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Chapter 16 included basic information regarding Corporations and how they are formed. get further. Even though Chapter 18 is not going to have a quiz or assignments, please read it for further background information.
It is recommended that you use Chrome to access the forms needed. These can usually be filled in online and then printed out. You can then scan them to submit them through Canvas.
In this assignment you will go through the basic steps involved in forming a business corporation (not a benefit corporation or an LLC), including selecting a name and filing the necessary Articles of Incorporation. Remember to keep it small, i.e. 10 shares of stock.
You would normally seek advice from an attorney and a C.P.A. before starting a company to make sure that you took the proper steps.
The assignment is to be uploaded into the Canvas assignment page.
Just click on the button to search your computer, click on the file, and upload. Try to do this as one file, but if not, then separate files. This assignment is due by 11:59 pm on Thursday, August 4, 2022.
Here is the assignment:
Incorporation Project—ALL FORMS MUST BE FILED IN WITH THE DETAIL REQUESTED!!!! CREATE ANY INFORMATION THAT YOU FEEL IS NECESSARY!!!
In this project you are going to create a corporation under the laws of the state of New Hampshire.
Locate the web site for the Secretary of State for New Hampshire. Answer the following questions.What are the eight areas that can be accessed from the home page? Look for the buttons along the top of the opening web page.What are the filing fees for the Articles of Incorporation, application for reserved name, and the application to transfer the reserved name to your new corporation. (these fees can be found in the NH statutes which are linked to the Secretary of State’s web site and also on the web site itself). Fundamentals of Business Law
Fundamentals of
Business Law
MELISSA RANDALL AND
COMMUNITY COLLEGE OF DENVER
STUDENTS
Fundamentals of Business Law by Melissa Randall is licensed under a
Creative Commons Attribution 4.0 International License, except where
otherwise noted.
Fundamentals of Business Law by Melissa Randall and Community
College of Denver Students is licensed under a Creative Commons
Attribution 4.0 International License, except where otherwise noted.
More information about this license may be found at
https://creativecommons.org/licenses/by/4.0.
Contents
Introduction
1
What is an Open Textbook?
1
The Authors and Contributors
2
Feedback Requested
3
1. Introduction to Law and Types of Legal
4
Systems
1.1 Introduction to Law and Types of Legal
4
Systems
1.2 What Is Law and What Functions Does It
6
Serve?
1.3 Modern Legal Systems of the World
8
1.4 Sources of Law
14
1.5 Concluding Thoughts
22
2. The United States Court System
24
2.1 Introduction
24
2.2 Separation of Powers
25
2.3 Federalism
29
2.4 Trial and Appellate Courts
32
2.5 Concluding Thoughts
35
3. Litigation
37
3.1 Introduction
37
3.2 The Parties, Attorneys, and Jury
38
3.3 Standing
42
3.4 Subject Matter and Personal Jurisdiction
42
3.5 Venue
44
3.6 Pretrial Procedures
45
3.7 The Trial and Appeal
52
3.8 Concluding Thoughts
55
4. Alternative Dispute Resolution
56
4.1 Introduction
56
4.2 Negotiation
58
4.3 Mediation
60
4.4 Arbitration
62
4.5 Concluding Thoughts
65
5. The Constitution
66
5.1 Introduction
66
5.2 Federalism and Preemption
67
5.3 The Commerce Clause
75
5.4 Business and the Bill of Rights
76
5.5 Concluding Thoughts
86
6. International Law
89
6.1 Introduction
89
6.2 The Nature of International Law
91
6.3 Sources of International Law
93
6.4 US Laws that Apply to US Nationals
99
Abroad
6.5 Concluding Thoughts
100
7. Administrative Law
101
7.1 Introduction
101
7.2 Creation of Administrative Agencies
102
7.3 Agency Functions
105
7.4 Judicial Review of Agency Actions
109
7.5 Public Access to Agency Information
111
7.6 Concluding Thoughts
113
8. Criminal Law
114
8.1 Introduction
114
8.2 The Nature of Criminal Law
115
8.3 Constitutional Rights and Defenses
122
8.4 Common Business Crimes
129
8.5 Concluding Thoughts
133
9. Torts
134
9.1 Introduction
134
9.2 Intentional Torts
137
9.3 Negligence
145
9.4 Strict Liability
153
9.5 Concluding Thoughts
156
10. Contracts
159
10.1 Introduction
159
10.2 Contract Elements
161
10.3 Types of Contracts
165
10.4 Performance and Breach of Contract
168
10.5 Defenses to Contracts
171
10.6 Assignment, Delegation, and Third Party
177
Beneficiaries
10.7 Parol Evidence Rule
179
10.8 Remedies
179
10.9 Concluding Thoughts
186
11. Sales Contracts
187
11.1 Introduction
187
11.2 Scope of the UCC
188
11.3 Sales Contract Formation
193
11.4 Performance
198
11.5 Warranties
199
11.6 Concluding Thoughts
200
12. Writing Contracts
201
12.1 Writing Contracts
201
12.2 Structure of Contracts
202
12.3 Common Mistakes
211
12.4 Tips for Writing a Contract
213
12.5 Concluding Thoughts
218
13. Employment Law
219
13.1 Introduction
219
13.2 Employment At Will
220
13.3 Common Employment Law Torts
225
13.4 Wage and Hour Laws
225
13.5 Family Medical Leave Act
228
13.6 Occupational Safety and Health Act
229
13.7 Employee Retirement Income Security Act
230
13.8 Workers’ Compensation Laws
231
13.9 Unemployment Compensation
233
13.10 Labor Relations
234
13.11 Concluding Thoughts
242
14. Anti-Discrimination Law
243
14.1 Introduction
243
14.2 The Equal Pay Act of 1963
246
14.3 Title VII of the Civil Rights Act of 1964
248
14.4 Enforcement of Title VII
258
14.5 The Age Discrimination in Employment
261
Act of 1967
14.6 The Americans with Disabilities Act of
262
1990
14.7 Genetic Information Nondiscrimination
265
Act of 2008
14.8 Concluding Thoughts
266
15. Agency
268
15.1 Introduction
268
15.2 The Agency Relationship
269
15.3 Duties of Agents and Principals
273
15.4 Liability to Third Parties
277
15.5 Termination of Agency Relationship
280
15.6 Concluding Thoughts
281
16. Business Organizations
283
16.1 Introduction
283
16.2 Sole Proprietorship
285
16.3 Partnerships
286
16.4 Franchises
289
16.5 Joint Venture
290
16.6 Corporations
292
16.7 Limited Liability Entities
297
16.8 Concluding Thoughts
302
17. Partnerships
303
17.1 Introduction
303
17.2 Types of Partnerships
303
17.3 Partnership Agreements
305
17.4 Rights and Duties of Partners
308
17.5 Termination of a Partnership
311
17.6 Concluding Thoughts
313
18. Corporations
314
18.1 Introduction
314
18.2 Corporate Structure
315
18.3 Shareholder Rights
316
18.4 Corporate Officer and Directors
321
18.5 Legal Theories
324
18.6 Mergers, Consolidations, and Dissolutions
326
18.7 Concluding Thoughts
329
19. Antitrust Law
331
19.1 Introduction
331
19.2 Historical Development
332
19.3 Monopoly
335
19.4 Unreasonable Restraints on Trade
339
19.5 Price Discrimination
345
19.6 Enforcement
349
19.7 Concluding Thoughts
350
20. Consumer Law
351
20.1 Introduction
351
20.2 Protecting the Purchaser
352
20.3 Protecting the Debtor
355
20.4 Enforcement
363
20.5 Concluding Thoughts
364
21. Workplace Privacy and Information Security
365
21.1 Introduction
365
21.2 Right to Privacy
366
21.3 Workplace Privacy
370
21.4 Information Security Issues
380
21.5 Concluding Thoughts
386
22. Property
387
22.1 Introduction
387
22.2 Personal Property
388
22.3 Real Property
393
22.4 Wills and Trusts
404
22.5 Land Use Regulation
408
22.6 Environmental Law
410
22.7 Concluding Thoughts
417
23. Intellectual Property
419
23.1 Introduction
419
23.2 Intellectual Property
420
23.3 Constitutional Roots
423
23.4 Patents
425
23.5 Trade Secrets
431
23.6 Trademarks
432
23.7 Copyright
440
23.8 Concluding Thoughts
444
24. Bankruptcy
445
24.1 Introduction
445
24.2 Types of Bankruptcy
446
24.3 Bankruptcy Proceedings
452
24.4 Concluding Thoughts
456
Introduction
What is an Open Textbook?
Open textbooks are complete textbooks that have been
funded, published, and licensed to be freely used, adapted, and
distributed. As a particular type of Open Educational Resource
(OER), this open textbook may be used and reused freely with
no direct cost to the user.
Unless otherwise noted, all content in this book is licensed
with a Creative Commons Attribution 4.0 license (CC BY 4.0),
which allows it to be adapted, remixed, and shared under the
same license with attribution. Instructors and students may
be interested in rearranging and adapting content or in
transforming content into other formats. If so, please include
the appropriate attribution under the Creative Commons
license. More information about this license is available at
https://creativecommons.org/licenses/by/4.0.
1 | Introduction
The Authors and Contributors
Melissa Randall is an attorney who teaches business law and
Constitutional law at the Community College of Denver.
Frustrated that the expensive textbook her business students
were using contained legal errors, heavily edited case studies
that confused students, and was a roadblock to their learning,
Ms. Randall sought a better option, which ultimately led her
down the OER path. Special thanks to Terence Lau and Lisa
Johnson for their OER textbook “Introduction to Business Law,”
which served as the inspiration for several chapters of this
book.
Ms. Randall’s business law students edited, updated, and
revised the chapters contained in this textbook. They are also
responsible for the visual depictions of the material. Although
Ms. Randall is the subject matter expert who ensured the
accuracy of the material, her students ensured the effective
delivery of the content to undergraduate business students. It
was truly a collaborative effort. Special thanks to Lucy Reyes
and Krissy Main who turned the students’ rough visual
concepts into professional quality graphics.
Thanks also to the Colorado Department of Higher Education
(CDHE) for the grant that partially funded the development of
this book. Without it, we could not have hired Lucy and Krissy
to be our graphic designers. Nor would we have been able to
have written so many chapters so quickly. The CDHE’s support
of OER and open pedagogy validated our classes’ commitment
to doing meaningful work and to contribute to the future of
higher education.
