THE LEGAL ENVIRONMENT OF BUSINESS Finance 331 School of Business and Public Administration Old Dominion University I. INTRODUCTION. The legal environment of business provides a wide variety of issues, both interesting and controversial, rooted in law, designed to provide legal order for the stability of social, political, and economic systems, dispute resolution, the mainte- nance of property, and preservation of our government. American law emanates primarily from the common law of England, but borrows many significant concepts, both substantively and procedurally, from the laws of other systems. Federal law, in turn, is derived from the Federal Constitution, which addresses the three branches of further sources, the Legislature, the Executive, and the Courts, and later, the administrative agencies, which together constitute the body of federal law, which in turn is superimposed upon the vast majority of law created by the states and local governments. The term "law" defies simple definition, but differ- ent kinds of law can be categorized, including, without limita- tion, substantive law, which deals with the definition of rights and duties; procedural law, which deals with appropriate rules to effect enforcement of those rights and duties; private law, such as the law of torts, contracts, and personal property, most com- monly involving private parties seeking enforcement of rights and duties between them; and public law topics, such as criminal and constitutional law, which involve the governance of individuals for public good and enforcement of legal sanctions that have an impact beyond mere private parties. II. CIVIL PROCEDURE. A. The Courts. 1. Federal Courts: The U.S. Constitution (Article III) creates the Supreme Court of the United States and leaves it to Congress to create such inferior courts as from time to time it determines. Such inferior courts were created. a. District Courts - the District Courts in the federal system are the trial courts of general, but limited, -2- jurisdiction to hear cases where there is exclusive federal juris- diction (such as copyright, antitrust, etc.) and where there is concurrent jurisdiction with state courts, but only where there is either: (1) Diversity jurisdiction and $50,000.00 in controversy, or (2) A substantial federal question. b. Courts of Appeal - Congress created eleven Circuit Courts, plus the District of Columbia Circuit. Each Cir- cuit Court hears appeals from the District Courts located within the circuit and also reviews actions and Orders of administrative agencies. c. U.S. Supreme Court - The nation's highest tribunal consists of nine Justices, with its principal function to review decisions of the Federal Courts of Appeal and sometimes those of the highest state courts. Very few cases come before the U.S. Supreme Court in that appellate jurisdiction has almost been eliminated and cases come in a discretionary manner by grant of writ of certiorari. 2. State Courts: Each of 50 states has its own independent court system, beginning with a small claims court, trial court of general subject matter jurisdiction, a Court of Appeals, and a State Supreme Court. The trial level courts can hear cases arising under private common law and state statutes, and most cases arising under federal law, but the case can be removed where federal subject matter jurisdiction exists (i.e., diversity or federal question). B. Jurisdiction. Jurisdiction means the power or author- ity of the Court to hear and decide a given case. To proceed with suit and bind a defendant, there must be both subject matter jurisdiction and jurisdiction over the person of the defendant. This issue, then, deals with the choice of the Court. 1. Subject matter jurisdiction (SMJ). Federal Court being one of limited jurisdiction. Subject matter jurisdiction must be either: a. an exclusive federal matter, such as copy- right, antitrust, etc., or b. concurrent jurisdiction which exists by way of: -3- (1) diversity of citizenship at $75,000.00, or (2) federal question. -4- Conversely, for state courts, the general trial level court, except for exclusive federal case jurisdiction, typically has subject matter jurisdiction so long as a minimum dollar amount is in controversy, including cases involving diver- sity or federal questions. 