does a piece of paper matter What do these students responses say about our global business climate Can you uphold the oath and still be responsible to shareholders Does ethics have any real value Is it just charity Ethics as a source of competitive advantage Consumers want ethical corporations Survey, 88% say important for businesses to be ethical Employees care about ethical behavior of their firms Emphasis on ethics in weak economy Firms not making ethics a reality Weak connection between mission statement and reality Symbolic public gestures, limited value Greenwashing

Embedding ethical values Led by top management Executed by middle management Followed by top/middle/low level employees Employees very attune to genuineness of ethical principles Aligning incentives Align ethics and employee: Self-interest (do ethical standards benefit me) Satisfaction (am I happy with ethical standards) Environment (are others ethical around me) Benefits of ethical behavior Attract and retain better employees Will apply and stay due to aligning values Filter for unethical employees Strengthen relationships with customers Encourages trust and commitment Socially conscious consumers Create more favorable political and regulatory environments Regulators have discretion Legislatures act after disasters Reinforcing Ethics through Corporate Social Responsibility CSR interaction of company with its stakeholders (employees, shareholders, government, customers, community environment) CSR often reactive and haphazard Self-reinforcing CSR aligns strengths of the organization with CSR needs EX: Microsoft educating poor children w/technology Ralph Lauren fashion bootcamp Final Principles Ethical issues will not raised on a silver platter They will not be clear, easy to discern, or give plenty of time for thought Embed values early, apply readily when time comes Doing good by doing well / Doing good because it is the right thing to do

**Intro to Law - 8/16/11** (Chapter 1 & 3)

Law as a Formalized Norm of Social Policy Norms Norm: A commonly accepted mode of behavior Norms embody social policy All cultures have norms, although these vary widely across time and geographic areas Norms can be both informal and formal: General test for difference between informal and formal norms: Severity of penalty/punishment for norm violation Informal norms can extend from etiquette (manners) to ethics Norms - Penalties Penalty for violation of informal norms: societal disapproval, without officially sanctioned punishment for norm violation. Exception: ethics codes with punishments for violation mandated by law or professional or accrediting boards. Formal Norms Formal norms are laws, officially sanctioned embodiments of social policy Penalty for violation of laws: officially imposed penalties / punishments, ranging from execution or imprisonment (for criminal violations only) to imposition of fines or ordering of specific acts (e.g., community service) Purpose of laws- to regulate human behavior: order gives predictability of behavior, predictability increases trust, and trust provides justice Law and Ethics Important overlaps between law & ethics Important phenomenon, especially in the 20th century: passing laws to regulate behavior previously thought to be within the scope of ethics only Sources of American Law Common Law Constitutional Law Statutory Law Administrative Law Common Law An English concept Basic principle: stare decisis (let the decisions stand) applicable law based on precedent Today, often referred to as case law or court made law (as distinguished from statutory law) Administrative law Law of administrative agencies (fourth branch of government) Administrative agencies created through enabling legislation by legislative bodies Functioning of administrative agencies governed by Administrative Procedures Acts (APAs) Common vs. Civil Law Many areas of the world, including Europe & countries that have not adopted the English legal system, have civil law systems (code countries) Types of Law (Civil vs. Criminal) Law concerned with acts against society as a whole, for which officers of the government seek punishment Must be a formal law defining certain actions as crimes A form of public law interests of the public (society as a whole) outweighs the freedom of an individual to do as he pleases Among allowable sanctions for violation of certain types of crimes are imprisonment and execution Standard of proof for conviction in a criminal case: Guilty beyond a reasonable doubt Concerned with disputes between specific parties; therefore a kind of private law, since the state (government) is not initiating the case (at least not pursuant to a criminal law) Note: a business, branch of government or government official can be a party in a civil suit Civil courts function as referees between disputing parties Civil courts can only order monetary relief or specific acts cannot imprison or execute Standard of proof to win a civil case: preponderance of the evidence (more probable than not)

How to Read a Legal Case Name of case name of parties Note: cannot tell who is the plaintiff or defendant from the name of the case, because may be an appellate case) *CITATION indicates how to find the courts written opinion in the court reporting system State cases: state or regional reporting systems Federal cases: three tiers District F. Supp. Court of Appeals - 13 Circuits (1st-11th+D.C.&Federal)- F./F.2d/F.3d U.S.Supreme Court - U.S./S.CT./L.Ed. US Appellate Court System Electronic Databases Lexis and Westlaw United States Supreme Court - Opinions Four Parts of a Legal Case FACTS (F) : describes the parties to the lawsuit& events leading up to the case may describe the lower court history if appropriate QUESTIONS (Q) or ISSUE states the central legal issues to be decided by the court HOLDING (H) or DECISION states the opinion of the majority of judges on the legal issues may be concurring or dissenting opinions RATIONALE (R) or REASONING explains the factual & legal reasons for the judges decision importance of stare decisis & citing precedent Jurisdiction and Venue Jurisdiction - What type of court should hear a case Venue - In what geographic area within a particular court system should a case be heard Appellate jurisdiction - Ultimate appeal from both federal & state court systems, is to the United States Supreme Court Alternatives to Litigation Alternative Dispute Resolution (ADR) Negotiation Mediation Arbitration Arbitration Many commercial and labor relations contracts and a growing number of consumer dispute processes have arbitration clauses If contracts have arbitration clauses, take precedence over right to go to court Very important legally because arbitration decisions legally binding

**Stages of a Lawsuit - 8/16/11**

(Civil Cases) Pleadings Complaint (by plaintiff) Various motions, including failure to state a claim Answer by defendant- can include counterclaim or third party complaint Possible reply Dismissals and Judgments Before Trial Judgment on the pleadings (JP) Summary judgment (SJ) Difference between JP & SJ: additional evidence can be taken in Summary Judgment These cases only decided when no disputes of fact, just law Discovery *Interrogatories written questions/ requests for information Depositions The taking of witness sworn testimony before trial written or videotaped Crucial stage in the lawsuit because it allows the deposing party to: -assess the strength of the other partys case; -assess the credibility and viability of the other partys witnesses; -obtain new important information -provides a possible basis for impeachment of the witness at trial -preserves the testimony Other forms of discovery: subpoena & subpoena duces tecum Trial Jury selection voir dire Opening statements Plaintiffs direct examination defendants cross Defendants direct plaintiffs cross (Possible motions for directed verdict, rebuttal & rejoinder) Closing arguments Judges instructions Jury verdict Judgment Pre and Post Judgment Activities Motion for new trial or judgment n.o.v. (notwithstanding the verdict) New trial because of new evidence, impropriety or judge error N.o.v. because of jury error Appellate Procedure Note: Only the trial court actually hears evidence Note: appellant must allege reversible errors of law made at trial Information available to appeals court: Lower court record Parties attorneys abstracts and briefs Outcome of Appeal Remand for more proceedings in the lower court Affirm or reverse (may do both in part-modify) Further appeals must allege reversible error of law Writ of certiorari to U.S. Supreme Court entirely discretionary

**Constitutional Law and Administrative Law - 8/16/11** (Chapter 4 & 5)

Compromises in the Constitution Commerce Clause Power [t]o regulate Commerce with foreign Nations, and among the several States. . . Source of extensive federal power Regulate any activity that has a substantial economic effect on interstate commerce substantial economic effect has been broadly expanded over the centuries Commerce Clause Power Wickard v. Filburn (1942) Govt limits on wheat production to increase prices during Great Depression Farmer grew excess wheat for own use, violation of wheat limit laws Farmer arg: used wheat to feed own livestock, therefore no impact on commerce & cant reg. Result Ct: act impacts CC, Farmer does not buy wheat on open market One farmer small impact, but cumulative effect if all farmers followed policy & would impact price of wheat Heart of Atlanta Motel v. US (1964) Large 216-room hotel in the center of Atlanta Showed broad expanse of the commerce clause in the latter 20th century Limitations of Commerce Clause United States v. Lopez Congress passed Gun-Free School Zones Act of 1990 Federal offense to possess firearm in school zone Not part of Fed. Govts power under CC Education is local activity nexus between regulating gun violence and the Commerce Clause power to regulate interstate commerce was too distant Dean Milk Co. v. City of Madison, Wisconsin, 340 U.S. 349 (1951) municipal ordinance - all milk sold in Madison to be pasteurized at an approved plant within 5 miles of the city Purpose to facilitate local milk inspection Cannot discriminate against out-of-state commerce EX: state toll booths that charge out-of-state drivers more than state residence Court in Madison case Court erecting an economic barrier protecting a major local industry against competition from without the state, Madison plainly discriminates against interstate commerce. This it cannot do, even in the exercise of its unquestioned power to protect the health and safety of the people, if reasonable nondiscriminatory alternatives... are available. In- state producers hurt, not relevant State Legislative Power Executive Power Judicial Power Government action is presumed to be constitutional Rational Basis test is the government action rationally related to a legitimate government interest If yes, constitutional. (A low threshold) Strict Scrutiny test action must be narrowly tailored to a compelling government interest to survive (A high threshold) What laws get SS Those that infringe on fundamental rights. Personal liberties (speech), race-based classifications Protected Rights: Free Speech Fifth Amendment - No person shall be deprived of life, liberty, or property without due process of law; nor shall private property be taken for public use, without just compensation. Procedural Due Process -- the government must go through procedures to ensure that the result is fair. The process due is in proportion to what the government is trying to take from the person.