Last, and certainly not least, thanks to the professionals who
contributed their expertise to our book. Judges and attorneys
filled our Counselor’s Corner with practical insights and advice
Introduction | 2
to business professionals. Their insight from “the trenches” was
an invaluable contribution. Subject matter experts peer
reviewed chapters and worked with our students to ensure
accurate information in dynamic areas of the law. Kathy was
our dedicated copy editor who thoroughly proofread anything
we gave her. Special thanks to the professional who was in
the trenches the most: Tom. A successful businessman, Tom
put his MBA to use by tirelessly editing the entire textbook
to ensure that it was consistent and accurate in a business
context. Our professional contributors volunteered their
expertise and gave enthusiastically to our project. Words
cannot express our gratitude for accompanying us on this
journey.
Feedback Requested
The authors seek content-related suggestions from faculty,
students, and users of this book. Please email Ms. Randall at
Melissa.Randall@ccd.edu with any suggestions or feedback
you may have. Also, faculty are invited to contact Ms. Randall to
discuss other OER used in the business law course, including
judicial opinions we use as case studies in lieu of heavily edited
excerpts in textbook dialogue boxes.
This textbook was finalized during the Spring 2020 semester.
With the outbreak of covid-19, our collaborative efforts were
curtailed. As a result, readers may find that some chapters are
better edited than others. Please help us with any constructive
feedback you may have to improve the book.
If you are an instructor reviewing, adopting, or adapting this
textbook, please help us understand how this book is being
used. This helps all of us in the OER community understand our
impact and justify future grant money.
3 | Introduction
1. Introduction to Law
and Types of Legal
Systems
1.1 Introduction to Law and Types of
Legal Systems
LEARNING OBJECTIVES
1. Understand the nature and sources of law.
2. Know the types of modern legal systems in the world.
3. Understand the various functions of a legal system.
4. Learn the primary sources of law in the United States.
It is important for business people to understand the legal
environment in which they are operating. To be successful,
businesses must understand how law and economic principles
influence each other. Businesses want to be successful, which
usually means they want to be profitable. While a basic
economic principle is that businesses act in their own selfinterest, they must do so within the parameters of the law.
Sometimes businesses weigh the penalties of violating the law
against the chances of getting caught to determine how they
should behave. In both instances, the law is a restraint on
behavior.
Most people want to conduct their business legally. Following
the rules saves money, time, and frustration, and it preserves
individual and professional reputations. So, if businesses have
Introduction to Law & Legal
Systems | 4
an incentive to operate legally, why are do so many legal
disputes occur? There are many reasons for this, including that
many of our laws are poorly written, and reasonable people
may disagree about what is “right.” Legal injuries happen even
under the best of circumstances, and parties need a method to
be compensated for their damages.
A common theme in the study of law is responsibility. Law
seeks to answer the questions:
1. Who is responsible, and what is their liability? and
2. How does a business limit exposure to liability in the first
place?
A solid understanding of business law minimizes the risk of
liability and avoids legal disputes. The law provides a
reasonable expectation of how things will be in the future
based on how they have been in the past. It provides
predictability and stability.
This book does not teach how to practice law or conduct legal
research. The goals of this book are practical. Think about
studying business law as a map by which to navigate business
dealings. We want to help you minimize the risk of legal liability
and avoid serious legal disputes. This book serves as an
introduction to legal topics that affect businesses. By
understanding the legal landscape, you will have a better
opportunity for business success.
Counselor’s Corner Even if a business is not officially
“international,” it is important to understand the
legal systems of the world because consumers
come from all over. Consumers, business partners,
5 | Introduction to Law & Legal Systems
and competitors are products of their environments,
including their societies and legal systems.
Therefore, their expectations and how they interact
with each other are influenced directly by their legal
systems of origin. The most successful businesses
take this into account. Not only for avoiding legal
liability, but also for enhanced consumer
satisfaction.
~Arham M.,
attorney
1.2 What Is Law and What Functions
Does It Serve?
Law is the system of rules which a particular nation or
community recognizes as regulating the actions of its
members and which it may enforce by the imposition of
penalties. In a nation, the law can serve to (1) keep the peace,
(2) maintain the status quo, (3) preserve individual rights, (4)
protect minorities, (5) promote social justice, and (6) provide
for orderly social change. Some legal systems serve these
purposes better than others.
Although a nation ruled by an authoritarian government may
keep the peace and maintain the status quo, it may also
oppress
minorities
or
political
opponents
(e.g.,
China,
Zimbabwe, or Syria). Under colonialism, European nations
often imposed peace in nations whose borders were created
by those same European nations. With regard to the functions
of the law, the empires may have kept the peace—largely with
Introduction to Law & Legal Systems | 6
force—but they changed the status quo and seldom promoted
the native peoples’ rights or social justice.
In nations with various ethnic and tribal groups, it is often
difficult for a single, united government to rule effectively. In
Rwanda, for example, power struggles between Hutus and
Tutsis resulted in the genocide of the Tutsi minority. In nations
of the former Soviet Union, the withdrawal of a central power
created power vacuums that were exploited by local leaders.
When
Yugoslavia
broke
up,
the
different
ethnic
groups—Croats, Bosniaks, and Serbs—fought bitterly rather
than share power. In Iraq and Afghanistan, the blending of
different groups of families, tribes, sects, and ethnic groups
into an effective national governing body continues to be a
challenge.
These situations highlight the struggle of a nation to
implement and maintain the Rule of Law. The Rule of Law
is a system in which laws are public knowledge, are clear in
meaning, and apply equally to everyone. These systems uphold
national political and civil liberties. Rule of law systems
establish authority, create expectations for behavior, and
establish redress for grievances and penalties for deviance.
Governance of conflict and the attainment of peace among the
governed are its primary goals. One of the greatest benefits of
the Rule of Law is that it allows people to understand what is
expected of them.
The United States is a Rule of Law System. The US Constitution
is based on the principle that people have rights that cannot
be taken away by the government. Instead, the role of the
government is to protect the individual rights of its citizens. The
US Constitution’s preamble states, “We the People…in Order
to…insure domestic Tranquility.” This is just one example of how
the US legal system was established to address the functions of
a legal system.
7 | Introduction to Law & Legal Systems
1.3 Modern Legal Systems of the
World
There are four main legal systems in the modern world:
1. Common law;
2. Civil law;
3. Religious law; and
4. Customary law/monarchy.
As the world becomes more interdependent, a fifth category of
legal systems has developed — the hybrid legal system, which
is a legal system that is a combination of two or more legal
systems.
Introduction to Law & Legal Systems | 8
Type of
Legal
System
Characteristics
Common
Law
• Written judicial decisions of appellate courts are
binding legal authority on lower courts when
interpreting and applying the same or similar
questions of law
• The legal system is adversarial
• The outcome of a case is often decided by a jury of
the parties’ peers
Civil Law
• All legal rules are in comprehensive legislative
enactments often called Codes
• Written judicial decisions of appellate courts are
not binding legal authority
• The legal system is inquisatorial
Religious
Law
• Religious documents are used as legal sources
• All major world religions have a religious legal
system
• Most nations that have religious legal systems use
them to supplement a secular national system
Customary
Law
• Legal system used by a monarchy or tribe
• Grants specific legal powers to kings, queens,
sultans or tribal leaders as heads of state
• Monarchs and leaders often seen to be “above the
law”
Hybrid
Law
• Combination of 2 or more legal systems within a
nation
Common Law Systems
The legal system in the United States comes from the English
common law tradition and the US Constitution. English
9 | Introduction to Law & Legal Systems
common law is a system that gives written judicial decisions
the force of law. As a result, the US legal system recognizes an
appellate court’s ability to interpret and apply the law to future
litigants through precedent. Precedent is a judicial opinion
that is considered legal authority for future cases involving the
same or similar questions of law. The benefit of this system is
consistency and resolution of disputes without requiring the
parties to take legal matters to court.
A famous example of how precedent works is the US Supreme
Court case Brown v. Board of Education of Topeka. In this
landmark 1954 case, the Justices unanimously ruled that racial
segregation of children in public schools is unconstitutional.
Brown v. Board of Education is one of the cornerstones of
the Civil Rights Movement and helped establish the precedent
that “separate-but-equal” education and other services were
not, in fact, equal at all. The case required all racially segregated
public schools to integrate, not just in Topeka, Kansas. In
addition, Brown has been cited as legal precedent in
thousands of cases nationwide involving racial equality.
The common law legal system is adversarial. This means that
the parties bring their cases to the court for resolution. The
judge or jury hears the parties’ evidence and arguments before
making a final decision. It is the parties’ burden to investigate
the facts, argue the law, and present their best case. Judges
and juries do not do independent investigations nor are they
responsible for helping parties argue their cases. It is a party’s
responsibility to raise all legal issues.
Another characteristic of common law systems is that cases
are often decided by juries of the parties’ peers. In both civil
and criminal matters, the parties usually have a right to have
a jury pulled from local citizens to resolve the dispute. When
a jury determines the outcome of a case, the judge acts as a
“gatekeeper,” who decides what evidence and legal arguments
Introduction to Law & Legal Systems | 10
the jury can properly consider. The judge ensures the parties
receive a fair trial while the jury decides the outcome of the
trial.
The common law tradition is unique to England, the United
States, and former British colonies. Although there are
differences among common law systems (e.g., whether
judiciaries may declare legislative acts unconstitutional and
how frequently juries may be used), all of them recognize the
use of precedent, and none of them relies solely on the
comprehensive, legislative codes that are prevalent in civil law
systems.
Civil Law Systems
Civil law systems were developed in Europe and are based on
Roman and Napoleonic law. Civil law systems are also called
code systems because all the legal rules are in one or more
comprehensive legislative enactments. During Napoleon’s
reign, a comprehensive book of laws—a code—was developed
for all of France. The code covered criminal law and procedure,
non-criminal law and procedure, and commercial law. The
code is used to resolve only cases brought to the courts, which
are usually decided by judges without a jury.
Civil law systems are inquisitorial systems in which judges
actively investigate cases. Judges have the authority to request
documents and testimony, as well as to shape the parties’ legal
claims. In addition, judges are not required to follow the
decisions of other courts in similar cases. The law is in the code,
not in the cases. The legislature, not the courts, is the primary
place to enact and modify laws.
