bill

LEGAL AND ETHICAL

ENVIRONMENT OF BUSINESS







LEB 320 F

When Compliance Isn’t Enough



• Does the Constitution come into play?

• EPA –is that in the Constitution?

• Social cost – what’s that?

• Are federal regulations mere guidelines?

• Was EPA supposed to stop all pollution?

• Cleaner water v. Steady jobs. Whoa?

Compliance???

• Can WaterClear sue SunBright?

• Managers like Rick. Trapped in

middle?

• Wasn’t Rick doing a pretty good job?

• Where does globalism come into

picture?

• What if you were a member of

WaterClear?

Aaron Feuerstein, CEO

Malden Mills



A fire destroyed the plant, but CEO continued

payroll until he rebuilt. His unionized plant

went strike free.

Now the firm is in bankruptcy, like Enron,

WorldCom, Adelphia, and others.

A firm should balance its profits and its good

works.

Ethics or Morality



What’s the Difference???



Is one of them tougher than the other?

Ethics

Ethical Absolutes

or

Ethical Relativism

Doing the Right Thing

• The Right Thing???

• The same in U.S. Saudi Arabia,

China?

Sources of Ethics

• Mom and Pop – Family

• School – Community

• Culture

• Religion

• And you keep right on learning

Socrates

• The ―Myth of the Cave.‖

• Realism v. Appearance.

• The Sun illuminates everything

but itself.

• The Light, Absolute, Logos.

Monday, 24 February 2003

• Woman’s right to choose.

• Religion – life is sacred; fetus is

human life.

• Platonic argument

• Secular – symbiotic/parasitic

relationship.

Plato

• Socratic Dialogues.

• Women, as well as men, could hold high

office.

• In ―The Laws,‖ he described men as

– Gold – philosopher kings

– Silver – soldiers

– Bronze- artisans and laborers

– Iron – aggies and the like

TriPartide Self

• Plato – Chariot driven by ―Reason‖ drawn

by one ―Noble‖ & one headstrong –‖Spirit‖

• Marx – Natural Self, Alienated Self, and, in

time, a Species Self.

• Freud – Ego/rationality principle, SuperEgo

(conscience and ego ideal), and Id

(aggression, power, dominance).

Sparta

• Spartan King Leonitus saved Athens from

Persians at Thermoplilea

• Sparta defeated Athens in Pelopenesian War

• In defeat, Socrates and Plato introduced the

―forms‖ and ―philosopher kings‖

• British philosopher Bertrand Russell during

Battle of Britain described Plato as fashistic

Aristotle

• Happiness - a life of virtuous

activity in accordance with

reason.

• Virtue – neither excess nor

deficiency.

• Where do you get that virtue?

Stoics & Epicurians

• Detachment – apathia

• Social engagement v.

separation from public

affairs

• Logos

Utilitarianism

• Greatest Good – Greatest Number

– A quantitative measure



• Bentham—Pleasure/Pain Calculus

– Stuffed - University of London.



• Mills – Examined quality of pleasures.

– On Liberty – virtues resembling Aristotle.

Go Figure

• By keeping her promise to Margot,

Alexis can create 500 units of utility.

• By breaking that promise, Alexis can

create 5000 units of utility with Nicole.

• Alexis wants to know what to do?

Neitzsche

God is Dead! Do something with your

freedom; create your own values free of

superstition.

Will to Power! Self-

strength/fulfillment. ―Whatever doesn’t kill

me makes me stronger.‖

Eternal Return -Affirm Life! Live it

with such love for life, that you’d do it

again, and again, forever, throughout

eternity.

Pragmatism

• Truth – look at consequences.

• Use rules, principles, utility, virtue.

• If it doesn’t work well, change it.

• This does NOT mean anything goes.

• If theory does not account for facts,

change the theory.

Theory of Justice

The Original Position





• In the Original Position, behind a Veil of

Ignorance, Rawls imagines that rational,

self-interested persons who know they will

live in the society they create, but do not

know their race, sex, abilities, religion,

interests, life plan, social position, income

or other particular attributes will choose fair

and impartial rules, such as the following:

Theory of Justice

John Rawls



• Equality Principle: Each person has

maximum basic liberty compatible with

others – Contracts free of force, fraud, deception.

• Difference Principle: Social/economic

inequalities should be arranged so

– All offices/positions are open to everyone

under conditions of fair equality of opportunity,

– Greatest benefit goes to least advantaged.

Business Ethics

1. Checklist

2. Facts

3. Issues

4. Stakeholders – includes

stockholders but also covers

everyone who impacts or is

impacted by the corporation.

PERSPECTIVES

A. Legality.

B. Headline News.

C. Consequences (utility).

D. The Right thing to do--moral rights.

E. The Golden Rule--respect for others.

F. Justice – Fairness.

G. Procedural justice.

H. Character/virtue.

ENRON

VISION & VALUES

Respect

Integrity

Communication

Excellence

Enron

Respect – As opposed to entrapment of 401-K

employees

Integrity – As opposed to greed, deceitfulness,

fraud

Communication – As opposed to stonewalling

by taking the 5th amendment

Excellence – As opposed to fair-to-middling

ENRON

Largest U.S. bankruptcy until

WorldCom.

Complex off-shore partnerships kept

liabilities off Enron’s books.

Energy trading completely legal, but not

self-dealing.

Enron – Merrill Lynch

―Sham‖ energy deal with M-L allowed

Enron to meet Wall Street expectations

and book $60 million profit (1999). Inflated

profits drove up stock price, unleashed

$$millions$$ in bonuses (Lay, Skilling . . .)

and was later cancelled as planned.

M-L denies receiving $8 from Enron for

cancellation. Still under investigation.

Arthur Andersen

• Let’s don’t talk about Arthur Andersen.



• It gave Professor

Shaw an all expense paid trip to their

Business Ethics seminar in Chicago.



• Over 3 years, it spent $5,000,000

WorldCom

• Overstated earnings by $3.8

million

• Laid off 17,000 employees

• Stock dropped from $64.50 to 0.83

• Former CEO received $366 million

in low interest loans

TYCO

• CEO Dennis Kozlowski charged with

evading $1 million in taxes and is accused

with destroying documents.

• Kozlowski and other executives bought art

work, and one executive bought a home. In

other words, they looted the firm (also

Adelphia) for personal gain.

• Tax avoidance with offshore incorporation.

ImClone Systems

CEO Samuel Waksal sold

stock after learning the

FDA denied certification

of cancer treatment drug.

Inside trading.

Martha Stewart

• Martha Stewart (a director of NYSE)

allegedly sold stock on inside information

provided by Merrill Lynch. Stock in

Stewart’s Omnimedia declined 40%. (see

Chpt. 16)

• M-L broker, Peter Bacanovic, allegedly

warned her of illegality.

Chainsaw Al

Al Dunlap built his reputation on Wall

Street as a CEO who could ―turn around‖

failing corporations. He did it, allegedly, by

an ―employee census‖ and more efficient

operations. The SEC now believes the

―turnaround‖ at Sunbeam was engineered

by financial fraud. An Arthur Andersen

audit partner certified the results.

Harken Energy

• In 1992, while George W. Bush was a

member of Harken’s audit committee, the

SEC forced Harken to correct an

overstatement of profit.

• Bush sold 212,140 sh. @ $4 prior to a

restatement of profit.

• U.T. Poly. Science Prof. Bruce Buchanan –

―[S]imilarity to Enron style of accounting.‖

Executive Compensation

• How Much Are They Worth?



• NYSE position is that all listed companies

be required to expense stock options.



• If options reward employees, why aren’t

they treated expensed as other forms of

compensation?

What’s the use of …

• The Checklist

• Ethical Theories

• If you know the right thing,

does that mean that you will do

the right thing???

Chapter 2



Introduction to Law

Power

Plato – In The Laws, Plato would establish

Philosopher-Kings, and place these Men of

Gold as governors over Men of Silver

(warriors) and Men of Bronz (citizens,

workers). Women were treated equally, and

private property abolished.

Aristotle – In The Politics, Aristotle would have

rule by Aristocrats, recognize private property,

women – mothers, homemakers.

Power

• Hobbes – life without civil government

[The Leviathan] is solitary, poor, brutish,

nasty, and short.



• Locke – Separation of power. State of

nature - private property. Caretaker

government – libertarian.

Contemporary Sources of Law



• Constitution

• Statutes

• Administrative Law

• Treaties

• Common Law

INTRODUCTION

• Administrative Law, e.g., EPA

regs

• Remember the Rick Wagner

hypothetical in your syllabus.

• Treaties: 2/3 Senate + President

(supreme law of the land).

Classifications of Law

1. Criminal - Justice Department

2. Civil fines – S.E.C.

3. Substantive (rights) v. Procedural

(rules).

4. Public (legislation) v. Private

(lawsuits)

Element of a Crime

1. Statutory violation – no common law

crime.

2. Intent (mens rea or ―guilty mind‖).

(a) Deliberate conduct.

(b) Recklessness – conscious disregard

of substantial risk of harm.

3. Proof beyond reasonable doubt.

A New Criminal Defense?

• Jury nullification—a S. D. referendum.

• ―Sure, I violated the law - it was too

goofy.‖

• Cruelty to animals? ―What, I was

defending myself against an attack

dog.‖

• Child pornography? ―I just took a

photo of my toddler in the bathtub?‖

CyberCrime

• Federal Law on CyberCrime.



• Criminal behavior if a person harasses

someone by means of interstate

telecommunications.

Cyber Defamation

Defamation in Cyberspace

Civil Lawsuit, Not Criminal



Chatroom

Bulletin Board

Cyber Stalking

Several state laws (not Texas) have

laws prohibiting cyber stalking.



Laws require either ―credible threat‖

or an intention to ―harass, threaten,

or alarm.‖

Cyber Theft

• Access classified • Sending viruses by

government info. hacking.

• Access info of • Fraudulent access to

financial institutions. government passwords

• Access govt.

department file to • Threat to cause

affect use. damage to computer to

• Access files to defraud extort something of

or obtain value. value

Children’s Internet Protection

• The Federal Children’s Internet Protection

Act requires libraries that receive federal

funds to install filtering software designed

to block access to adult websites.

• Constitutional after the ALCU had

successfully challenged the 1st two attempts

to get this act on the books.



.

Actual Federal Crimes

• Fraudulent use of 4-H symbol or pretending

to be a 4-H member.

• Unauthorized use of of ―Smoky Bear‖

name.

• Illegal use of cremation urn.

• Interstate transportation of dentures.

• Issuing false weather reports.

• Mailing false divorce information

Jurisprudence—Legal Wisdom



• Legal Positivism – look to Letter of the Law

• Natural Law – look to the Source

• Legal Realism – look to the Enforcer

• Legal Pragmatism – finding a workable

legal solution roughly in accord with the

Constitution, statutes, and cases

Natural Law – Natural Religion

• David Hume (1711-76) Scottish skeptic,

friend of Adam Smith.

• Laws of nature, discoverable through

rational inquiry, are inconsistent with

miracles of Bible.

• Natural law – a purely secular project

developed as a means of protecting and

promoting life in communities.

Examples of Tort

• Osborne v. Stages Music Hall, Inc.

– Did Music Hall owe a duty?

• Ozzie Osbourne’s ―Suicide

Solution‖

– Could Ozzie foresee this outcome?

Closing Arguments

• Refresh your memory - Scan the

slides chapter review.

• Examine problems at end of

chapter.

• Ask a bunch of questions.

Chapter Three



Dispute Resolution

Enviro-Vision v. Coastal Ins.

Tony Caruso drowned. His partner, Beth

Smiles, tried to collect double

indemnity for accidental death. No

luck! Then she turned to Janet

Booker. . . .