The Takings Clause -- when the government takes private property for public use, it must pay a fair price. Substantive Due Process -- some rights (voting, speech, travel, privacy) are so fundamental that the government may not take them at all. Constitutional Business Issues Businesses are persons under the law, but dont have the same range of protections (e.g. 4th amendment search and seizure & 5th amendment self-incrimination) Commercial speech Advertisements can be more closely regulated Can speak out on social and political issues Only regulate issue advocacy under strict scrutiny Recent Cases: Kelo Permissible for public entity to take land by eminent domain and transfer for benefit of private organization Eminent domain seizure of land by government with just compensation Parks and highways vs. economic redevelopment Recent cases: Citizens United Corporate funding of political broadcasts cannot be limited Corporations are persons under the first amendment Corporation is an association of citizens; similar treatment to media Administrative Law What is Administrative Law Law or regulations promulgated by administrative agencies FCC FDA SEC Some life-saving, some almost frivolous What is an Administrative Agency Administrative agencies are government entities created by federal or state legislation that enforce or regulate specific industry or issue Created by enabling legislation (federal or state) that: Establishes the specific agency, Delegates certain limited powers to the agency, and Defines the scope of the agencys authority Classification of Agencies Executive Federal Agency: Part of executive branch, under the control of the President; usually support the Presidents policies. Power of Agencies -- Rulemaking Two types of rules Legislative rules -- require businesses and people to act a certain way; have the effect of a Congressional statute. Interpretive rules -- these do not change the law; they define or apply the laws to new situations. Three types of rulemaking Informal rulemaking -- proposed rule must be published and public allowed to comment. Formal rulemaking -- must hold a public hearing before establishing the rule. Hybrid rulemaking -- some elements of both of the above -- perhaps the proposal and comment, with crossexamination, but not a full hearing. Power of Agencies -- Investigation Recalls The US Product Safety Commission investigates hundreds of consumer products each year and urges a recall of products considered dangerous. Search and Seizure a legal search of a business, in order to take evidence of wrongdoing. Most require a warrant before the search. Some industries are closely regulated and may be searched at any time, with no warning. Power of Agencies -- Adjudication

Limits on Agency Power Statutory Control - The enabling legislation that created the agency places controls on it through requirements and restrictions. Political Control The President has control over agencies through political pressure and through nominations of agency heads. Congress controls the budgets of agencies. They can eliminate funding for any program or an entire agency. Congress can amend enabling legislation to place limits. Informational Control & The Public Freedom of Information Act (FOIA) allows any citizen to request information from an agency Privacy Act -- prohibits agencies from giving information about an individual to other agencies without consent. There are some exceptions Participation via hearings and comments

**Securities Law - 8/18/11** (Chapter 37)

Securities Regulation Our Focus Federal Law What is a Security 33/34 Acts Securities Fraud Rule 10b-5 Insider Trading Federal Securities Laws and Regulations 1933 Act Regulates the first issue of any security in interstate commerce 1934 Act Regulates the sales after the first issue (secondary trading) of any security in interstate commerce Created the Securities and Exchange Commission (SEC) Regulates the stock exchanges, brokers, and dealers Many more federal laws regulating investment banks, companies, etc. See text p. 225 Securities and Exchange Commission (SEC) Agency created in the 1934 Securities Act to administer the federal securities laws: Legislate rules and regulations to implement broad law: Commission in Wash., D.C. These are published first in the Fed. Register and then finally in the Code of Federal Regulations (CFR) Investigate: investigators in SEC branch offices around the U.S. Adjudicate the violations of these laws: administrative law judges in SEC branch offices around the U.S. State Securities Laws Called Blue Sky laws Modeled after the federal laws Both federal and state laws must be followed, not one or the other Unless either law says an issuer is exempt What is a security U.S. Supreme Court: Securities & Exchange Commission v. W.J. Howey Co. 1946 Any time person, A, gives his money to person, B, in the hopes of making a profit mostly from the management efforts of person B See broad definition in text = courts interpret the definition very broadly Securities Act of 1933 Regulates the first issue of all securities for the first time Calls for the issuer to disclose: reveal all the important information about itself to the public By filing a registration statement containing everything about the issuer with the SEC By supplying a prospectus of everything about the issuer in simplified form to every purchaser 1934 Act to Regulate Regulates Secondary Trading (after the first issue) Registration and reporting by big companies Insider Trading Regulations: 16B and 10B Proxy Regulations Take-over Regulations Stock Exchanges must register and follow certain rules and regs. Brokers, Dealers must get licensed and follow certain rules and regs. Rule 10b-5 10b-5 Securities Fraud 1. Misstatement or omission of material fact 2. Scienter 3. Purchase or Sale 4. Reliance

5. Harm

1. misstatement or omission of a material fact Anyone who fails to disclose information Incomplete or inaccurate disclosure Material important enough to influence an investors decision EX: Firm repeatedly and falsely denied that it was involved in merger negotiations. Liable under 10b-5 even though negotiations in preliminary stages. Basic Inc v. Levinson 485 U.S. 224 (1988) 2. Scienter Willfully, knowingly, or recklessly The defendant must have: A. Known (or be reckless in not knowing) that the statement was inaccurate; and B. intended for plaintiff to rely on the statement Presumption of reliance made in efficient market All but Ninth Circuit regard recklessness as sufficient One definition (5th Cir.)-- an extreme departure from the standard of ordinary care Negligence is usually not enough EX: Shareholders sued accounting firm Ernst & Ernst because it failed to discover during audit that a companys chief executive was stealing funds Shareholders argued that auditors should have discovered that executive refused to let anyone else open his mail and therefore should have been suspicious of wrongdoing COURT: Ernst & Ernst not liable under 10b-5 Although E&E may have been negligent, it did not intentionally or even recklessly facilitate fraud 3. Purchase or Sale 10b-5 applies to both buyers and sellers Does not include someone who failed to buy because of material misstatement Holding on to stock also no claim Concern about could have, would have Indeterminate liability 4. Reliance by plaintiff Plaintiff must show that she relied upon the misstatement In open market trades, reliance is generally assumed because of efficient market 5. Harm Economic disadvantage arising from misstatement Usually loss of share price Forward Looking Statements (10b-5 Safe Harbor) Private Securities Litigation Reform Act of 1995 a safe harbor for forward-looking statements to encourage companies to provide investors with information about future plans and prospects. A defendant is not liable with respect to any forward-looking statement if it is identified as forward-looking and is accompanied by "meaningful cautionary statements" that alert investors to the factors that could cause actual results to differ. Insider Trading Buying or selling of shares based upon non-public information Awfully tempting Costandi Nasser learned of takeover and made $4.6 million of profit in three weeks Harms the confidence in the market Fundamental fairness Insider Trading (Traditional Theory) Fiduciaries A fiduciary violates 10b-5 if she trades stock of her company while in possession of non-public material information Anyone who works for a company is a fiduciary Constructive insiders are fiduciaries Indirect employment relationship

Employees of company auditors; law firm

Strangers SEC repeatedly argued that anyone possessing insider information must disclose or refrain. SCT said no! If no fiduciary, no duty to company EX: Dumpster diving for confidential info Ok to trade on insider info! No insider trading (though violate other laws trespassing) Tippers Insiders who pass on information liable, if: 1. They know info is confidential 2. Expect some personal gain personal gain loosely defined Any gift to a friend is personal gain Tippees Liable for trading, if: 1. They know info is confidential 2. They know info came from fiduciary who was violating fiduciary duty 3. Insider expected some personal gain EX: U of Okla football coach overheard someone talking about company to be acquired. He bought stock. No insider trading because tipper did not tip anyone on purpose. Insider also did not expect personal gain. Misappropriation Theory of Insider Trading

**Fraud - 8/18/11**
Common Law Tort of Fraud Difference between the legal consequences of misrepresentation & fraud Innocent Misrepresentation making a false statement, believing that it is true not actionable unless some existing legal duty to know the truth Fraudulent Misrepresentation, AKA FRAUD: a false statement of a material fact, made with intention that plaintiff rely on it, resulting in injury to the plaintiff Proof of Fraud False statement made as a Fact (opinion not fraud unless made by an expert) Materiality must be important to the plaintiff Puffery (sales talk) is not fraud because not material to reasonable person Justifiable detrimental reliance by the plaintiff on the defendants statement Silence as Fraud Traditional view: silence does not constitute fraud Situations where silence is actionable as fraud to correct a basic mistaken assumption that has created detrimental reliance special (usually fiduciary) relationship between the parties

**Law and Strategy - 8/18/11** ("Pathways to Legal Strategy" article)

Purpose of this presentation How can law or legal resources be an enabling rather than a constraining force for business Show that law can be value capturing resource Enable firms to use law as a source for capturing a competitive advantage over rivals What is competitive advantage The development of attitudes or attributes that enable an organization to outperform its competitors a value creating strategy not simultaneously being implemented by another rival Competitive Advantage: Application Marketing (Bharadwaj et al., 1993) Accounting (Dunk, 2004) Human Resources (Lado & Wilson, 1994) Management (Silvi & Cuganesan, 2006) Organizational Capital (Castro et al., 2006) Human Capital (Hatch & Dyer, 2004) Interconnectivity (Lavie, 2006) Others Business Law & Competitive Advantage Area in need of development requires the crossing of two largely disconnected fields Cross citation is rare, superficial; theory cross-pollination virtually non-existent Risk-focus vs. return-focus What about Law Can a firms legal assets or knowledge be leveraged to capture competitive advantage Larry Downes, HBR: Law is the last great untapped source of competitive advantage. Law is a Critical Function 20% of Fortune 500 executives time spent on legal issues (Cavenagh, 2000) CEOs may spend 5-25% of time on legal problems (Siedel, 2000) Legal issues in general have emerged as the most important factor in the external environment in which a business operates (Siedel, 2000) Can law be a source of competitive advantage Jay Barney, Firm Resources and Sustained Competitive Advantage, Journal of Management vol. 17(1), pp. 99-120 (1991). Four criteria: valuable, rare, imperfectly imitable, and no equivalent substitutes Sustainable an advantage that rivals cannot easily copy 1. Is law valuable Value: enables a firm to conceive or implement strategies that improve efficiency and effectiveness. (Barney, p. 106) Intellectual property laws grant various rights (e.g. patent, trademark) that reward innovation Contract laws permit firms to enforce agreements and receive compensation for breaches Tax laws incentivize firm behavior; anti-trust/consumer protection deter unfair competition (call on regulators to act on their behalf) 2. Is law rare Rare: source of value-creating strategy not simultaneously implemented by [many] firms. (Barney, p. 106) Laws are not rare, but rights and obligations are Unique contractual arrangements with vendors, etc. Collective bargaining & non-compete agreements Home state laws vary from one another IP assets specific to enterprise Each firm has unique legal mix of assets and obligations with which to exploit effectively 3. Is law imperfectly imitable

II: if have at least one of the following: unique historical conditions, causally ambiguous, socially complex Unique historical conditions grandfather rules Clean Air Act permits older facilities to pollute more Additional powers now prohibited by statute (banking & insurance) Impossible to imitate Causal Ambiguity - Link between resource and competitive advantage poorly understood by rivals Legal advice is protected information Attorney client privilege Cannot be easily copied reverse engineering of legal decisions imperfect Social Complexity advantage based upon complex social phenomena Knowledge / implementation of legal decisions dependent on experience of counsel and relationship with client Personal relationship with outside regulators Have discretion, reciprocity norms of trust and mutual commitment may influence decision to undertake legal investigation Personal relationship with allied firms Relational contracts encourage short term sub-optimal performance for maximization of long-term relations 4. Does law lack substitutes Substitutes difficult to imagine; firms cannot simply choose laws they like and avoid ones they dont Inter-jurisdictional substitutes jurisdictions may converge over time firms shift to exploit differences (e.g. outsourcing) Selection of litigation favorable precedent benefits rivals too Law is a source of competitive advantage Knowledge and application of legal rules can be used to outflank rivals. How to businesses treat legal rules in practice Four pathways of legal strategy exist Pathways of Legal Strategy Four perspectives on business law How managers interact with the legal environment Each pathway makes certain assumptions about role and importance of law in business Level One: Avoidance Law is a barrier to economic growth Compliance = Obstruction Purpose of the firm = lower costs Exploit legal loopholes Resolve all legal ambiguities in firms favor Follow the letter of the law only when absolutely necessary Winning at any cost Lawyer as discipliner / rulemaker Avoidance firm: Example Film Recovery Systems, Inc. Extract silver from old x-ray film 140 vats of foaming hydrogen cyanide Employee death triggers investigation No less than 17 gross violations No cyanide antidote available Negligible safety equipment EEs ordered to remove skull warnings from labels Preferred illegal aliens because complain less Rules emphasized productivity over all else Avoidance Firm: Enron Jeff Skilling while student at HBS (apocryphal) Q: What would you do if your company were producing a product that might cause harmor even deathto the customers that used it

