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              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?
• Can WaterClear sue SunBright?
• Managers like Rick. Trapped in
• Wasn’t Rick doing a pretty good job?
• Where does globalism come into
• What if you were a member of
              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
Ethics or Morality

    What’s the Difference???

Is one of them tougher than the other?
Ethical Absolutes
Ethical Relativism
Doing the Right Thing
      • The Right Thing???
• The same in U.S. Saudi Arabia,
      Sources of Ethics
•   Mom and Pop – Family
•   School – Community
•   Culture
•   Religion
•   And you keep right on learning
• 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
• Socratic Dialogues.
• Women, as well as men, could hold high
• 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).
• 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
• Happiness - a life of virtuous
  activity in accordance with
• Virtue – neither excess nor
• Where do you get that virtue?
Stoics & Epicurians
• Detachment – apathia
• Social engagement v.
  separation from public
• Logos
• 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?
God is Dead!       Do something with your
 freedom; create your own values free of
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
•   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.
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.
Respect – As opposed to entrapment of 401-K
Integrity – As opposed to greed, deceitfulness,
Communication – As opposed to stonewalling
  by taking the 5th amendment
Excellence – As opposed to fair-to-middling
Largest U.S. bankruptcy until
Complex off-shore partnerships kept
 liabilities off Enron’s books.
Energy trading completely legal, but not
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
• Overstated earnings by $3.8
• Laid off 17,000 employees
• Stock dropped from $64.50 to 0.83
• Former CEO received $366 million
  in low interest loans
• 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
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
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.
• 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
• Administrative Law, e.g., EPA
• 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
4. Public (legislation) v. Private
Element of a Crime
1. Statutory violation – no common law
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
• Cruelty to animals? ―What, I was
  defending myself against an attack
• Child pornography? ―I just took a
  photo of my toddler in the bathtub?‖
    • Federal Law on CyberCrime.

• Criminal behavior if a person harasses
     someone by means of interstate
Cyber Defamation
 Defamation in Cyberspace
Civil Lawsuit, Not Criminal

       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‖
• 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
  – Could Ozzie foresee this outcome?
 Closing Arguments
• Refresh your memory - Scan the
  slides chapter review.
• Examine problems at end of
• 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
• Private award (secret), quicker,
  cheaper compared to litigation.
• However, no class actions, no
  discovery procedure.
• No appeal unless arbitrator is
Enforcement of Arbitration
   Meehan v. Nassau Community College
   Professor assigned to teach course; he had no proper
                   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
• EEOC permitted to sue Waffle
  House for employee back pay
  under Americans With Disabilities
State and Federal Courts.
• Which to choose: state or federal?
• Either choice, the court must have
    a. Personal Jurisdiction
    b. Subject matter Jurisdiction
• 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
    (a) Complete diversity of parties,
    (b) Amount in controversy $75,000
• Out of State Motorists

• Out of State Corporations
• Plaintiff initiates suit by filing a
  petition in a court with
• 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
 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 tells why defendant is
   not responsible.

 Don’t default by failing to
• 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
          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
 Jury Instructions
• If jury cannot decide whether death
  was accidental or suicide, there is a
  legal presumption that death was
• 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
 Statutory, &
       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 – 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
  – 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
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
• Union Pac--duty to rescue trespasser.
• Cappier – laborer suffered ―heat
• Osterlind v. Hill – canoe renter
• Soldano v. O’Daniels – Happy Jack’s.
• 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
• 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
• From there back to Legislature,
• Finally to Executive for signature or
• 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
• Separation of Powers - checks and
• 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
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
 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 . . . ?
• 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
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
• 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
       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
• Could you be prosecuted if your sign
  supported or opposed the war on
      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)
• Would AVERAGE person applying
  CONTEMPORARY community standards
  find the work as a whole appeal to
  PRURIENT interest.
  sexual conduct defined by state law.
• Does work as a whole lacks serious literary,
  artistic, political, or scientific.
• 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