 Alternative Dispute Resolution,

 State or Federal Court

Alternative Dispute Resolution



• Negotiation

• Mediation

• Arbitration

• Mini-Trial – panel of ―judges‖

• Summary jury trial

Arbitration

• Private award (secret), quicker,

cheaper compared to litigation.

• However, no class actions, no

discovery procedure.

• No appeal unless arbitrator is

corrupt.

Enforcement of Arbitration

Meehan v. Nassau Community College

Professor assigned to teach course; he had no proper

credentials.

647 N.Y.S 2d 865 (1996)

Awards won’t be enforced if they contravene

strong public policy or corruption. An error

of judgment is not sufficient.

EEOC v. Waffle House

• Employee lost job-related

arbitration dispute with Waffle

House.

• EEOC permitted to sue Waffle

House for employee back pay

under Americans With Disabilities

Act.

State and Federal Courts.

• Which to choose: state or federal?

• Either choice, the court must have

a. Personal Jurisdiction

AND

b. Subject matter Jurisdiction

Venue

• Venue designates the proper court within a

state to file a lawsuit.

• Assuming the court has jurisdiction over the

case, venue will be proper . . .

– In the county where the tort happened,

– In the home county of the defendant,

– If the suit involves real estate, in the county

where the property is located.

Federal Jurisdiction

• Federal Jurisdiction:

Diversity & Federal Question.

• Exclusive federal jurisdiction --

bankruptcy, patent-copyright law,

federal crime.

• Original and Exclusive.

• Original – Louisiana v. Texas.

Diversity Jurisdiction

• Federal Diversity jurisdiction

requires:

(a) Complete diversity of parties,

AND

(b) Amount in controversy $75,000

Non-residents

• Out of State Motorists



• Out of State Corporations

Pleadings

• Plaintiff initiates suit by filing a

petition in a court with

jurisdiction.

• The petition alerts the defendant in

plain language of the facts the

lawsuit is based on.

• This is in compliance with our

notion of due process. It’s based on

fairness.

Summons

 A summons is served on the defendant with a

copy of the petition by a court-authorized agent.

The summons will notify the defendant of when

and where to appear to answer the petition.

 Normally the defendant will have an attorney

answer the petition and appear on defendant’s

behalf. Failure to appear will result in the

defendant’s losing the the lawsuit by default.

Answer

 Answer tells why defendant is

not responsible.





 Don’t default by failing to

answer!

Answer

• Answer may respond challenging the

court’s jurisdiction.

• Answer may respond that ―statute of

limitations‖ has expired.

• Answer may respond that ―driving while

blonde‖ in not a civil wrong.

• Answer may say that plaintiff hasn’t alleged

elements of tort or breach of contract.

Judgment of Pleadings

Court doesn’t have jurisdiction,

Statute of limitations expired,

State doesn’t give legal relief

for plaintiff‖s claim.

Motion to Dismiss

• U.S. District Court dismissed ―fat suit‖

v. McDonald’s.

• Parents had ―reason to know‖ that fast

food produced weight gain.

• Ads ―McChicken Everyday‖ and ―Big

N’ Tasty Everyday‖ were mere

puffery.

Class Action

• If there is commonality of fact and law

among plaintiffs, the judge may certify a

class. Class members will be notified and

may opt-out.

• Caesar Barber, 5’10‖ 272#, represents a

class v. McDonald’s, Ky.Fried, Wendy’s,

and Yum on failure to warn on cholesterol,

obesity, diabetes, heart disease, high blood.

Pre-trial Discovery

– Interrogatories

– Depositions

– Documents

– Medical Exams

– Admissions.

Klupt v. Krongard

• Klupt, according to trial court, ―grossly

abused‖ the discovery process. Krongard’s

motion to dismiss counter-claim was

granted and affirmed on appeal.

• Abuses: Klupt routinely objected to dates

for depositions; changed lawyers causing

delay; lied about conflicts; managed further

6 mo. delay; destroyed tapes.

Summary Judgment

• Undisputed facts.

• Outcome is a matter of law.

Jones v. Clinton

• Summary judgment for Clinton

because Jones did not show

―tangible job detriment or adverse

employment action.‖

• Other issues – trial was postponed.

• Settled out of court.

Burden of Proof

Preponderance evidence:

Civil actions the 51-49%

rule applies.

Beyond reasonable doubt:

Criminal actions.

Motion for Directed Verdict.



At close of each party’s case, the other will

move for a directed verdict asking the

judge to take the case out of the jury’s

hands and order it to return a verdict in

his/her favor.

Reason: The other has not introduced

evidence to prove elements of his/her

case.

Jury Instructions

• If jury cannot decide whether death

was accidental or suicide, there is a

legal presumption that death was

accidental.

• Is this a proper instruction?

Ponce v. Sandoval

• Judgment NOV (against weight of evidence) and

New Trial (error of law).

• Ponce v. Sandoval-Sandoval received $1600 jury

verdict for medical expenses. Trial judge granted

her NOV motion. Appellate court reversed NOV

and reinstated jury verdict.

• Appellate court may affirm, modify, reverse and

remand, or outright reverse.

Closing Arguments

• Review

• Chapter ending problems

Chapter 4

•Common,

Statutory, &

Administrative

Law

Common, Statutory, &

Administrative Law



• Stare Decisis – the doctrine of precedent.

• Res Ipsa Loquitur--1) defendant controls

instrument of harm, 2) harm not normally

occur in absence of negligence, 3) plaintiff

in no way responsible for negligence or

harm. Burden of proof shifts to defendant.

• Res Judicata.

Common,Statutes,Administrative

• Common – Bystanders

• Statutory – Civil Rights Act

• Administrative –

– Chevron v. U.S. – ―bubble‖ concept was a

reasonable approach even though it may not have been

superior to another strategy. ―

– Holly Farms v. NLRB

• Ginsburg –maybe not best, but a reasonable way

• O’Connor – strict construction, plain meaning

Common Law Doctrines

• Stare decisis – stand by the decision.

– Any case influenced, controlled by earlier case.





• Res ipsa loquitur – the thing speaks for

itself.

– Suit v. surgeon who, 8 years earlier, failed to

remove IUD while doing a hysterectomy.

Going to the Rescue

• Duty to go-to-the-rescue.

• Ethical duty.

a) Ability--harm to rescuer?

b) Need—how serious?

c) Proximity—close by or not?

d) Last Resort—no one else

helping.

Going to the Rescue

• General Rule—NO legal duty to rescue

unless defendant has caused danger.

• Factors considered in exceptional cases.

– Could harm have been prevented?

– Was aid negligently administered?

– Was harm foreseeable?

– Was failure to act morally wrong?

– Was there a special relationship to victim?

Restaurants and Bars

• Restaurant served drinks to diner until he

was visibly intoxicated.

• Drove away and killed motorcyclist.

– El Chico v. Poole (Texas 1987).

– Texas per se statute.

• Per Se—What’s that???

• What if diner in your restaurant is choking?

Per Se Negligence

1) DEFENDANT WITHIN CLASS

OF PERSONS INTENDED,

2) TYPE OF HARM STATUTE

INTENDED TO PREVENT,

3) BREACH OF STATUTE

CAUSES INJURY.

Rescue

• Union Pac--duty to rescue trespasser.

• Cappier – laborer suffered ―heat

stroke.‖

• Osterlind v. Hill – canoe renter

drowned.

• Soldano v. O’Daniels – Happy Jack’s.

Psychiatrist

• Tarasoff v. California—special relation

with Poddar who confided intent to

kill; the victim was foreseeable.

• Is psychiatrist responsible?

• Psychiatrist is an agent of the

University of California.

• Special relationship.

Almonte v. Ingram

• DeMasi, a psychiatrist, confided to Ingram, a child

psychiatrist, that he was a pedophile. Ingram told

no one; 4 months later DeMasi molested Denny

Almonte.

• DeMasi served 5 yrs in prison. When released he

violated parole and returned to prison. When

released in 1995 he disappeared.

• Almonte experienced emotional legal & problems

and was confined to institutions himself.

Almonte v. Ingram

• Patients in therapy say all sorts of troubling

things. In fact, it’s the therapist’s job to

encourage patients to reveal deep-seated

feelings. No reason to think patient would

act on all of them. Therapist shouldn’t

breach confidentiality each time patient says

something bizarre – that would cause

patients to avoid therapist in the first place.

Rescue in Texas

• Dr. Thapar began treating Lilly in 1995; he knew

about Lilly’s paranoia and delusional attitude

toward Zezulka, his stepfather. Lilly was treated

with psychotherapy and drugs; on 6 occasions he

was hospitalized.

• Thapar testified that Lilly felt like killing Zezulka.

• Within a month after release, Lilly killed Zezulka.

Thapar is sued by Zezulka’s wife.

Thapar v. Zezulka (Texas 1999)

Rescue in Vermont

• A person who knows that another is exposed to

grave physical harm and can render aid without

peril to himself or diminished duty to dependants

must give reasonable aid if not provided by others.

• Reasonable assistance relieves one of civil

damages unless

– gross negligence (slight care), or

– expects remuneration.

• Does not affect physicians in ordinary practice.

• Fine - $100. 23 Vermont Code sec. 519

Adulterous Affair

• Employees of Helena Labs began

having an affair. Their spouses later

discovered the liaison, and sued Helena

Labs for carelessly failing to prevent it.

• Outcome?

Helena Laboratories v. Snyder, Texas 1995.

The Legislative Process

• Bills--Move from Legislature to

Conference,

• From there back to Legislature,

• Finally to Executive for signature or

veto.

• Two thirds vote of both houses passes

bill over president’s veto.

Griggs v. Duke Power

• Civil Rights Act of 1964 prohibits

intentional racial discrimination in hiring.

• What if hiring policy is ―fair in form,‖ but

discriminates in practice?

• After 1964 Act a new Duke rule: Executive

jobs only to those with h.s. diploma/IQ test.

• What if that discriminates on race??

Wards Cove v. Atonio

• Whites hired for skilled jobs; nonwhites-unskilled

jobs. This violated law unless employer could

show a good reason (―business necessity.‖)

• S.C. concluded that ―business necessity‖ in hiring

was NOT required despite Griggs v. Duke Power.

• Congress later restored requirement of business

necessity. President G.H.W. Bush vetoed. Failed

by one vote to pass over veto.

• 1991 Act just vague enough to pass Congress.

Statutory Interpretation

Statutory interpretation:

–(a) plain meaning,

–(b) legislative intent,

–(c) public policy.

Griggs v. Duke Power

• Title VII, based on commerce

clause, prohibits job practices

that are ―fair in form,

discriminatory in practice.‖

• Ability tests developed by

professionals are legal.

Administrative Law

• Agencies may be executive or independent.

• Agencies gain power through a delegation

from the legislature.

• Independent - SEC, FCC, FTC, NLRB.

• Executive –IRS, FBI, NRC, EPA.

• Separation of powers.

• Formal and Informal Rules.

Subpoena duce tecum

FDIC v. Garner

―Subpoena duce tecum.‖



Subpoena duce tecum must not be

unreasonably burdensome or seek

privileged information; it must

seek only relevant documents.

Judicial Review

• Holly Farms v. NLRB

• The S.C. found that the Board’s

interpretation, while not the only one

possible, was reasonable, therefore the

Board was affirmed.

• Majority – Ruth Bader Ginsberg

• Minority – Sandra Day O’Connor

Chapter Five





Constitutional

Law

Constitutional Law

• Separation of Powers - checks and

balances.

• Art. I - Grant of powers to

Congress. Especially important is

the Commerce and the Necessary

and Proper clauses.