Civil law systems are used throughout Europe, Central and
South America, Asia and Africa. France, Germany, Holland,
11 | Introduction to Law & Legal Systems
Spain, and Portugal had colonies outside of Europe, and many
of these colonies adopted the legal practices that were
imposed on them by colonial rule.
There are also communist and socialist legal systems that differ
significantly from traditional civil law systems. Legal scholars
debate whether this is a separate type of legal system or a
subset of modern civil law systems. In a communist or socialist
legal system, the nation has a code but most property is owned
by the government or agricultural cooperatives. In addition, the
judiciary is subservient to the Communist party and is not an
independent branch of government.
Religious Law Systems
Religious law systems arise from the sacred texts of religious
traditions and usually apply to all aspects of life, including social
and business relations. In religious legal systems, a religious
document is used as a primary legal source. All major world
religions–Judaism,
Christianity,
Islam,
Buddhism
and
Hinduism–have a religious legal system. The Islamic legal
system (Sharia) with Islamic jurisprudence (Fiqh) is the most
widely used religious legal system in the world. Most nations
that have religious legal systems use them to supplement their
secular national system. Only Saudi Arabia (Islamic) and the
Vatican (Christian) are pure theocracies that have only a
religious legal system in their nations.
Customary Law Systems
Customary legal systems are becoming increasingly less
common. A customary system is used by a monarchy and
grants specific legal powers to the kings, queens, sultans or
Introduction to Law & Legal Systems | 12
tribal leaders as heads of state. A challenge of a customary
system is that the ruler is seen to be “above the law” because
the laws do not apply equally to the ruler and subjects. There
are only a handful of monarchies remaining in the world, and
most of them have evolved into hybrid legal systems or have
adopted a different type of legal system.
Hybrid Law Systems
Hybrid legal systems are a combination of two or more legal
systems within a nation. India is a classic example of a nation
with a hybrid legal system. As a former British colony, India has
a common law legal system, which recognizes the power of
the Supreme Court and High Courts to make binding judicial
decisions as a form of precedent. However, most of its laws
are integrated codes found in a Napoleonic code system. In
addition, India has separate personal codes that apply to
Muslims, Christians, and Hindus. As a result, India has a hybrid
system made up of common law, civil law and religious law
systems.
Figure 1.1 Legal Systems of the World Map
13 | Introduction to Law & Legal Systems
1.4 Sources of Law
Where does law come from? How do individuals and
businesses know right from wrong? Not all actions that are
considered “wrong” or inappropriate are violations of the law.
They simply may represent social norms. So what is the
difference? There are two types of rules in our society—social
norms and laws.
Social norms are the informal rules that govern behavior in
groups and societies. Social norms and cultural expectations
may
be
violated
with
negative
social
or
professional
consequences for doing so. However, no legal repercussions
follow violating social norms alone.
Violations of law are different. Violating the law carries
penalties, such as civil liability, fines, or loss of liberty. While it is
optional to conform to social customs, people are compelled to
obey the law under threat of penalty.
Laws are generally classified as public law or private law. Public
law applies to everyone. It is law that has been created by a
legitimate authority with the power to create law, and it applies
to the people within its jurisdiction. In the United States, the
lawmaking authority itself is also subject to those laws, because
no one is “above” the law. If the law is violated, penalties may
be levied against violators. Examples of public law include
constitutions, criminal laws, and administrative laws. For
example, if someone steals items from a store, the thief is
violating public law. He committed the crime of theft which
affects the community as a whole (not just the store owners),
and the crime is defined in public legislation.
Private law is law that is binding on specific parties. For
instance, parties to a contract are involved in a private law
agreement. The terms of the contract apply to the parties of
Introduction to Law & Legal Systems | 14
the contract but not anyone else. If the parties have a contract
dispute, the terms of the contract and the remedy for breach
will apply only to the parties of the contract. In addition to
contracts, other examples of private law include tort and
property laws. For example, if someone installs an industrial
smoker on his property and the smoke creates a dense haze
in the neighbor’s yard, there may be a violation of private law
because the smoke is interfering with the neighbor’s right to
peacefully enjoy one’s property.
Laws are also classified as civil or criminal. Civil law is usually
brought by a private party against another private party. For
example, one company decides to sue another for breach of
contract. Or a customer sues a business when injured by the
company’s product. Most laws affecting businesses are civil.
Criminal law involves a governmental decision to prosecute
someone for violating a criminal statute. If someone breaks a
criminal law, he or she could lose their freedom (i.e. be sent to
prison) or lose their life (i.e. if convicted of a capital offense). In
a civil action, no one is sent to prison. Usually, liability results in
the loss of property such as money or assets.
Civil
Criminal
Source of
Law
statute or common law
statutes defining crimes
Who files
case?
business or individual
suffering harm
the government (e.g.
District Attorney)
Burden of
Proof
preponderance of
evidence
beyond a reasonable doubt
Remedy
damages, injunction,
specific performance
punishment (e.g. fine or
imprisonment)
Purpose
provide compensation
or private relief
protect society
Additionally, some law is procedural and some law is
substantive. Procedural law describes the legal process and
15 | Introduction to Law & Legal Systems
rules that are required and must be followed. For instance,
parties who are sued in court must receive notice of the lawsuit
before the court can impose judgment against them.
Substantive law refers to the actual substance of the law or the
merits of the claim, case, or action. Substantive law embodies
the ideas of legal rights and duties and is captured by different
sources of law, including the Constitution, statutes, and
common law.
For example, if someone drives fifty-five miles per hour in a
forty mile-per-hour zone, she has broken the substantive rule
of law of the speed limit. However, how and what gets decided
in court related to the speeding ticket is a matter of procedural
law. For example, whether the driver is entitled to a hearing
before a judge, whether she has a right to be represented by
legal counsel, whether the hearing takes place within a certain
amount of time after the ticket was issued, and what type of
evidence can be presented are procedural law issues.
Sources of Law
In the United States, our laws come primarily from:
• Federal and state constitutions;
• Statutory law from Congress, the state legislatures, and
local legislative bodies;
• Common law from federal and state appellate courts;
• Administrative rules and regulations;
• Treaties and conventions; and
• Executive orders.
Introduction to Law & Legal Systems | 16
Constitutions
The most fundamental law in the United States is the US
Constitution, which is the supreme law of the nation. Any law
that conflicts with it is void. The Constitution serves three
important functions. First, it establishes the structure of our
national government and identifies the powers of the
legislative, executive, and judicial branches. Second, it defines
the boundaries of each branch’s authority and creates “checks”
on each branch by the other branches. For example, the
president is the commander-in-chief of the armed forces, but
does not have the power to declare war. That duty falls to
Congress. And, third, the Constitution guarantees civil liberties
and individual rights.
The power granted to the federal government by the
Constitution is limited. Any powers not expressly granted to
the federal government by the Constitution are reserved to
the states. This means that if the Constitution does not give
the federal government power over a particular area, then the
states regulate it.
The first ten amendments to the Constitution are known as the
Bill of Rights. Despite the limited power granted to the federal
government by the Constitution, the Bill of Rights protects
certain individual civil rights and liberties from governmental
interference. These rights include the freedom of speech and
religion, the right to bear arms, and the rights of individuals
who are suspected and accused of crimes.
Figure 1.2 Separation of Powers of the Federal Government
17 | Introduction to Law & Legal Systems
Each state also has its own constitution, which serves
essentially the same function for the state government as the
US Constitution serves for the federal government. Specifically,
they establish limits of state government power, establish the
organization
and
duties
of
the
different
branches
of
government at the state level, and protect fundamental rights
of state citizens. This dual system of government in the United
States is called federalism, which is a governance structure
whereby the federal government and the state governments
coexist through a shared power scheme.
Figure 1.3 Separation of Powers of the State Governments
Introduction to Law & Legal Systems | 18
Statutes
Statutes are laws created by a legislative body. Congress is
the federal legislative body, and each state also has its own
legislative body. Almost all statutes are created by the same
method. An idea for a new law is proposed in the legislature.
This proposal is called a bill. The House of Representatives and
Senate independently vote on a bill. If the majority of both
chambers approves it, the bill is sent to the president or
governor for approval. If the president or governor signs the bill,
then it becomes a statute.
Local governments, such as counties, cities, and townships,
may be authorized under a state constitution to create or adopt
ordinances. An ordinance is a legislative act of a local
19 | Introduction to Law & Legal Systems
government entity. Examples of ordinances include building
codes, zoning laws, and misdemeanors such as jaywalking.
Common Law
Binding legal principles also come from the courts. When
appellate courts decide a case, they may interpret and apply
legal principles in a way that are binding on lower courts in the
future. The process of applying a prior appellate decision to a
case is called precedent. Simply put, precedent is when judges
use past decisions to guide them. The benefit of precedent is
that it makes the law predictable and furthers the rule of law
by applying legal principles to the greater community, not just
the parties to a lawsuit. Businesses value common law systems
because they reduce the cost of business. For example, if a
business is unsure of how its contract rights will be applied by
the court, it can understand its rights by learning how courts
interpreted similar contract provisions in past lawsuits. This
allows businesses to assess their risks, determine their liability,
and make rational business decisions without the expense of
litigation.
Administrative Rules and Regulations
Administrative law is the collection of rules and decisions
made by agencies to fill in particular details missing from
constitutions and statutes. For example, the Internal Revenue
Service (IRS) is the federal agency responsible for collecting
national taxes and administering the Internal Revenue Code
enacted by Congress. All businesses and individuals must
follow the IRS rules and regulations about how to report, file,
and pay applicable taxes that Congress levies. Congress passes
Introduction to Law & Legal Systems | 20
statute defining “what” taxes need to be paid. The IRS adopts
the rules about “how” those taxes are paid.
In the United States, many of the day-to-day regulation of
businesses is done by administrative agencies. These agencies
are created by the legislature to implement and enforce a
particular statute. Agencies often report to the executive
branch, but some are run by independent commissions.
Legislative bodies give agencies the power to create rules and
regulations that individuals and businesses must follow to
comply with the statute. For example, the Environmental
Protection Agency (EPA) was created to implement and
enforce the Clean Air Act and the Clean Water Act.
