Ch A - Business Foundations

Uniform Commercial Code (UCC)

A comprehensive commercial law, adopted by every state in the United States, that covers sales laws and other commercial laws.

contract

A legally enforceable agreement between two or more parties.

consumerism

A social movement that seeks to increase and strengthen the rights and powers of buyers in relation to sellers.

tort

A wrongful act that causes injury to another person's body, property, or reputation.

The 2005 reform helped reduce the annual number of bankruptcy filings to 600,000 from an average of 1.5 million between 2001 and 2004. However, the financial crisis of 2008 pushed the number of bankruptcies again to well over 1 million

As the economy slowly recovered, bankruptcies stayed over a million until 2015 when numbers began to decrease.25 Although high-profile bankruptcies of businesses—such as Sears, Toys"R"Us, and Payless ShoeSource—tend to dominate the news, 97 percent of bankruptcy filings each year are by individuals.

involuntary bankruptcy

Bankruptcy procedures filed by a debtor's creditors.

Bankruptcy procedures begin when a petition is filed with the court under one of the following sections of the Bankruptcy Code:

Chapter 7—"straight bankruptcy" or liquidation (used by businesses and individuals). Chapter 11—reorganization (used almost exclusively by businesses). Chapter 13—repayment (used by individuals).

precedent

Decisions judges have made in earlier cases that guide the handling of new cases.

administrative agencies

Federal or state institutions and other government organizations created by Congress or state legislatures with delegated power to pass rules and regulations within their mandated area of authority.

negotiable instruments

Forms of commercial paper (such as checks) that are transferable among businesses and individuals and represent a promise to pay a specified amount.

deregulation

Government withdrawal of certain laws and regulations that seem to hinder competition.

taxes

How the government (federal, state, and local) raises money.

negligence

In tort law, behavior that causes unintentional harm or injury.

Legally, an intentional tort is a willful act that results in injury. The question of intent was a major factor in the lawsuits against the U.S. tobacco industry. Courts had to decide whether tobacco makers intentionally withheld information from the public about the harmful effects of their products.

Negligence, in tort law, describes behavior that causes unintentional harm or injury. In a classic court finding of negligence, McDonald's lost a lawsuit to an older woman severely burned by hot coffee bought at a drive-through window. The jury felt that McDonald's failed to provide an adequate warning on the cup. The case became a flashpoint in the debate over product liability. Today, product liability remains a controversial area of tort law, so let's take a closer look at this issue.

product liability

Part of tort law that holds businesses liable for harm that results from the production, design, sale, or use of products they market.

business law

Rules, statutes, codes, and regulations that are established to provide a legal framework within which business may be conducted and that are enforceable by court action.

contract law

Set of laws that specify what constitutes a legally enforceable agreement.

consideration

Something of value; consideration is one of the requirements of a legal contract.

express warranties

Specific representations by the seller that buyers rely on regarding the goods they purchase.

In the late 19th century, big oil companies, railroads, steel companies, and other industrial firms dominated the U.S. economy. Some feared that such large and powerful companies would be able to crush any competitors and then charge high prices. In that atmosphere, Congress passed the Sherman Antitrust Act in 1890 to prevent large organizations from stifling the competition of smaller or newer firms.

The Sherman Act forbids (1) contracts, combinations, or conspiracies in restraint of trade; and (2) the creation of actual monopolies or attempts to monopolize any part of trade or commerce.

common law

The body of law that comes from decisions handed down by judges; also referred to as unwritten law.

judiciary

The branch of government chosen to oversee the legal system through the court system.

bankruptcy

The legal process by which a person, business, or government entity unable to meet financial obligations is relieved of those obligations by a court that divides any assets among creditors, allowing creditors to get at least part of their money and freeing the debtor to begin anew.

endorsement.

The payee's signature

breach of contract

When one party fails to follow the terms of a contract.

