Managers and the Legal Environment: Strategies for the 21st Century, 8th Edition Lecture Notes

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1C H A P T E R1LAW,VALUECREATION,ANDRISKMANAGEMENTThisfirst chapterlays the foundation for the modern corporate managerwho isswimming in a“sea of law.” It sets forth a framework for the legally astute manager tobetterunderstand theintersection between law and management, while introducinga systems approach to business,law, and society. And finally, this chapter, can helpmanagers becomemorelegally astute byunderstanding howtolegally protect a company’s value, while managing legal risks.1-1THESYSTEMSAPPROACH TOBUSINESS ANDSOCIETYBecause we live in a social system, managers must anticipate,understand, and respond tochanging policy and social perceptions of ethical management.1-1aMeeting Societal ExpectationsBusiness decisions are a series of interrelated economic and moralcomponents, aswell as systems of shareholders and community stakeholders.1-1bEffect of Law on the Competitive Environment and Firm’s Resources(i)Law shapes competitive environmentwith five forcesthat determine acompany’s attractiveness to customers:(1)buyer power, (2) supplierpower, (3) the competitive threat posed by current rivals, (4) theavailability of substitutes, and (5) the threat of new entrants.(ii)Resource-based view(RBV): firm’s resources can sustain competitiveadvantage if they are valuable, rare, and hard or expensive to imitate bycompetitors.(iii)Considerthe corporatescandalsbeginning in 2000 with Enron, andcontinuing to the recent JP Morgan “London Whale Trades.”(iv)Legally astute management teams are proactive, and practicestrategiccompliance management.1-1cLaw and the Value ChainEach activity in the value chain has legal aspects: design, manufacturing,distribution, sales and warranties.1-1dLawIsDynamicSystems approach recognizes that the law is not static and changes based on courtdecisions, federal, or state laws. Managers should be proactively involved in

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BAGLEY, MANAGERS AND THE LEGAL ENVIRONMENT,8THED.—INSTRUCTOR'S MANUAL2lobbying for law that gives them competitive advantage, and be self-policing toavoid unnecessary regulations.1-2LAW ANDPUBLICPOLICYAmerican law seeks to enhance economic activity, commerce, andfor-profit corporationsthrough the pursuit of four key public policy objectives:1-2aPromoting Economic GrowthProtectsand enforcesprivate property rights, enforcescontracts, and developsincentives.1-2bProtecting Workers1-2cPromoting Consumer Welfare1-2dPromoting Public Welfare1-2ePolicy ConflictsCASE 1.1Sorrell v. IMS Health, Inc., 131 S.Ct. 2653 (2011).Vermont statute prohibited pharmacies from selling prescriber-identifying information for marketing prescription drugs withoutthe prescriber’s consent. Vermont data miners and otherschallenged the statute as a violation of their free-speech rightsunderthe First Amendment.HELD:For the data miners. The statute violated the FirstAmendment because it was too broad and engaged in “content-based discrimination.”1-3THELEGALLYASTUTEMANAGERLegally astute managers(LAMs)know how to communicate and work with counsel tosolve legally complex problems.LAMsknow how to: (1) negotiate contracts, (2) protectand enhance the firm’s value (3) create legal options, and (4) convert regulatory barriersinto value.* * * * *

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CHAPTER 1LAW, VALUE CREATION, AND RISK MANAGEMENT3THERESPONSIBLEMANAGER:Teaching Suggestions1.How should the legally astute manager deal with gossip circulating around the company viaemails about possible legal or ethical wrongdoing?2.Discuss the cultural dilemmas that face managers in the global economy: Are gifts of moneyor services illegal or unethical, or culturally neutral? Discuss, for example, in China whetherGuanxiis social networking, or is it mere bribery. Or, in Latin America, whether payingofficials directly is a way to “expedite” service, or whether it is bribery.3.Discuss the possible conflicts between legally doing business and selling fast-food, given theincreasing evidence of how it is a significant contributing factor in public health, obesity, anddiabetes facing many Americans. Do you agree with how McDonalds and the DisneyCompany are handling the issue? What ethical obligations, if any, do fast food companieshave to consumers?