Skilling: Id keep making and selling the product. My job as a businessman is to be a profit center and to maximize return to the shareholders. Its the governments job to step in if a product is dangerous Avoidance firms: Characteristics Laws are costs to be minimized Regulations suppress firms from reaching optimal profitability The China argument Win at any cost; win by skirting laws Management rules by power and authority Employees are economic units of production; all legal issues groundless Dont get caught Avoidance phase not always bad EX: Tax planning No problem with legal tax avoidance Use ambiguities/loopholes to lower payment Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes. Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934). (Learned Hand, J.) Legal arbitrage Taking advantage of new law phase in dates to delay costs Regulatory arbitrage Taking advantage of new law phase in dates to delay costs Example, environmental phase in Jurisdictional arbitrage Shift production to take advantage of lower legal standards EX: national differences in intellectual property laws Protection of new IP innovation (patent protection for life forms) Avoidance firms: Benefits Profitable in the short-term Requires no leadership except dominance Exploits weaknesses in regulatory system that other firms may not utilize Avoidance firm: Drawbacks Ethically questionable Soaring legal defense costs likely exceed costs of preventative measure Reputational / Relational effects Some shareholders react negatively Easy to replicate by competitors no long-term competitive advantage Level Two: Compliance Law as a cost center Compliance a cost of doing business Follow laws, codes, regulations Corporate legal staff a check against wrongdoing as interpreted by formal rules Law = justice What is right = just = legal Example of what you see.. Corporate Codes of Conduct Comply with the law Dont to anything unlawful that will hurt the organization Lawyer as traffic cop Limitations of Compliance Easily copied by rivals, thus not a strong competitive advantage over the long term Standards for proper compliance can shift under your feet EX: Ford Pinto Stage Three: Prevention Establish practices and procedures that prevent legal violations and disputes Compliance = cost

Addressing law proactively rather than reactively Shift from legal rules to business practices Implementing practices that may not be literally required or directly cause compliance but indirectly cause legal standards to be satisfied Lawyer as problem-solver Acknowledgement of a higher standard Above the line allows for mishaps Legalistic preventative strategy Compliance with U.S. sentencing guidelines Safe Harbors DMCA ER liability shield for SH if procedures in place Business oriented preventative strategy Discrimination and harassment prevention (no romance rules, diversity and sensitivity training) Audits Do procedures prevent legal infractions Faith-based preventative law Business practices based upon Christian principles (belief not necessary) Use biblical law for prevention ACIPCO Stage Three to Stage Four Critical turning point for organizations Learning Stage Management tests efficacy of law as a competitive tool Realize economic value of legal knowledge and assets Shifting focus from internal to external Shifting maturation from evolutionary to revolutionary Stage Four: Value Capture Lawyer as strategist For the first time, lawyer participates in strategic decision making Can legal assets or knowledge capture marketplace value Leveraging assets How can current legal assets generate new value Requires strategic thinking Operational planning Law professionals as partners Value Capture: Intellectual Property Intellectual Property 75% of Fortune 100s market capitalization represented by intangible assets (Reitzig, 2004) Motorola Established technology standard (GSM) in Europe for cell phones Before and after standard, patented ownership of essential technologies that GSM depended on. Bayer Lost patent to aspirin a century ago Shifted emphasis from patent enforcement to trademarked brand development Result retained brand equity and enormous revenues from Bayer sale IBM Extensive licensing system Royalty revenue Value Capture: SOX Sarbanes-Oxley 404: maintain sound internal control structure for financial reporting Majority reaction: increased costs of compliance (stage 2 thinking) Minority reaction: opportunity to improve firm operations See Wagner & Dittmar, HBR 2006 Standardization and consolidation of financial processes

Consolidated data requirement eliminated aged-receivable and bad-debt accounts Improving financial controls Pepsi surveys execs to determine control culture & tests employees knowledge of responsibilities investor ratings services include assessment of control environment Exploit Convergence Opportunities RSA Security (identity and asset protection) Combined SOX compliance with other legal obligations (eg HIPPA) to gain efficiencies and control costs Unified record keeping system Streamlined ISO9000 standardization Template for compliance with other statutory regimes first-mover skill advantages to capture value from new SOX-style regulation

Value Capture: Corporate Codes More than just internal compliance Leverage corporate codes to capture market Ethically sensitive investors Ethically aware consumers Signaling effect Product differentiation strategy Capturing Laws Value: Results Product differentiation Incumbency Advantages Raises entry barriers Supplier Power [split all this into IP and CoC sections] Beyond Value Capture Can exploitation of legal resources reshape the organization Stage Five: Transformation Transformation occurs when legal asset or legal knowledge so invigorates an enterprise that it transforms the fundamental practices of the firm across disciplines Full institutional buy-in: from CEO to line employees Law redefines firm culture and mission Difficult to obtain (resource intensive) Difficult to copy (sustainable advantage) Lincoln Electric Company Began in 1895 producing electric motors in a shop; now a $1 billion dollar company producing welding products and equipment globally Cyclical industry dependent upon car, ship, rail manufacturing industries Located in Cleveland, OH Piecemeal System Wages linked directly to productivity Pay for only what you produce Defect directly penalized to employee, lose eligibility for bonuses If defect reaches customer, EE must repair item himself on his own time Health insurance out of own bonuses No sick days except from contributed pool Demand for Jobs LEC receives 75 applications for every 1 position Absenteeism 2%/year Turnover 3%/year 1/3 of all EEs have 20 years service 34 EEs over 50 years service Why such a demand for LEC positions No Layoff Agreement Never had a work stoppage in 110 years Guarantees employment for US workforce, regardless of economic conditions (30 hrs/wk, 3 yrs or more) LEC has not laid off a single US employee in sixty years, even in times of dire economic necessity Employment Agreement is the Cornerstone of the Organization

Trust Communication and open access to management Organizational Citizenship Suggestions without fear of job elimination Honesty Management does not confirm productivity rates Egalitarianism 15:1 salary ratio, no executive perks, 100 workers per supervisor Business Impact LEC system saved life of organization 1990s economic recession and costly expansion mistakes triggered 20% shareholder losses in 1992 and 1993 Typical firm may have collapsed under pressure Firm Response Employees banded together to offset foreign losses Fixed production bottlenecks Management reassigned to labor duties Key workers worked harder EEs gave up 614 weeks of vacation Some EEs worked for seven days a week for months on end Result Firm returned to profitability in 1994 Cost of return goods 0.3% EEs twice as productive as those in similar businesses Sign reads on plant gate, no admittance prior to one-half hour start time Looking Inward But how managers create these pathways in their organization How can managers make legally strategic thinking a reality Purpose identify sources of barriers and opportunities in the organization Organization into Variables Attributive and attitudinal antecedents of behavior What conditions are most likely to encourage firms to use legal knowledge as a value capturing resource Cause firms to shift to higher pathways E.g.: Compliance Prevention Attitudinal Variables Viewpoints embodied by individuals that may impact a persons decisions, interests, values or behaviors Studies on the influence of attitudinal variables on: Firm performance, marketing, union membership, and organizational stability 1. Legal Self-Efficacy Belief that law can be shaped through ones own efforts successfully Most common corporate political activity Do managers view laws as unchangeable or flexible Have I participated in the legal process Greater perception of LSE more likely positive pathway shift 2. Perception of Legal Processes Do managers perceive law as fair Procedural fairness Substantive fairness Generalized regulator-regulated environment, adversarial or cooperative (sec reg. US v. UK) Specific regulator-regulated interactions (e.g. audit) Personal / professional interaction with judicial system (e.g. negative experience with litigation) Perceptions from popular media PLP more positive the perception of fairness of legal process (via above sources), greater likelihood of positive pathway shift 3. Perception of Lawyers Overly conservative, more interested in legal technicalities

Obstructionist, out-of-touch with business Survey of small US business owners authoritative, conservative, arrogant, intimidating to describe their attorneys Why such a poor relationship Deep disconnect between lawyer and manager; most executives do not view attorneys as source of strategy Law students not trained in business practices; focus on litigation and legal rules Lower the disconnect between executive and attorney, greater likelihood of positive pathway shift Better the perception of attorneys generally, greater likelihood of positive pathway shift 4. Attitude Toward Risk Law perceived as an unknown Tendency towards over-caution Examples from ADA & Wrongful discharge May overreact to changes in law Certainty vs. uncertainty in legal rules More risk-averse towards law, less likely positive pathway shifts Attributive Variables Characteristic of an organization or people employed by it EX: Firm size, industry, number of employees Studies on the influence of attributive variables on: Firm performance, creativity, capacity to change, and strategic orientation What attributive variables influence pathway behavior 1. Presence of Lawyer-CEO Some of top firms led by lawyers Lawyer/business person may view law more strategically May understand controversial issues better like ethics and social responsibility Positive correlation between Lawyer-CEO & positive pathway shifts 2. Presence of Legal Counsel Inside counsel closer relationship Outside counsel contacted occasionally; may only be used to put out fires Presence of inside legal counsel with strong relationship with executives may promote legally strategic behavior Positive correlation between IHC presence/influence & positive pathway shifts 3. Regulatory scrutiny of industry Greater regulatory scrutiny, more familiarity with law and legal rules May have closer relationship with regulators; encourage flexibility Passive vs. Active scrutiny Utility passive Drugs & Arms active, vulnerable to political shifts Greater scrutiny more positive pathway shifts Law is a Critical Function 20% of Fortune 500 executives time spent on legal issues (Cavenagh, 2000) CEOs may spend 5-25% of time on legal problems (Siedel, 2000) Legal issues in general have emerged as the most important factor in the external environment in which a business operates (Siedel, 2000) The IT of the 21st Century 1980s information technology segregated from strategic planning Larry Downes, HBR: Fifteen years ago, another member of the executive team stood in comparable disregard, his value a matter of doubt. That person was the CIO. We all know how that turned out. Constance Bagley: Law is not a black box best left to the experts. Laws great fortress Your companys legal department is broken. At best it is an expensive overhead, an evil made necessary by our litigious society. At worst, it is your biggest roadblock to innovation. In most organizations the legal staff is isolated and paid too much just to say no to the most interesting ideas and strategies. The new corporate counsels must act as coach, adviser, and strategist, embracing their companies most innovative plans. - Harvard Business Review, 2004