Commerce Power

• Wickard v. Filburn, 317 US. 111

(1942)—The Depression Era.



• U.S. v. Lopez, 514 U.S. 115 (1995)—

The Rehnquist Court.

Dormant Clause

10th Amendment



• Maine tried to use10th amendment tax

power to deprive Camps of property

tax exemption. Camps attendees were

95% out-of-state. Can Camps be

penalized in comparison to in-state?

• What is the dormant aspect of the

commerce clause?

• Camps Newfoundland/Owatana v. Maine

Taxing and Spending

• In addition to the Commerce Power, Art. 1,

Section 8 of the Constitution gives

Congress the power to ―lay and collects

Taxes . . . to pay the Debts and provide for

the Common Defence and general Welfare

of the United States.‖

• Teenage drinking was a ―general welfare‖

problem – highway funds withheld.

Judicial Supremacy

• The Case of the Midnight Judges

• Marbury v. Madison—Chief

Justice John Marshall saw a

judicial veto in the Constitution.

Where did he get that idea?

Judicial Supremacy

• Article III -- One Supreme Court and

other courts as Congress may establish.

• Article VI – Supreme Law of the Land:

– The Constitution.

– Laws in Pursuance of Constitution.

– Treaties under Authority of U.S. Treaties

are made by President and 2/3 of Senate.

Executive Powers

• Art. II--President is commander in

chief and chief executive officer.

• Youngstown Sheet and Tube v.

Sawyer—Did President Truman

exceed his powers as Chief Executive?

• What about President Nixon fixing

prices?

The First Amendment

• Congress shall make NO law respecting . . .

– Establishment of religion or abridging free exercise

thereof, or

– abridging these constitutional rights:

– Speech,

– Press,

– Peaceable Assembly, or

– Petition government to redress grievance.

Fourteenth Amendment

• Establishes citizenship if born or

naturalized in U.S.

• States cannot deny life, liberty, or

property to ANY PERSON without

due process of law.

• States cannot deny ―any person within

its jurisdiction‖ equal protection of

law.

Pledge of Allegiance

• ―. . . Under God . . .‖

• Do these two words in the Pledge of

Allegiance violate the Establishment Clause

of the First Amendment?

• Two religious clauses: Establishment and

Free Exercise.

• Why is this applied to states . . . ?

Ethnicity

• Due process clause of 14th A. applies the

Bill of Rights to the states.

• Massachusetts passed statute forbidding

discrimination on basis of ethnicity.

• Porcaros awarded $1.5 million - permit for

developing real estate denied on grounds

that were not held against other groups.

• ―All you Italians are a bunch of thieves.‖

Symbolic Speech

Amendment I--Texas v. Johnson



US flag was burned at Republican

Convention (1980) in Dallas.



What kind of message was that?

Symbolic Speech

U.S. v. Eichman – U.S statute - flag burning

Barnes v. Glen Theater – non-obscene nude

dancing

R.A.V. v. St. Paul – hate-crime ordinance

penalized burning crosses – the Klan

Wisconsin v. Mitchell – child beaten on

account of race - symbolic speech?

Political Speech

• Political speech receives

highest protection.

• However, it may be

criminalized if ―intended and

likely to create imminent

lawless action.‖

Justice Holmes

• ―The question in every case is whether the

words used are used in such circumstances

and are of such a nature as to create a clear

and present danger that they will bring

about the substantive evils that Congress

has a right to prevent. It is a matter of

proximity and degree.‖

– Schenck v. U.S., 249U.S 47, 52 (1919).

Justice Holmes

• ―The most stringent protection of free

speech would not protect a man in falsely

shouting fire in a theatre and causing a

panic.‖

• The [Act] punishes conspiracies as well as

actual obstruction. No grounds for saying

that success alone makes an action a crime.

• Schenck v. U.S.

Justice Holmes

• [The] ultimate good desired is better

reached by free trade in ideas – that the best

test of truth is the power of that thought to

get itself accepted in the competition of the

market . . . . That at any rate is the theory of

our constitution.‖

– Abrams v. U.S., 250 U.S 616, 627-28 (1919)

Dissenting Opinion

Republican Party v. White

• Supreme Court struck down Minnesota law that

prohibited judicial candidates from announcing

position on legal and political issues.

• Strict scrutiny is applied to rules limiting speech.

– must be narrowly tailored

– must be a substantial advancment

– must be a compelling state interest.

122 S.Ct. 2528 (2002)

5 – 4 Split

Cleveland Voucher Program

By a 5 – 4 decision, the

Supreme Court concluded that

school vouchers put money into

the hands of parents who could

use it for parochial or other

private schools.

Zelman v. Simmons-Harris 122 S.Ct. 2460

(2002)

Freedom of Religion



• Engle v. Vitale – School Prayer.

Can it acknowledge an

―Almighty Being.‖



• Pledge of Allegiance – 10th Circuit.

―One Nation Under God.‖

Watchtower v. Stratton

• Village ordinance required registration and

permit to engage in door-to-door advocacy.

• Ordinance covered religious proselytizing,

anonymous political speech, and

distribution of handbills.

• Violation of First Amendment??

Watchtower v. Stratton, 122 S.Ct. 2080 (2002).

8 – 1 split

Time, Place, Manner Limitations



• Park ordinance required a permit before

holding large-scale events in public parks.

• Ordinance was content neutral regulation

with adequate safeguards to guide

enforcement and judicial review.

• Not a big surprise.

Clark v. Chicago Park District, 122 S.Ct. 775 (2002).

Yard Signs

• A city ordinance prohibited yard signs

of any kind. It was designed to foster

an aesthetically pleasing visual

environment.

• Could you be prosecuted if your sign

supported or opposed the war on

terrorism.

Nude Dancing

Was law prohibiting nudity a valid

exercise of 10th amendment power

to control health, safety, morals.

Was law an unconstitutional

suppression of expressive conduct.

Barnes v. Glen Theater, 501 U.S. 560 (1991)

Obscenity

• Would AVERAGE person applying

CONTEMPORARY community standards

find the work as a whole appeal to

PRURIENT interest.

• Depicts in PATENTLY OFFENSIVE way

sexual conduct defined by state law.

• Does work as a whole lacks serious literary,

artistic, political, or scientific.

Obscenity

• Prurient – excites lustful or lascivious thoghts. Court must

distinguish between normal and shameful interest. Look to

local community standards, not state or national.

Brockett v Spokane, 472 U.S. 491 (1985).



• Patently offensive – ultimate sex act normal or perverted,

actual or simulated.

– Miller v. Cal., 413 U.S. 15 (1973)

• Social merit – national standard/average person. Jury

determines standard.

– Pope v. Illinois, 481 U.S. 497 (1987).

Justice Potter Stewart

Justice Stewart concluded

that he couldn’t define

obscenity, but

―I know it when I see it.‖

Commercial Speech

• Commercial speech may be prohibited

if false or misleading.

• Regulations must be reasonable and

must directly advance a legitimate

goal.



Fane v. Florida Institute of CPA.

(see problem #2, p. 123)

LiquorMart

• LiquorMart v. Rhode Island--statute

prohibited truthful, non-misleading price

advertising. R.I. did not show that

regulation would materially advance

state interest without impairing an

important component of free speech.

• Further, it ignored easy alternatives.

LiquorMart v. Rhode Island, 517 US 484.

Execution of mentally retarded..

Eighth Amendment

Cruel and unusual???

Atkins v. Virginia. 122 S.Ct. 2242 (2002)

Penry v. Lynaugh, 492 U.S. 302 (1989)



National consensus‖ of 29 states plus U.S.

UNCONSTITUTIONAL!

Execution of Juveniles

• S.C. Justices Stevens, Ginsberg, and Beyer

dissented from majority which denied a stay of

execution for Texas inmate, Toronto Patterson,

who was 17 when he murdered his 3 year old

cousin.

• An issue for the court to examine within the next

few terms.

WHAT DO YOU THINK? CONSTITUTIONAL!

Reproductive Rights

• Amendment IX--Enumeration of

rights in Constitution not deny those

reserved to people.

• Roe v. Wade – right of privacy.

• Fathers, husbands, boyfriends have

no right to veto a woman’s right to

have an abortion.

Reserved Powers of State

Amendment X Powers not delegated to the

U.S. are reserved to the states and to people.



Amendment X covers the state’s power to

incorporate or establish cities, counties,

state agencies, plus schools, roads, and all

other state laws and instrumentalities.

Drug Testing

 Supreme Court approved school district policy

requiring random drug testing (urinalysis) of high

school students in band, glee club, etc.



 Interest of educators in keeping drugs out of

school outweighs privacy interests.



Board - Education v. Earls, 122 S.Ct. 2559 (2002).

Peyote

• In 1991 the S.C. held that use of peyote in a

Native American church was not protected

from enforcement of Oregon criminal law.

• Congress passed the Religious Freedom

Restoration Act forbidding government

from enforcing law that substantially

burdened religion without compelling need

and in least restrictive manner.

Peyote

• In City of Boerne v. Flores (1997) the S.C.

affirmed its earlier holding.

• Religious Freedom Restoration Act –

unconstitutional.

• The 14th Amendment, section 5, only gives

Congress the power to enforce Freedom of

Religion, not to define terms.

• S.C. had already said Oregon criminal law

did not violate the Constitution.

Due Process

• Procedural due process.

• How much process is due?

• Depends on importance of

liberty or property affected.

• Judge must be neutral.

Hearings

Attachment – hearing before

attachment

Garnishment – hearing before

attachments

In Texas - garnishment for child

support and student loans only

Secret Settlements

• Secret settlements between the parties to a lawsuit

may in fact ―do justice.‖ They also clear court

dockets quickly, and that’s a plus.

• But secrecy also keeps the settlement from the

public. Think what might be different today if the

misdeeds of Catholic priests had been revealed a

long, long time ago.

• Secrecy in the asbestos and textile industries, most

likely, cost many lives.

Taking of Private Property

• Private property taken for

public use requires government

to pay just compensation.

Amendment 5.

• Government may regulate

private property without

payment for restriction of its

use, e.g., zoning.

Taking

In 1986, Lucas paid $1 million for two lots on

the Isle of Palms in S.C. Two years later

the state passed the Beachfront

Management Act. It prohibited building

homes on the property. The barrier islands

protect shoreline from erosion.

Is this a taking, or a regulatory measure?

Lucas v. S.C. Coastal Council, 505 U.S. 1003 (1992).

Procedural Due Process

• Doehr was about to be sued for assault and

battery. DiGiovanni got a $75,000

prejudgment attachment on Doehr’s home.

• Doehr challenged the prejudgment

attachment as unconstitutional.

• Outcome?

• Connecticutt v. Doehr, 501 U.S. 1 (1991)

Substantive Due Process

• Examines basic rights being affected

• The more important the right, the higher

scrutiny that is required

• Economic regulation demands a reasonable

relation between means and ends

• Fundamental rights – regulation presumed

invalid unless state has compelling reason

Means and Ends

• Economic regulation – some

income brackets are taxed at a

higher rate than others

• Social regulation – speed limit

and other traffic laws

Strict Scrutiny

• The statute (or ―the means‖) must be

necessary to promote a compelling

interest.

• Compelling Interests - Fundamental

Rights

• Examples: speech, voting, travel,

racial discrimination, privacy

Equal Protection of Law

• Minimal scrutiny – economic and

social regulations

• Intermediate scrutiny – gender

classifications and legitimacy

• Strict scrutiny – race, privacy, and

fundamental rights

Minimal Scrutiny

• Practically always the courts can

find some reasonable connection

between ―means‖ and ―ends.‖

• NYC Transit Authority v. Beazer –

methadone users excluded from

jobs that were not safety sensitive.