2. Jurisdiction over the parties (J/P). The valid exercise of a court's jurisdiction requires the parties to the dispute be given fair notice and a reasonable opportunity to be heard in accordance with U.S. due process rights. Jurisdiction over the plaintiff always exists where the plaintiff files suit. Jurisdiction over the defendant is the focus of this area. Note, with respect to business: The issue is whether it is fair to subject the defendant to litigating in a foreign jurisdiction. Jurisdiction over the person exists where: a. Defendant is present and served with process in this state. b. Defendant is doing business in the state. c. Defendant has committed minimum contacts out of which the claim arose. This latter basis is illustrated by "long-arm statutes." Thus, when the defendant is actually present in the jurisdiction, or is a corporate defendant doing a continuous active business, or where the suit arose out of an event that occurred in the state where the suit is brought in state or federal court, it is deemed fair that the defendant be forced to defend in a foreign forum. The matter is one of due process. C. Choice of Governing Law. 1. Stare decisis. Borrowed from the common law, courts are directed to follow courts superior to them in the appellate system. They are also directed to follow their own decisions. In both instances, the reasoning is fairness and pre- dictability. However, courts can choose not to follow decisions rendered by themselves or courts superior to them if they can find the case before them distinguishable. In some instances, federal courts, including the Supreme Court, may find a prior decision unconstitutional and refuse to follow it. 2. Conflicts rules. Conflicts rules are substantive rules of state law. Where suit is brought in a state or federal court foreign to where the event giving rise to the suit occurred (such as a contract or accident), courts will turn to their -5- state's conflicts rules to determine whether to apply law of the jurisdiction where the event occurred. The purpose of conflicts rules is to prevent plaintiffs from "forum" shopping by attempting to bring suit in a state other than where the event occurred in an attempt to obtain a more favorable substantive rule of law govern- ing the case. (The Erie Doctrine holds Federal Courts must apply the substantive law of the state where they sit and this includes all conflicts rules of that state.) D. Civil Litigation. Civil disputes (as opposed to criminal disputes) involve enforcement of rights and obligations typically brought by private parties against private parties. The most typical common law remedy in a civil suit is money damages. Additional chancery remedies, such as injunctions, specific per- formance, and the like, can also be sought: 1. Pleadings. Pleadings are a series of formal written statements by each party setting forth their side of the dispute. The purpose of the pleadings is to give notice of plain- tiff's claim and, through defendant's response, to narrow the issues of the suit by elimination of certain facts not in dispute. Plaintiff files a Complaint (VA = Motion for Judgment) and defen- dant either files a Motion to Dismiss (VA = Demurrer) or files an Answer (VA = Grounds of Defense). Where defendant fails to respond by Motion to Dismiss or Answer, defendant is in default. Plaintiff can immediately proceed to enforcement by way of gar- nishment, levy and execution, etc., after obtaining a Default Judgment. 2. Pretrial procedures. Discovery is the pretrial exchange of information between opposing parties to a lawsuit. In preparation for trial, each party has the right to obtain relevant evidence or facts which may lead to evidence from the other party. Purposes of discovery are to eliminate surprise and encourage settlement. Discovery tools include depositions of witnesses and parties, written Interrogatories, Requests for Document Produc- tion, and other discovery tools. Unfortunately, the discovery process has been abused in many litigations. Subsequent to dis- covery, defendant may make a Motion for Summary Judgment, which is a trial upon the papers provided at this stage. 3. Trial. The Seventh Amendment of the U.S. Consti- tution guarantees the rights of jury trial "as at common law." This has been construed to mean that jury trial extends to all cases that had the right of jury at the time of the Constitution's adoption. Because many rights have been created subsequent to the Constitution and many forums have been developed, such as admin- istrative agencies, the right of jury trial has been construed not -6- to extend to those matters; thus, a trial by a judge ("bench trial") is also common today. The basic format for presenting evidence for determination and ruling include impaneling the jury, plaintiff's opening statement, plaintiff's case in chief with the right of cross-examination by defendant, defendant's case in chief with the right of cross-examination by plaintiff, rebuttal evi- dence, plaintiff's close, defendant's close, and plaintiff's rebuttal. 