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1C H A P T E R2ETHICS AND THELAWThischapterexplains the basic concepts and dilemmas of the application of business ethics andsocial responsibility in business. The goal of the chapter is to providethe manager with anethical framework to evaluate business decisions in the global legal environment.2-1THERELATIONSHIPBETWEENLAW ANDETHICSLaw and ethics are interrelated.Creating a “good”organizational culture that strives tohave the highest ethical standards will ultimately make it more financial healthy. But thelaw does not—indeed cannot—prohibit all “bad” behavior.In fact, unethical conduct canlead to more onerous regulation.Seethe Enron accounting scandal, which was a primaryfactor in the enactment of the Sarbanes-Oxley Act of 2002.2-2THEETHICALTONEISSET AT THETOPThe chief officer has the most important role in instilling ethics in the organization.Paydisparities and the wealth gap between corporate executives compared to averageworkers and public scandals reduce public faith in the business community.2-2aTheImperialCEOAs of2013,theaverage CEOin Standard and Poors’ 500 Index was paid $11.7million, more than 331times what the average worker was paid.ConsiderDennisKozlowski, CEO, Tyco International. In 2005,Kozlowski was convicted of grandlarceny, conspiracy, and fraud. He was sentenced up to 25 years in prison.2-3ETHICALBUSINESSLEADER'SDECISIONTREESee Exhibit 2.1.To ensure success, managers must create a culture of sociallyresponsibility by asking a series of questions:2-3aIs the Action Legal?2-3bWouldItMaximize Shareholder Value?Maximization of shareholder value(shareholder primacy)isgenerallynot legallyrequired.

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BAGLEY, MANAGERS AND THE LEGAL ENVIRONMENT, 8THED.—INSTRUCTOR'S MANUAL22-3cIs the Action Ethical? WhatIsEthical?The three main ethical frameworks useteleological,deontological, orcomparative justiceviewpoints.(i)Ateleologicalview of ethicsis concerned about theconsequences ofdecisions. Morality is measured by the effect a decision has on others.(ii)Adeontologicalview of ethicsemphasizes the motivation and principlebehind an action, not the consequences. Immanuel Kant emphasized theform of action (not the outcomes) and the reason for choosing said actions.Rawlsian justiceseeks to maximize the plight of the worst-off person bydeveloping principals behind a ‘veil of ignorance.’Comparative Justice.Consequences of decisions can be compared between rule-based systems andoutcome-oriented (utilitarian) frameworks.Considerdistributive,compensatory,andretributivejustice.How Do Business Leaders Define Ethics?Many associate ethics with integrity, fairness, and honesty. Ex-CEO of HP, CarlyFiorina, said “good leadership means doing the right thing when no one iswatching.”HISTORICALPERSPECTIVE:FromAquinasto Pope Francis.Thomas Aquinasbelieved thathuman lawswere just only if they: (1) are consonant with universalgood; (2) can be obeyed; (3) are unambiguous; (4) approved by the community;and (5) universal; and that immoral laws should be disregarded or opposed.2-3dReaching a DecisionIf an action is legal, ethical, and would maximize shareholder value, the actionshould be taken.ActionsThat Might Maximize Shareholder ValuebutWould Be Unethical.Mostshareholders would not want their managers to act unethically, even if itmeant increasing shareholder value.Actions thatDo NotMaximize Shareholder ValuebutAre NonethelessAreEthicallyRequired.Managersmust balance social responsibility with shareholder returns.If an actiondoes not maximize shareholder value and the firm has no ethical reason to act, theaction should not be taken. Otherwise, the action might result in liability for wasteof corporate assets.Failure to meet social expectations of ethical behavior cantarnish a firm’s reputation and impact corporate good will and earnings.

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CHAPTER 2ETHICS AND THE LAW32-3eFinding the “Sweet Spot”Ideal courses of action are ethically sound and maximize corporate value.Managers should look for intersections of “shared value” that balance competitiveadvantage with social responsibility.Ralph Johnson, CEO of Johnson andJohnson says he will do both.And seeGeneral Electric, theToyota Prius, WholeFood Markets, andTimberland.2-3fApproaches to Resolving the Tension Between Short-Term Results andLong-Term ValueManagers can take affirmative steps to resolve tensions between the short-termand long-term.Soften the Edges.Hiring and wage freezes,shortening workweeks, eliminating bonuses, buyoutpackages.Lobby for Changes in the Lawor the Enactment of Codes of Conduct.Form coalitions with other companies to lobby state and federal lawmakers forfavorable laws that help American companies compete in the global economywhile maintaining ethical conduct. OECD and FCPA.Adopt an Ethics Program.Walk the Walk.Employees are watching.2-4INDIVIDUALRESPONSIBILITYActing ethically isalways an individual choice. If the employee isasked to engage in alegal, but unethical action, she should review the company’s code of conduct and perhapstalk to coworkers.2-5FAILING TOMEETSOCIETALEXPECTATIONSPublic perception of a company’s socially irresponsible or unethicalbehavior mightresult in severe financial setbacks.Corporate social responsibility extends to many areas.