**Contract Law - 8/18/11** (Chapter 18)

Contracts pp. 405-09, 415-17 Supplemental Reading What is a Contract An agreement that may be enforced in court Disputes arise when promise in contract is unfulfilled Disputes arise when a term in contract may be interpreted two different ways Six Requirements for a Valid Contract Agreement Consideration Legal Capacity Legal Purpose Form Statute of Limitations 1. Agreement Offer and Acceptance Offer The offeror must have intent to make an offer Intent is judged under an objective standard--What would a reasonable person believe under the circumstances Most advertisements are an invitation to bargain as are items submitted for auction If the offer is very specific, then maybe it will be termed an offer Agreement: Offer The terms of the offer must be reasonably certain Under the common law of contracts, at a minimum the offer must contain Price, Quantity, the Parties and the Subject Matter of the contract. Must contain all material terms Follow steps given in class for filling in gaps in contract terms The offer must be communicated to the offeree and the offeree knows of the offer before performing If an offer is made to the offeree, a third party cannot accept the offer Offers can be directed to classes of offerees Agreement: Acceptance Just like an offer, the acceptance must have: Intent to be bound Again judged by objective standard silence is not deemed an acceptance unless the parties had prior dealings complete and unconditional acceptance No conditions or counteroffer (or else rejection) Acceptance communicated to the offeror Offeree should use the same medium used by the offeror to make the offer if nothing is said in the offer Termination of an Offer Lapse of Time Revocation Rejection of Offer Counteroffer Consideration Something bargained for in return for the offerors promise. Value exchange or received Is the exchange element in a contract Each side much give something up must incur a legal detriment Examples of consideration: Make a promise in exchange for a promise Transfer something of value in exchange for value Generally the courts do not consider the adequacy of consideration

unless they decide the bargain is unconscionable Consideration does not exist if the other party has a preexisting duty to perform by law or contract In general past consideration is not consideration Consideration does not exist if the promise made by the promisee is illusory If the promisee maintains an unlimited right to cancel at any time for any reason, the promise is illusory Pre Existing Duty Rule Moral Duty/Sense of Honor Hamer v. Sidway

Legal Capacity Both parties to a contract must have capacity to contract There are three categories of people MAY do not have capacity Minors--under 18 Intoxicated people--must not comprehend the transaction Mentally deficient either due to age or disease Legal Purpose Contracts can be illegal by statute or by public policy In either event, the agreement is void There are a number of agreements that have been ruled illegal by statute in various states: Gambling, illegal drug sales, usurious loan agreements, contracts with unlicensed professionals Increasingly, illegal contracts are taking place in cyberspace-- e.g., prescriptions drugs sold online. Under public policy a number of bargains are void Exculpatory agreements such as agreements not to sue employers under workmens compensation Contracts to excuse intentional actions Form: Statute of Frauds Created in 1677 Certain contracts must be in writing to be enforceable Real estate Not performable within 1 year Promise to answer debt of another Goods over $500 Form: Parol Evidence Rule Excludes prior or contemporaneous evidence that conflicts with a written agreement If the written agreement is incomplete, oral evidence may be introduced Supplement incomplete or ambiguous terms A party can always introduce evidence of fraud or misrepresentation or mistake Statute of Limitations Time permitted to enforce a contract in court Goods Contracts (UCC) 4 years Non-goods contracts 6 years SOL begins when injury determined Remedies Remedies Generally the remedy in contract law is money damages The theory of compensatory damages is to put the nonbreaching party in the position he would have occupied if the contract had been performed Compensatory Damages Damages: Compensatory In sale of goods contracts, damages are often calculated as the difference between the market price and the contract price time quantity Consequential Damages Consequential damages Damages that are the result of the contract breach but are unusual in some way Lost profits are an example of consequential damages Damage to person or property

Liquidated Damages Liquidated Damages In many contracts damages are difficult to calculate so the parties agree in advance what damages are If the parties provide a reasonable estimate of damages, liquidated damages clauses are enforceable If the liquidated damages clause is judged excessive it will not be enforced as a penalty Damages (contd) Punitive damages in contracts are very rare The nonbreaching party is expected to mitigate damages Landlords whose lease has been breached cannot refuse to lease to another tenant Wrongfully discharged employees cannot turn down comparable job offers from 3rd parties Equitable Remedies Specific Performance The remedy is appropriate if the promisee attaches great value to the consideration The consideration must be unique Jewelry, works of art, real estate, family heirlooms Injunctions The courts will freeze the action if irreversible damage may occur with a continued breach The plaintiff generally has to demonstrate that he will likely prevail in trial that the defendant is breaching the contract General Contract Terms may vs shall Boilerplate clauses complex phrases with specific meaning EX: "This agreement signed by both parties constitutes a final written expression of all the terms of this agreement and is a complete and exclusive statement of those terms" Principles of contract interpretation 1. Contract language is presumed to express the intent of the parties 2. Contracts will be read as a whole 3. Separately negotiated terms greater emphasis 4. Ordinary meanings over technical definitions 5. Lawful interpretations preferred Principles of Contract Interpretation 6. Specific wording supersedes general language 7. Preference for handwritten/separately typed terms 8. Practical results favored 9. Construed against the drafter 10. Specifications supercede drawings The details matter Suppose, for example, that your firm obtained comprehensive insurance coverage for its primary factory. One unfortunate evening, a sudden windstorm rips high voltage power lines off the building. The power lines set ablaze a shipment of paper products, which in turn cause a fire that causes $5million of damage to the factory building. Whether or not such an expensive calamity is covered by insurance might depend on the simple formatting of the insurance contract. The details matter PERILS COVERAGE & EXCLUSION This insurance policy covers losses arising directly from: (a) fire; and (b) flood, except when arising from windstorm. In this policy, your company would be responsible for $5million loss. You are covered for fire and flood, except when arising from windstorm. The exception to the fire and flood coverage starts on a new line which is aligned with the opening words of the clause. This alignment makes it clear (at least to lawyers and judges) that the exception qualifies losses from of fire and flood. Your insurance contract does not require the insurance company to pay a dime. The details matter PERILS COVERAGE & EXCLUSION This insurance policy covers losses arising directly from: (a) fire; and

(b) flood, except when arising from windstorm. In this policy, the exclusion except when arising from windstorm is intended to line up with the text of clause (b). This indentation shows that the exception only qualifies losses arising from flood. Only flood is subject to the windstorm exception, while fire damage is still covered when arising from a windstorm. Under this clause, the insurer is obligated to pay the $5 million loss to the factory. Example Rogers Communications v. Aliant Opportunism Advantage taking of other people in a contractual relationship Exploit weakness in bargaining power or contract language Smith v. Dravo Corp. Trust State of mind, vulnerability to other person Enables cooperative behavior Maximize the relationship, not transaction Easier to resolve problems; reduce transaction costs; improve reputation

**Intellectual Property - 8/19/11** (Chapter 43)

What is Intellectual Property Any original work of the human mind that has value in the market place Why Regulate IP Protect New Ideas Reward Innovation Financial Benefits Incentive to Invent Inhibit Creativity Suppress Incremental Discoveries Fear of Litigation Overbroad Application Patents A patent is a grant by the government that permits the inventor exclusive use of an invention for 20 years (or 14 years in the case of design patents). A patent is not available solely for an idea, but only for its tangible application. Patents are not available for laws of nature, scientific principles, or mathematical formulas and algorithms. Requirements for a Patent To obtain a patent, the new invention must be: Novel not known or used in this country and not published anywhere. Nonobvious cannot be an obvious way to do something. (ex: size/color change, Smuckers PB&J with crimped edges vs. cut) Useful must have some application, even if not commercially practical. Duration of a Patent Patents are valid for 20 years from the date of filing the application. Design patents are only good for 14 years from the date of issuance. Infringement A patent holder has exclusive rights to use the invention during the terms of the patent. Strategic Patenting Patents as a defensive and offensive resource Defensive protect against infringement by others Offensive hinder competition Example: IBM Patents core discoveries Makes peripheral discoveries public by publishing with patent authorities Why Champion of the open source movement Community Altruism IBM Cant license technology you dont own, but. Public invention prior art; not new or patent worthy Stops others from patenting those features Easier to publish for free than patent (patent filing expensive) IP patent picket fence strategy through non-patenting

Copyrights The holder of a copyright owns the particular tangible expression of an idea, but not the underlying idea or method of operation. A work is automatically copyrighted once it is in tangible form. Registration with the Copyright Office of the Library of Congress is necessary only if the holder brings suit to enforce the copyright. Use of the copyright symbol () is optional, but often recommended to make ownership clear.

The Copyright Act protects literature, music, drama, choreography, pictures, sculpture, movies, recordings, and architectural works. Currently, copyrights are valid until 70 years after the death of the works only or last living author. In the case of works owned by a corporation, the copyright lasts 95 years from publication or 120 years from creation. Infringement To prove a violation, the plaintiff must present evidence that the work was original and that either: The infringer actually copied the work, or That the infringer had access to the original and the two works are substantially similar. A court may: Prohibit the infringer from further violations, Destroy infringing material, and Require the infringer to pay damages. Exception: Doctrine of Fair Use use by reproduction in copies or phonorecords for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research is permitted Fair Use Factors (1) purpose and character of the use (commercial or non-commercial such as educational) (2) nature of copyrighted work (fact or fiction) (3) amount and substantiality of amount used (4) effect on the market for the copyrighted work Examples of Fair Use Pretty Woman parody Roy Orbison v. 2 Live Crew The Cat in the Hat case Dr. Seuss challenges book titled: The Cat NOT in the Hat Examples of Fair Use The Cat NOT in the Hat book written by the fictional "Dr. Juice O.J. Simpson, wearing the Cat in the Hats distinctive red and white striped stove-pipe hat, holding a bloody glove, and narrating a rhyming whimsical version of the Simpson murder trial "A man this famous/Never hires/Lawyers like/Jacoby Meyers/When youre accused of a killing scheme/You need to build a real Dream Team" The Cat NOT in the Hat! Dr. Seusss widow, sued for a preliminary injunction to prevent publication, eager to prevent a commingling of the Seuss image with that of the accused killer. Penguin book was merely a parody and fair use Court: "we completely agree that Penguins fair use defense is pure shtick and that their post-hoc characterization of the work is completely unconvincing." Not a true parody eligible for fair use defense Result Court: The stanzas have no critical bearing on the substance of style of The Cat in the Hat. [The defendants] merely use the Cats stove-pipe hat, the narrator (Dr. Juice), and the title (The Cat NOT in the Hat!) to get attention or maybe even to avoid the drudgery in working up something fresh. Satire v. Parody Satire: Defendant uses plaintiffs work to target something other than plaintiffs work Dr. Seuss Enterprises, L.P. v. Penguin Books USA, Inc., 109 F.3d 1394 (9th Cir. 1997) Parody: Defendant uses plaintiffs work to target plaintiffs work Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994) Trademarks A trademark is any combination of words and symbols that a business uses to distinguish products or services.