4. Appeal. Subsequent to verdict by the jury (or judgment by the judge), the losing party can elect to appeal the verdict (or judgment). E. Alternatives to Court. Alternative dispute resolu- tions include arbitration, mediation, and conciliation. Arbitra- tion, being by far the more common, can be mandatory or elective. Certain types of contracts provide mandatory arbitration, which means the parties may not go to court, but rather must go to arbi- tration before a panel of arbitrators chosen by the parties. Arbitrators tend not to be attorneys, but rather knowledgeable in the particular field the dispute arose from. Arbitration removes subject matter jurisdiction from courts, but is subject to judi- cial review to determine if arbitrators acted arbitrarily, capri- ciously, motivated by fraud, or made an extreme mistake in apply- ing the law wherein the award can be reversed for further arbitra- tion. III. CONSTITUTIONAL LAW. Issues of constitutional law arise in the business context with respect to federal and state regulation of business and busi- ness practices and economic rights, and, to a lesser extent, where government's need to regulate impinges upon the free exercise of individual rights enjoyed by businesses, as well as individuals. Questions of constitutional law, including construction of the meaning of the Constitutional, are ultimately decided by the Supreme Court of the United States. A. Sources and Balance of Federal and State Power. One major theme of constitutional law involves the various sources of governmental power to regulate by federal and state governments, and the balance of power between them. Both federal and state governments feature a constitu- tional separation of powers between their respective branches. -7- States and local bodies have, before and after the U.S. Constitution, been vested with the traditional "police powers" to govern all state matters in the furtherance of legiti- mate governmental ends of health, safety, and general welfare, so long as at least reasonably related to those ends. Conversely, federal power emanates solely from the Constitution (Article I - Congress, Article II - President, Article III - Federal Courts). While Congress' powers are pri- marily enumerated in §8 of Article I, they have from time to time been construed and broadened using both the "interstate commerce" clause to regulate commerce "among the several states" and the "necessary and proper" clause, which has been construed to autho- rize Congress to regulate activities not enumerated which are necessary and proper to Congress' enumerated powers. The power of Congress over interstate commerce has been substantially expanded to authorize congressional regulation of truly intrastate matters which, when aggregated, affect an interstate market or are involved in a U.S.-wide economic issue or crisis. Article VI of the Constitution provides that the federal law shall be the supreme law of the land. This "supremacy clause" has been construed to strike down state law regulating a matter, such as a business activity, where a federal law is already in regulation and the law is in conflict with the state law. It is not uncommon to find business from time to time attacking the state law as "pre-empted" by the federal supremacy clause where there is a federal statute in disagreement with the state law, and even where there is no federal law passed by Congress (such as the interstate commerce power). More commonly, there is an express conflict between a state and federal regula- tion. The first issue for the court to determine when a business challenges the state law is whether there, in fact, is a conflict. Courts will attempt to harmonize and give effect to both federal and state law. Further, more modern federal legislation, such as environmental law, frequently has anti-preemption clauses, so that states may impose different or greater burdens on business without fear of unconstitutionality. State law has also been held unconstitutional for burdening or discriminating against "interstate commerce." There are many cases especially where there is a federal statute or regulation in place where a state or municipality has enacted a local law or ordinance addressing the same activity. Businesses have frequently attacked the state law or local regulation as being a "burden on interstate commerce" if there is a conflict and where the true showing of the motivation for the state or local law is not the furtherance of legitimate ends of health, safety, -8- and general welfare, but rather for the purpose of economically discriminating against other states for each state's benefit, "discriminating against interstate commerce." B. Balance Between Government Regulation and Individual Rights. A second major constitutional theme involves the govern- ment's need to regulate for the common good as balanced against and frequently limited by the free exercise of individual rights enjoyed by individuals and businesses, as guaranteed by the Bill of Rights (Amendments 1 - 10) and other constitutional provisions. The Bill of Rights addresses such issues as religion, speech, press, and assembly (First Amendment), taking by government, law regulating life, liberty, or property without due process of law (Fifth and Fourteenth), and equal protection of the law (Four- teenth). A key concept with respect to this constitutional theme is the notion of balancing the needs of government regulation with the rights of individuals. 1. Due process. Two types of due process analysis are involved: a. Substantive due process - the notion that the law must reasonably comport and not unduly interfere with individual rights. The notion of fairness and prohibition of arbitrary and capricious action, and b. Procedural due process - whether indi- vidual's rights, property, or liberty has been deprived by the law, and, if so, when and to what degree a hearing must be afforded before the taking occurs. 