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BAGLEY, MANAGERS AND THE LEGAL ENVIRONMENT, 8THED.—INSTRUCTOR'S MANUAL42-5aCustomers and ClientsGeneral Motors and Chevrolet Malibu’s ExplodingFuel Tank.Conflicts of Interest:Goldman Sachs.2-5bEmployeesPublic investigation reveals that clothing companies and retailershave usedchildlabor, impose harsh work conditions, and pay substandard wages.Racialdiscriminationmaystillbeprevalent in large corporations, e.g.,Texaco.Discrimination costs more than money, it saps morale.2-5cInvestors: Managed Earningsand Other Types of Securities FraudCase of JP Morgan Chase, the “London Whale,”and failure to ‘police’ the ponzischeme of Bernie Madoff.2-5dThe EnvironmentPetroleum and electronics industries must balance costs of environmental clean-up with profits.BP’sDeepwater HorizonOil Spill.2-5eCommunitiesCompanies must negotiate relations with foreign governmentsand local peoples,e.g.,South Africa and Apartheid, Chevron in Burma. The public has put pressureon companies doing business with repressive regimes.2-6POSITIVEACTIONDespiteexamples of corporate misconduct, many companies have undertaken sociallyresponsible moves on customer and product safety, in treating employees fairly, for theenvironment and certain communities.2-6aCustomers and Product Safety:Johnson & Johnson and Tylenol2-6bEmployees:Auditing of Supplier Work Conditions2-6cEnvironment:Socially Responsible InvestmentThe Coalition for Environmentally Responsible Economics is a diverse networkof investors, environmentalists,and labor unions that are committed to helpingcorporations promote environmental sound and sustainable practices.

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CHAPTER 2ETHICS AND THE LAW52-6dCommunities:Coca-Cola Co.’s Sugar Supply Chain2-7PROMOTINGETHICALBEHAVIORManagers set the ethical tone of the corporation and play the most important role increating an ethical environment.Companies need mission statements, a code of ethicsand ethics training, regular channels of oversight to review company behavior,andshould makeit easier for employees to blow the whistle.2-7aCraft a Mission Statement2-7bAdopt a Code of Ethics2-7cProvide Ethics TrainingBoeing provide innovative online ethics training. Citigroup also requiresmandatory online ethicstraining for all employees.2-7dAlign IncentivesFinancially reward the ‘right’ actions.2-7eProvide Oversight2-7fMake It Easier to Blow the Whistle2-8HONOR OR“THEMORALS OF THEMARKETPLACE”?Law imposes a fiduciary duty onofficers and partners to act in the best interests of theother party. What duties does a finder owe its client?CASE 2.1Northeast General Corp. v. Wellington Advertising, Inc., 624 N.E.2d129 (N.Y. 1993).Wellington hired Northeast to “find”entities interested in buying ormerging with Wellington.Thefinders agreementstatedNortheast wouldbeentitled to a finders fee ifany of the“found”companies ultimatelypurchased or merged with Wellingtonwithin three years of beingintroduced to Wellington. Northeast found and introducedSternau toWellington but did not disclose Sternau’s reputation for ‘raiding’ theassets of the purchased company. The transaction proceeded butWellington cancelledthe finders fee checkafter major shareholdersalleged breach of fiduciary duty.Northeast sued.HELD: For Northeast. The agreement did not raise to a fiduciary level.