Treaties and Conventions
A treaty is a binding agreement between two nations. A
convention is a binding agreement among a group of nations.
In the US, a treaty or convention is generally negotiated by the
executive branch. To be binding, the US Constitution requires
the Senate to ratify treaties by a two-thirds vote. Once ratified,
a treaty becomes part of federal law with the same weight and
effect as a statute passed by the entire Congress. Therefore,
treaties and conventions have equal standing as statutes in US
law.
Executive Orders
Article II, Section 1 of the US Constitution gives the president
the power to “take care that the laws be faithfully executed.”
Under this power, the president may issue executive orders
requiring officials in the executive branch to perform their
duties in a particular manner. State governors have the same
21 | Introduction to Law & Legal Systems
authority under state constitutions. Although they are not laws
that apply directly to individuals and businesses, executive
orders are important legal documents because they direct the
government’s enforcement efforts.
Hierarchy of Sources of Law
Priority
Source
Comment
1
Constitutions
Exist at both federal and state levels
2 (tie)
Statutes
Laws passed by the federal or state
legislatures
2 (tie)
Treaties and
Conventions
International agreements that have the
same standing as statutes
4
Judicial
Opinions
Court interpretation and application of
constitutions, statutes, treaties, agency
regulations, and executive orders
5
Agency
Regulations
Rules and regulations adopted by
administrative agencies at the federal,
state, or local level
6
Executive
Orders
Guidance from the president or
governor to executive branch officials
about how to perform their duty
1.5 Concluding Thoughts
Understanding business law is essential to successfully
running any type of business because a solid understanding
of laws and regulations helps avoid liability and minimizes risk.
In business, it is not enough to conduct business ethically.
Knowledge of business law is essential to successful business
practices. Ultimately, business people should be able to
recognize legal issues, minimize liability exposure, and know
when to consult an attorney.
Legal systems vary widely in their aims and in the way they
Introduction to Law & Legal Systems | 22
resolve disputes. Common law systems are adversarial, use
juries and adhere to precedent. Civil law systems are
inquisatorial, do not use juries and do not recognize precedent.
All major world religions have a legal system, although only two
nations have a purely national religious system. Many nations
have hybrid legal systems that combine two or more legal
systems.
The legal system in the United States is composed of multiple
jurisdictions at the local, state and federal levels. Local and state
laws may not conflict with federal laws. Primary sources of law
in the United States include constitutional law, statutory law,
common law, administrative law, treaties, and executive orders.
23 | Introduction to Law & Legal Systems
2. The United States
Court System
2.1 Introduction
LEARNING OBJECTIVES
1. Understand the US court system and how it affects the
conduct of businesses.
2. Understand the three branches of government and how
they check and balance each other’s powers.
3. Explore the state and federal court systems.
In the United States, law and government are interdependent.
The US Constitution establishes the basic framework of the
federal government and imposes certain limitations on the
powers of government. In turn, the various branches of
government are intimately involved in making, enforcing, and
interpreting the law. Most law comes from Congress and the
state legislatures. Courts interpret the laws and apply them to
cases.
Laws are meaningless if they are not enforced. Companies have
to make many decisions daily, from product development to
marketing to maintaining growth. These decisions are based
on financial considerations and legal requirements. If a
company violates a law, it is often held accountable through
litigation in courts.
The United States Court
System | 24
Counselor’s Corner Under the Supreme
Court’s Citizens United decision, business entities
enjoy the same right as natural persons to influence
the political process through contributions.
Because federal judges are appointed for life,
businesses cannot directly influence actions of the
judicial branch. However, they can do so indirectly
by lobbying Congress on laws that it considers and
lobbying the president concerning enforcement
priorities. While all states have a comparable threebranch system, in some states (not in Colorado),
judges obtain office through partisan elections. In
such states, businesses can seek to influence the
judicial branch through supporting judges whose
philosophy favors business generally or a particular
industry. For these reasons, in choosing whether to
litigate in state or federal court, businesses should
consider that federal judges may be more likely to
take politically unpopular actions.
~John W., judge
2.2 Separation of Powers
Under the US Constitution, power is separated among three
branches of government. Article I of the Constitution allocates
the legislative power to Congress, which is composed of the
House of Representatives and the Senate. Congress makes
laws and represents the will of the people. Article II of the
Constitution creates the executive power in the president and
makes the president responsible for enforcing the laws passed
by Congress. Article III of the Constitution establishes a
25 | The United States Court System
separate and independent judiciary, which is in charge of
applying and interpreting the meaning of the law. The US
Supreme Court is the highest court in the federal judiciary and
consists of nine Justices.
Figure 2.1 Separation of Powers of the Branches of the Federal
Government
The Constitution is remarkably short in describing the judicial
branch.
Under
the
Constitution,
there
are
only
two
requirements to becoming a federal judge: nomination by the
president and confirmation by the Senate. Article III provides:
“The judicial power of the United States, shall be vested in one
Supreme Court, and in such inferior courts as the Congress
may from time to time ordain and establish.” The Constitution
also guarantees that how judges decide cases does not affect
The United States Court System | 26
their jobs because they have lifetime tenure and a salary that
cannot be reduced.
Separation of powers is discussed in more detail in Chapter 5.
Marbury v. Madison
In 1800, the presidential election between John Adams and
Thomas Jefferson nearly tore the nation apart. John Adams
was the President and his Vice-President, Thomas Jefferson,
ran against him. They were both Founding Fathers but were
members of different political parties that had opposing
visions for the future of the new nation. The election was bitter,
partisan, and divisive. Jefferson won but wasn’t declared the
winner until early in 1801. In the meantime, Adams and other
Federalists in Congress attempted to leave their mark on
government by creating a slate of new life-tenured judgeships
and appointing Federalists to those positions. For the
judgeships to become effective, official commissions had to
be delivered in person to the new judges. At the time power
transitioned from Adams to Jefferson, several commissions
had not been delivered, and Jefferson ordered his acting
secretary of state to stop delivering them. When Jefferson
came to power, there was not a single federal judge from his
Democratic-Republican Party, and he refused to expand the
Federalist influence any further.
One Federalist judge, William Marbury, sued Secretary of State
James Madison to deliver his commission. The case was filed
in the Supreme Court, led by Chief Justice John Marshall, who
was also a Federalist. In a shrewd move, Marshall ruled against
Marbury while declaring that it was the Supreme Court’s role
to decide the meaning of the Constitution. This is called judicial
review, and it makes the US Supreme Court an equal branch
of government to the Executive and Legislative branches.
Because President Jefferson won the case, he was willing to
27 | The United States Court System
accept the Supreme Court’s assertion of power as an equal
branch of government.
Checks and Balances
The US Constitution establishes the three branches of the
federal government as independent branches with their own
authority. The Founding Fathers were fearful of setting up an
authoritarian regime, where the rulers of the government are
above the law and often rule arbitrarily. Therefore, the
Founding Fathers ensured that each branch of government
had a “check” on the other two branches in order to “balance”
the power of the government among the branches. Therefore,
if a president decided to become a dictator, the other two
branches could prevent him.
Figure 2.2 Checks and Balances of the Federal Government
Judicial review means that any federal court can hold any act
The United States Court System | 28
of the president or Congress to be unconstitutional. This is the
power of the Judicial Branch to ensure that the Executive and
Legislative branches do not overstep their powers and violate
the Constitution.
The other branches each have a “check” on the judiciary. For
example, the president (Executive branch) can control the
judiciary by nominating judges. The president can also pardon
those convicted by a federal court. A pardon is an executive
order vacating a criminal sentence for a crime.
Congress also plays an important role in “checking” the
judiciary. The most obvious role is in confirming judicial
selections. In addition to confirmation, Congress also controls
the judiciary through its annual budgetary process. Although
the Constitution protects judicial salaries from any reductions,
Congress is not obligated to grant any raises. Finally, Congress
can control the judiciary by determining how the courts are
organized and what kind of cases the courts can hear, except
for the types of cases the Constitution lists as the original
jurisdiction of the Supreme Court.
2.3 Federalism
There are fifty-six separate legal systems in the United States:
those of the fifty states, the federal government, the District
of Columbia, the military, and three territorial systems. Within
each legal system is a complex interplay among executive,
legislative, and judicial branches of government. This division
of authority between a central, federal government and state
governments is known as federalism.
In the United States, the federal government only has the
authority given to it by the states via the US Constitution. If
29 | The United States Court System
a power is not granted to the federal government, the states
retain the power. For example, the federal government cannot
tax the exchange of goods between states as “exports.” The
Constitution limits the power of the federal government, and
the
state
constitutions
limit
the
power
of
the
state
governments.
Figure 2.3 Federalism Between Federal and State Governments
Federalism is discussed in more detail in Chapter 5.
Jurisdiction
The authority of a court to hear a particular type of case is
called jurisdiction. State and federal courts hear different types
of cases, involving different laws, different law enforcement
agencies, and different judicial systems. The rules governing
the procedures used in these courts are known as civil
procedure or criminal procedure.
The United States Court System | 30
The rules of subject matter jurisdiction dictate whether a case
is heard in federal or state court. The vast majority of civil
lawsuits are filed in state courts, including lawsuits involving
state laws such as property, contracts, probate law, and torts.
State laws also involve most criminal cases, and domestic
issues such as divorce and child custody. Torts are any civil
wrong other than a breach of contract and include a variety of
situations in which people and businesses suffer legal injury.
Some states are friendlier toward torts than others, and the
resulting patchwork of tort laws means that companies that
do business across the nation need to know the different
standards they are held to based on the state their customers
live in.
Given the wide array of subject areas regulated by state law,
most businesses deal with state courts. Federal court subject
matter jurisdiction is generally limited to federal question
jurisdiction. In other words, federal courts hear cases involving
the Constitution or a federal law. Cases involving the
interpretation of treaties to which the United States is a party
are also subject to federal court jurisdiction. Finally, lawsuits
between states can be filed directly in the US Supreme Court.
Sometimes a federal court may hear a case involving state law.
These cases are called diversity jurisdiction cases, and they
arise when all plaintiffs in a civil case are from different states
than all defendants, and the amount claimed by the plaintiffs
exceeds seventy-five thousand dollars. For example, a citizen
of New Jersey may sue a citizen of New York over a contract
dispute in federal court. But if both were citizens of New York,
the plaintiff would be limited to the state court of New York.