Types of Marks Trademarksaffixed to goods Service marksidentify services, not goods Certification marksmarks used by an organization to attest that products meet certain standards Collective marksmarks that identify members of an organization

Ownership and Registration First person to use a mark in trade owns it. Registration is not necessary, but does have some advantages. Allows owner to use the symbol Makes trademark protection valid nationally Notifies public of its use, which makes challenges virtually moot Increases damage awards available Generally gives first right to use the trademark as an Internet domain name What Prerequisites Necessary for a Trademark Must be distinctive capable for identifying the source of a particular good. USPTOs five categories of words: Generic (weakest) Descriptive | Suggestive | Arbitrary | Fanciful (strongest) Generic Describes the general category to which the underlying product belongs: computer, apples, bread, milk Receives no trademark protection A trademark can become generic Cola, kleenex, xerox, aspirin cellophane, thermos This is called genericide Descriptive Directly describes, rather than suggests, a characteristic or quality of the underlying product: Holiday Inn, All Bran, Vision Center, Park N Fly Cannot be initially registered - Not inherently distinctive until it has acquired a secondary meaning. Then registerable Secondary Meaning A descriptive mark can become distinctive when the consuming public primarily associates that mark with a particular producer, rather than the underlying product Holiday Inn has acquired this secondary meaning; public thinks of a particular chain of motels, not just any motel where people stay on holidays How to Establish Secondary Meaning Descriptive marks cannot be registered until they acquire a secondary meaning Courts test for secondary meaning: The amount and manner of advertising under the term The volume of sales under the term The length and manner of the terms use Results of consumer surveys in recognition of a particular product, dress, or service Suggestive Evokes or suggests a characteristic of the underlying good Indirectly alludes to a quality of a product EX: Coppertone, Greyhound, Jaguar, Mustang Inherently distinctive and entitled to protection immediately in use of commerce or trade Arbitrary or Fanciful No logical relationship to the product

EX: Exxon, Kodak, Amazon Inherently distinctive and entitled to protection immediately in use of commerce or trade

Service Mark Words, phrases, logos, or other graphic symbols that identify and distinguish the services of a company. Primarily used in sales or advertising. Put sm next to the mark Example Jiffy Lube Trade Dress Protection can extend beyond the words, symbols and phrases to other aspects of the product, such as its color or design or shape or of its packaging McDonalds yellow and white golden arches Coca-Colas red stripe IHOPs building structure and logo Loss of a Trademark Lose trademark if: Abandonment No renewal of registration in the fifth year, expires at the end of the sixth year Improper licensing or assignment Genericity becomes generic Kleenex, xerox Trademark Infringement To win an infringement suit, the trademark owner must show that the defendants trademark is likely to deceive customers about who made the product or provided the service. likelihood of confusion Key goal stop consumer confusion Trademark Dilution Federal Trademark Dilution Act of 1995 The statute prevents others from using a trademark in a way that dilutes its value. Even if the misuse does not confuse a consumer about the origin of a product, a trademark cannot be used by others. Purpose protect brand equity of trademark owner, not consumer Dilution: Two Types Blurring Reducing the capacity of the consumer to identify a mark with a characteristic or brand attribute EX: Hyatt Hotels / Hyatt Legal Services Tarnishment New mark creates negative associations with the established mark EX: Godiva Chocolates / Godiva Dog food (Dogiva Dog Food) Dilution: Associative Direction New Brand must weaken established brand EX: If Dogiva Biscuit consumers think of Godiva when hearing brand, this is *not* evidence of dilution for Godiva. EX: Rather, Godiva must show that when consumers hear Godiva, they now think of both Godiva and Dogiva Infringement / Dilution How to prove Consumer surveys Expensive, time consuming Mall intercepts Expert testimony Financial Data Best defense is a good offense - strong advertising and brand loyalty Trade Secrets

Exclusive Knowledge Information that derives economic value from not being known (and would generate value in others if known); if Reasonable efforts taken to maintain secrecy How Infringed Economic espionage Economic Espionage Act of 1996 (foreign espionage) Breach of non-disclosure agreement Indefinite Term (compare patents)

Comparing IP Forms Going Global with IP Not all nations respect intellectual property rights equally Key treaties Defense of IP through non-legal measures Key Treaty: TRIPS Trade Related Aspects of Intellectual Property Rights Broad standards in many IP areas Nation must have quick remedies available and strong IP laws Nations sign treaty; signal for investors Doha Declaration on TRIPS and Public Health The Declaration provides for the extension of the transition period until January 1, 2016 during which least developed countries would be exempt from providing patent and trade secret protection for pharmaceuticals Compulsory licenses Allow governments to issue (narrow conditions) companies to make patented products without consent of patent holder (pharma products only) IPR: The Developing Nations View IPR not a universal norm Collectivist view of knowledge Copying as form of reverence Brazil, Russia, India, China 2003 study: BRICs will constitute four of G6,G8 By 2050, BRICs larger than G6 By 2030, India larger than all except US/China China overtakes Germany in five years, Japan in ten, US in thirty-five years Ascendancy of the BRICs strong possibility IPR protection in BRICs key factor for US investment US Coercion of BRICs Key tool Section 301 sanctions. USTR has authority to impose sanctions for non-compliance or unfair competition. USTR uses or threatens to use against nations who do not comply with IPR standards The China Cycle: Countersanction The India Cycle: Delay Sanctions Alone Unsuccessful Devastates DC economies Provokes retaliation by targeted state Benefit to one US industry harms another Mobilizes resistance and hostility Fail to fix underlying problems for IPRs Alternative: Telecom in China Telecom firm enters China and outsells competitors Copycats appeared; govt no help Chinese regulators demanded endless stream of fees, taxes, levys, etc. Declining profitability


US Firm Response Publicized its long-term commitment to Chinese market Committed itself to reinvest all profits back into Chinese operations Donated to charities popular with government officials Implemented business and technical training programs Localized management & developed suppliers Heinz in China Problem rampant piracy of baby formula Pirates using uniforms and trucks Little interest in enforcement from officials Response framed piracy as consumer safety issue Invited press to show dangers of counterfeit formula Lobbying local officials about health danger Pirates quickly disappeared China Response Unnecessary tax demands disappeared Piracy declined Govt officials helped US firm enforce extremely helpful in finding and closing unlicensed manufacturers Govt belief that firms interest paralell to nations Govt cited firm as one of few examples of US companes benefical to China Global IP business strategy Use publicity; commit to long term Educational and training initiatives Respond to conciliatory acts Be prepared to retaliate if necessary to avoid exploitation Be sensitive to power relationships and national culture

**Fiduciary Duties - 8/19/11** (Chapter 35)

Fiduciary Duties and the Business Judgment Rule Fiduciary Duties of Agents and Employees to Principals & Employers Duty of Loyalty Duty of Care Duty of Loyalty Agent cannot receive gifts or profits (because of agent status) unless the principal knows & approves Agent cannot disclose confidential information acquired because of the agency Cannot compete with the principal in any matter within scope of agency Duty to provide information useful/ germane to principal Corporate opportunities doctrine (for directors) Duty Not to Self-Deal to the detriment of the principal Duty of Care Duty of diligence Special duty of professionals re. level of care malpractice (negligence) Business Judgment Rule (BJR): Fiduciary Duties of Directors Courts policy not to second guess a corporations directors about their business judgment re. what is in the best interest of the company Business Judgment Rule: as long as directors have made an informed decision and have no self or conflict ofinterest in a transaction they are asked to approve, a court will not substitute its judgment for the directors and try to assess the ultimate business wisdom of the decision Issues in applying the Business Judgment Rule: Informed decision i.e., did directors ensure access to appropriate facts & receive adequate information on which to make a reasonable decision E.g. Smith v. van Gorkom -directors grossly negligent & did not reach a properly informed decision - approval of a merger after a 2 hour meeting with 8 of 10 directors having no prior notice of the issue-CFO at meeting said proposed price per share buyout was not an indication of fair price Business Judgment Rule BJR Test: Is there a reasonable basis to conclude that reports of officers or experts are reliable & that their recommendations made in good faith for the best interest of the company & its shareholders BJR a part of the Fiduciary Duty of Care: duty of good faith & reasonable supervision over corporate operations by Board (duty of reasonable diligence)

**Sarbanes Oxley (SOX) - 8/19/11**

Special Topic: Corporate Compliance Sarbanes Oxley and the Foreign Corrupt Practices Act SOX: Brief History Created by US Senator Paul Sarbanes (D-Maryland) and US Congressman Michael Oxley (R-Ohio) Signed into law July 30, 2002 When President George W. Bush signed the Act into law, he characterized it as one of gthe most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt. Reason and Purpose for SOX Contributing Factors Misstatements of financial status to keep companys stock prices inflated ~ Enron Securities fraud/conspiracy and false regulatory filings ~ WorldCom Other high-profile companies with execs facing criminal charges: Tyco Intention of the Legislation Restore investor confidence End financial scandals and implement proper corporate oversight Produce more accurate financial statements Enhance direct responsibility of senior corporate management PCAOB Establishes Public Company Accounting Oversight Board (PCAOB) Agency that oversees audits Registering existing public accounting firms which prepare audits for publicly traded companies Establishing and amending rules and standards Enforcing compliance Key Provision: Section 302 Quarterly certification of internal financial control provisions for all companies filing periodic reports under section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 No supporting documentation or independent examination requirement under Section 302. The signing officers have reviewed the report The report does not contain any material untrue statements or material omissions or is misleading The financial statements fairly present the financial condition in all material respects The signing officers are responsible for internal controls and have evaluated these internal controls within the previous ninety days and have reported on their findings A list of all deficiencies in the internal controls and information on any fraud that involves employees who are involved with internal activities Any significant changes in internal controls or related factors that could have a negative impact on the internal controls Cannot avoid requirements through foreign reincorporation Key Provision: Section 404 Requires management and external auditor to report on the adequacy of the companys internal reporting controls Section 404 contains both a documentation and independent examination requirement, unlike 302 Requires management to provide documented evidence of their self assessment of internal controls over financial reporting. Management must assess effectiveness of internal control structure and procedures for financial reporting as of the end of the most recent fiscal year 404 Report Key Points Statement of managements responsibility for monitoring internal control Managements assessment of internal effectiveness Framework management used to assess effectiveness Attestation by external auditor Whats changed Internal audit/compliance officer de facto requirement Auditors work for the audit committee Fewer pre-choreographed AC meetings Careful readings & real discussions Suppressed audit / consulting conflict

