Solution Manual for The Legal Environment of Business, A Managerial Approach: Theory to Practice, 4th Edition

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Chapter 01-Legal FoundationsThe Legal Environment of Business, 4e________________ 1-1Chapter 1: LegalFoundationsCHAPTER OVERVIEWThis introductory chapter begins with a very broad based view of the legallandscape including a working definition of and purposes of the law, levels andsources of law (e.g., federal statutory), anintroduction to stare decisis, andcategories of law (e.g., criminal vs. civil). Equally important, this chapter sets thetone for the entire textbook and course by discussing and provides illustrations ofhow the law operates in abusinesscontext.Teaching Tip: Clean the slateStudents frequently have certain notions and pre-conceptions about the law andlegal terms that were generated primarily (or exclusively) by television, Websites, blogs, and folklore. Ask students to set aside any notions they have aboutwhat law is, howit operates, and the meaning of legal terms, so that they maystart the course with a clean slate.KEY LEARNING OUTCOMESOutcomeAccreditation CategoriesArticulate a working definition of and primarypurposes of the law,and identify sources, levelsand categories of law.KnowledgeExplain the importance of understanding the lawin the context of business decision-making andgives examples how the law impacts business.Application;Critical ThinkingProvide examples of how stare decisis mayimpact business planning.Application;Critical ThinkingTEACHING OUTLINEA.Introduction to LawPoints to emphasize:▪Law is abody of rulesof action or conduct prescribed by controllingauthority, and having legal binding force that create duties, obligations

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Chapter 01-Legal FoundationsThe Legal Environment of Business, 4e________________ 1-2and rights as well as a mechanism to resolve disputes arising fromthose duties and rights.▪Jurisprudence:The philosophybehind the law, including natural law(moral values form the basis for all law), positivists (agreed-upon lawsenforced uniformly and strictly) and legal realism (law is a socialinstitution accounting for social and economic realities to promotefairness).▪Purposes of Law:(1)System of orderthat defines crimes and leviespunishment for violations;(2)system forresolving disputesbyproviding a basis for deciding the legal interests and rights of theparties;(3)creatingreliabilityin business planning and commercialtransactions by promoting good faith dealing among merchants andconsumers.▪Language of the Law:Primarily a combination of Latin, early andmodern English, and French, a basic understanding of which is usefulto maximize the value of interaction between business managers andattorneys.B. Legal Decisions in a Business Environment: Theory to PracticePoints to emphasize:▪Learning to apply legal awareness in practice involvesrecognizingopportunities for proactive business planning, limiting liability,gaining a competitive edge, and adding value to the business.▪Legal Insight and Business Strategy:Reference to Table 1.1:Expansion Options and Potential Legal Impacts▪Role of Counsel:Managers often work closely with businessattorneys, resulting in business opportunities, reduced costs, andlimitation of risk and liability.

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Chapter 01-Legal FoundationsThe Legal Environment of Business, 4e________________ 1-3C. Sourcesand Levels of American LawChalk Talk: Sources and Levels of LawCovering sources and levels of law in tandem makes sense, but students often havetrouble understanding the interplay between the two. I use a diagramon the boardandfill in as I go along asking students for examples of each along the way.ConstitutionalStatutoryAdminCommonFederalFirst AmendmentPatent ActOSHA“gap filler”(political speechby corporations)

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Chapter 01-Legal FoundationsThe Legal Environment of Business, 4e________________ 1-4StateStructureofFormationEnvironmentalContractsstate gov’tof an LLC(regulation offor services.hazardous materials)LocalCharter:ZoningSanitary conditionsN/Alocal gov’t(residentialin restaurantsvs. industrial)Points to emphasize:▪Modern law regulating businesses and individuals is generally acombination of the primary sources of law: constitutional law,statutory law, common law, and administrative (regulatory) law.▪Constitutional Law:Exists at state and federal levels as the supremelaw, providing the foundation for all other law to prescribe the basicstructureand powers of a particular government body and to protectcertainrightsof individuals and business from governmentencroachment.▪Statutory Law:Exists at the state, federal and local levels of law,created by alegislative bodyand approved or disapproved by theexecutive branch.oStatutory Scheme and Legislative History:When interpretingstatutes courts look to the structure of the law itself (statutoryscheme) and to the records kept by the legislature in draftingthe statute (legislative history).oFinding Statutory Law:The official publication of federalstatutory law is in the United States Code and it is arranged bytitle and divided into chapters and sections that form a citation.oGap filling function: See Case 1.2]U.S. v. Ulbricht