Intermediate

• The statute (―the means) must have

a substantial relationship to an

important government objective

(―the end‖).

• Gender based discrimination.

• Legitimacy.

Strict Scrutiny

• Government restriction must be

necessary to compelling interest.

• Abortion - women under a certain

age; parents must be given notice.

• Adults – no notice to natural father

or husband.

Helmet Law

• Motorcyclist challenged law as violation of

Equal Protection (14th).

• Law upheld. It was presumptive valid; this

means rationally related to legitimate end.

• Not unconstitutionally vague, created no

suspects classification, and violated no

fundamental rights.

Robotham v. State, 488 NW2d 533

City of Dallas v. Stanglin

• Dallas ordinance prohibited ages 14-18

from ―Class E‖ dance halls to avoid

drugs and such. They were permitted

in roller rinks and other places

teenagers congregate.

• Texas S.C-distinction unconstitutional-

teens mix at roller rinks too.

• Should U.S. Supreme Court affirm or

reverse?

Examples

• Plessy v. Ferguson

• Brown v. Board of Education

• Bolling v. Sharp

• Sweatt v. Painter

• Hopwood v. University of Texas

CID’s and Due Process

Common Interest Developments



CID’s: Open for private regulation?

or

Is this State Action?

Tort Law

• Torts are civil wrongs, other

than breach of contract, that law

grants compensation to injured

party.

• Intentional Torts – Chapter 6

• Negligent Torts – Chapter 7

Intentional Torts

• Intentionally negative Theater reviews,

Movie reviews, Book reviews.



What about . . .

Restaurant reviews

such as

― . . . yellow death on duck.‖

Statute of Limitations

Reminder!!!



• Attached to every legal cause of action, there is a

period of time in which a lawsuit – tort or contract

– must be filed in a court of proper jurisdiction.

• Plaintiff’s action in tort and in contract based on

defendant’s negligent misrepresentation of

contract terms.

• For plaintiff couldn’t discover her claim existed

until after statute of limitations expired.

Example – Intentional Tort

• Jury verdict for $5 million v. California

cemetery for fraud. Two hundred fifty

bodies buried in roadway of cemetery.

• Unusual but jury divided amount per

plaintiffs. It took two days to read the

verdict.

– Barnes v. Angles Abbey, (Sup. Ct. L.A. ).

Elements of Tort

• Fault – breach of duty

• Causation

A) ―chain of dominos‖ causation (actual cause)

AND

B) foreseeability



• Damage – physical or emotional

Defamation

• DEFAMATION--intentional false statement

of fact, not opinion, harmful to reputation

and communicated to a third person.



• Third person may be secretary receiving

dictation or someone who overhears

defamatory statement.

Publication

• Sixty-eight year old Christine Melton was

stopped by security guard and accused

loudly in parking lot. Shoppers stopped and

heard: nothing was found in purse.

• No witnesses produced by Melton.

• For Melton based on reasonable inference

that other heard accusation of crime.

Forced Self Publication

Lewis was asked by employer to falsify

records. When she refused she was fired for

―gross insubordination.‖ She had to say

that in answer to prospective employer’s

question, and her explanation was not

believed. She didn’t get the new job.

When she sued original employer, the defense

was that she publicized the info herself.

Defamation per se

• Accusation of serious crime

• Incompetence in profession

• Having a sexually transmitted disease

• Being and unchaste woman



• Per se – What’s that????

Damages

• Slander – oral defamation.

– Plaintiff must show actual money damages





• Libel and defamation per se.

– Showing of non-monetary damages such as

mental anguish or humiliation is sufficient

Opinion

Yeagle v. Collegiate

Times--opinion or

defamation (libel) per

se???

Actual Malice

Public figures must show actual

malice.



What is ―actual malice?‖

Actual Malice

• Actual malice--knowledge of

falsity or reckless disregard

for truth.

• Communication majors –

proceed with caution.

Butt Head Astronomer

• A big project at Apple was code-named

―Sagan.‖

• Famous astronomer Carl Sagan filed suit to

force Apple to stop using his name.

• Apple renamed the project ―BHA.‖

• Sagan filed second suit for defamation.

Sagan v. Apple Computer (Mass. 1994).

Libel in Cyberspace

• Varian Medical Systems and two executives

won libel suit against former employees for

posting 14,000 defamatory messages, some

vulgar, on 100 internet messages boards.

• Defendants alleged extramarital affairs,

danger to children, videotaping office

bathrooms, chronic lying , and

hallucinating.

http://www.law.com

Oprah

• Texas cattle ranchers sued on basis of

―False Disparagement of Perishable Food

Products Act.‖ Statements must have basis

in ―reasonable and reliable scientific

inquire, facts or data.‖

• Statute covers agri- and aqua-culture only.

• Dismissed: No cause of action in Texas.

• Source: Texas A&M.

Privilege

• Absolute privilege

–Witness in court

–Legislative debate

• Qualified privilege

–Legitimate need to know

QUALIFIED PRIVILEGE

• Texas Qualified Privilege

• Texas employer who discloses information

about a current or former employee is

immune from liability unless proven by

clear and convincing evidence that

employer spoke with actual malice.

• ―Clear and convincing evidence.‖ Huh???

False Imprisonment

• False Imprisonment--intentional restraint

without reasonable cause or consent.



• Sixty-eight year old Christine Melton

stopped by security guard and accused of

shoplifting. This is not in itself false

imprisonment. That depends on the basis

for accusation; nothing was found in purse.

Ruditys v J.C.Penny

• Woman waiting in car for two shopping

companions when asked by security guard

to return to store for questioning.

• All charged with theft and acquitted.

• Awarded $250,000 for false imprisonment

and malicious prosecution.

• Ruditys v. J.C.Penny, Co.

• No. 02-4114 Delaware (2003.

Cook v. Chrysler

• Cook was induced to test spaciousness of

trunk in new car she was shopping for.

• Salesman slammed down the trunk and

gathered others to witness.

• When Cook emerged, salesmen were ―high-

fiving.‖

• For being 1st, salesman won $100.

Emotional Distress

• Conduct - extreme &

outrageous??

• Was this appropriate for

summary judgment?

• Roe v. Lynn Mills

Assault

• Assault--an act that places

victim in fear of immediate

battery.

• Western Union Telegraph V.

Hill (Ala. 1933).

• Danny Devito???

Battery

• Unwanted or offensive

• Intentional touching

• Cattle Prod

– Caudel v. Betts, 512 So.2d 389 (1984)

Intentional Torts

• Trespass – intentionally entering

another’s land without permission, or

refusing to leave after permission

expires.

• Trespass to property – hiding

roommate’s book before final.

• Conversion--civil action that is

equivalent of theft.

Fraud

• Intentional misrepresentation of

material fact on which someone

relies and suffers damage.

• Accountants liability for fraud.

– Those who hired the accountant

– Limited to known and intended beneficiaries

– Reasonably foreseeable

Damages

• Nominal

– Small amount to vindicate right



• Compensatory

– Amount of money to compensate victim



• Punitive

– Some multiple of compensatory

Punitive Damages

• Punitive damages--damages

over and above compensation

designed to punish defendant

for conduct that is extreme and

outrageous.

Grubbs Nissan v. Bien, 881 SW2d 843 (1994)

Fraud and Punitive Damages

• Walston v. Monumental Life Ins.

• Deceptive insurance practices and wrongful

denial of benefits. Punitive damages

approved.

Walston v. Insurance Co., 129 Idaho 211

(1996)

Business Torts

• Tortious interference with

contract: Texaco v. Pennzoil.



• Tortious interference with

prospective advantage: The

Barber Shop case.

Privacy

a) Intrusion,

b) Private Facts,

c) False light,

d) Commercial Exploitation.

Lanham Act

• Lanham Act--a) False, misleading, b)

Commercial context, c) Likelihood-harm



• Coors v. Anheuser Busch. Natural Lite, a

beer brewed by A-B on the East Coast, was

being outsold by Coors. It televised a

parody of ―Pure Rocky Mountain Spring

Water.‖ Coors wasn’t amused.

Defamation Review

A. Elements--falsity, harm, communication to a third

person.

B. Defamation per se: (1) Accusation of serious

crime, (2) Sexually transmitted disease, (3)

Incompetence in profession, (4) Unchastity in

women.

C. Actual Malice--knowledge of falsity or reckless

disregard for truth.

D. Privilege: (a) Absolute--sworn testimony in court,

(b) Qualified--good faith communication of

information to recipient who needs to know.

Intentional Torts

• False Imprisonment--reasonable basis for

suspicion and reasonable detention.

• Intentional infliction of emotional distress—

Grubbs Nissan v. Bien.

• Damages--nominal, compensatory, punitive.

• Tortious interference with contract

– Texaco v. Pennzoil.

Intentional Torts

• Privacy and Publicity:

Intrusion.

Disclosure of embarrassing facts.

False Light.

Commercial Exploitation.



• Lanham Act--false or misleading

commercial speech which is likely to

harm.

Defenses

• Plaintiff fails to prove elements of

tort.

• Written waiver of liability.

• Privilege: Absolute – Conditional.

• Self defense.

• Statute of Limitations

Segue

A Southwest Texas student secretly

video taped intercourse with a U.T.

coed. Then he circulated the tape to

friends, and the tape made its way to

both campuses. She was outraged by

this betrayal; her suit was based on

negligent infliction of emotional harm.

Negligence?

Boyles v. Kerr, 855 SW2d 593 (1993).

Negligent Torts



Chapter 7

Negligent Torts

• TORTS--Fault + Causation + Injury.

• Fault --Duty of care + breach

• Causation -factual chain of causation

and foreseeability or proximate cause

• Injury.

Jenny Jones

• Scott Amedure was killed after revealing a

―same sex‖ crush on Jonathan Schmitz.

• Schmitz was convicted of murder.

• Amedure’s parents claimed tha Jenny Jones

―ambushed‖ Schmitz by not telling him

subject matter of program.

• Jury - $25 million for plaintiffs.

Trip and Fall

 Verdict for plaintiff $21 million. She tripped over

remnant of ―no-parking‖ sign which was 3-4

inches high and 2 from curb.

 NYC put on notice by complaints.

 Damages:

 Skull fracture epidural hematoma

 Frontoparietal craniotomy

 Cognitive dysfunction, depression, headaches

 Memory loss, cognitive deficits

 Fired from job

 Paek v. NYC, Sup. Ct. 2002.

Palsgraf v. Long Island

• Foreseeability



• Proximate Cause





• Both mean the same thing.

Joy Riders

• Garage (Breisig) left keys in ignition.

• Before owner came, teenagers took it.

• Left it parked on street overnight.

• Next day a friend drove and injured the

plaintiff, George.

• Defendant negligent? Proximate

cause?

Brown v. P.C.O.M.

• Yvette gave birth to daughter who

tested positive for syphilis. Husband

was confronted, and admitted an affair.

• Later, husband and baby retested

negative.

• Stress - husband physically abusive.

• Wife chased him outside with her

police revolver; shot, missed, both

arrested.

–760 A.2d 863 (2000)

Fault = Breach of Duty

Negligence = falling below

standard of care expected of

average reasonable person

under the circumstances.



Louisiana Civil Code, Art. 2315

Negligent Retention

• $2.5 million for N.Y. woman sexually

assaulted.

• Apple Tours employed supervisor with

record of assaulting another woman years

earlier.

• $1 million for psychological injury and $1.5

in punitive damages.

Horse Hockey

A young woman and her employees were

guests of the circus owner.

A ―dancing horse‖ evacuated in her lap.

Everyone laughed. She was mortified, and

sued the the circus owner.