Allied Security Trust

a nonprofit firm that acquires intellectual property of interest to its members

Article 3 of the Uniform Commercial Code requires negotiable instruments to follow four conditions

(1) be written and signed by the maker or drawer, (2) be made payable on demand or at a certain time, (3) be made payable to the bearer (the person holding the instrument) or to specific order, and (4) contain an unconditional promise to pay a specified amount of money.

A contract does not have to be complicated as long as

(1) it is in writing, (2) it specifies mutual consideration, and (3) it contains a clear offer and agreement.

Basically, a contract is legally binding if the following conditions are met:

1. An offer is made. An offer to do something or sell something can be oral or written. If I agree to sell you my bike for $100, I have made an offer. That offer is not legally binding, however, until the following other conditions are met. 2. There is a voluntary acceptance of the offer. The principle of mutual acceptance means that both parties to a contract must agree on the terms. If I use duress—coercion through force or threat of force—in getting you to agree to buy my bike, the contract will not be legal. You couldn't use duress to get me to sell my bike, either. Even if we both agree, though, the contract is still not legally binding without the next four conditions. 3. Both parties give consideration. Consideration means something of value. If I agree to sell you my bike for $100, the bike and the $100 are consideration, and we have a legally binding contract. If I agree to sing at your wedding and you do not give me anything in return (consideration), we have no contract. 4. Both parties are competent. A person under the influence of alcohol or drugs, or a person of unsound mind (one who has been legally declared incompetent), cannot be held to a contract. In many cases, a minor may not be held to a contract either. If a 15-year-old agrees to pay $15,000 for a car, the seller will not be able to enforce the contract due to the buyer's lack of competence. 5. The contract covers a legal act. A contract covering the sale of illegal drugs or stolen merchandise is unenforceable since such sales are violations of criminal law. (If gambling is prohibited by state law in your state, you cannot sue to collect the poker debt.) 6. The contract is in proper form. An agreement for the sale of goods worth $500 or more must be in writing. Contracts that cannot be fulfilled within one year also must be put in writing. Contracts regarding real property (land and everything attached to it) must be in writing.

If a breach of contract happens the following may occur:

1. Specific performance. The party who violated the contract may be required to live up to the agreement if money damages would not be adequate. If I legally offered to sell you a rare painting, I would have to sell you that painting. 2. Payment of damages. If I fail to live up to a contract, you can sue me for damages, usually the amount you would lose from my nonperformance. If we had a legally binding contract for me to sing at your wedding, for example, and I failed to come, you could sue me for the cost of hiring a new singer. 3. Discharge of obligation. If I fail to live up to my end of a contract, you can agree to drop the matter. Generally you would not have to live up to your end of the agreement either.

patent

A document that gives inventors exclusive rights to their inventions for 20 years.

copyright

A document that protects a creator's rights to materials such as books, articles, photos, and cartoons.

Criminal law defines crimes, establishes punishments, and regulates the investigation and prosecution of people accused of committing crimes

Civil law proceedings cover noncriminal acts—marriage, personal injury suits, and so on

First, creditors with secured claims receive the collateral for their claims or repossess the claimed asset (such as an automobile, equipment, or building); then unsecured claims (backed by no asset) are paid in this order:

Costs of the bankruptcy case. Any business costs incurred after bankruptcy was filed. Wages, salaries, or commissions owed. Contributions to employee benefit plans. Refunds to consumers who paid for products that weren't delivered. Federal and state taxes.

implied warranties

Guarantees legally imposed on the seller.

voluntary bankruptcy

Legal procedures initiated by a debtor.

strict product liability

Legal responsibility for harm or injury caused by a product regardless of fault.

Patent Infringement

Patent owners have the right to sell or license the use of their patent to others. Foreign companies are also eligible to file for U.S. patents.13 They account for nearly half the U.S. patents issued. Penalties for violating a patent (patent infringement) can be costly. In 2020, Apple and Broadcom were ordered to pay $1.1 billion to California Institute of Technology for infringing on three of the university's WiFi patents, which had helped Apple stay competitive in the mobile phone market.14 The USPTO does not take action on behalf of patent holders if patent infringement occurs. The defense of patent rights is solely the job of the patent holder.

statutory law

State and federal constitutions, legislative enactments, treaties of the federal government, and ordinances—in short, written law.