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Chapter 01-Legal FoundationsThe Legal Environment of Business, 4e________________ 1-5__________________________________________________________________CASE 1.1: U.S. v. UlbrichtFacts:AfederalGrand Jury indicted Ross Ulbricht, also known as Dread PirateRoberts (Ulbricht), for, among other things, conspiracy to launder moneyobtained from illegal activities. Prosecutors alleged that Ulbricht was engaged innarcotics trafficking, computerhacking, and money laundering conspiracies bydesigning, launching, and administering a website called Silk Road as an onlinemarketplace for illicit goods and services. He allowed payment only via bitcoin,an anonymous and untraceable form of digitalcurrency. Thousands oftransactions allegedly occurred over the course of nearly three years—sellersposted goods when available; and buyers purchased goods when desired.Ulbricht filed a motion to dismissarguingthat he could not be guilty of moneylaundering because the use of bitcoins did not fit into the statute’s requirementthat money laundered be a result of a “financial transaction.”Issue: Does the use of virtual currency such as bit coins fit into the moneylaundering statute requiring that the laundering be the result of a financialtransaction?Ruling:Yes. The plain meaning of the statute indicates that “funds” may bedefined as bitcoins because they are used to pay for certain things or act as amedium of exchange.Answers toCase Questions:1. The heart of Ulbricht’s argument is that the statute doesn’t fit his activities orvirtual currency. His point about IRS’s treatment of bitcoins as property bolstershis argument that bitcoins cannot be squared with the text of statute (funds).2. Perhaps. The court plainly believed that Ulbricht created the silk road primarilyfor illicit activity and therefore he had knowledge that the funds were being“laundered.”3.Critical Thinking:This question is intended to stimulate discussion about theappropriate role of judicial interpretation absent explicit language in the statute.On one hand, if Congress had wanted to include bitcoins as “funds” under thestatute, wouldn’t they have doneit? On the other hand, shouldn’t courts act as agap-filler in cases where the legislature could not have accounted for a particularuse of funds via bitcoins?Teaching Tip: Reading casesThis is the first case featured in the textbook and an ideal time to discuss theimportance of cases in the law. The hybrid format gives students a summary of

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Chapter 01-Legal FoundationsThe Legal Environment of Business, 4e________________ 1-6facts and of the precise holding related to the point in the text. That point isthen reinforced by a short excerpt from the opinion (“Words of the Court”). Thisis also an ideal time to point out the SUR (Scan, Understand, Read) systemfeatured inAppendix A of this chapter: A Business Student’s Guide to Findingand Understanding the Law.▪Common Law:Law made byappellate courtsand is based on thefundamentals of previous cases that had similar facts.oOrigins:Deep-seated in British common law that hasdeveloped over several centuries beginning around 1066.▪Stare Decisis and Precedent:Appellate courts createprecedent andunder the doctrine of stare decisis, lower courts apply the precedent tonew cases with similar facts.oStare Decisis and Business:Stare decisis allows business tohave somedegree of confidencethat the law will remainreasonably consistent. (Reference to Table 1.2:Laws ThatImpact Business [P.13]▪Departing from Precedent: Strict adherence to precedent has asignificant drawback-it does not allow for evolvong societalstandards of behavior or expectations.__________________________________________________________________▪Administrative Law:The source of law that regulates the exercise ofauthority byadministrative agencies.