Was this the ―negligent infliction of

emotional harm?‖

AIDS

Jennifer Lawson, 12, contracted HIV in a

blood transfusion in 1985. Her doctor,

affiliated with UCLA, knew this and

informed the donor, but not Jennifer though

he treated her for next 5 years. Three years

later she had sex with Reisner, and in 1990

Jennifer died of AIDS. Reisner tested

HIV+ and sued UCLA. Outcome??

Waiver

 S.C. Connecticut held that waiver

signed by ―snowtube‖ renter not

preclude liability for damages. Ms.

Hyson released White Water Mountain

from ―inherent‖ risks, but not

negligence.

 Colorado law controls this issue.

Waiver

• Plaintiff rented Honda ATV and signed

agreement with clause that waived liability

of defendant for harm caused directly or in-

directly by use of ATV.

• Release valid if

– Not contravene public policy

– Relates to private conduct

– Freely bargained, no adhesion

Dumont v. Shaw’s Supermarkets

• Dumont ―slipped and fell‖ on chocolate

cream that fell from Shaw’s candy bin.

• Foreseeable?

• While Shaw’s didn’t know of hazard, Shaw

was aware of similar hazards in the

store and failed to address this one.

664 A 2d 846 (1995)

Mulcahy’s Roadside Pub

• Slip and Fall

• Plaintiff recovers $450,000

• Plaintiff suffered nerve and tendon

lacerations

• Witness for plaintiff testified that earlier

that evening he had seen glass on floor in

area of plaintiff’s fall

Case of the Missing Finger

• Wells was sent into ―tank‖ by Durkee

without proper gear. He was overcome

by gas, and became incoherent and

delirious.

• At hospital he bit off nurse’s finger.

• Foreseeable or Way too bizarre?

Widlowski v. Durkee Foods, (Illnois 1990)

Danger Invites Rescue

Sewage worker died in tunnel when gas mask

failed. Co-workers entered tunnel in

attempted rescue without masks and died.

Foreseeable???

Should manufacturer be held responsible to

co-workers???

Guarino v. Mine Safety Appliance Co.

Hernandez v. Univ. of Arizona



The duty to act reasonably under

circumstances is socially imposed-

common law.

Social host liability.

Affirmative duty to act--basically no

legal duty to rescue unless defendant

has caused harm.

Social Host - Texas

• Smith v. Merritt (1997)—Smith was injured

while riding with 19 year old who

consumed liquor at Merritt’s party.

• Did Merritt have duty to Smith not to serve

liquor to 19 year old driver?

• Would the result be the same if the

defendant was a bar or restaurant?

Landowner’s duty

Trespasser--landowner’s only duty is not to

intentionally injure.



Licensee--guest on land with consent; social host

must warn of hidden dangers that are known

about.



Invitee--person on property because open to public.

For example, a business customer-- owner has

duty of reasonable care to invitee.

Ann M. v. Strip Mall

 Was the owner of strip mall

responsible for sexual assault

on employee.

 Many requests to increase

security.

 High crime area?

Components

 Negligence Per Se minimum standard of care to

protect certain groups; violation of statute that

injures group member is per se negligence.



 Factual cause--chain of dominoes.



 Foreseeability--can general type of harm be

reasonably anticipated?



 Superseding cause--entirely unforeseeable; ―highly

unusual, extraordinary, bizarre.‖

Coca Cola

Waitress’s hand badly damaged as she

was loading Cokes into cooler.

Presumption of defective bottle or

excessive pressure prevailed. Coke

employee testified that he had

seen/heard explosions in warehouse,

150 P2d 436 (1944).

What about a roach in a coke bottle???

Repo Man

Should summary judgment for

Repo Man be reversed and

remanded for trial?

• SECURITY INTEREST: COVERAGE

– The vehicle and all parts or goods installed in it;

– All money or goods received (proceeds) for the vehicle;

– All insurance . . . or other contracts we finance for you; and

– All proceeds from all insurance . . . or other contracts we

finance for you.









• WE MAY TAKE VEHICLE FROM YOU:

– If you default, we may take (repossess) the vehicle from you if

we do so peacefully and the law allows it.

Affirm or Reverse??

• Plaintiff’s argument. • Defendant’s argument.

• Valley owed duty to • Irresponsible owner at

everyone. fault; not repo man.

• Foreseeable because • Nighttime repo was as

repo involves hostility. safe as possible.

• Darkness and car • Alternative: Knock on

alarm evidences negl. door?

• Harrision Ford • Negl use of gun

fantasy. caused injury;not repo.

The Condom Case

Reynolds v. Highland

Manor.



Injury must be genuine, not

speculative.

Guest fears HIV

• Employee, fearing HIV, sues employer for

emotional harm. Co-employee who

―looked and acted gay‖ cut his hand and

blood splattered on Ms. Guest. She began

to suffer from panic attacks, depression,

insomnia – diagnosed with Post-Traumatic

Stress Disorder. Five HIV tests were

negative. 38% permanent partial disability.

Bystanders

Negligent infliction of emotional

harm to bystander. Example: mom

sees injury to child.

Elements

 Plaintiff near scene

 Distress from contemporaneous sight of accident

 Plaintiff is close relative of victim

Child Molestation

• Friends of owners/operators of an Austin

daycare center knew of child abuse and

failed to report it.

• Does the Texas Family Code which

criminalizes the conduct of the perpetrators

also impose per se tort liability on

bystanders?

Contributory v. Comparative

Contributory Negligence—a small degree of

negligence can prohibit plaintiff from collecting

any damages.

Comparative Negligence—a jury will assess

percentage of damages attributable to each

party.

If damages are $1000, and defendant is 80%

negligent, plaintiff can recover $800.

Texas, if plaintiff is 51% negligent, no recovery.

Comparative Negligence

• Texas Rule

• Multiple Defendants

• Damages $100,000

• Plaintiff’s fault = 10%

• D-1 = 30% (judgment for $30,000)

• D-2 = 60% (judgment for $60,000)

• If plaintiff over 50%, no recovery.

Ultrahazardous Activity

Strict liability.

Comparative or contributory

negligence is irrelevant even if

victim is negligent or reckless.



Old Island Fumigation v. Barbee

Product Liabil/ity

Ford Pinto, Mustang, and ―Side Saddle‖

Pickup

Product liability--If manufacturer puts a

product in chain of commerce that comes

into possession of consumer and is used in

normal way, manufacturer is liable for harm

for personal injury and property loss caused

by product that is ―defective‖ and

―unreasonably dangerous.‖

Cost/Benefit of Ford Motor

• Cost: $11 x 12.5 million = $137 million.



• Benefits: 180 deaths @ $200,000 each + 180 burn

injuries @ $67,000 each + 2100 burned vehicle

salvage value @ $700 = $49.15 million.



• Costs outweigh Benefits by $86.85 million.

Rollover

$15.5 Million



• Pennsylvania jury awarded Hutchinson

$15.5 million v. Freightliner. While

negotiating a curve on on-ramp, driver

struck guiderail and rolled over

embankment; he lost an arm and wears a

prosthetic.

• Cab not crashworthy; cruise control poorly

designed; failed to disengage while braking.

Assumption of Risk

Plaintiff/spectator sued Chicago Cubs for

injury pursuing a foul ball. Cubs

claimed she was negligent for not

moving her season ticket seat to a

protected area of the park.

Held: For Plaintiff.

• Comparative negligence abolished assumption of risk.

• Duran v. Cubs, 1989 U.S. Dist. LEXIS 10969.

Injury

1. Physical

2. Economic

3. Pain and Suffering

4. Emotional

Contracts



Introduction

Chapter 8

Introduction to Contracts

Must Jerusalem deliver steel to Hardbody?



Does Nicole have a job with Hardbody?



Must Nicole purchase Jasper’s house?



Do Cassandra and Jasper have a contract?

Introduction to Contracts

 Contracts--legally enforceable

promises.

 Predictability

 Flexibility



 Elements

 Agreement

 Consideration

 Capacity

 Legal object.

 Some MUST be in writing--Statute of Frauds.

Introduction to Contracts

Types of contracts:

Bilateral-Unilateral

Express-Implied

Executed-Executory

Valid, Voidable, Void,

Unenforceable

Employment at Will???

Federal Express v Dutschmann

Employment at will was

confirmed by signature of

plaintiff. It is enforced instead of

the “Hearing Policy” stated in

employment manual.

Dillion v. Champion JogBra

• Disclaimer of JogBra: ―PROCEDURES

CONSTITUTE GUIDELINES, NOT AN

EMPLOYMENT CONTRACT.

• Linda Dillion sued for wrongful breach.

• Issue: Employee handbook promised fair

discharge procedures that were inconsistent

with disclaimer.

• Vermont Supreme Court (2003)

Winters v. Houston Chronicle



Does Texas allow a suit for wrongful

discharge of ―whistleblower‖ against

private employee?

Plaintiff alleged violation of a crime:

Texas Deceptive Trade Practices Act



795 SW2d 723; 1990 Tex. Lexis 106.

Promissory Estoppel

Promise is made with knowledge that it will

be relied upon.



Actual reliance and change of position.



Injustice unless promise is enforced.

• Hoffman v. Red Owl Food Store

Quasi Contract



Vortt Exploration v. Chevron

a) Benefit conferred on defendant,

b) Defendant knows of plaintiff’s

reasonable expectation to be

paid,

c) Unjust enrichment.

Pyeatte v. Pyeatte

o Margrethe agreed to support husband’s law

school education if he, in turn, would

support her for a graduate degree.

o Charles got his degree and divorced

Margrethe. She sued, and Charles, a newly

minted attorney, defended saying ―No

contract.‖

– 661 P2d 196 (1983)

Uniform Commercial Code

 Texas Bus/Comm Code and UCC.

 Pittsley v. Houser--mixed goods

and services.

What happens if goods and

services are mixed in the same

transaction?

Chapter 9





Agreement

Katrina and Bob



The Handshake . . .



. . . what would you enforce?

Agreement

• Offer and Acceptance – ―Meeting of

the Minds‖

• Offer - intent, terms, communication

• Intent--objective v. subjective

• Invitations - Quotes, Advertisements,

Auctions

Offer

 An offer shows an intent to

enter a contract.

 It names reasonably definite

terms.

 It is communicated to offeree.

Newspaper Ad

• SATURDAY

• 9 a.m. Sharp

• 1 Black Lapin Stole

• Beautiful

• Worth $139.50

• FIRST COME, FIRST SERVED

Duration of Offer

• An offer lasts for the specified period of

time.

• If no time specified, lasts a reasonable time.

• It lasts until revoked or rejected.

• It expires by-operation-of-law when offeror

dies.

• If offeror dies after acceptance, what then??

Auctions

• UCC 2-328



• Auctions with Reserve



• Auctions without Reserve



• E-bay???

Sufficient Terms?

• Terms have to be clear enough

for a court to know what to

enforce.

• Or else . . . What?



• Lemming v. Morgan

UCC and Open Terms

• UCC 2-204--‖goods‖ only

• Price: UCC 2-305

• Output v. Requirement

• Delivery, Time, Payment

• Warranties

– Merchantability UCC 2-314

– Fitness 2-315

– Express 2-313

Gateway

• Agreement to a ShrinkWrap/ClickWrap

express warranty with arbitration term?

• P sued in N.Y – D made motion to dismiss.

• Arbitration, but . . .

– You must pay a $4000 arbitration fee,

– You must go to Chicago,

– International C.C. rules to govern process.

– Brower v. Gateway, N.Y. Appellate Division (1998)

Specht v. Netscape

• Netscape offered free software

―SmartDownLoad‖ with click of mouse.

• Specht downloaded and now sues for

violation of 2 federal statutes.

• Netscape moved to compel arbitration term

of license that became binding when Specht

downloaded.