Two major fields of law are important to businesspeople: statutory law and common law.

Statutory law includes state and federal constitutions, legislative enactments, treaties of the federal government, and ordinances—in short, written law. You can read the statutes that make up this body of law, but they are often written in language whose meaning must be determined in court. With over 1.3 million licensed lawyers, the United States has more lawyers per citizen than any country in the world. Common law is the body of law that comes from decisions handed down by courts. We often call it unwritten law because it does not appear in any legislative enactment, treaty, or other written document. Under common law principles, what judges have decided in previous cases is very important in deciding today's cases. Such decisions are called precedent, and they guide judges in the handling of new cases. Common law evolves through decisions made in trial courts, appellate courts, and special courts (e.g., probate courts or bankruptcy courts). Lower courts (trial courts) must abide by the precedents set by higher courts (e.g., appellate courts) such as the U.S. Supreme Court.

Critics believe product liability laws have gone too far; others feel these laws should be expanded. Product liability holds businesses liable for harm that results from the production, design, or inadequate warnings of products they market. The average product liability case can cost businesses millions, including defense costs, out-of-court settlements, and jury awards.

Strict product liability is a major concern for businesses. More than 100 companies have been forced into bankruptcy due to asbestos litigation and the issue is not yet closed.4 Johnson & Johnson was ordered in a recent case, to pay $4.6 billion to 22 women who alleged they suffered ovarian cancer from the company's talcum powder.5 The company denies the claim and is appealing.6 General Motors recalled more than 2.6 million cars and has paid more than $2.5 billion in penalties and settlements due to faulty ignition switches linked to 124 deaths.7

Because some of the language in the Sherman Act was vague, there was doubt about just what practices it prohibited. To clarify its intentions Congress enacted the following laws:

The Clayton Act of 1914. The Clayton Act prohibits exclusive dealing, tying contracts, and interlocking directorates. It also prohibits buying large amounts of stock in competing corporations. Exclusive dealing is selling goods with the condition that the buyer will not buy from a competitor (when the effect lessens competition). A tying contract requires a buyer to purchase unwanted items in order to purchase desired ones. Let's say I wanted to purchase 20 cases of Pepsi-Cola per week to sell in my restaurant Harvest Gold. Pepsi, however, says it will sell me the 20 cases only if I also agree to buy 10 cases each of its Mountain Dew and Diet Pepsi products. My purchase of Pepsi-Cola would be tied to the purchase of the other two products. An interlocking directorate occurs when a company's board of directors includes members of the boards of competing corporations. The Federal Trade Commission Act of 1914. The Federal Trade Commission Act prohibits unfair methods of competition in commerce. This legislation set up the five-member Federal Trade Commission (FTC) to enforce compliance with the act. The FTC deals with a wide range of competitive issues—everything from preventing companies from making misleading "Made in the USA" claims to insisting funeral providers give consumers accurate, itemized price information about funeral goods and services. Along with the Department of Justice, the FTC has the added responsibility to oversee proposed mergers and acquisitions (Chapter 5) to prevent anticompetitive mergers or acquisitions that would "substantially reduce competition." The Wheeler-Lea Amendment of 1938 also gave the FTC additional jurisdiction over false or misleading advertising, along with the power to increase fines if its requirements are not met within 60 days. The Robinson-Patman Act of 1936. The Robinson-Patman Act prohibits price discrimination and applies to both sellers and buyers who knowingly induce or receive price discrimination. Certain types of price cutting are criminal offenses punishable by fine and imprisonment. That includes price differences that "substantially" weaken competition unless they can be justified by lower selling costs associated with larger purchases. The law also prohibits advertising and promotional allowances unless they are offered to all retailers, large and small. Remember, this legislation applies to business-to-business transactions and not to business-to-consumer transactions.