Diversity jurisdiction cases allow one party who feels it may
not receive a fair trial where its opponent has a “home court
advantage” to seek a neutral forum to try the case.
31 | The United States Court System
Type of
Jurisdiction
Description
Minimum
Dollar
Requirement
Applicable
Law
Federal
Question
Cases involving
the US
Constitution,
treaties, or
federal laws &
regulations
None
Federal law
Diversity of
Citizenship
Cases brought
between
citizens of
different states
$75,000
State law
2.4 Trial and Appellate Courts
Within the federal court and the state court systems, there are
a hierarchy of courts. The first level of court is a trial court or
a court of limited jurisdiction such as traffic court and small
claims court. Trial courts accept evidence and testimony to
determine what happened in a case. Appellate courts review
the decisions of the trial court, without holding a new trial, to
determine whether the parties received a fair trial and whether
the appropriate law was applied.
Figure 2.4 Court System Hierarchy
The United States Court System | 32
In the federal court system, cases are filed in the US District
Court. There are ninety-four judicial districts in the nation,
which are named for their geographical location. However,
some states with low population have only one judicial district,
while more populous states have multiple judicial districts. The
US Department of Justice, which acts as the prosecutor
representing the federal government in both civil and criminal
cases, divides its attorneys among the ninety-four judicial
districts.
As a trial court, the US District Courts hear both civil and
criminal cases. At trial, witnesses are called and their
testimonies are recorded into a trial record. The losing party is
entitled to appeal the case to the US Circuit Court of Appeals.
There are thirteen circuit courts in the United States. A party
losing an appeal at the circuit court level may ask the US
Supreme Court to hear its case. However, the Constitution only
requires the Supreme Court to hear a few types of appeals.
Figure 2.5 Map of Federal Circuit Courts
33 | The United States Court System
In the state court system, a trial court of general jurisdiction
accepts most types of civil and criminal cases. These courts are
called various names such as superior court, circuit court, or
district court. There may be other courts of limited jurisdiction
at the state level, such as traffic court, family court, or small
claims court. Like their federal counterparts, state trial courts
hold trials, and preserve a trial record for review by an appellate
court. Finally, in certain state cases that involve a federal
constitutional right, a party that loses at the state supreme
court level can appeal to the US Supreme Court. These cases
typically involve the application of the Constitution to criminal
procedure, evidence collection, or punishment.
Whenever an appeal is filed, the trial record is forwarded to
the appellate court for review. Appellate courts do not conduct
new trials and are unable to recall witnesses or call new
witnesses. The trial court’s duty is to figure out the facts of the
case—who did what, when, why, or how. This process of factfinding is an important part of the judicial process, and a great
deal of deference is placed on the judgment of the fact finder,
which is usually the jury. The issues on appeal are therefore
limited to questions of law or legal errors. The deference to the
The United States Court System | 34
fact finder means that, as a practical matter, appeals are hard
to win.
Figure 2.6 Roles of Trial and Appellate Courts
2.5 Concluding Thoughts
The US Constitution establishes the three branches of the
federal government and gives them the ability to check each
other’s authority. The Judicial branch oversees the actions of
the Executive and Legislative branches through judicial review
to ensure that they do not violate the Constitution. While not
perfect, the US federalist system was designed to restrain
governmental power and to prevent the rise of an authoritarian
regime.
35 | The United States Court System
The Judicial Branch is the only unelected branch of
government. Marbury v. Madison established the doctrine of
judicial review, which allows courts to determine the final
validity of laws as well as the meaning of the Constitution. The
president can check the judiciary through appointments and
the pardon power. Congress can check the judiciary through
confirming judges, administrative control of court calendars
and funds, and legislation about the types of cases a court can
hear.
There are fifty-six separate legal systems in the United States.
Subject matter jurisdiction is the authority of a court to hear
a case based on the type of dispute. State law claims are
generally heard in state courts, while federal question cases
are generally heard in federal court. Federal courts may hear
state law claims under diversity jurisdiction. Federal cases are
filed in a US District Court and appealed to a US Circuit Court
of Appeals. State cases are typically filed in a trial court and
appealed to an intermediate court of appeals.
The United States Court System | 36
3. Litigation
3.1 Introduction
LEARNING OBJECTIVES
1. Identify the parties involved in litigation.
2. Explore the responsibilities of attorneys.
3. Understand the roles and types of juries.
4. Explore the standing requirement.
5. Follow a trial from opening statements to closing
arguments.
Litigation provides an opportunity for each side in a dispute to
tell their story to an impartial jury or judge to decide who wins.
Business professionals have a responsibility to their company
and stakeholders to avoid legal liability. Acting ethically helps
achieve this goal. Agreeing to mediation or arbitration may
help businesses avoid court. However, litigation may be the
only dispute-resolution mechanism available or the one that is
best for the situation.
Counselor’s Corner Litigation is like any other
business effort: you are trying to get someone to see
things your way. The best way to do that is to be
likable and persuasive to the judge, other lawyers,
and the jury. Construct your theory of the case early
on. Meet your deadlines. Maintain a strict ethical
37 | Litigation
standard in your professional life. Work hard to
explore both sides of the case, and develop a short
and compelling statement about why your side
should prevail. If you do all that, you will make it easy
for others to want to find in your favor. Why does
this work? Because as humans, we want good to
prevail. Be good.
~Valerie M., magistrate
3.2 The Parties, Attorneys, and Jury
The Parties
The litigation system relies on parties to bring forth and defend
their respective claims. The party that begins a civil lawsuit is
called the plaintiff. The plaintiff sues the defendant to recover
damages for, or to stop, a legal wrong. In a criminal trial, the
party that initiates litigation is the prosecution, representing
the people within a state or federal government. In a criminal
trial the accused wrongdoer is also called the defendant.
Cases may involve multiple plaintiffs and multiple defendants.
Civil procedure encourages parties to bring their complaints
against each other at once. All parties, and every possible claim
(each claim is a separate violation of law) arising out of a single
incident or series of related incidents, should be identified and
raised in a lawsuit.
Except in some small-claims courts, parties may hire attorneys
to represent them. Individuals who represent themselves are
called pro se litigants. The complexities of litigation require
Litigation | 38
knowledge and objectivity to succeed. Courts hold pro se
litigants to the same standards as they do attorneys. Therefore,
a pro se litigant is expected to understand and follow all the
rules of the court and applicable laws.
Attorneys
In the United States, law school is a graduate-level program
that usually takes three years to complete. Law school
graduates earn a Juris Doctorate degree, or JD. Graduates then
take the bar exam in the state where they wish to practice. If
they pass the exam and background check, they can apply to
be licensed in that state. Because the practice of law in the
United States varies widely by jurisdiction, attorneys are only
permitted to practice in jurisdictions where they are licensed.
Attorneys are bound by a professional code of ethics that is
overseen by the supreme court of the state where they are
licensed. One of the most important rules of professional
responsibility is the obligation to keep a client’s secrets. The
communications between a client and his or her attorney are
absolutely confidential under the attorney-client privilege
doctrine. The privilege belongs to the client, and the attorney is
not permitted to reveal any of these communications without
the client’s consent. A narrow exception exists for clients who
tell their attorneys they intend to harm others or themselves.
Attorneys must avoid violating the privilege because it exists
for the client’s benefit. Someone who cannot communicate
with his or her attorney freely is unable to help the attorney
prepare the best possible case.
In spite of an attorney’s professional obligations to his or her
client, it’s important to remember that ultimately an attorney’s
first duty is to the administration of justice. The requirements
39 | Litigation
for attorneys to be civil, honest, and fair are written to ensure
that attorneys represent the very best aspects of the judicial
system. For example, a client admits to his attorney that he is
guilty of a crime. The client then wants to testify under oath
that he is innocent. Although an attorney cannot reveal what
her client has told her, the attorney is prohibited from
knowingly suborning perjury. The attorney must either
convince the client to not testify or withdraw from the case.
An attorney owes her client zealous advocacy, but her zeal
must be constrained within the bounds placed on her as an
officer of the Court and under the Court’s rules. Attorneys
cannot assert legal claims or arguments that are not wellfounded under existing law or through the modification or
expansion of law. Attorneys are also prohibited from using the
courts for a purpose unrelated to the resolution of a legitimate
legal cause of action.
The Jury
In the US legal system, the jury has a very special role of citizen
participation in the administration of justice. As the trier of fact,
the jury has the duty of determining the truth in any given
situation: who said and did what, why, and when. The litigation
system is a process in which each side gets to present its case
to a group of unbiased citizens, and then ask them to decide
who wins the case.
There are two types of juries. A grand jury is a group of citizens
convened by the prosecution in serious criminal cases to
determine (1) whether probable cause exists to believe that a
crime has occurred, and (2) whether it’s more likely than not
that the defendant committed the crime. If the grand jury
decides probable cause exists, then the government may bring
Litigation | 40
criminal charges against the defendant. The grand jury
prevents prosecutors from abusing their powers of arrest and
indictment. The grand jury requirement exists at the federal
level and in most states. A grand jury typically meets for an
extended period of time and hears several different cases.
The grand jury does not determine guilt or innocence. A petit
jury does that. This jury is impaneled for a specific trial. During
the trial, members of the jury listen to the evidence presented
and then deliberate as a group on the facts of the case. They
then apply the law, as instructed by the judge, to the facts.
There are typically twelve members in a petit jury in criminal
trials and from six to twelve members in civil trials. In a criminal
trial, a jury must arrive at a unanimous verdict to convict a
defendant of the crimes charged.
The jury system is incredibly important because ordinary
citizens adjudicate all sorts of disputes. There are problems
with administering this system, however.
Both grand and petit juries are drawn from citizen voter and
driver license rolls. In high-profile cases, it may be difficult to
find citizens who have not heard about the case or who can be
impartial. Another problem arises from the burdens placed on
jurors’ personal lives through their service. While most states
have laws that prevent an employer from firing a worker or
taking any negative action against workers on jury duty, there
is no legal requirement that an employer continue to pay a
worker on jury duty. Some citizens, such as those who are selfemployed, risk losing personal income by serving on juries.
Another potential problem arises in the composition of the jury.