Problems SOX is still a moving target. Costs of SOX high Open to debate. Opportunity for massive anxiety: What will happen when the real tests begin What are the standards for success and failure Considerable management resentment: I am laying off engineers and hiring accountants and auditors. Advice for management Remember, you work for shareholders A lot more oversight, more work, more meddling, dont take it personally Honesty and transparency trump solidarity and teamwork Some tension between internal audit and operating management is expected (and beneficial) 4. Issues/Implications Form over substance, the illusion of control What will SOX become If SOX degenerates into a massive aggregation of CYA on the part of companies, external auditors, internal auditors, lawyers, and audit committees society is probably worse off. (Costs more, get less) Broader effects Giving business ethics a bad name Is Cynicism an unintended consequence Impact on the market Impact on competitiveness Only time will tell

**Torts - 8/22/11** (Chapter 6 & 7)

What is a Tort Tort: a personal wrong a violation of a civil duty The same act can be both a tort and a crime Three categories of Torts Intentional Negligence Strict Liability Intentional Torts Defamation Intentional Infliction of Emotional Distress Invasion of Privacy Defamation False statements that cause harm to a persons reputation 2 types of defamation: libel = written defamation slander = oral (spoken) defamation Elements of Defamation Statement Falseness Communication Injury Defenses of Defamation Truth But note disclosure of embarrassing private facts under the tort of invasion of privacy such disclosures may be actionable even though true) Opinion may include obvious exaggeration or jokes Privilege may be absolute (as when testifying in an official governmental hearing) or qualified (good faith statement to further societal goals) Special issue in business management: recommendations & evaluations Intentional Infliction of Emotional Distress Extreme and outrageous conduct that causes serious (verifiable) emotional harm Must show more than just hurt feelings must go beyond all possible bounds of decency; test: would an average person find the actions outrageous Invasion of Privacy Based on concept of invasion of Constitutional penumbral right to privacy The intrusion on privacy must be offensive to an average reasonable person; and There must be a reasonable expectation of privacy Issues re. employee privacy & internet and phone use Proof of Negligence Duty of Care duty to reasonably prevent exposing others to risk of harm reasonable person standard: what would a reasonable, objective person do in similar circumstances e.g., safe road speed levels of duty e.g.s: duty to entrants onto real property; dram shop acts (liability extended) Breach of duty defendant breached duty Causation foreseeability and proximate cause if the defendant could have foreseen injury to a particular person, he/she has a duty to that person for the defendant to be liable, the type of harm must be reasonably foreseeable

Special Negligence Doctrines Respondeat Superior AKA vicarious liability Employer liable for the torts of its agent or employee note: no employer liability for torts of independent contractor Respondeat Superior Key requirement for liability: employee operating within the scope of his employ Special circumstances: Joel v. Morison (1834) mere detour still creates vicarious liability employee cannot be on a frolic of his own Negligence per se Proof: the act constitutes violation of a statue that states a standard of conduct plaintiff in a class intended to be protected by the statute statute designed to prevent that kind of injury E.g.: dram shop acts as extended by statute in many states- makes social hosts who serve alcohol (or maintain homes where minors drink) liable for injuries caused by their intoxicated guests Special Issues in Negligence Negligent Hiring Liability for Recommendations Defenses to a Negligence Action Contributory negligence a complete bar to recovery by the plaintiff Comparative negligence amount for which defendant is liable is reduce by the extent that the plaintiff contributed to his/her injury Strict Liability in Tort Liability without fault Original types of cases: water diversion; explosives, dangerous animals Products liability now the primary use of this concept: Section 402A of the Second Restatement of Torts a business that sells any product in a defective condition that is unreasonably dangerous to the user or consumer is liable if the seller is engaged in the business of selling such a product and the product reaches the user or consumer without substantial changed in the condition in which it was sold Special Issues in Product Liability Design defect Warnings cases

*International Law - 8/22/11** (Chapter 9)

What is International law A rule that has been accepted as such by the international community.. Includes : International treaties and agreements General principles common to major legal systems Private International Law Public International Law What is an international norm A rule which governs or constrains the behavior of group members Not backed by the power of the state Developed through practices and traditions Important part of international law Treaties Treaties are binding agreements between two or more nations Convention is a treaty Bilateral vs. multilateral treaties Protocol is an agreement on matters less significant than those addressed in a treaty What impact do treaties have on business Treaties involve public law but can apply to private transactions Tax treaties Trade treaties Intellectual Property treaties Environmental treaties Trade, GATT & WTO Introduction to Trade Trade Barriers GATT WTO Trade Concepts (MFN, etc.) Intro to Trade: History Since WWII, trade barriers have fallen Avoid trade wars and depression Trade has expanded rapidly Commercial disputes have arisen Typically focused on specific policies Have influenced trade laws US & other nations GATT & WTO Varieties of Trade Restrictions Trade restrictions include: Tariffs and quotas. Voluntary restraint agreements. Embargoes. Regulatory trade restrictions. Nationalistic appeals. Tariffs Tariffs (custom duties) are taxes governments place on internationally traded goods. Tariffs make imported goods relatively more expensive encouraging the consumption of domestically produced goods. Tariffs: An Example

The Smoot-Hawley Act of 1930 was a disaster that raised tariffs on imports to 60 percent. Hoover promised to raise farm prices Logrolling in Congress expanded the bill 12,000+ products Tariff rev./value of dutiable imports > 60% Signed June 17, 1930 40 nations retaliated; world trade collapsed

Quotas Quotas are quantity limits placed on imports. Both tariffs and quotas increase price and reduce quantity. Voluntary Trade Agreements Voluntary trade agreements are agreements to limit exports. Voluntary trade agreements are often not all that voluntary. The effect of such voluntary restraint agreements is identical to the effect of quotas. Embargoes An embargo is an all-out restriction on import or export of a good. Embargoes are usually established for international political reasons rather than for economic reasons. Regulatory Trade Restrictions Regulatory trade restrictions are government-imposed procedural rules that limit imports. Some regulatory restrictions are legitimate. Others are designed simply to make importing more difficult. Nationalistic Appeals Nationalistic appeals are also ways to limit trade. The Buy American campaign is an example. Reasons for Trade Restrictions Unequal Internal Distribution of the Gains From Trade People dont like losing their jobs because foreign goods are cheaper so they lobby to prevent foreign competition. Setting up tariffs or quotas in order to save domestic jobs costs the economy money. Benefits of trade are generally widely scattered among the entire population. General Agreement on Tariffs and Trade (GATT) Formed in 1947 by 23 countries to abolish quotas and reduce tariffs Laid the foundation to liberalize world trade Required members to open markets equally to every other member However, it could not enforce compliance The World Trade Organization replaced GATT in 1995 From GATT to WTO The GATT functioned through trade rounds inter-state negotiations to reduce tariffs and other barriers to trade After the Tokyo Round of the 1970s, tariffs were brought to record lows However, Uruguay Round was launched in 1986 to address previously neglected trade issues, such as agriculture and textiles, as well as new trade issues, such as intellectual property rights and trade in services From GATT to WTO (cont.) Uruguay Round Agreement signed in 1994 The round established the WTO: 144 members as of 1 January 2002 reaches beyond GATT to new trade issues; has a more effective dispute settlement mechanism; and monitors national trade practices more consistently What Is the WTO The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. WTO agreements are negotiated and signed by the trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct and grow their business.

Improve welfare of citizens in member countries

Major WTO Functions Administering WTO trade agreements Forum for trade negotiations Monitoring National Trade Policies Resolving Trade Disputes Technical assistance and training for developing countries Cooperation with other international organizations Criticisms of the WTO The WTO undermines state sovereignty It undermines representative democracy Member nations are prevented from protecting the environment Members are unable to uphold laws guaranteeing workers rights The WTO is controlled by the larger nations The WTO represents the interests of large corporations and wealthy citizens Foreign Corrupt Practices Act: Elements of the Law The FCPA Prohibits: 1. U.S. Persons and other Persons in the U.S. from 2. Giving Anything of Value 3. Directly or Indirectly to 4. Government Officials for the 5. Purpose of Obtaining Business or Securing an Improper Advantage 1. Persons subject to FCPA U.S. individuals and companies Non-U.S. individuals and companies committing some act in furtherance of a bribe in the U.S. Examples: U.S. Companies U.S. Expatriates and other U.S. citizens employed by foreign operations (regardless of where the bribe is committed) Foreign employees or companies using the phone or mail in the U.S. in furtherance of a bribe 2. Payment or Anything of Value To offer, give, pay, promise to pay or give anything of value Examples: Offer a job to a relative Services Business information 3. Directly or Indirectly A third party payment on behalf of U.S. Person is treated as if made directly Use of an agent does not insulate from liability Willful ignorance is not a defense A company could be liable for the acts of its: Employees, Agents & Owners 4. Government Official Officer or employee of a government Political candidates or political parties International organizations and their representatives Examples: Representatives of telecommunication ministries Officers and employees of state-owned companies Employees of the IMF, INTELSAT, Inmarsat and Red Cross 5. Purpose of obtaining business or securing and improper advantage Intended to assist in obtaining or retaining business Examples:

Granting of concessions or licenses Obtaining better contract terms Obtaining favorable legislation Obtaining site or building permits

Sanctions Maximum company fines: $2 million or twice the profit Maximum individual fines: $100,000 and/or up to five years in jail Companies may not reimburse employees for fines imposed on them. Exceptions and Defenses Entertainment and promotional expenditures Facilitating payments Payments permitted under local law Entertainment and Promotional Expenditures Expenditures directly related to: (a) the promotion, demonstration or explanation of products or services, or (b) the performance of a contract with a foreign government or agency. Examples: Courtesy gifts Meals and other entertainment Product samples Visits to company operations or headquarters Facilitating Payments Facilitating or grease payments are not prohibited if made merely to expedite or secure the performance of routine governmental action. Routine Governmental Action Obtaining permits, licenses or other official documents Processing papers such as visas and work orders Providing police protection, mail pick-up and delivery, phone service, power or water supply NOT Routine Governmental Action Any decision by a foreign government official on whether or on what terms to award new business or to continue existing business Any action to encourage a decision to award new business or to continue existing business