– 150 F.Supp. 2d 585 (2001)

Termination of Offers

• Revoke – effective when received.

• Reject – effective when received.

• Expiration – terminated at end of

time limit.

• Operation of Law – death of

offeror.

EXCEPTION . . .

REVOCABILITY RULE

• Firm Offers – UCC 2-205

• Common law option contracts

UCC 2-207

Sub-part 1: Must be sale of goods.

Goods are tangible-movable things

Sub-part 2: If merchants involved on both

sides of deal, WATCH OUT!!!

Merchants are in the business of buying/selling goods

Sub-part 3: Implied contract.

Leadertex v. Morganton

• Sub-part 1: Offer may be accepted with

added or different terms.

• Whose terms control??

• Sub-part 2: Additional terms in

acceptance binding on offeror (Leadertex)

• UNLESS:

(1) Offer forbids changes, (2) Material

Alteration, (3) Objection

Mailbox Rule

• Time of acceptance governed by

Mailbox Rule--acceptance

effective as soon as offeree

relinquishes control

• Offers, revocations, rejections must

be communicated (made known to

addressee) to be effective

What happens if ….

1. Offeror specifies mode of acceptance?

2. Offeror requires receipt of acceptance?

3. Acceptance is sent by authorized means,

then offeree calls offeror to reject.

4. Rejection sent by mail, as authorized, then

offeree mails acceptance letter.

5. Revocation is ―on the way,‖ when

acceptance is sent.

Promissory Estoppel

1. Serious promise knowing

promissee would rely

2. Actual reliance by promissee

3. Enforce promise to avoid

injustice

Agreement

(1) Invitations--similar to typical auction with

reserve.

(2) Price quotes--Leviton’s price quote to

Litton not specific enough to be and offer,

therefore limitation on liability in Leviton’s

quote is not part of contract.

(3) Advertisements and Auctions typically

are not offers.

Agreement

5. Agreement must be specific enough for

judge to know what terms to enforce.

4. Open Terms & Gap Fillers.

A. Open price, 2-305.

B. Output & Requirement Contracts, 2-306.

C. Delivery, Time, Payment: UCC 2-208, 209, 210.

D. Warranties.

6. Termination of Offers: Revocation,

Rejection, Expiration of Time,

Operation of Law.

Agreement

Firm Offers: UCC 2-205.

Acceptance: Mirror Image v. 2-207.

UCC 2-207

• Leadertex v. Morganton: Morganton, the

defendant/offeree, included a new term,

―arbitration‖ in its acceptance.

• Is new term binding on Leadertex?

• Was ―arbitration‖ term a material

alteration.

• Did arbitration term inflict surprise or

hardship?

Mail Box Rule

Remember the mailbox rule of

Soldau v. Organon. Even if the

post office gives the letter back,

the law still rules that the

acceptance is finalized when

deposited.

Stiglitz: Roaring ’90’s

• Focusing most criticism on the Clinton

Administration, Stiglitz concludes

a) Bush’s tax cuts benefiting mainly the wealthy and deficit

spending is the best way to end the recession.

b) Clinton policies fueled the unstable expansion of a stock

market bubble.

c) Clinton reduced economic debate to Neanderthal

simplicity.

d) Clinton ended massive subsidies to domestic industries,

and made global competition more equitable.

Chapter 10

Consideration

Consideration

• Bargained-for exchange

• The ―price‖ each pays for

other party’s promise or

performance

• Kelsoe v. International Wood

Products

Unilateral Contracts

• Hamer v. Sidway – Nephew (15) promises

Uncle he won’t smoke, drink, swear, play

cards or pool for money for 6 years. Uncle

promises $5,000 for restraint. Outcome?

• Dahl v. HEM Pharmaceuticals – Clinical

trial for Ampligen. Dahl signed consent

form; could withdraw and was warned of

side effects. HEM didn’t pay off.

Adam and Eve

• The ―Garden Drive-In,‖ some hanky-panky.

• Eve became pregnant – Adam?

• Adam made all sorts of promises if Eve

promised not to sue. She promised.

• Turns out . . . Adam not the father.

• Mutual exchange of promises – or is there

some other issue?

Texas

Coin Toss

Adequacy v. Illusion

• Adequacy of consideration.

– Alaska gold mine



• Illusory promise.

– Culbertson v. Brodsky

Requirement & Output

The amount to be sold can be

measured by all or part of the

requirements of the buyer or the

output of the seller.

Texas Business and Commerce Code (UCC)

Art. 2-306

Past Consideration

• Past consideration = no

consideration.

• Dementas v. Estate of Tallas.

• What about Kelsoe v. International

Wood Products, Inc.?

Promissory Estoppel

1. Serious promise knowing

promisee would rely

2. Actual reliance by

promisee

3. Enforce promise to avoid

injustice

UCC 2-209

• An agreement modifying a

contract for the sale of goods

needs no consideration to be

binding.

• Modification must be in writing

if original written contract so

specifies.

Liquidated v. Unliquidated

• Liquidated--creditors promise to

settle for less is not binding

• Unliquidated--agreement to settle

disputed debt is binding

• Accord and Satisfaction--

agreement is settle unliquidated

debt + actual payment

Review

 Consideration--a bargained-for exchange of

promises or the price you pay for someone else’s

promise or performance. Kelsoe case--gratuitous

promise, no bargain, not enforceable.

 Adequacy--courts allow the parties to decide

what is adequate, but there must be some

commitment (no illusory promises). You be the

Judge, p. 276--For Culbertson v. Brody.

 Output-Requirement contracts: Must show good

faith, 2-306.

Review

 Past consideration = no consideration. Such promises are

not enforceable, Dementas v. Estate of Tallas.

 Promissory Estoppel--Job offer, Pittsburgh Pirates, G.M.

 Performance of a contract that one was already under an

obligation to perform is not consideration for a promise to

pay extra unless a) additional work or b) unforeseen

circumstances.

 It is possible to rescind old contract and enter new under

common law, or modify old contract without consideration

under UCC 2-209.

Legality

• Wagers • Noncompete

• Licensing • Exculpatory

• Usury • Unconscionable

Wagers

Gambling

Illegal unless permitted by state law.

California law makes gambling-on-

credit contracts void as public

policy.

Whatever happened to Full Faith &

Credit Clause of the Constitution

Texas in Toss

• Ryno was shopping for a BMW – $125,000.

• Tyra – Ft. Worth: ―Double or nothing.‖

• Ryno won – he got car, title, keys for $0.00.

• Tyra repossessed BMW.

• A gift, a gag, gambling, or conversion?



Ryno v. Tyra, 752 SW2d 148 (1988).

Wagers

Investments

Betting on the rise and fall of stock price

is illegal.

Future

Derivatives are futures--the value depends

on some underlying reference, e.g., exchange

rate, prime rate, $bl$ of oil, weather.

Wagers

Insurance

Insurable interest.

Jiminez v. Protective Life

Bright-line test.

Pepsi v. Coke

• Coke sued Pepsi for violation of a court order that

prohibited lotteries.

• Lotteries:

– Prize

– Chance

– Consideration

• S.C. response to House-Rep concluded that

promotional contests for prizes/money that did not

require consideration were legal.

License

If calculated to protect public interest,

fee for “professional” work without a

license cannot be enforced.

Cevern Inc. v. Furbish--contractor not

licensed when agreement was signed.

Later he became licensed. Result?

Bremmeyer v. Kiewit

• Kiewit held road building contract from

state and sub-contracted with Bremmeyer,

an unlicensed firm to remove timber.

• Kiewit lost state contract; settled with state

for $1,729,050. Offered Bremmeyer $38.

• Public protection statute not undercut by

allowing Bremmeyer to sue Kiewit.

License

If licenses are issued as

revenue-making measure for

government, contracts by

unlicensed person are still

enforceable.

Covenants Not To Compete

Covenants Not To Compete are valid if

– promisee’s need is not outweighed by harm to

promisor and to public,

– ancillary to a legitimate contract,

– no greater than necessary to protect that

contract

• In time

• In geographic area

Non-Compete

Non-compete clauses--ancillary to legitimate

bargain.

a. Sale of a business--ancillary clause must be

reasonable in time, distance, scope.

b. Employment--enforced to protect trade screts,

confidential information, customer lists.

Metro Traffic v. Shadow—Should court issue

injunction against Shadow?

Exculpatory

Exculpatory clauses must be clearly written

and visible.

Exculpatory clauses not generally valid

(a) for intentional conduct or gross negligence,

(b) for a needed public service, or

(c) unequal bargaining power.

Exculpatory

Clause not valid where

(a) business suitable for public

regulation,

(b) business important/necessary to

public,

(c) business open to public,

(d) party seeking exculpation holds

advantage of bargaining power.

Bailments

Bailment relinquishes possession and

control.

Exculpatory provision frequently valid

because it involves property not

persons.

a) Self-storage--exculpatory clause valid

for mildew.

b) Auto parking lot liable for theft of car?

Stolen Cars

• Plaintiff used Houston parking garage.

Ticket said on back, ―READ CAREFULLY.

WE CLOSE AT 6 p.m.‖ It went on to limit

to limit to $100 liability for theft occasioned

by negligence. A notice was also posted on

wall, and greater rates available with

higher fee.

– Schroeder v. Allright, 551 SW2d 745 (1977)

Adhesion

Adhesion Contract - Take it or

leave it.

WorldWide Ins. V. Klopp – Was

arbitration clause unconscionable?

Bias favors of WorldWide:

low awards couldn’t be appealed,

only insurance appeals high awards.

Unconscionability

• Court determines fairness.

• Criteria:

– a) oppression,

– b) surprise.

EDS v. Chubb

• Unconscionability (UCC

2-302).

• Limitation of liability (UCC

2-719).

• Electronic Data Systems v.

Chubb.

Capacity & Consent

• Minority • Unilateral-Bilateral

• Mental Disability Mistake

• Fraud (silence as • Duress

fraud) • Undue Influence

Minors’ Contracts

 Contracts of minors (defined: 18 or under)

are voidable - minor can disaffirm, but adult

cannot.

 Minor must return the thing that has been

purchased (or what remains) to get refund.

 Ratification--after becoming 18, a person

may ratify a contract made during minority

by

 a) express ratification, or

 b) by words/action that expresses an intention to be

bound.

Misrepresentation

Minor may lie about age and

induce adult to enter

contract.

TEXAS does not allow

rescission because of the

fraud.

Necessaries

Food, clothing, housing, medical care



No contract because minor is incapable

of creating a contract.



Minors are bound in quasi contract for

reasonable value of product or service.

Mental Impairment

 Insanity--mental impairment whereby

person cannot understand nature or

consequences of transaction. Parties

presumed sane.

 Contract is voidable - it will be void if a

court had declared insanity.

 Restitution must be made by insane

person if that condition NOT known or

apparent to the other party. But, if

incapacity is known . . . Hauer v. Bank.

Mental Impairment

Hauer v. Union Bank--banker was

in bad faith because he knew of

Hauer’s condition.

A reasonable banker would have

plenty of notice that Hauer could

not understand nature or

consequences of the transaction.

Fraud

• Law – an intentional tort

• Ethics

– Aristotle – character, integrity

– Kant – categorical imperative

– Bentham & Mill – utility

– Neitzsche – you must be willing to live this life

over and over again throughout eternity

Fraud

Innocent misrepresentation--

speaker believes statement is true.

Fraudulent misrepresentation--

speaker has knowledge of falsity.

Either of the above justifies

rescission by injured party. Fraud

permits plaintiff to pursue

rescission and damages.

Fraud

Fraud:

a) Intentional

b) Misrepresentation

c) Material fact

d) Justifiable reliance

e) Damage/injury to victim.