To provide a fair jury, courts attempt to draw from a crosssection of society to reflect the diversity of the surrounding
community. Local court rules typically allow judges to excuse
potential jurors for hardship or extreme inconvenience. The
only professions that are automatically exempt are active-duty
41 | Litigation
military members, police officers, firefighters, and public
officers. In spite of these administrative problems, the jury
system remains a cornerstone of the US legal system.
3.3 Standing
Standing is a constitutional requirement. Article III of the US
Constitution grants the judiciary the power to hear “cases” and
“controversies.” This means actual cases and controversies, not
merely hypothetical ones. The standing requirement means
that courts are unable to give advisory opinions. Standing is a
doctrine that limits judicial overreach by limiting the types of
cases that are litigated in court.
To demonstrate standing, a party has to prove that it has an
actual case to proceed. This is a procedural matter, and it
requires the case to be brought at the right time. If a case is
brought too early, it is not yet ripe. If it’s brought too late, then
the case is moot.
The case also has to be brought by the right person. To show
standing, a plaintiff has to demonstrate that he or she has an
actual stake in the litigation, or something of value that would
be lost if he or she loses the case. It’s important to note that
standing is not related to the merits of the case. It only means
that a party may proceed with litigation.
3.4 Subject Matter and Personal
Jurisdiction
In order to hear a case, courts must have subject matter
jurisdiction over the type of dispute and personal jurisdiction
Litigation | 42
over the parties. As discussed in Chapter 2, subject matter
jurisdiction is the legal authority to hear and decide a case or
controversy. The court must dismiss a case if it lacks either form
of jurisdiction.
Personal jurisdiction is the power of the court to compel the
parties to appear in court. Personal jurisdiction requires
litigants to have some form of minimum contacts with the
state where the case is filed. Personal jurisdiction seeks to avoid
inconvenient litigation, even if the case has merit.
A court obtains personal jurisdiction over the plaintiff when the
plaintiff files a lawsuit. The court obtains personal jurisdiction
over a defendant when he or she is served with process or
waives service.
Obtaining personal jurisdiction over the defendant requires
some connection between the defendant and the state where
the court is located. Businesses that incorporate, have a
physical location, or do business in a state create personal
jurisdiction through their actions within the state. Owning
property in a state also creates personal jurisdiction.
Personal
jurisdiction,
like
standing,
is
a
constitutional
requirement. Most states have long-arm statutes that set forth
the procedure by which out-of-state defendants can be
required to appear before a court. The statutes provide for how
service of process occurs. Service of process is the process
by which a defendant is notified that it is being sued. Service
of process typically requires a copy of the notice to appear
before a court to be personally delivered to the defendant or
the defendant’s agent. In the case of businesses, service of
process is usually delivering a copy of the notice to appear to
their registered agent. Service can be more challenging with
individuals.
43 | Litigation
Basis of
Personal
Jurisdiction
Description
Consent
• A business or individual agrees to the
jurisdiction of the court
Residence
• A business or individual resides in the state
Service of
Process
• The defendant is served a summons and
complaint within the state
Long-arm
Statute
• A resident business or individual was
involved in an incident in another state; or
• A non-resident business or individual was
involved in an incident within the state
3.5 Venue
Venue is the proper geographic location of the court to hear a
case because the place has some connection with the events
that give rise to the lawsuit. While multiple courts may have
subject matter and personal jurisdiction over a dispute, only a
few may be the proper venue. For example, by doing business
in Colorado a company is subject to the jurisdiction of Colorado
courts. However, the court in the county where the plaintiff was
injured or where the business maintains an office would be the
proper court to hear the dispute.
Litigation | 44
3.6 Pretrial Procedures
Figure 3.1 Litigation Flowchart
Pleadings
In civil cases, litigation begins with the filing of a complaint by
the plaintiff. The complaint is a legal document setting forth
who the parties are, the facts of the case, and what laws the
plaintiff claims defendant has violated. The complaint ends
with a prayer for relief. The plaintiff may be seeking damages
(money), specific performance in certain types of contract
cases, or an injunction.
The complaint is filed with the clerk of the court where the
lawsuit is to be heard. The clerk will issue a summons, which is
45 | Litigation
an official notice that a lawsuit has been filed with the court
and summons the defendant(s) to court to defend against it.
To be effective, the defendant(s) must be served the summons
and a copy of the complaint.
In certain types of cases, there may be a large number of
plaintiffs injured by a defendant’s actions. This may happen
in a product liability lawsuit where a product is purchased by
many thousands of consumers, all of whom experience the
same product failure. In these cases, several lead plaintiffs may
attempt to form a class in a class action lawsuit against the
defendant(s). Under federal civil procedure rules, class actions
may be granted when:
1. There are so many plaintiffs that
2. It is impractical for them to file separate lawsuits;
3. There are questions of law or fact that are common to
members of the class; and
4. The lead plaintiffs will fairly and adequately protect the
interests of the class.
The defendant must file an answer to the complaint within a
specified period of time, usually thirty days. The answer is a
paragraph-by-paragraph response to the complaint, admitting
certain allegations and denying others. The answer may admit,
for example, noncontroversial claims by the plaintiff such as the
defendant’s name, address, and the nature of the defendant’s
relationship with the plaintiff. Each time the defendant denies
a plaintiff’s claim in the complaint, that sets up a controversy or
argument that must be litigated. The answer may also contain
any affirmative defenses and counterclaims the defendant
wishes to pursue. Taken together, the complaint and answer
are known as the pleadings.
Litigation | 46
Discovery
After pleadings are filed, litigation moves into the discovery
phase. Discovery is a process in which each side finds out
information about the other’s case. Discovery is designed to
prevent trial by surprise, where either side may suddenly
produce a damning piece of evidence. Because trials are based
on the discovery of truth, they should be tried on the merits of
the case rather than a party’s deceit. In that spirit, the rules of
discovery are broad. Relevant evidence is discoverable even if
it is later ruled to be inadmissible at trial by the judge. Parties
are also obligated to turn over material that supports their case,
without demand from the other side unless it is protected by
the attorney-client privilege.
47 | Litigation
Type of
Discovery
Description
Request for
Admission
• Ask opposing party to admit specific facts or
claims
• Ex: confirm legal name and address, existence
of contract, etc.
Interrogatory
• Written questions to opposing party about
nature of claim
• Ex: identity of witnesses, extent of injuries,
description of injury, etc.
Request for
Production
• Ask opposing party to produce documents and
evidence relevant to lawsuit
• Ex: copies of contracts, records, reports, emails,
etc.
Deposition
• Sworn testimony of potential witnesses at trial
• Court reporter is present and makes official
transcript of questions and answers but judge is
not present
There are four types of discovery. The simplest is a request
for admission. Remember that a complaint contains a series
of claims the plaintiff is making against the defendant. The
parties may ask each other to admit that certain facts are true
or that a contested claim is true. Doing so narrows the issues
for trial because it is one less thing that the jury has to decide.
Even if the parties dispute legal liability, if they agree upon the
facts that caused the dispute, the case may take less time and
money to resolve.
The second type of discovery is an interrogatory. These are
written questions addressed to the other party. The questions
tend to be simple and straightforward. Interrogatories seek to
gather information about what happened, who was involved,
Litigation | 48
a company’s structure, and the names and addresses of
witnesses.
A third form of discovery is a request for production. A party
can request another party produce relevant documents to the
lawsuit, including internal company reports, emails, product
manuals, and employee records. In some cases physical
evidence may also be produced. For example, if a consumer
sued a vehicle manufacturer because a wheel fell off while
driving, the manufacturer may ask the consumer to produce
the vehicle so that its engineers can inspect it. Failure to
preserve and produce key evidence in litigation can lead to
charges of spoliation, which may result in severe sanctions
against the offending party.
Finally, discovery can take the form of a deposition. A
deposition is a sworn oral statement, in response to questions,
given by a potential witness in a trial to the attorneys in the
case. A deposition is attended by the witness being deposed,
attorneys from all the parties, and a court reporter who keeps a
written or video transcript of the deposition. There is no judge
present, so there is great latitude for parties to ask questions,
even if the answers are not admissible in court. Depositions
help prepare for trial by knowing everything a witness may say
in court. They also serve to pin down a witness’s testimony,
because a witness who changes testimony between a
deposition and trial can be impeached.
Motions
At any point in litigation, either party may file motions with the
court. A motion is a request to the court to rule on an issue or
claim.
If a defendant is properly served and does not answer the
49 | Litigation
complaint, the plaintiff can file a motion for default judgment.
In essence, the plaintiff asks the court to enter judgment in his
or her favor because the defendant refused to show up to court
to defend against the case. The alleged facts are admitted by
default and the plaintiff may receive all the relief requested.
At the beginning of a lawsuit, a party can file a motion to
dismiss for failure to state a claim. In this motion, the
defendant argues that even if everything in the complaint is
factually true, the plaintiff is not entitled to legal relief. In other
words, the defendant’s conduct has not broken any laws.
If a long period of time has passed since the incident in
question and the filing of the lawsuit, a defendant may file a
motion to dismiss based on the statute of limitations. Every
civil and criminal action has a statute of limitations, which
requires lawsuits to be brought within a specified period of
time. Statutes of limitations exists to encourage parties to file
their lawsuits quickly, while evidence is still fresh and relevant
witnesses remember what occurred. As time passes, evidence
may be destroyed, witnesses may die or move away, and those
who can be located can’t remember what they saw or heard. In
other words, the quicker a lawsuit is filed, the more likely that
the truth will be discovered through litigation. For businesses, a
statute of limitations also allows it to “close the books” on past
liabilities.
Another motion that is filed before discovery and trial is
a motion for judgment on the pleadings. This motion asks the
court to determine whether a genuine issue of material fact
exists that allows the case to proceed. These motions are not
as common as motions to dismiss but they are an important
tool to dismiss lawsuits that are fatally flawed before the parties
spend too much money. For example, if a business is sued
by several parties for injuries resulting from a common cause
but the complaints allege conflicting facts, the business may
Litigation | 50
file a motion for judgment on the pleadings. In other words,
the defendant is asking the court to dismiss the complaints
because they contradict each other in a way that it is
impossible to reconcile. If dismissed, the plaintiffs may file new
complaints that are not flawed.