**Employment Law I - 8/24/11** (Chapter 30)

Who is an Independent Contractor IRS Definition The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result. Who is an employee Definition Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is true even when you give the employee freedom of action. - Why does the difference matter Payment of benefits not necessary for IC Title VII and dismissal laws do not apply to ICs Tax ER required to deduct and withhold tax for EE, not for IC Wage & Hour laws -- wage and hour laws (e.g., minimum wage, overtime, meal periods and rest breaks, etc.) dont apply to ICs ERs perspective more ICs the better! Independent Contractor vs. Employee Examine the relationship of the worker and the business. Three categories as determined by the IRS: behavioral control, financial control, and the type of relationship of the parties. Behavioral Control An individual is considered an employee if the employer determines: When and where to do work What tools or equipment to use What workers to hire or to assist with work Where to purchase supplies and services What work must be performed by a specified individual What order or sequence to follow The necessary training and provides it Financial Control An individual is considered an employee if: Expenses reimbursed Facility in which the work is performed is an investment of the employer Guarantee of regular wage for an hourly, weekly, monthly or other period of time They cannot realize a profit or loss, but only earn income Type of Relationship An individual is considered an employee if: Benefits provided Expectation given that relationship will continue indefinitely, versus a specific project or period A worker provides services that are a key aspect of your regular business activity direction and control of his/her activities Sample Worksheet - See For tax purposes Employment at Will History of Employment Law Virtually non-existent No discrimination, safety, harassment laws Class system responsibility

Feudal Relationships master/servant Sacred rituals Hire for year at a time ; mutual dependence Industrial Revolution Move to cities; glut of potential workers Bonds of responsibility broke down Balance of power to employer (ER) Frontier Individualism . Result

History of Employment On the killing beds you were apt to be covered with blood, and it would freeze solid; if you leaned against a pillar, you would freeze to that, and if you put your hand upon the blade of your knife, you would run a chance of leaving your skin on it. The men would tie up their feet in newspapers and old sacks, and these would be soaked in blood and frozen, and then soaked again, and so on, until by nighttime a man would be walking on great lumps the size of the feet of an elephant. Now and then, when the bosses were not looking, you would see them plunging their feet and ankles into the steaming hot carcass of the steer . . . The cruelest thing of all was that nearly all of them all of them who used knives were unable to wear gloves, and their arms would be white with frost and their hands would grow numb, and then of course there would be accidents. Today Numerous employment laws regulate: Certain discrimination Unsafe practices Family and medical leave Overtime Workmen's compensation Discharge Non-compete agreements More Modern Laws Civil Rights Acts of 1866 & 1870 Social Security Act of 1935 Fair Labor Standards Act of 1938 Equal Pay Act of 1963 Employment Retirement Income Security Act (ERISA) of 1974 Employment at Will EE can be hired or fired for any reason a good reason, a bad reason, or no reason at all EE can leave job for any reason Quasi-contractual relationship Includes firings for politics, nepotism, left-handedness, or any unfair reason The default rule of employment in US Any reason means any reason Failure to make required contribution to charity Off-duty relationship with co-worker Refusal to be a swinger (still legal) Inappropriate off-duty lifestyles Left handedness Zodiac Sign Yankees Fan Sample at-will contract language I acknowledge that if hired, I will be an at-will employee. I will be subject to dismissal or discipline without notice or cause, at the discretion of the employer. I understand that no representative of the company, other than the president, has authority to change the terms of an at-will employment and that any such change can occur only in a written employment contract. I understand that my employment is not governed by any written or oral contract and is considered an at-will arrangement. This means that I am free, as is the company, to terminate the employment relationship at any time for any reason, so long as there is no violation of applicable federal or state law. In the event of employment, I understand that my

employment is not for any definite period or succession of periods and is considered an at-will arrangement. That means I am free to terminate my employment at any time for any reason, as is the company Who contracts on what terms Is Employment at Will Good Yes - Epstein, Chicago Law Review No - Blades, Columbia Law Review Cost Bird & Knopf; ROA & Salaries Employment ADS; Eurosclerosis effect Employment at Will Today Most EEs do not understand EAW Kim study, Cornell Law Review (1997) 1. Company discharges Employee in order to hire another person to do the same job at a lower wage. Employee's job performance has been satisfactory. Is the discharge lawful or unlawful Lawful % of total responses Lawful Unlawful NR Error Rate 17.8 82.2 0 82.2 2. Employee is discharged because Company mistakenly believes Employee has stolen money. Employee is able to prove in court that Company is mistaken. Employee's job performance has been satisfactory. Is the discharge lawful or unlawful Lawful % of total responses Lawful Unlawful NR Error Rate 10.4 87.2 2.4 87.2 3. Employee is discharged because he reported to his supervisor that another employee has been stealing company property. Is the discharge lawful or unlawful Lawful % of total responses Lawful Unlawful NR Error Rate 20.8 79.2 0 79.2 Others. Discharge due to Personal Dislike of Employee 89% surveyed believed firing unlawful Legal under employment at will Lack of Work 18% surveyed believed firing unlawful Legal under employment at will Unsatisfactory Job Performance 7.7% surveyed believed firing unlawful Legal under employment at will Conclusion Broad misunderstanding of employment at will by rank and file employees Belief closer to just cause Cause Fairness heuristic what I believe is unfair must be illegal Will discuss implications later in relational contract section Workplace Impact Employers benefit from trust, commitment, and loyalty that comes with belief in a secure job Employers do not have to pay for that benefit through actual job security A free ride Can the employment relationship be better understood than as a mere exchange of labor for wages Exceptions to Employment at Will Statutory and judicially created

Mitigates harshest impacts of employment at will Trend toward greater exceptions Significant variance among states GA, RI, NY ER CA, MT, MA EE CT in the middle

Contract Exception EAW may be superseded if employer and employee agree otherwise Contract of any kind, but most common: Union collective bargaining agreement Statute legislative protection of workers (civil service) Tenure academic agreement Executives special employment contracts Public Policy Exception Provides defense against employer when an employee acts to defend vital public interests or to claim uncontroversial rights as a citizen refusing to break the law (theft) public obligation (jury duty, testifying) clear legal right (collecting WC, suing) clear threat to public health or safety well established standards (state board; bar assn) Other examples Refusing to commit perjury in court on the employers behalf Cooperating with a government agency in the investigation of a charge or giving testimony Refusing to violate a professional code of conduct Reporting Occupational Safety and Health Administration (OSHA) infractions Refusing to support a law or a political candidate favored by the employer Whistle-blowing, or reporting illegal conduct by the employer Informing a customer that the employer has stolen property from the customer Remember that Most but not all states recognize public policy exceptions Exceptions recognized in varying strengths Check variance from state to state Does not protect employees asked to violate their conscience, unless interests of the public are involved Does not offer protection in mere differences in judgment Does not acknowledge private codes as sources of public policy (state board stds ok) Balance the interests of the public & the employer Implied Contract Most controversial of three exceptions Some (far from all) states accept Statements made by employer that imply contravention of EAW default rule well treat you like family stay as long as you like Express/implied statements in employee handbook (beware the handbook!) Covenant of Good Faith Exception ERs cannot treat EEs in bad faith implied covenant that neither party shall do anything which will have the effect of injuring the right of the other party to receive the fruits of the contract p.36 Promise to deal with one another fairly and in good faith Some states allow this exception Bad Faith exception Contractual-type exception to EAW Most narrow/least intrusive Denial of benefit of the employment bargain Firing because used permitted sick leave Refusing agreed upon vacation hours Denial of commission

Recognition of Employment-at-Will Exceptions, by State Promissory Estoppel Misrepresentation in hiring Improperly induce someone to leave their old job and incur expenses in moving Constructive Discharge The general rule is that if the employer deliberately makes an employee's working conditions so intolerable that the employee is forced into an involuntary resignation, then the employer has encompassed a constructive discharge and is as liable for any illegal conduct involved therein as if it had formally discharged the aggrieved employee. Bad treatment Constructive Discharge If EAW, ERs can fire immediately anyway, why waste time making EEs life difficult Must be coupled with illegal activity (i.e. improper discrimination) I dont want Jane around because she is a woman. I know I cant fire her. I will make her life so difficult so she will quit instead. Factors (1) increased and more burdensome duties; (2) a removal of duties or loss of responsibilities; (3) a job transfer or reassignment; (4) a demotion; (5) a temporary suspension from employment; (6) a failure to promote or a rescission of a promotion; (7) workplace harassment by co-workers or supervisors (8) discrimination in salary or other compensation (9) a reduction in pay (10) a reduction in hours worked (11) a denial of vacation or other accrued leave (12) lowered evaluations (13) demeaning reprimands, ridicule, or increased criticism by supervisors; and, (14) coercive threats of discharge. Retaliatory Discharge Title VII prohibits discrimination because of filing action under the act May also be covered by public policy exception Self-Publication Defamation