Misstatement must be of fact, not

opinion.

Fraud if person intends to induce while

knowing statement was false or

statement is spoken with reckless

Materiality & Remedies

o Material fact, or materiality, means the factual

statement is important enough for plaintiff to

rely upon.

o Reliance must be justifiable - something that

a reasonable person would have done.

o Remedies:

o Misrepresentation=rescission.

o Fraud = rescission + damages.

o UCC 2-721 = recission + damages.

Silence as Fraud

a) Correct a previous statement later

found to be untrue: “Nonrecourse

loan”.

b) Correct a basic mistaken assumption:

“Haunted House.”

c) Latent defect - seller knew but buyer

didn’t. Strawn v. Canuso.

Mistake

Mistake-assumptions not in

accord with facts.

#1. The sell of old records to X not realizing

they had been lost in a fire.

#2. A miscalculated construction bid accepted

by X who relies on it.

Bilateral & Unilateral

– Bilateral--normal remedy is to allow injured party

to rescind.

– Reilley v. Richards--mutual mistake regarding

floodplain. Richards, the purchaser, was

entitled to rescind.



– Unilateral—rescission (1) if non-mistaken party

knew of the victim’s error, or (2) if enforcement

would be unconscionable.

– Example: Valuable painting sold cheaply

but without knowledge of its origin.

Release

Plaintiff Hoggatt was injured when he lost

control of his motorcycle while passing

Jorgensen’s car. The parties settled

financially, and Hoggatt signed a release.

Hoggatt then realized the full extent of his

spinal injuries – can he set aside the release

based on mutual mistake of fact?

What is the ―single recovery rule?‖

Bidding

• Success, Inc., bids on job to prime

contractor, Arango. Arango is awarded the

main bid with X.

• Success wants to withdraw because of error

in bid.

• Can Success use mistake to justify

withdrawal?

Arango v. Success Roofing, 730 P2d 720 (1996).

Duress

Duress--voidable if wrongful threat impairs free choice

and victim had no reasonable alternative. However,

a threat to do something you have a legal right to do

is not duress.



Economic Duress: Ponder v. Lincoln National Sales--

most economic duress plaintiffs lose, and so did

Ponder. Lincoln had option NOT to renew.



Undue influence:

a) Relationship of trust/confidence &

b) improper persuasion.

Bonds v. Bonds

Undue influence:

a) Relationship of trust/confidence &

b) improper persuasion.

Bonds v. Bonds – in 1987, while earning only

$107,000, Barry met a Montreal bartender, Sun,

and were married the next year in Las Vegas. On

Barry’s initiative they stopped in Phoenix and

signed a pre-nuptual agreement. Whoa!

Statute of Frauds

Certain Contracts MUST be in writing to be

enforceable

even though there is an agreement,

consideration, legal object, and competent parties.

Statute of Frauds

• Unenforceable unless in writing:

– a) Land,

– b) Debt of another,

– c) Long duration,

– d) Executor’s promise,

– e) Marriage promise.

• UCC 2-201.

• Parol Evidence Rule.

Statute of Frauds

• Contracts that are required to be in writing,

e.g., contracts for the sale of interest in land,

will be unenforceable if made orally. These

contracts are not ―void‖ because, once they

are executed or performed, neither party can

demand a rescission.

• Contracts for the sale of any interest in land--

any legal right regarding land--must be in

writing to be enforceable.

Exceptions

• Exceptions:

a) Full performance by seller

b) Part performance by buyer

c) Promissory estoppel

• Hershon v. Cannon: ―Purchase‖ of 54 acre

Tulip Hill.

a) Promise not to solicit other offers and ―right of

first refusal‖ were inducements to Hershon..

b) Promissory Estoppel-not enough reliance-

position/part performance by Hershon.

Year + 1 day

• Contracts that cannot be fully performed w/i one

year from time they are made must be in writing.

• Example: Contract to work for one month

beginning 2 years from now must be in writing.

• Wior v. Anchor--Wior’s employment contract was for

―20 plus years, until he retired.‖ Should have been

in writing since that cannot possibly be performed

within one year. For Anchor.

• Lifetime employment--oral contract is enforceable

since a person can die within first year.

Debts of Another

• Promise to pay debt of another has to be in writing

because, while you are normally responsible for

your own debts, it’s unusual to require you to pay

the debt of a 3rd person. Same rule, requiring

writing, if executor promises to pay debt of estate.

• Leading Object Rule--If promise to pay debt of 3rd is

mainly for promisor’s benefit, i.e., self-interest, then

an oral promise is enforceable.

• Farm Credit promised to pay Perry’s debt to Sunrise

so Perry could feed hogs and repay loan to Farm

Credit. Sunrise v. Farm Credit--held for whom?

UCC 2-201

• Sufficiency of the written agreement:

a) names of both, b) subject matter, c)

essential terms,+SIGNED BY

DEFENDANT.

• Contracts for sale of goods priced

$500 or more must be written, must

specify the quantity of goods, and must

be signed by defendant.

Merchant’s Exception

• UCC 2-201 (2)



• GPL Treatment v. Louisiana-Pacific



• Louisiana-Pacific did not object to

GPL’s confirmation within 10 days of

receipt. Result?

UCC 2-201 (3)

• Specially manufactured goods.



• Admissions in court under oath.



• Goods

– To extent seller has delivered.

– To extent buyer has paid for.

Parol Evidence

• UCC 2-202. Parol Evidence Rule. A

contract intended to be final and

complete cannot be changed by parol

(oral) evidence.

• But, if it is ambiguous, the ambiguity

may be explained by parol evidence.

• Cheyenne v. Thompson - contract

unclear on payment for unused

vacation. Outcome?

Introduction to Sales





• Harold and Maude

Introduction to Sales

• Art. 2 of the UCC always has something to do

with transations in goods (tangible, movable

things).

• If goods and services are mixed (e.g., If hardware

store sells and installs washing machine), the UCC

controls the transaction if goods predominate.

See, Perma Sash v. Scandinavian House.

• Merchants, UCC 2-103, ―deal‖ in particular kinds

of goods, e.g. a clothing merchant or an auto parts

merchant.

Insul-Mark v. Kor-It

• Kor-It (distributors) supplied defendant with

nails to be ―rust proofed.‖ Defendant repacked

nails and shipped back to Kor-It, who then

sold to contractors. The coating did not work

and Kor-It lost customers and profit.

• Kor-It sued for breach of warranty.

• UCC supplies warranty; common law does

not.

• Outcome?

Introduction to Sales

• Good faith, UCC 104, = honesty (if a

merchant, honesty + reasonable

commercial standards.

• Unconscionability: UCC 2-302--court

need not enforce if contract is shockingly

unfair and lop-sided.

• Colorado-Kansas Grain v. Reifschneider--

Farmer didn’t respond to letter of

confirmation within ten days, is he bound

on the confirmation even though he didn’t

sign it.

Superior Boiler v. Sanders

• UCC 2-207--Acceptance may create a

contract even though it includes new

or different terms.

• Do both parties have to be merchants?

• In Superior Boiler v. Sanders, sub-part

(2) of UCC 2-207 applies.

• Delivery terms in contract conflicted.

• What then?

Price and Quantity

• UCC 2-305. Open price--reasonable

price at time of delivery.



• UCC 2-306. Output and Requirement

contracts. Parties must act in good

faith.

Modifications

• Contract modifications need no

consideration, but get it in writing!!!

• Tennis Club v. T.J. International -

Oral modifications may be forbidden.

Between merchants, the contract may

require all modifications to be in

writing and signed.

• Roof collapsed 25 years later.

Outcome?

Auto Purchase

• HOW THIS CONTRACT CAN BE

CHANGED:

– This contract contains the entire agreement

between you and us relating to this contract.

Any change to this contract must be in

writing, and both you and we must sign it. No

oral changes to this contract are binding.

– This provision must be separately signed by

the buyer.

.

Negotiable Instruments

• Detective • Tony Jenkins

Waterston - partner

• Sergent • Letitia

Malloy Lamour -

• Haverstock - payee

deceased

Negotiable Instruments



Checks and Notes

FUNDAMENTAL RULE



Possessor - unconditional right to

payment

– Paper is Negotiable

– Paper is in the hands of a Holder

– Holder is Holder in Due Course

– There are no ―Real‖ defenses.

NEGOTIABLE INSTRUMENTS

• Two types of negotiable

instruments:

– Notes--two party instruments and

promises to pay

• Purchase of auto from G.M.

– Drafts--three party instruments and

orders to pay

• Payment of tuition to the Universisty.

Non-negotiable

• Legal and enforceable.

• Subject to same defenses you studied

in chapters on Agreement,

Consideration, Legal Object, and

Competent Parties.

• May be assigned, but not if contract is

for special expertise, e.g., surgeon,

architect.

NEGOTIABLE INSTRUMENTS

Formal requirements of negotiability:

a) WRITTEN

b) SIGNED by maker or drawer

c) UNCONDITIONAL promise or order to pay

d) CERTAIN AMOUNT of money

e) Payment on DEMAND or at a DEFINITE time

f) To ORDER or BEARER.

Trade Acceptance

• Check – You draw a check on Hometown

Bank payable to order of U.T. (tuition)

• Note – You make note payable to order of

Cowtown Ford for a new car.

• Trade Acceptance – Sasha (seller) draws

Trade Acceptance on Circle S

(buyer/drawee) payable to order of herself

or to one of her creditors, e.g.,Citizens Bank

(payee). Circle S ―accepts‖ by signing.

BOARDWALK

Estimated time of payment not sufficient for

negotiability



Must be payable on demand or at definite time

Ambiguities

a) Words control figures,

b) Handwriting controls typed

or printed terms,

c) Typed terms controls printed.

Holder in Due Course

• Holder-in-Due-Course (HDC).

• Holder who has

– given value

– in good faith

– without notice of

• claim or

• defense.

INDORSEMENTS

• Blank – Indorser’s name only

•Negotiated by Delivery.

•Changes Order Paper into

Bearer Paper if it’s the

last or only indorsement.

Special Indorsement

Special indorsement names indorsee

– ―Pay to Kristen, (signed) Lily‖

– Changes bearer paper into order

paper if it’s the last or only

indorsement.

– Order paper needs indorsement plus

delivery for negotiation.

Restrictive Indorsement

Amy, drawer, issues check payable to order of

Lindsey, payee:

(a) Lindsey, payee, indorses ―For deposit,

(signed) Lindsey,‖ and deposits check

into her account in Houston 1st Fed.Bk.

(b) Lindsey’s bank credits her account and

sends check through bank channels to

drawee Hometown Bank for collection.

(c) Drawee debits Amy’s checking account.

(d) Drawee may refuse payment if ―NSF‖ or

stop order.

Indorser Liability

• Indorser liability is secondary.

• For an indorser to become liable, the holder

must

– Present the instrument to the primary party,

– The primary party must dishonor by refusing

payment,

– The indorser must be given notice of dishonor.

Qualified Indorsement

• Indorsement without recourse means ―not liable as

an indorser.‖

• Qualified indorsers make transfer warranties.

– Transferor is a holder,

– All signatures are genuine,

– No material alterations,

– No defense is good against transferor, and

– No knowledge of issurer’s insolvency.

NEGOTIABLE INSTRUMENTS

• Notice of the following prevents holder from

becoming a HDC: a) Overdue, b) Dishonor,

c) Alteration, Forgery, Incompleteness, and

d) Notice of a defense.



• Hartford Ins. Co. (Avon) v. American Express--

Dishonest employee (Skalkos) wrote company

checks to pay personal debts, but disguised

payee’s name. American Express was in good

faith (HDC).