Similar to a motion for judgment on the pleadings, a motion
for summary judgment asks the court to enter judgment in
a party’s favor instead of trying the case. Filed after discovery,
this motion asks the court to rule that there are no genuine
issues of facts for trial. For example, if a plaintiff admits during
his deposition that he lied about being involved in an accident,
the defendant may bring a motion for summary judgment
because the plaintiff brought a fraudulent lawsuit. Although
any party may file a motion for summary judgment,
defendants file and win many more motions for summary
judgment than plaintiffs.
51 | Litigation
Pretrial Motion
Description
Motion for
Default
Judgment
• Defendant was served but does not answer
the complaint
• Plaintiff wins because defendant does not
defend against the lawsuit
Motion to
Dismiss for
Failure to State a
Claim
• Determination of whether the law supports
the plaintiff’s claim(s)
• Defendant wins because conduct did not
break the law
Motion for
Judgment on
the Pleadings
• Determination of whether plaintiff is
entitled to judgment or damages, even if
the facts alleged are true
• Defendant wins because complaint is fatally
flawed
Motion for
Summary
Judgment
• Determination of whether genuine issue of
material fact exists to support plaintiff’s
claim(s) based on pleadings and evidence
during discovery
• Defendant wins because evidence does not
support plaintiff’s claim(s)
A party may submit an affidavit in support of any motion. An
affidavit is a written statement made under oath. Affidavits
play an important role in pretrial procedure because they are
an effective way for parties to tell their side of the story to the
judge.
3.7 The Trial and Appeal
After discovery is completed, the case is scheduled for a trial. In
civil litigation, well over 90 percent of cases filed are resolved
Litigation | 52
or settled before trial. If a case goes to trial, it means there are
genuine issues of fact that the parties cannot resolve, and both
sides are determined to win.
The first step in this process is to select a jury. The process of
selecting a jury is called voir dire. Voir dire typically begins with
the jurors filling out a written questionnaire. The questionnaire
asks the jurors to identify their occupation, any work or
occupational conflicts, and any potential conflicts of interest
with the case. The process then continues with attorneys
quizzing each potential juror to determine if he or she has any
biases against upholding the law and whether he or she can
keep an open mind during the trial.
After a jury has been selected and sworn in, the trial begins. The
plaintiff or prosecution begins by giving an opening statement
that is a preview of the trial. Attorneys inform the jury during
opening statements what they expect to prove at trial.
Attorneys do not make any arguments during the opening
statement; they simply lay out what jurors can expect from the
trial ahead. After plaintiff’s opening statement, the defendant
may give an opening statement.
After opening statements, the trial moves into the examination
phase. The plaintiff presents evidence first. Evidence may be
in the form of documents and witness testimony. The other
parties have the right to cross-examine witnesses who testify
at trial. During the cross-examination, the attorney will try to
discredit the witness to convince the jury that the witness is
not credible. The attorney may probe into any potential biases
the witness may have or try to prove that the witness’s
recollection of events may not be as clear or certain as the
witness believes.
Once the plaintiff has called all their witnesses and introduced
all their evidence, the plaintiff will rest their case. The
defendant then has an opportunity to present witnesses and
53 | Litigation
evidence on their behalf. After the defense has rested its case,
the attorneys once again address the jury in closing
arguments. Here, the attorneys summarize the case for the
jury. They address what witnesses were called and what the
witnesses said. During closing arguments, the attorneys are
permitted to be much more persuasive and argumentative
than during the opening statement. They appeal to the jury’s
emotions and argue how the jury should interpret the
evidence before them.
After closing arguments are made, the judge instructs the jury
on the relevant law. The jury then deliberates. During
deliberations, the jury will decide what facts are true. Then
it will apply those facts to the law as outlined in the jury
instructions.
Central to the jury’s deliberations is the burden of proof
applicable to the case. In civil cases the burden of proof is
preponderance of the evidence. This standard requires the
scales of justice to tilt ever so slightly toward one party. If the
jury believes one side is 51 percent correct and the other is 49
percent correct, that is enough to declare a winner. It is an easy
standard to meet because it only requires a party to prove that
its side is more likely than not telling the truth.
During jury deliberations, the jurors are permitted to ask the
judge for clarification about the law and to request to see the
evidence again. If the jury is unable to come to a verdict, the
jury is said to be deadlocked, and a mistrial results. Since trials
are expensive and time consuming, the judge will usually
instruct the jury to try its best before giving up. If the jury
arrives at a decision, it is called a verdict.
The judge enters the jury’s verdict as a judgment of the court.
After that, the losing party has the right to file an appeal. The
appellate court only reviews the record for legal errors and
Litigation | 54
cannot call new witnesses or substitute its judgment on the
facts for the jury’s.
Once all appeals are exhausted, the winning party may collect
the judgment entered in its favor. This process is called
execution. If a party is unable or unwilling to pay the judgment,
the court can order the party’s assets to be sold to satisfy the
judgment.
A party cannot refile a lawsuit once it has been decided in
the hopes of a more favorable outcome. The doctrine of res
judicata holds that once a dispute is litigated and resolved,
the parties are barred from relitigating the issue again. Res
judicata is a Latin phrase that means “the thing has been
decided” and it is a rule of finality in the legal system.
3.8 Concluding Thoughts
Litigation is a method for parties who cannot resolve their
disputes to have a judge or jury determine what happened and
whether legal liability exists. Although it may be challenging
to keep the names of the parties, motions, and parts of the
process straight, businesses need to understand the process
to navigate it successfully. Litigation is a long and expensive
process, but is often a part of a business’s activities.
The goal of civil litigation is to find the truth. An attorney’s
highest duty is to the administration of justice. Attorneys are
ethically bound to represent their clients with zealous
advocacy. A grand jury acts as a body of citizens to prevent
abuse by prosecutors. A petit jury sits in trials as the trier of
fact to ascertain the truth through their observations of the
presented evidence.
55 | Litigation
4. Alternative Dispute
Resolution
4.1 Introduction
LEARNING OBJECTIVES
1. Understand alternative dispute resolution (ADR) methods.
2. Learn the benefits and drawbacks of different methods of
dispute resolution.
Imagine that someone has a legal claim against a supplier,
employer, or a business where he or she is a customer. What
will happen? They probably don’t want to immediately initiate
litigation because litigation is very expensive and time
consuming. Besides, they may want to continue doing
business with the supplier, employer, or business. Perhaps the
matter is of a private nature, and they do not want to engage in
a public process to determine the outcome. They would like the
dispute to be resolved, but do not want to engage in a public,
time-consuming, expensive process like litigation to do it.
A common method of dispute resolution that avoids many of
the challenges associated with litigation is alternative dispute
resolution. Alternative dispute resolution (ADR) encompasses
many different methods of resolving disputes outside of the
judicial process. Some ADR methods vest power to resolve the
dispute in a neutral third party, while other strategies vest that
power in the parties themselves.
Figure 4.1 Alternative Dispute Resolution Continuum
Alternative Dispute
Resolution | 56
The most common methods of ADR are negotiation,
mediation, and arbitration. ADR is often used to resolve
disputes among businesses, employers and employees, and
businesses and consumers.
ADR methods are used outside of the courtroom, but
participation in ADR has important legal consequences. For
instance, parties that have agreed by contract to be subject
to binding arbitration give up their constitutional right to go
to court. The Federal Arbitration Act (FAA) is a federal statute
that requires parties to participate in arbitration when they
have agreed by contract to do so, even in state court matters.
The FAA preempts state power to create a judicial forum for
disputes arising under contracts with mandatory arbitration
clauses. The FAA encompasses transactions within the
broadest permissible exercise of congressional power under
the Commerce Clause in the US Constitution. This means that
the FAA requires mandatory arbitration clauses to be
enforceable for virtually any transaction involving interstate
commerce, which is very broadly construed. This is an example
57 | Alternative Dispute Resolution
of federal preemption exercised through the Supremacy
Clause in the US Constitution.
Counselor’s Corner “Alternative dispute resolution.”
The term suggests that litigation is the primary
means of dispute resolution and that mediation,
arbitration, and other means are “alternatives.” But,
actually, negotiation is the primary means of
dispute resolution and the others are the alternative
means—with litigation being the last (legal)
alternative. In negotiation and mediation, the
participants make decisions based on their values
and predispositions, needs, criteria for satisfying
those needs, pertinent information they are aware
of, and available ways to satisfy their needs.
Negotiation is the most used means of resolving
disputes. It is an invaluable life skill. Don’t wing
it—learn how to do it well.
~Russell C., judge
4.2 Negotiation
Imagine that Han is a tent manufacturer. Han’s supplier of tent
fabric routinely supplies him with appropriate water-resistant
fabric to construct tents, so that he can make and sell them.
After many years of a good working relationship, Han’s fabric
supplier delivered nonconforming goods. Specifically, the
fabric delivered was not water-resistant, despite the need for
water-resistant fabric to make tents. However, when Han
notified the supplier of the problem, the supplier denied that
the fabric was nonconforming to his order. Han refused to pay
Alternative Dispute Resolution | 58
for the goods. The fabric supplier insisted on payment before
future delivery of any additional fabric. Without water-resistant
fabric, Han cannot continue to make tents.
This is an example of a business to business dispute. Despite
the problem, Han wants to continue working with this supplier,
since they have a good, long-standing relationship. This
problem seems to be a “hiccup” in the regular business
relationship so they want to resolve this dispute quickly and
without hard feelings. It is very unlikely that Han will
immediately hire an attorney to file a formal complaint against
his supplier. However, that does not change the fact that there
is a dispute that needs to be resolved.
One of the first strategies that Han and his supplier are likely
to use is negotiation. Negotiation is a method of alternative
dispute resolution in which the parties retain power to resolve
their dispute. No outside party is vested with decision-making
power. Negotiation requires the parties to define the conflict
and agree to an outcome. Often, this can take the form of
a compromise. Note that a compromise does not mean that
anyone “loses.” If both parties are satisfied with the result of
the negotiation and the business relationship can continue
moving forward, then both parties will likely consider the
settlement a “win.”
Benefits to negotiation as a method of ADR include its
potential for a speedy resolution, the inexpensive nature of
participation, and the fact that parties participate voluntarily.