2. Equal protection. Equal protection analysis must begin with the understanding that nearly all law creates classifi- cations (since the law regulates some types of businesses, but does not address the business of others that may be direct com- petitors). 3. First Amendment. First Amendment provides two religion clauses and one governing free speech, press, and asso- ciation. The religious clauses are the "establishment cause" and the "free exercise clause." First Amendment speech deals with such issues as whether the speech is of a political character as opposed to mere commercial speech (such as advertising), whether the speech, in fact, falls within several categories of "unpro- tected" speech for which the Amendment does not provide protec- tion, and the constant issue raised to legitimize law regulation is the law or regulation merely a reasonable "time, place, and manner" regulation. Other issues of First Amendment jurisprudence -9- include whether certain conduct constitutes speech for purposes of First Amendment protection and even, if so, whether such speech is "protected" speech. 4. Constitutional tests. Constitutional tests applied by the courts to decide if a law violates due process or equal protection: a. Strict scrutiny test. This test requires courts to uphold the law in question from constitutional challenge only if (a) there is a compelling state interest and (b) no less restrictive alternative is available. The strict scrutiny analy- sis is applied for purposes of due process where there are funda- mental rights (generally defined as First Amendment, voting, interstate travel, marriage and family issues) and purposes of equal protection where there is a classification based upon race or national origin. b. Intermediate test. An intermediate test has been designed principally seeing equal protection cases where laws are classified along the lines of gender, age, alienage, and legitimacy, and as applied to commercial speech. c. Rational basis test. The easiest test asks (i) whether a legitimate governmental interest is furthered, such as health, safety, and general welfare, and (ii) whether the law in question is rationally or reasonably related to furthering in any way such end or ends. The rational basis analysis is most typical where the law attempts to regulate business or economic issues and not individual rights, particularly when there is no suspect classification involved. IV. ADMINISTRATIVE LAW. Administrative agencies, the "fourth branch" of government, were not envisioned by the founders of the Constitution, but now generate more law and regulation over businesses than any of the other sources combined. Since the late 1930's, there has been enormous increase in federal agencies and the regulations they provide. Three functions of federal agencies (states have similar functions) include: A. Rule Making - promulgation of regulation considered the most efficient mode of regulation, but subject to the consti- tutional requirements of at least notice and a period for comment and subject to judicial review. -10- B. Adjudication - where an individual or business is required to attend and defend in an administrative hearing. C. Enforcement - the agency has full power to investigate the violations of rules it has made and conduct discovery by sub- poena and other means to determine if a business is acting in compliance with regulations passed. Administrative agencies are rarely reversed by the courts. Some bases for reversal, however, include where the agency, by passing a regulation, has exceeded the authority granted it by its enabling act, the improper interpretation by an agency of its enabling act and powers, an agency's violation of an individual constitutional right, a failure by the agency to follow its own procedures, actions by the agency that are arbitrary and capri- cious, as opposed to those where there is substantial evidence or at least a rational basis on the agency's record for its actions, the idea being that the court will typically not substitute its own judgment for that of the agency which is considered expert in its field. V. CRIMINAL LAW. The purpose of civil law is to compensate the aggrieved party for a civil wrong. Criminal law, on the other hand, is designed to prevent harm to society by declaring a conduct as criminal and establishing a punishment for such conduct. The government must prove the defendant's guilt beyond a reasonable doubt, which is a significantly higher burden than most civil actions which only require the plaintiff to prove violation of a civil wrong by a preponderance of the evidence. As in civil law, the burden of proof rests upon the proponent. With criminal law, the defendant is presumed innocent, whereas in civil law, the plaintiff has the burden to prove his case. The same conduct may often constitute both a crime and a tort (typically, an intentional tort). Because of due process requirements, all crimes are now published by statute, regulation, or local ordinance, listing each element which must be proven for the crime to be established. These requirements, coupled with the court's narrow construction of criminal law, are intended to provide prior constructive notice that certain conduct is considered criminal and is subject to punishment, and, thus, punishment is fair when the conduct occurs. A. Nature of Crime/Essential Elements. (1) Wrongful act, and (2) criminal intent (mens rea). Both elements are generally -11- required. Some crimes do not require the second element, and impose criminal liability due to mere negligence or without any fault. (Example: Sale of liquor to minors.) 