Defenses

• Real defenses – essentially this means

―no contract‖ or that the law forbids

enforcement.



• Personal defenses – there is a contract

but something is defective about it.

FTC Rule

• Background: Far too many

consumer credit transactions

were for defective goods, but

consumer’s note would be

negotiated to HDC. This led

FTC to ban HDC in consumer

transactions.

FTC Rule

• NOTICE: Any holder of this consumer

credit contract is subject to all claims and

defenses which the debtor could assert

against the seller of goods or services

obtained pursuant hereto or with the

proceeds hereof. Recovery hereunder by

the debtor shall not exceed amounts paid

by the debtor hereunder.

SECURITIES



Inside Trading

Securities

Firms that have issued

publicly traded stock must

make current information

available continuously.

Proxies

o SEC Act sec. 14--Proxies needed for

business meeting quorum, and for info on

officers, candidates, issues.



o If you don’t vote your proxy, the firm

will vote for its own slate of directors.

INSIDE TRADING

• SEC Act sec. 10(b)--prohibits fraud in

connection with purchase or sale of any

security whether or not registered under the

1934 Act.

Elements of Inside Trading

• Misstatement or Omission of Material

Fact.

• Scienter--statement must be willfully,

recklessly, or knowingly made and with

intent that it be relied on.

• Purchase or sale.

• Reliance--courts assume reliance.

Levison v. Basic, Inc.

• Secret negotiations between CEI and Basic

regarding a merger.

• Secret leaked out and stock sales +++

• Press release said ―Nothing unusual

happening here.‖

• NYSE – alerted by Stockwatch‖ - phoned

and was told by Basic, ―No way.‖

INSIDE TRADING

• FUNDAMENTALLY UNFAIR--

marked cards or a stacked

deck.

• DESTROYS CONFIDENCE IN

PUBLIC SECURITIES

MARKET--the insider will

always win (right up until indictment).

INSIDE TRADING

• Insider is someone who has fiduciary

duty to company whose stock he has

traded.

• Fiduciary must not trade company stock

while in possession of material, non-

public information.

Tipper’s Liability

• Tippers who pass on inside info are

liable if they know the info is confidential

and they expect some personal gain.

• Paul Thayer—Deputy Secretary of

Defense.

INSIDE TRADING

• Tippees, having no fiduciary duty, are

liable if

(a) they know the info is confidential,

(b) know the insider is violating a duty, and

(c) the insider expects some personal gain.

• SEC v. Barry Switzer

Tipper - Tippee

• SEC v. Dirks (1983) Dirks was a stock

analyst of insurance companies. He heard

and investigated fraud at Equity Funding.

The he reported to clients who sold their

Equity Funding stock.

• Tippee’s liability for trades is derivative—

liable only if tipper is liable.

• Outcome???

INSIDE TRADING

• SEC Rule 14-e. Prohibits inside trading

during tender offer if trader knows info

came from bidder or target.

• Misappropriation--liability for profitable

trades using inside information if breach

of duty is to source of information.

INSIDE TRADING

• Carpenter v. U.S.--Wall Street Journal.

• Foster Winans, writer of ―Heard on the

Street,‖ in WSJ bought of X-Corp.

before he wrote/published good things

about X-Corporation. Stock price +++

• Then he sold X and made profit.

• LEGAL???

Constructive Insiders

• Constructive or Temporary Insiders



• U.S. v. O’Hagen—O’Hagen’s harm to

securities market was the same

as in typical inside trading case.



• Misappropriation liability: ―Fraud on the

source.‖

• The ―source‖ was his law firm.

Constructive Insider

Constructive and Temporary

Insiders are treated the same way.

Herbst prepared press releases for

X-Corp and traded its stock

depending on the news and before

the news became public.

Chapter 18



Environmental

Law

$$$$$ v. $$$$$

• Energy Efficiency--Paper v.

Paperless

• East Texas lumber to paper mill to

U.of T.

• Strip mined lignite to power plant

to U.of T.

• Energy Efficient v. Wealth

Transfer.

Environmental Law

• CLEAN AIR ACT--National Uniform

Ambient Air Quality Standards.

• PRIMARY STANDARDS--Protect public

health w/o regard to cost + adequate margin

of safety (3 yrs).

• SECONDARY STANDARDS--Protect

public welfare within reasonable period of

time.

Environmental Law



• STATE IMPLEMENTATION PLANS--

states were to identify polluters and issue air

pollution permits.

• CITIZEN SUITS--citizen may sue polluter

for violating permit or sue the state or EPA

for failing to enforce.

Environmental Law

CENTRAL ARIZONA WATER CONSERVATION

DISTRICT V. EPA.



A Citizen Suit spurred EPA into action v.

Navaho Generating Station. Was the EPA

order ―arbitrary and capricious,‖ i.e., a waste of

money in relation to air quality improvement?

P.S.D.

PREVENTION OF SIGNIFICANT DETERIORATION





• NEW SOURCES: The CAA ―protects and

enhances‖ air quality, so new sources that

cause major increases in pollution must get

a permit.

• Under the PSD program, a permit will be

granted only if (a) emissions won’t cause

an overall decline in air quality, and (b) the

applicant installs BACT -- Best Available

Control Tech

ACID RAIN

ALTERNATIVE TECHNOLOGIES





• Scrubbers.

• Low Sulfur Coal.

• Use alternative fuels (e.g., gas).

• Trade emission allowances.

AUTOMOBILE EMISSIONS

• GM built catalytic converter (1975).

• Auto travel quadrupled, 1970-2000.

• Oil companies must produce cleaner fuel.

• Auto companies must produce low-

emission vehicles.

• Highly polluted cities must arrange for car

pools.

AIR TOXICS

1990 Amendments to CAA requires EPA to

set standards for 189 pollutants based on

MACT (Maximum Achievable Control

Technology).

INTERNATIONAL LAW

Export Controls:

• Export Administration Act: protects

national security and conserves

resources. Secretary of Commerce

approves/denies license.

• Arms Export Control Act: President

controls list of military weaponry.

INTERNATIONAL LAW

Import Controls:

• Average duty on goods entering U.S., 1997,

was between 3-4%.

• Marubeni Corp. v. US (1994)—Nissan Pathfinder

(SUV) initially classified for transport of goods

reduced on appeal to ―transport of persons.‖ Tariff

reduced from 25% to 2.5%.



Dumping, Subsidizing:

• Sales in US by a foreign firm at less than fair

value triggers a ―dumping duty‖ by the Secretary of

Commerce. Goods that are subsidized by a foreign

government will draw a ―countervailing duty.‖

INTERNATIONAL LAW

Nontariff Barriers:

• Quotas and Import Bans.

• B-West Imports v. US (1996)—

president’s authority to ―control‖ arms

imports under Arms Export Control Act

empowers ban on imports from China

because of human rights abuses.

GATT



General Agreement on Tariffs and Trade

• Between 1947 & 1994, GATT reduced tariffs

worldwide by 35%. This is expected to boost

world trade by $500 billion by 2005. WTO

resolves trade disputes; US can opt-out if ―3

unprincipled decisions are rendered against it in a

5 yr. Period.‖ Environmental and child labor

problems are exacerbated with global free trade.

Intellectual property is granted new protection.

Regional Pacts: EU, NAFTA, ASEAN, Mercosur.

World Trade Organization

• Evolved from GATT.

• WTO authorized European Union to impose

$4 billion penalty on U.S. because of tax

breaks given to corporations operating

abroad.

• Penalty will be enforced by retaliatory

tariffs on American exports.

INTERNATIONAL LAW

International Sales Agreements:

A. Direct Sales: UCC and CISG are similar,

but note differences.

1) CISG does not require written contracts (see

UCC 2-201).

2) CISG—some offers irrevocable even if not written

(see UCC 2-205).

3) CISG—acceptances must be ―mirror images‖ (see

UCC 2-207).

4) CISG authorizes specific performance in some

cases but not the UCC.

INTERNATIONAL LAW



International Sales Agreements:

Parties may choose which forum (which

national court system) will hear the

case. Also, which language will be

official and which currency to use.

INTERNATIONAL LAW

International Sales Agreements:

Letter of Credit: Buyer (account party) arranges with its

bank, for a fee, to issue a letter of credit to seller

(beneficiary). This obligates the buyer’s bank to pay the

seller on the basis of certain documents (bills of lading) that

will be issued by the carrier when the goods are deposited

with the airline or other freight company. If the letter of credit

is confirmed, seller’s bank, for a fee, will guarantee the

soundness of buyer’s bank and pay the seller’s draft (bill of

exchange similar to a check) when the bills of lading are

presented to it. The confirming, seller’s bank will then

collect it’s money under the letter of credit from the buyer’s

bank, and the buyer’s bank will debit the buyer’s account.

INTERNATIONAL LAW

International Sales Agreements:

Centrifugal Casting Machine, Co. v. American Bank

(1992)—the buyer of Centrifugal’s goods was an

agency of the Iraqi government, and Iraqi’s assets in

the US had been frozen because of the Kuwait

invasion. The Central Bank of Iraqi issued an

irrevocable letter of credit (LOC), and it was

confirmed by the defendant bank. CCM is entitled

to payment despite Iraqi’s assets being frozen

because the obligation to pay is on the defendant,

not the Iraqi government.

INTERNATIONAL LAW



International Sales Agreements:

Indirect Sales via Distributor:

Exclusive distributorships in the EU must account

for Art. 85, Treaty of Rome, forbidding

agreements that ―distort competition.‖ The

Sherman Antitrust Act will allow a domestic firm

to sue foreign firms for anti-competitive

agreements that are made overseas if they

intend to affect the US market and the harm is

direct and substantial.

INTERNATIONAL LAW

International Sales Agreements:

Indirect Sales via Distributor:

Hartford Fire Insurance v. California (1993)— plaintiffs

sued insurance companies based in Britain for conduct

legal in Britain. The defendant companies, acting in

conjunction, pressured/forced US firms to change the

terms of their policies in the US. The changes were

favorable to the British firms but not to US policyholders.

The US Supreme Court allowed the suits to go forward.

There was no requirement or compulsion under British law

for the firms to take this action, even though it was

permitted. Since there was no compulsion or conflict with

US law, ―comity,‖ which would prevent US legal

proceedings, was not applicable.

INTERNATIONAL LAW

International Sales Agreements:

Licensing a Foreign Manufacturer: Patents

and trademarks get protection under

GATT, but other antitrust issues may

arise in US or EU as discussed above.

INTERNATIONAL LAW

Investing Abroad:

A. Repatriation of Profits—US investors in foreign

countries may have difficulty getting their profits

back home in the absence of treaty guarantees.

B. Expropriation—Not considered to be illegal if just

compensation is paid (eminent domain).

C. Sovereign Immunity—The courts of each nation

lack to power/jurisdiction to hear suits v. a foreign

nation unless the foreign nation has waived the

immunity or the suit involves some commercial

activity

INTERNATIONAL LAW

Investing Abroad:

D. Act of State Doctrine. Lawsuits v. foreign

nations not permitted if they interfere with

right of the President or Congress to

manage foreign affairs.

E. Overseas Private Investment Corp.—US

investors may insure against political

violence, expropriation and the like.

Bribery

D. Foreign Corrupt Practices Act—Criminalizes

gifts (―anything of value‖) from US citizen to

a foreign official to influence commercial

transactions.

1. Illegal for US firm to bribe foreign officials to

gain, or maintain, business.

2. All publicly traded companies must keep detailed

records to document legal/illegal transactions.

Student Law

University of Texas

At

Austin

Thanks for stopping in. Have a lovely day.









Bill Shaw and Anna Kylie Clark, napping in the lazy

boy.

December 1998