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Chapter 01-Legal FoundationsThe Legal Environment of Business, 4e________________ 1-7D.Secondary Sources of LawPoints to emphasize:▪Secondary sources function to increase the level of uniformity andfairness across all 50 states, however, they have no independentauthority, nor are they legally binding.▪Uniform Model Laws:Drafted by legal experts, in hopes that they willbe used or adopted by state legislature to provide uniformity in lawsbetween the states (i.e. the U.C.C.).▪Restatements of the Law:Collections of uniform legal principles in aspecific area of law that are designed to reduce the complexity ofjudicial decisions.CASE 1.2 South Dakota v. Wayfair, Inc.Facts:South Dakota taxes the retail sales of goods and services. Sellers arerequired to collect and remit the sales tax to the state, but if they do not, then

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Chapter 01-Legal FoundationsThe Legal Environment of Business, 4e________________ 1-8consumers are reaponsiblefor doing so. UnderNational Bellas Hess, Inc v.Department of Revenue of IllinoisandQuill Corp. v. North Dakota, South Dakotamay not require a business that has no physical presence in the state to collect itssales tax. Because the state was losing sales tax revenue, it passed a law requiringout-of-state retailers to collect and remit the sales tax to the state"as if they had aphysical presence in the State." On appeal, the State supreme court ruled in favorof the retailers citing theQuilldecision.Issue:Are theNational Bellas HessandQuill Corp. cases controlling?Holding:The United States Supreme Court overruled the State supreme courtand found in favor of South Dakota. The Court held that the rule ofQuillrequiring a "physical presence" in the State is unworkable given modetntechnology.Case Questions:1.What wasthe "physical presence" test?2.Why did the Court overruleQuillandNational Bellas Hess?3.Focus on CriticalThinking: What other areas of the law might be affectedby technology in the future?Figure 1.1 : Hierarchy of Primary Sources of Federal and State Law

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Chapter 01-Legal FoundationsThe Legal Environment of Business, 4e________________ 1-9Concept Summary:Sources of LawSelf-Check:What is/are the source(s) and level(s) of law that govern thefollowing business transactions?E. Categories of LawPoints to emphasize:▪Broad categories based on classification related to a particular legalfunction or a right afforded by law are helpful in understanding the“big picture” of our legal system.▪Criminal Law versus Civil Law:Civil laws are designed tocompensate parties for losses as a result of another’s conduct, whilecriminal laws are a protection of society, and the violation of criminallaws results in penalties to the violator such as fines or imprisonment.▪Substantive Law versus Procedural Law:Substantive laws provideindividuals with rights and create certain duties, while procedural lawsprovide a structure and set out rules for pursuing substantive rights.▪Law versus Equity:Where remedy at law is inadequate, an injuredparty may also obtain a remedy at equity.oRemedies at law generally take the form ofmoney damageswhileequitable remediesgenerally include an injunction orrestraining order, and specific performance.See Case 1.4 foran equitable remedyCASE 1.3: Wilcox Investment v. Brad Wooley Auctioneers, et alFacts:Wilcox entered into a contract with Wooley Auctioneers, Inc. to marketand sell approximately 333 acres of real property owned by Wilcox in Arkansas.It was to be an “absolute” auction, meaning that the property would be sold to thehighest bidder regardless of price. As the date of the auction approached, Wilcoxexpressed reservations about the auction to Auctioneers but decided to go

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Chapter 01-Legal FoundationsThe Legal Environment of Business, 4e________________ 1-10through with the auction. Wilcox did not attend but was represented by two of hischildren and his attorney. Shollmier was the highest bidder with a bid of$235,000. Wilcox, who claimed the property was appraised in excessof$950,000, refused to complete the sale.Issue: Is specific performance an appropriate remedy or can money serve as anadequate remedy.Ruling: Shollmier is an innocent, non-breaching party. There was no evidence ofcollusion and Shollmier should be given title to the property as promised in thecontract.Case Questions:1. Money wasn’t adequate because Shollmier contracted for the real estate via hishighest bid. Since Wilcox breached his promise before the transaction wascontemplated, Shollmier isn’t out of pocket, but is entitled to purchase theproperty upon the termsand conditions set forth at the auction.2. Wilcox is alleging that Shollmier conspired with the auctioneers to complete aquick sale at a discounted rate. However, the jury found no evidence of collusion.3.Critical Thinking: This question asks students to think proactively about thelaw. Wilcox could have stipulated that a minimum auction price be paid as acondition of sale. Instead, he agreed to an “absolute auction” where the seller hasvirtually no protection on price.▪Important Equitable Maxims:Intended to be broad statements ofrules that are based on notions offairness and justice in applying thelaw.oEquity Aids the Vigilant:The law favors those who exercisevigilance in pursuing their claims and disfavors those who reston their legal rights by failing to act to protect their rights in areasonable period of time.oSubstance over Form:When applying the law, courts look tothe intent of parties involved and adhere to a standard of goodfaith instead of applying the black letter law in a way thatwould violate fundamental principles of fairness andconsistency.