       Fane v. Florida Institute of CPA.
            (see problem #2, p. 123)
• 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.
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
 • An issue for the court to examine within the next
                      few terms.
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).
• 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.
• In City of Boerne v. Flores (1997) the S.C.
  affirmed its earlier holding.
• Religious Freedom Restoration Act –
• 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.
Attachment – hearing before
Garnishment – hearing before
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.
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
• Compelling Interests - Fundamental
• 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.
• 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
•   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?
       Is this State Action?
         Tort Law
• Torts are civil wrongs, other
  than breach of contract, that law
  grants compensation to injured
    • 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

• 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
        – Barnes v. Angles Abbey, (Sup. Ct. L.A. ).
 Elements of Tort
• Fault – breach of duty
• Causation
    A) ―chain of dominos‖ causation (actual cause)
    B) foreseeability

• Damage – physical or emotional
• 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.
• 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????
• 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
Yeagle v. Collegiate
Times--opinion or
defamation (libel) per
Actual Malice
Public figures must show actual

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
• 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
• 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.
• Absolute privilege
  –Witness in court
  –Legislative debate
• Qualified privilege
  –Legitimate need to know
• 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-
• For being 1st, salesman won $100.
Emotional Distress
• Conduct - extreme &
• Was this appropriate for
  summary judgment?
      • Roe v. Lynn Mills
• Assault--an act that places
  victim in fear of immediate
• Western Union Telegraph V.
  Hill (Ala. 1933).
• Danny Devito???
• 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
• Trespass to property – hiding
  roommate’s book before final.
• Conversion--civil action that is
  equivalent of theft.
• 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
          • 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
    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
        Walston v. Insurance Co., 129 Idaho 211
    Business Torts
• Tortious interference with
  contract: Texaco v. Pennzoil.

• Tortious interference with
  prospective advantage: The
  Barber Shop case.
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
B.   Defamation per se: (1) Accusation of serious
     crime, (2) Sexually transmitted disease, (3)
     Incompetence in profession, (4) Unchastity in
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:
     Disclosure of embarrassing facts.
     False Light.
     Commercial Exploitation.

• Lanham Act--false or misleading
  commercial speech which is likely to
• Plaintiff fails to prove elements of
• Written waiver of liability.
• Privilege: Absolute – Conditional.
• Self defense.
• Statute of Limitations
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.
   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
 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
• Stress - husband physically abusive.
• Wife chased him outside with her
  police revolver; shot, missed, both
       –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
• Apple Tours employed supervisor with
  record of assaulting another woman years
• $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?‖
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??
 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
 Colorado law controls this issue.
• 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
• 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
• 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.
Should manufacturer be held responsible to
        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

 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
  High crime area?
   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.

  – 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

Injury must be genuine, not
      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.
Negligent infliction of emotional
harm to bystander. Example: mom
sees injury to child.
   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
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
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‖
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.
              $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
• 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.
1. Physical
2. Economic
3. Pain and Suffering
4. Emotional

   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
     Predictability
     Flexibility

 Elements
       Agreement
       Consideration
       Capacity
       Legal object.
       Some MUST be in writing--Statute of Frauds.
Introduction to Contracts
 Types of contracts:
    Valid, Voidable, Void,
 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
• 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
 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
       – 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
  Chapter 9

    Katrina and Bob

The Handshake . . .