Drawbacks include the fact that there are no set rules, and
either party may bargain badly or even unethically. In a
negotiation, there is no neutral third party to ensure that rules
are followed, that the negotiation strategy is fair, or that the
overall outcome is sound. Moreover, any party can walk away
whenever it wishes. There is no guarantee of resolution
59 | Alternative Dispute Resolution
through this method. The result may not be “win-win” or “winlose,” but no resolution at all.
In addition, the parties may not have equal bargaining power.
If Han’s business and the supplier are both dependent on each
other for roughly equal portions of their businesses, then they
are most likely relatively equal with respect to bargaining
power. However, if Han has a small business but his supplier
has
a
large
business,
then
negotiation
is
potentially
unbalanced, since one party has a much more powerful
bargaining position than the other. For example, if Han needs
that particular type of fabric, which is only available from one
supplier. But the supplier does not need Han’s business
because he do not provide a significant amount of its profit.
This would be an example of unequal bargaining power.
4.3 Mediation
Mediation is a method of ADR in which parties work to form
a mutually acceptable agreement to resolve their dispute with
the help of a neutral third party. Like negotiation, parties in
mediation do not vest authority in a third party to decide the
dispute. Instead, this authority remains with the parties
themselves, who are free to end mediation if it is not working.
Often, when parties end mediation, they pursue another form
of ADR, such as arbitration, or they choose to litigate their
claims in court. Like negotiation, mediation seeks a “win-win”
outcome for the parties involved. Additionally, mediation is
confidential, which may be attractive to people who wish to
avoid the public nature of litigation. Discussions during a
mediation are not admissible as evidence if the parties proceed
to litigation. This encourages parties to be open with each
other when trying to resolve their dispute. Finally, the
Alternative Dispute Resolution | 60
mediation process is usually much faster than litigation, and
the associated costs can be substantially less.
Unlike negotiation, a third party is involved in mediation.
Indeed, a neutral mediator is crucial to the mediation process.
Mediators act as a go-between for the parties, seeking to
facilitate the agreement. Mediators do not provide advice on
the subject matter of the dispute. Mediators might not possess
any subject-matter expertise concerning the nature of the
dispute. The value of mediators, however, is their training and
experience in conflict resolution, which they use to facilitate an
agreement between the parties.
Advantages of Mediation
• Quick resolution
• Less expensive than
litigation & arbitration
• Non-adversarial process that
can preserve the
relationship between the
parties
• Allows parties to work
together to solve shared
problem
• Confidentiality
• Set ground rules by a third
party
• Possibility of a “win-win”
outcome
Drawbacks of Mediation
• Requires genuine
participation by parties
• Results may depend on skill
of mediator
• No uniform rules or
procedures that apply to all
mediations
• No guarantee of a mutually
agreeable outcome
Parties often enter into a legally binding contract that
embodies the terms of the resolution immediately after a
successful mediation. Therefore, the terms of the mediation
can become binding if they are reduced to a contract.
Mediation is often required by courts as part of the litigation
process. In an effort to reduce the court’s docket and
encourage the parties to settle their own disputes, parties to
lawsuits often must mediate their disputes after discovery and
61 | Alternative Dispute Resolution
before trial. If the parties cannot settle their dispute with the
help of a mediator, the case will proceed to trial before a judge
or jury who will determine the outcome of the case.
4.4 Arbitration
Arbitration is a method of ADR in which parties vest authority
in a neutral third-party decision maker to hear their case and
issue a decision, which is called an arbitration award.
An arbitrator presides over arbitration proceedings. Arbitrators
are neutral decision makers who are often experts in the law
and subject matter at issue in the dispute. Arbitrators act like
judges during trials. For instance, they determine which
evidence can be introduced, hear the parties’ cases, and issue
decisions. They may be certified by the state in which they
arbitrate, and they may arbitrate only certain types of claims.
For instance, the Better Business Bureau trains its own
arbitrators to hear common complaints between businesses
and consumers (B2C). However, their decisions do not form
binding precedent like appellate court decisions.
Participation in the arbitration proceeding is sometimes
mandatory. Parties must arbitrate if they signed a contract
requiring mandatory arbitration for that type of dispute.
Arbitration is also mandatory when state law requires it.
Voluntary arbitration is frequently used in business disputes.
Sometimes parties simply agree that they do not want to
litigate a dispute because they believe that the benefits of
arbitration outweigh the costs of litigation, so they choose
arbitration in hopes of a speedy and relatively inexpensive
outcome.
In binding arbitration, the arbitration award is final. Therefore,
Alternative Dispute Resolution | 62
appealing the merits of a binding arbitration award to court
is not available. An arbitration award may be converted to a
judgment by the court, thereby creating the legal mechanism
through which the judgment can be collected. This process is
called confirmation.
Although courts review arbitration awards, their review is very
limited and all doubts are resolved in favor of the validity of the
award. Courts review whether (1) the arbitration award covered
matters beyond the issues submitted; (2) the arbitrator failed to
apply the law correctly; and (3) fraud occurred. Courts do not
review the merits of the award.
Like any other form of dispute resolution, arbitration has
certain benefits and drawbacks. Arbitration is an adversarial
process like a trial, and it will produce a “winner” and a “loser.”
Arbitration is more formal than negotiation and mediation and,
in many ways, it resembles a trial. Parties present their cases
to the arbitrator by introducing evidence. After both sides have
presented their cases, the arbitrator issues an arbitration
award.
The rules of procedure during arbitration are often less formal
or less restrictive on the presentation of evidence than in
litigation. Arbitrators decide which evidence to allow, and they
are not required to follow precedents or to provide their
reasoning in the final award. In short, arbitration adheres to
rules, but those rules are not the same as the rules for litigation.
Arbitration can be more expensive than negotiation or
mediation, but it is often less expensive than litigation. Parties
must pay the costs of the arbitrator, and they often hire
attorneys to represent them. Additionally, in mandatory
arbitration clause cases, the arbitration may be required to take
place far from one of the parties. This means that a party may
have to pay travel costs during the arbitration proceeding.
Arbitration is also faster than litigation.
63 | Alternative Dispute Resolution
A common issue is whether mandatory arbitration is fair in
certain circumstances. It’s easy to imagine that arbitration is
fair when both parties are equally situated. For example,
business to business (B2B) arbitration is often perceived as
fair, especially if businesses are roughly the same size or have
roughly equal bargaining power. This is because they will be
able to devote approximately the same amount of resources
to resolve the dispute, and they both understand the issues
involved.
However, issues of fairness often arise in business to employee
(B2E) and business to consumer (B2C) disputes, particularly
where parties with unequal bargaining power have entered
into a contract that contains a mandatory arbitration clause. In
such cases, the weaker party has no real negotiating power to
modify or to delete the mandatory arbitration clause, so that
party is required to agree to such a clause if it wants to engage
in certain types of transactions. In B2E contexts, unequal
bargaining power alone is insufficient to hold arbitration
agreements unenforceable.
In B2C cases, different issues of fairness exist. As noted
previously, when the parties possess unequal power, these
issues can be magnified. Consumers tend to fare better in
litigation than in arbitration. Incentives exist to favor businesses
over consumers in the arbitration process, including the lack of
appeal rights to the courts, the limits on consumers’ remedies,
prohibitions against class-action suits, limitations on access to
jury trials, limitations on abilities to collect evidence, and
greater out-of-pocket expenses.
Not all binding arbitration clauses have been upheld by courts
in B2C cases. The FAA does not prevent the courts from
applying state law, including the unconscionability of contract
terms. In other words, if the terms of the contract make it
Alternative Dispute Resolution | 64
unreasonable to enforce the arbitration provision, then a party
may still bring claims to court for resolution.
Similarly, arbitration agreements may be rescinded on the
same grounds as other contracts. Fraud, mutual mistake, and
lack of capacity are grounds for voiding arbitration contracts.
Revocation is also possible in the event of death or bankruptcy
of one of the parties, as well as destruction of the subject
matter of the underlying contract.
4.5 Concluding Thoughts
ADR is the body of dispute-resolution methods outside of the
litigation process. ADR is often faster, less expensive, and more
private than litigation. For this reason, ADR may be the
preferred dispute resolution method, particularly when an
ongoing relationship between parties is desired. Common
methods of dispute resolution are negotiation, mediation, and
arbitration. Mandatory arbitration clauses are common in
contracts, and such clauses are usually enforceable against the
parties even if they wish to litigate their claims.
65 | Alternative Dispute Resolution
5. The Constitution
5.1 Introduction
LEARNING OBJECTIVES
1. Explore how the US Constitution creates a limited
government through the separation of powers and
through checks and balances among the three branches
of government.
2. Learn how the US Constitution resolves conflicts between
state and federal laws.
3. Explore how the US Constitution grants Congress the
power to regulate interstate commerce.
4. Understand how the US Constitution protects the civil
liberties of business entities.
Our
first
national
constitution
was
the
Articles
of
Confederation. The Articles granted limited authority to the
federal government, including the power to wage wars,
conduct foreign policy, and resolve issues regarding claims by
the states on western lands. Many leading statesmen, known
as
Federalists,
thought
the
Articles
created
a
federal
government that was too weak to survive. The lack of power
to tax, for example, meant that the federal government was
frequently near bankruptcy. Larger states resented the
structure under the Articles, which gave small states an equal
vote as larger states. Finally, the Articles reserved the power to
regulate commerce to the states, meaning each pursued its
own trade and tariff policy with other states and with foreign
nations. Because the federal government was too weak to
The Constitution | 66
function, the Articles were abandoned and the current
Constitution was adopted in 1787.
Counselor’s Corner The Constitution is the
fundamental law of our nation and is extremely
powerful. It’s also beautiful in its simplicity. The
Constitution in action, though, is often messy.
People’s rights conflict with each other. Branches of
government clash over which has the power to act.
Federal and state governments argue over who has
ultimate authority to govern. But as long as we
continue to cherish the values instilled in the
document, the Constitution will remain a living
protection against tyranny. We must protect it at all
costs if we expect it to protect us. Tyranny starts
when our dedication to Constitutional principles
ends.
~John K., judge
5.2 Federalism and Preemption
Much of the Constitution deals with the allocation of power
among three separate and coequal branches of government.
Substantively, much more attention is paid to the limitations
on the power given to each of the three branches than to
any positive grant of rights. The Constitution is a document of
prohibition, outlining what government cannot do as opposed
to what go…