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Chapter 01-Legal FoundationsThe Legal Environment of Business, 4e________________ 1-11Talking Points:Additional Discussion QuestionsonSubstance over Form1. Has anyone in this class ever been treated unfairly because the letter of law wasapplied over fundamental fairness?2. Has the university/college or any of your professors ever enforced “form oversubstance” which resulted in you being treated unfairly?3. In a business context that is absent of any fraud, should courtshave the right todecidewhat is “fair” in atransaction or contract?oClean Hands Doctrine:Courts are not inclined to decide adispute based ontechnicalitiesthat benefited a party whoacted dishonestly.STRATEGICLEGALSOLUTIONSNote to Instructor: This is a new feature for this edition and incorporates the useof business strategy into the legal environment. It is important for students to readthis overview (and refer back when necessary) which lays out four basic strategiesthat are discussed throughout the text. The end of each chapter features a“Strategy 101” problem and assignment that is related to one or more subjectscovered in that chapter. The examples are intended to connect with businessstudents and to focus on the law as a strategy rather than as a set of rules. For anexcellent discussion of the integration between law and strategy, seeAmericanBusiness Law Journal, Volume 47 (4) [Winter 2010] where the entire periodicalis devoted to the law as a source of strategic advantage. Also, see “Finding the

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Chapter 01-Legal FoundationsThe Legal Environment of Business, 4e________________ 1-12Right Corporate Legal Strategy” a groundbreaking article in MIT’sSloaneManagement Reviewby Professors Robert Bird and David Orozco.Strategy 1: NoncomplianceExample: UPS policy of noncompliance for parking citations. ‘Part of the cost ofdoing business’Issues: Cost-benefit analysis; Ethical considerationsDiscussion: Is it socially responsible to park in a handicapped spot or fire lane?Strategy 2: AvoidanceExample: Pfizer’s “tax inversion merger” with Irish Company Allergan to avoidist U.S. tax burden.Issues: Cost-benefit; Ethical considerations; U.S. tax policy; StakeholdersDiscussion: Are there any cases in which relocating to a more favorableregulatory environment is justified? Can you think of any examples? (e.g., Ubermoving from California to Arizona to test driverless cars).Strategy 3: PreventionExample: Disclaimers in consumer contracts; Limiting liability at Fenway ParkIssues: Consumer awareness/fairness; LoopholesDiscussion: In what ways can counsel work with a business to anticipate potentiallegal pitfalls? (e.g., a labor audit to be sure employees are correctly classified).Strategy 4: Value Creation/Competitive AdvantageExample: Differentiating one’s business model via durable forms of intellectualproperty law. Google co-founders were required to assign their first algorithm toStanford since they developed it while research students there. But subsequentalgorithms aretrade secrets that don’t expire (like patents do). Disney useslobbying to extend copyright protection for Mickey Mouse.Discussion: What other opportunities could business managers use to createvalue? Could data analytics be used to avoid liability for negligence?CHAPTER REVIEW QUESTIONSAnswers and ExplanationsEND OF CHAPTER PROBLEMS, QUESTIONS AND CASESTheory to Practice1. Galaxy’s business objectives will necessarily involve a lease for the store andtherefore contract law will impact business planning. The lease may also begoverned by a landlord-tenant law. Jackson’s plan to hire new employees tostaff the stores will involve aspects of employment and labor law. [Ties toTable 1.1]