      . . . what would you enforce?
• Offer and Acceptance – ―Meeting of
  the Minds‖
• Offer - intent, terms, communication
• Intent--objective v. subjective
• Invitations - Quotes, Advertisements,
 An offer shows an intent to
        enter a contract.
 It names reasonably definite
 It is communicated to offeree.
Newspaper Ad
        • SATURDAY
         • 9 a.m. Sharp
     • 1 Black Lapin Stole
           • Beautiful
       • Worth $139.50
   Duration of Offer
• An offer lasts for the specified period of
• If no time specified, lasts a reasonable time.
• It lasts until revoked or rejected.
• It expires by-operation-of-law when offeror
• If offeror dies after acceptance, what then??
      • 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
• 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
• 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
        – 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
• 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)
   (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
(1) Invitations--similar to typical auction with
(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.
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.
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
• Did arbitration term inflict surprise or
    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
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
d) Clinton ended massive subsidies to domestic industries,
   and made global competition more equitable.
Chapter 10
• Bargained-for exchange
• The ―price‖ each pays for
  other party’s promise or
• Kelsoe v. International Wood
 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?
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
• 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
3. Enforce promise to avoid
    UCC 2-209
• An agreement modifying a
  contract for the sale of goods
  needs no consideration to be
• Modification must be in writing
  if original written contract so
  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
 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.
 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
 It is possible to rescind old contract and enter new under
 common law, or modify old contract without consideration
 under UCC 2-209.
• Wagers          • Noncompete
• Licensing       • Exculpatory
• Usury           • Unconscionable
 Illegal unless permitted by state law.
 California law makes gambling-on-
  credit contracts void as public
 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).
  Betting on the rise and fall of stock price
   is illegal.
    Derivatives are futures--the value depends
     on some underlying reference, e.g., exchange
     rate, prime rate, $bl$ of oil, weather.
 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.
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.
If licenses are issued as
revenue-making measure for
government, contracts by
unlicensed person are still
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
     • In time
     • In geographic area
Non-compete clauses--ancillary to legitimate
  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 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.
Clause not valid where
  (a) business suitable for public
  (b) business important/necessary to
  (c) business open to public,
  (d) party seeking exculpation holds
    advantage of bargaining power.
Bailment relinquishes possession and
Exculpatory provision frequently valid
 because it involves property not
  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 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.
• Court determines fairness.
• Criteria:
 – a) oppression,
 – b) surprise.
   EDS v. Chubb
• Unconscionability (UCC
• Limitation of liability (UCC
• Electronic Data Systems v.
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
 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
      a) express ratification, or
      b) by words/action that expresses an intention to be
Minor may lie about age and
 induce adult to enter
TEXAS does not allow
 rescission because of the
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.
• 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
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.
  a) Intentional
  b) Misrepresentation
  c) Material fact
  d) Justifiable reliance
  e) Damage/injury to victim.
Misstatement must be of fact, not
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
b) Correct a basic mistaken assumption:
   “Haunted House.”
c) Latent defect - seller knew but buyer
   didn’t. Strawn v. Canuso.
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.
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?‖
• 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
     Arango v. Success Roofing, 730 P2d 720 (1996).
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
        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:
     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
• 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
• 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
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
• 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
• 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.
     Auto Purchase
 – 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
Negotiable Instruments

     Checks and Notes

Possessor - unconditional right to
  – Paper is Negotiable
  – Paper is in the hands of a Holder
  – Holder is Holder in Due Course
  – There are no ―Real‖ defenses.
• Two types of negotiable
  – 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.
• 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,
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.
Estimated time of payment not sufficient for

Must be payable on demand or at definite time
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.
• 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
  – 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
  – Present the instrument to the primary party,
  – The primary party must dishonor by refusing
  – 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.
• 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).
• Real defenses – essentially this means
  ―no contract‖ or that the law forbids

• 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
          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.

 Inside Trading
Firms that have issued
publicly traded stock must
make current information
available continuously.
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.
• 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
• 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.‖
  marked cards or a stacked
  MARKET--the insider will
  always win (right up until indictment).
• Insider is someone who has fiduciary
  duty to company whose stock he has
• 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
• 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???
• 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.
• 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
• 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

    $$$$$ v. $$$$$
• Energy Efficiency--Paper v.
• East Texas lumber to paper mill to
  U.of T.
• Strip mined lignite to power plant
  to U.of T.
• Energy Efficient v. Wealth
                 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).
  public welfare within reasonable period of
                   Environmental Law

  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

  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?

• 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

•   Scrubbers.
•   Low Sulfur Coal.
•   Use alternative fuels (e.g., gas).
•   Trade emission allowances.
• 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
        AIR TOXICS
1990 Amendments to CAA requires EPA to
  set standards for 189 pollutants based on
  MACT (Maximum Achievable Control
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.
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.‖
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.

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
• Penalty will be enforced by retaliatory
  tariffs on American exports.
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 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 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 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 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 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 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.
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
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.
D. Foreign Corrupt Practices Act—Criminalizes
   gifts (―anything of value‖) from US citizen to
   a foreign official to influence commercial
  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
Thanks for stopping in. Have a lovely day.

Bill Shaw and Anna Kylie Clark, napping in the lazy
                  December 1998

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