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BAGLEY, MANAGERS AND THE LEGAL ENVIRONMENT, 8THED.—INSTRUCTOR'S MANUAL6* * * * *THERESPONSIBLEMANAGER:Teaching Suggestions1.Research Martin Luther King’s view of law and theory of civildisobedience. What part cancivil disobedience play in today’s corporate world? Analyze the recent housing market crisisin terms of race, ethics, and government regulations. What would Dr. King have done had hebeen CEO of Freddie Mac or Fannie Mae?2.Have student-teams create a one page code of ethics for their own fictional company, alongwith the means to enforce and evaluate complaints.3.Research the Texas Deceptive Trade Practices Act,seeChapter 17,Tex. Bus. Comm. Code(or any comparable state consumer protection law). After analyzing the law, list and describeall of the ethical considerations that went into the drafting and implementation of that law.

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1C H A P T E R3SOURCES OFLAW,COURTS,ANDDISPUTERESOLUTIONThis chapter explains federal and state court systems, how jurisdiction is determined, and variousresponses to litigation. It also examines common law and explains how to read casecitations.3-1HOWTOREAD ACASECITATION3-2SOURCES OFLAWIn order to decide how to rule on a case, courts look to federal and state constitutions,statutes, regulations, and common law (previous court rulings).3-2aConstitutions3-2bStatutes3-2cRegulations3-2dCommon Lawandthe Doctrine ofStare DecisisSettled legal principles and case law, made by judges.Staredecisisis a doctrinein law used to guide judicial decisions.Reversing U.S. Supreme Court Precedent.The U.S. Supreme Court rarely overrules its previous decisions but set forth fourprimary questions inPlanned Parenthood v. Caseyto be considered whendeciding whether an earlier decision should be overruled.Splitsin the Circuits.3-2eRestatements3-3THEU.S.ANDSTATECOURTSYSTEMSThe United States has two co-existing judicial systems, federal and state.

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BAGLEY, MANAGERS AND THE LEGAL ENVIRONMENT, 8THED—INSTRUCTOR'S MANUAL23-4FEDERALJURISDICTION3-4aFederalQuestion JurisdictionExists when the dispute concerns federal law,i.e., U.S. Constitution, federalstatute, federal common law, treaty,or federal administrative agency law.3-4bDiversity JurisdictionBetween citizens of twodifferent states or between citizen of one state andforeign country, plus $75,000. Federal courts will apply conflict-of-law rules todetermine which state’s law governs the dispute.Determining Citizenship.Citizenship (person orcorporate) is determined by place of legal residence ordomicile. Corporate citizenship is based upon state of incorporation and where ithas its principal place of business, usingthenerve-centeror thetotal activitytests).3-4cJurisdiction in Cases in Which the United StatesIsa Party3-5FEDERALCOURTS3-5aU.S. District CourtsNinety-four trial courts of the federal system.3-5bU.S. Courts of AppealThirteen courts of appeal.3-5cSpecialized Federal CourtsBankruptcy, tax, International Trade Commission, U.S. Courts of Appeal forArmed Forces and Veterans Claims.3-5dU.S. Supreme CourtHas discretionary review,writ of certiorari.3-6STATECOURTSState Courtshandle the bulk of American cases,decide criminal matters, civil suits, andother specialized legal disputes.3-6aState Trial Courts

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CHAPTER 3SOURCES OF LAW,COURTS,AND DISPUTE RESOLUTION33-6cState Appellate Courts3-6cState Supreme Court3-7STANDINGCourts will not hear cases unless a party hasstanding: the party seeking relief is theproper party to file the case, has a personal interest in the outcome of the case, and willbenefit from a favorable ruling.3-8PERSONALJURISDICTIONState courts must have personal (in personam) jurisdiction,or legal authority, over theparties of the property (in rem) involved in the case.State courts acquire personaljurisdiction over out-of-state defendants through “long-arm” statutes whendefendantshave “minimum contacts” with the state.Service of process gives defendant formalnotice of suit.3-8aPersonal Jurisdiction and the InternetExercising personal jurisdiction over people or companies that do business on theInternetis directly proportionate to the nature and quality of the commercialactivity in question. TheZippocaseintroduced the“sliding scale” standard, whichis now in use in many jurisdictions.3-9CHOICE OFFORUM,WAIVER OFRIGHT TOTRIALBYJURY,ANDCHOICE OFLAW3-9aChoice of Forumand theDoctrine ofForum Non ConveniensCourts will honor clauses in valid contracts in which the parties have agreed upona state or forum to hear a dispute concerning the contract,unlessthere was fraud,it would deny a party’s day in court, enforcement would be against public policy.In the event of a choice-of-forum clause, a defendantmay request a change inforum on the grounds that the jurisdiction chosen by the plaintiff poses a hardship.3-9bWaiver of Right to Jury Trial3-9cChoice of LawIn diversity cases, generally the law of the state having the most contacts to thelitigants or most interest to the litigation will be applied.