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Chapter 01-Legal FoundationsThe Legal Environment of Business, 4e________________ 1-132. Students benefit from understanding that Galaxy will not have in-housecounsel, but will rely on a law firm for advice. In this case, Galaxy’smanagement could work with counsel in understanding various options andbeing proactive in negotiating a favorable lease and implementing acompliance system to ensure proper hiring and employment practices. [Ties tothe “Role of Counsel”]3.Answer based on Table 1.2LawSourceLevelContracts forservices/landPrimarily common lawStateEmploymentdiscriminationPrimarily statutory andadministrativePrimarily state andfederal, some localTaxStatutory andadministrativeFederal, state, localGalaxy liability protection could come in several forms. First, the liability canbe limited through various provisions in the lease. Second, the liability ofGalaxy’s principals may be protected through choosing an appropriatebusiness entity.4. In this case, Galaxy should learn how the IRS has taxed any similartransactions in past. A primary purpose of the law in a business planningcontext isreliability:similar cases, with similar facts, should be treated (inthis case taxed) in a similar way. [Tied to the importance of understandinghow stare decisis and precedent can be used in business planning]5. The equitable maxim of “equity aids the vigilant” may apply to this situation.This maxim favors Jackson/Galaxy in this case because it was Holmes whofailed to pursue his legal rights for such a long period of time. [Tied to“Important Equitable Maxims”]Manager’s ChallengeA sample answer to Manager’s Challenge is provided inConnect.

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Chapter 01-Legal FoundationsThe Legal Environment of Business, 4e________________ 1-14Case Summary 1.1: Equity and Fairness: Sokoloff v. Harriman EstateDevelopment Corp.1. Can Harriman withhold the plans from Sokoloff?A: No. Doing so would clearly breach a duty owed to Sokoloff.2. What legal theories or maxims would a court consider in deciding this case?A: The court would consider the legal theories of equitable relief and/or aremedy at law. The legal maxims that could apply are substance over formand the clean hands doctrine.3. How should the court rule and why?A: The court ruled in favor ofSokoloff and ordered specific performance(deliver the plans).Case Summary 1.2: Statute of Limitations: Jones v.R.R. Donnelley & SonsCo.1. Which statute of limitations governs and why?A: The federal statute of limitations governs because Jones is bringing a suitthat alleges a violation of federal antidiscrimination statues, thus bringingthe claim within federal jurisdiction.2. Will Jones be able to sue Donnelley?A: Yes, assuming that the cause of action is initiated after 1990, the threeyears past is within the four-year statute of limitations.Case Summary 1.3: Clean Hands Doctrine: Day v. Case Credit Corp.1. If the court applies the clean hands doctrine, will Case be able to recover thefarm equipment because Day is unable to make payments? Why or why not?A: No. Courts are not inclined to decide disputes based on technicalities thatbenefited a party who acted dishonestly and here the transaction was abad-faith, fraudulent transaction.2. Are Case’s hands clean? Why or why not?

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Chapter 01-Legal FoundationsThe Legal Environment of Business, 4e________________ 1-15A: No. Case’s hands are stained by bad faith, misrepresentation and deceit intheir awareness of the forgery followed by a failure to act.Case Summary 1.4:Cargill v. Montfort1. If Monfort files suit and the merger is deemed toviolate antitrust laws, whattype of remedy willMonfort want to receive and why?A. Relief in equity because they did not suffer monetary damages.Case Summary 1.5:Arizona v. United States1.Who prevails and why?A.The US won at the appellate level based on federal preemption.2.If a federal law is ineffective, should a state have the right to legislate inthat area without federal intervention?A.Yes, so long as the state law does not frustrate the purpose of thefederal law.Case Summary 1.6:In re: Sedimentation Pollution Act1. How is precedent created, and how is it applied infuture cases?A. By courts of authority starting with the date of the decision.2. When two separate panels of the same court heardifferent cases withsimilarissues, must the secondpanel follow the decision made by the first?A. No. Only courts of authority set precedent. Panels are not bound byeach other’s decisions.3. If precedent has been set by a state appellate panel,who has the power tooverrule that precedent?A. Courts of authority (i.e., appellate courts)

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