**Employment Law II - 8/25/11** (Chapter 30)

Employment Law (contd) 1. Disparate Impact 2. Age Discrimination 3. Disability Discrimination 4. OSHA 1. Disparate Impact (DI) Related to disparate treatment Neutral practice with discriminatory impact built in headwind for protected group Less common and less interesting than DT Proven by statistics Determining DI Discrimination Adverse Rejection Rate, or Four-Fifths Rule Rule of thumb followed by the EEOC Adverse impact when the selection rate for any racial, ethnic, or sex class is less than four-fifths (or 80 percent) of the rate of the class with the highest selection rate. Not a legal definition of discrimination Used as monitoring device Determining Adverse Impact: The Four-fifths Rule Business Necessity Defense ER can state that employment practice consistent with business necessity EX: credit history request results in less women hired; ER states it needs policy because business handles large sums of money hiring people with stable credit history a business necessity No bottom line defense ER cannot create quotas to circumvent unfair employment tools. Connecticut v. Teal p.100 Equal employment (no) vs. Equal employment opportunity (yes) 2. Age Discrimination Age matters! American culture values youth Statistics do not match perceptions By 2012 the number of workers 55 and over will almost double Older workers perceived as more costly Younger workers perceived as better educated and better qualified Myths about older workers In a reduction in force caused by economic reasons, employers should always terminate the older workers, since they are usually the highest paid. If most people in a certain age group have a common weakness, it can be generalized that all in the group have the weakness, and age can be used as a job qualification. Employees must retire at age 65 Exceptions Dont work as hard Get tired more easily Less able to perform Dont understand technology Unwilling to travel Inflexible in learning Make too much money relative to job Just marking time until retirement False Perceptions / Employer Opportunism Age Discrimination in Employment Act (ADEA) Prohibits discrimination in employment on the basis

of age Applies to individuals who are at least 40 years old No upper age limit If fired and replaced EE are both above 40, fired EE can still recover under ADEA - EX: 65 year old replaced with 50 year old If fired EE is younger than replaced EE, cannot recover under ADEA - EX: 52 year old replaced with 71 year old Exceptions Narrow exceptions for: top executives with immediate retirement benefit over $44,000 Observing a bona fide seniority system Police work, firefighting, pilots, other age sensitive jobs (BFOQ exception) Youth not protected Under 40 EE cannot use ADEA to prove discrimination because of youth The law does not mean to stop an employer from favoring an employee over a younger one The enemy of 40 is 30, not 50 Justice Souter. Connecticut state Law Connecticut state law does NOT have an age limitation In other words, no over 40 requirement to receive protection from age discrimination protection Common in New England states Proving Age Discrimination Reductions in Force Biased Words BFOQ Defense Foreign Laws Defense US ERs working overseas not a violation of US law for an employer to take action that might otherwise constitute unlawful employment discrimination, when such action is necessary to avoid violating a local law of the foreign country where the place is located. Applies to Age discrimination and other employment discrimination laws Mahoney v. RFE/RL case Foreign Laws Defense: Hypothetical Example: A Casparian statute requires that, after the period of their pregnancy-related disability, new mothers be given six weeks paid leave for childcare purposes. In compliance with the law, R, a United States employer employing teachers of English in Caspar, provides its female employees with such paid leave. Charging Party, a male U.S. citizen employed by R in Caspar, challenges R's failure to provide him the six weeks' childcare leave when his wife gave birth to their first child. R asserts a foreign law defense based on the Casparian statute. Would Rs giving the plaintiff cause a violation of foreign law such that the foreign laws defense would apply 3. Disability Discrimination Disability Discrimination The Americans With Disabilities Act defines a disability as: A physical or mental impairment that substantially limits one or more of the major life activities. A record of such impairment. Being regarded as having such an impairment. ADA Coverage The ADA applies to both private and public sector employers with fifteen or more employees State laws may have less coverage Does not apply to most Federal government employers American Indian tribes Bona fide private membership clubs Disability Discrimination The ADA does not cover: Homosexuality or bisexuality

Gambling, kleptomania, or pyromania Current illegal use of drugs Alcoholics who use or are under influence at work Infectious or communicable diseases of public health significance (applied to food-handling jobs only and excluding AIDS) impairments that are transitory (defined as an impairment with an actual or expected duration of six months or less) Do all disabled individuals receive protection Qualified individual with a disability Who is disabled See earlier requirements. An individual with a disability who is able to perform, with reasonable accommodation, the requirements of the job in question, despite the disability An employer is not required to hire a person with a disability who is not capable of performing the duties of the job Duty of Reasonable Accommodation ER reasonable accommodations for disabled individuals to perform jobs essential functions Limit undue burden UB - an action requiring significant difficulty or expense when considered in light of a number of factors. These factors include the nature and cost of the accommodation in relation to the size, resources, nature, and structure of the employer's operation. Medical Exams and Tests The ADA limits the ability of an employer to test for or inquire into the disabilities of job applicants and employees Employers are prohibited from asking about the existence, nature, or severity of a disability An employer may ask about the individuals ability to perform the functions and requirements of the job Employers are likewise not permitted to require pre-employment medical examinations of applicants Once an offer of a job has been extended to an applicant, employers can require a medical exam, provided that such an exam is required of all entering employees Current employees are similarly protected from inquiries or exams, unless those requirements can be shown to be job-related and consistent with business necessity The ADA Amendments Act of 2008 The ADA was amended, effective January 1, 2009, to reconsider the definition of disability Reverses some earlier supreme court decisions interpreting the ADA narrowly Gives list of major life activities that might be impaired: caring for oneself, performing manual tasks, seeing, hearing, eating, sleeping, walking, standing, lifting, bending, speaking, breathing, learning, reading, concentrating, thinking, communicating and working. The ADAAA also lists major bodily functions, including, but not limited to, functions of the immune system; normal cell growth; and digestive, bowel, bladder, neurological, brain, respiratory, circulatory, endocrine, and reproductive functions. When determining whether an impairment substantially limits a major life activity, the court is not to consider the ameliorative effects of mitigating measures, assistive devices or aids, other than eyeglasses or contact lenses State Disability Discrimination Laws All fifty states have laws that prohibit discrimination against individuals with disabilities The coverage of such laws varies The provisions of such laws generally parallel those of the ADA but in some instances go beyond the ADA protections The California Fair Employment and Housing Act requires only that physical and mental disabilities place a limitation on a major life activity, rather than the substantial limitation required under the ADA Some states have specific legislation prohibiting discrimination against individuals with specific conditions Connecticut list of disabled defined as DSM-IV. Drug Testing by Private Sector Employers Neither the ADA nor the Rehabilitation Act prohibits drug testing by employers Private sector employers may be subject to federal laws or regulations that require drug testing of certain employees ADA Remedies The ADA is enforced by the EEOC The Act specifically provides that the procedures and remedies under Title VII of the Civil Rights Act of 1964 shall be those used or available under the ADA Remedies available include Injunctions

Hiring or reinstatement order (with or without back pay) Attorney fees The Civil Rights Act of 1991 amended 42 U.S.C. Section 1981A to allow suits for compensatory and punitive damages against parties accused of intentional discrimination in violation of the ADA 4. Workplace Safety & OSHA 1970 no uniform safety laws 2.5 million workers disabled Response Occupational Safety and Health Act OSHA: Purpose Establish separate but dependent responsibilities and rights for employers and employees for achievement of better safety and health conditions Maintain a reporting and record-keeping system OSHAs Purpose Establish training programs Develop & enforce mandatory job safety and health standards Provide for the development, analysis, evaluation and approval of state OSH programs General Duty Clause 5(a)(1) The OSH Act has a broad general duty clause requiring all employers to furnish a workplace free from recognized hazards that are causing or likely to cause death or serious physical harm. The general duty clause is meant to apply when a recognized hazard exists, for which there is not (or not yet) a precise standard. In other words, an unsafe condition not covered by one of OSHAs specific standards is understood to be covered by the general duty clause. Workplace Inspections To enforce standards, OSHA is authorized under the Act to conduct workplace inspections. To enter without delay and at reasonable times any facility where work is performed by an employee or employer. . . Inspect and investigate during regular working hours. . . Penalties Serious Violation: A violation where there is substantial probability that death or serious physical harm could result and that the employer knew, or should have known, of the hazard. A mandatory penalty of up to $7000.00 for each violation is proposed. Willful Violation Penalty If an employer is convicted of a willful violation of a standard that has resulted in the death of an employee, the offense is punishable by a court-imposed fine or by imprisonment for up to six months, or both. A fine of up to $250,000 for an individual, or $500,000 for a corporation, may be imposed for a criminal conviction. Criminal Penalties In addition to civil penalties, the following may result in criminal penalties: Willful violation causing death Giving unauthorized, advance notice of an inspection Giving false information Killing, assaulting or hampering the work of an OSHA inspector

**Equal Employment Opportunity - 8/25/11**

Primary Federal Employment Discrimination Act: Title VII, 1964 Civil Rights Act, Amended by 1991 Civil Rights Act Covered employers: Private employers, employment agencies, & labor unions with 15 or more employees o Exempt: US government, bona fide membership clubs, Native Americans, religious organizations (limited), bona fide seniority system, national security Covered decisions: hiring, firing, terms & conditions of employment (including compensation & evaluation) Protected classes: o Race & color o National origin-plaintiff has the burden of showing that n.o. discrimination was the primary motive o Religion - incl. observance & practice - accommodation & undue hardship issues. Undue hardship = more than a de minimis cost (TWA v. Hardison, 1977) o Sex (gender) includes Pregnancy Discrimination Act (1978) (pregnancy a temporary disability)& Sexual harassment see below Defenses (in sex, religion, national origin & also age under ADEA): o Merit & seniority o -Bona fide occupational qualification (BFOQ) test - reasonably necessary to the normal operation of that particular business - -n.a. in race or color. Employee testing and BFOQ test must be a reasonable measure of job performance Griggs v. Duke Power (USSCt.1971) Enforcement of Title VII o Must use collective bargaining or administrative remedies if available o Federal EEOC or state civil rights agencies must be used first o Employment contract arbitration clauses may also apply Sexual Harassment: Mainly created by EEOC regulation 2 types: o Quid Pro Quo or o Hostile Environment hostile environment= harassing behavior sufficiently severe or pervasive to alter the conditions of their employment (Meritor Savings Bank v. Vinson) Supreme Court cases on sexual harassment: Burlington Industries v. Ellereth and Faragher v. Boca Raton (USSCt.1998): o Rule: an employer is strictly liable for supervisor harassment that culminates in a tangible employment action, such as discharge, demotion or undesirable reassignment. Ellereth/Faragher o Affirmative Employer Defense: (only available when no tangible employment action): employer must show by a preponderance of the evidence that: the employer exercised reasonable care to prevent and correct promptly any sexually harassing behavior; and (2) the plaintiff employee unreasonably failed to take advantage of any preventive or corrective opportunities provided by the e/er or to otherwise avoid harm (mitigate harm) Pennsylvania State Police v. Suders (USSCt.2004) o Note: summary judgment of defendants at district court (Ct. of App. remanded for trial S.Ct. affirmed remand) o Reaffirmed Ellereth & Faragher o Doctrine of constructive discharge does apply in Title VII sexual harassment cases must be harassment so intolerable that her resignation qualified as a fitting response the intolerable harassment may be caused by co-worker conduct, unofficial supervisory conduct, or official company acts respondeat superior may apply Ellereth & Faragher employer affirmative defenses are available Burlington Northern & Santa Fe Ry. v. White (USSCt.2006) o Ruling: plaintiff may recover for retaliatory adverse employment actions that do not necessarily result in being fired (retaliatory discharge) o Standard for recovery for alleged retaliatory adverse employment actions: showing of material adverse change in terms & conditions of e/ment o Test for materially adverse: (1) would employer actions be considered materially adverse to a reasonable employee or applicant-beyond trivial harms: or (2) the challenged action might well have dissuaded a reasonable worker from making or supporting a charge of discrimination o E.g.: in White, plaintiff removed from former duties to more arduous & dirtier ones and subsequently suspended without pay for 37 days for insubordination (insubordination charges later found groundless)