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BAGLEY, MANAGERS AND THE LEGAL ENVIRONMENT, 8THED—INSTRUCTOR'S MANUAL43-10ALTERNATIVES TOLITIGATION3-10aApplication of Tort and Criminal Law to ADRAs discussed more fully in Chapter 9,managers should be careful not to pursuesettlementswithout counsel.3-11CLASSACTIONS(i)If the conduct of the defendant affected numerous persons in a common way, thecase may becertifiedas aclass actionby a representative of the class of personsaffected.Individuals may opt out of the class and pursue private or separateaction.In federal courts, plaintiffs must have common questions that predominateover all plaintiffs, and the representatives of the class must have the same interestsas all the plaintiffs.(ii)Defendantconcerns:see class-action suits as a “strategic management tool” asthey can reduce or limit the damages.CASE 3.1Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011).One million female Wal-Mart employees sued Wal-Mart in a nationwideclass action suit claiming Wal-Mart had violated Title VII of the CivilRights Act by discriminating against them on the basis of their sex in bothpay and promotions. The issue was whether the employees could sue as aclass.HELD:The Supreme Court dismissed the case, because it was improperlycertified as a class action case.3-12CIVILPROCEDURE:LITIGATIONSTEPS3-12aFiling, Prosecuting, and Defending Against a ClaimComplaint.Summons.Answer and Counterclaim.Default Judgment.

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CHAPTER 3SOURCES OF LAW,COURTS,AND DISPUTE RESOLUTION53-12bPretrial ActivityPretrial Motions.Motion todismiss, and summary judgmentPretrial and Status Conferences.3-12cTrialSelection of Jury.Presentation ofcase—plaintiff, then defendant.Motion for a Directed Verdict.Jury Verdict.3-12dPosttrial MotionsJudgment Notwithstanding the Verdict (j.n.o.v.).New Trial.3-12eAppeals3-13ALTERNATIVEDISPUTERESOLUTIONThere are three types of ADR:negotiation,mediation, andarbitration. A manager canmix these with the formal judicial system and have additional options: minitrials, med-arb, arb-med, and summary jury trials.3-14NEGOTIATIONThe give-and-take people engage in whencoming to terms with each other.3-14aLiability for Failed NegotiationsThe liability for failed negotiations depends on the facts of each case.

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BAGLEY, MANAGERS AND THE LEGAL ENVIRONMENT, 8THED—INSTRUCTOR'S MANUAL63-15MEDIATIONMediation occurs when the parties themselves agree to reach a mutually beneficialresolution with the assistance of a third person (the mediator). Need for privacy maymake mediation attractive in some claims. There are dangers: lack of proceduralprotections, unequal bargaining power, ensuring confidentiality. Choice of mediator iscrucial in the process: make sure to hire someone who is certified and experienced.3-15aMediation Process3-15bWhen to Use Mediation3-15cDangers of Using Mediation3-15dPreserving Confidentiality3-15eSelecting a Mediator3-16ARBITRATIONThe resolution of a dispute by a neutral third party, usually binding, and created bycontract.3-16aArbitration Process3-16bChoice of ArbitratorGenerally binding andcannot be ‘set aside.’3-16cArbitration ClausesParties should specify whether decision is binding or not binding. Managersshould consider ‘mandatory arbitration.’3-16dJudicial Enforcement of Arbitration Clauses: Federal Arbitration Act(FAA)U.S. Supreme Court has enforcedemployment arbitration clauses, especiallywhen there is consideration from the employer.CASE 3.2American Express Co. v. Italian Colors Restaurant,133 S.Ct.2304 (2013).AmEx and various merchants agreed to submit all claims toarbitration, expressly excluding class-action claims.The merchantssued claiming violation of, among other things, federal antitrustlaws. AmEx moved to compel individual arbitration under the

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