1. Vicarious liability of employer. An employer is not liable for the unauthorized criminal acts of employees. How- ever, employer may be subject to criminal penalties for unautho- rized acts directed to be performed within the scope of employ- ment. 2. Corporate liability. Historically, corporations were not held criminally liable because of the traditional rule that a corporation possessed no criminal intent (second element) and therefore was incapable of committing a crime. Modern law has changed this approach, imposing liability without fault in many instances by statute and imposing fines against corporate assets. Some suggest a death penalty by mandatory dissolution. B. White-Collar Crime. White-collar crimes are non-vio- lent crimes involving deceit, corruption, or breach of trust, including fraud and deceit. On the rise is consideration by states to computer crimes involving theft of computer hardware or software secrets and unauthorized use of computer services and information. Congress has passed the Racketeering Influenced and Corrupt Organizations Act (RICO), providing federal criminal enforcement of organized crime's intervention into legitimate businesses. Many of the Act's provisions generally defined such as "Racketeering." Subject of many suits and some abuse. C. Crimes Against Business. Because many crimes involve violations to property, crimes against property are of relevance to business, including larceny, embezzlement, theft by false pre- tense, extortion and bribery, forgery, and bad checks (uttering bad checks in Virginia). D. Criminal Defenses. Even if criminal liability is shown by the establishment beyond a reasonable doubt of each ele- ment of the crime charged, the defendant may interpose a defense, including, but not limited to: (1) self-defense or defense of others, (2) insanity, (3) infancy, (4) intoxication, (5) duress, and (6) entrapment. E. Criminal Procedure. Many of the Bill of Rights' con- stitutional protections of individual rights focus on criminal procedure; therefore, criminal procedures have been subject to numerous constitutional test cases concerning compliance with the Fourth, Fifth, Sixth, Eighth, and Fourteenth Amendments. -12- Criminal and civil procedure varies, in general, as follows: Civil Procedure Criminal Procedure Terminate litigation by proponent Nonsuit Nol prosse Court's construction of law Plain reading, narrow if in conflict with common law, liberal if to benefit a policy Narrow construction to benefit defendant Standard of proof Generally, preponder- ance of evidence Beyond reasonable doubt Presumption of liabil- ity Generally, none Defendant is innocent Carrier of burden of proof Plaintiff (defendant for affirmed defenses) State Procedures Pleadings, pre-trial discovery, trial, appeal, and enforce- ment Arrest, preliminary hearing (or grand jury), arraignment, trial, appeals, and enforcement -13- F. Constitutional Law Protections. Each state and the federal government have procedures for instituting and initiating criminal prosecutions. Because the government is involved in every case, the Constitution and its Bill of Rights are applica- ble. 1. Fourth Amendment. The express warrant require- ment for arrest and for search and seizure has, for practical matters, been abolished by a multitude of exceptions. The Fourth Amendment requirement of probable cause remains (with some excep- tions, such as the "stop and frisk" rule). Exceptions with respect to search include auto exception, hot pursuit, search incident to arrest, and others. The probable cause requirement for arrest and search and seizure generally continues. 2. Fifth Amendment. The due process clause of the Fifth Amendment (and Fourteenth, as applicable to states) pre- cludes "unfair" treatment. Construed to provide protections for "custodial interrogations" requiring the reading of Miranda warn- ings, and self-incrimination by confessionary statements. Beyond protection are productions of information not considered "testimo- nial," including blood tests, handwriting samples, breathalyzer tests. Other tests will probably be construed as "non-testimo- nial" and, therefore, without Fifth Amendment protection. 3. Other constitutional protections. These include Sixth Amendment rights of competent attorney, speedy trial, and cross-examination, and the Eighth Amendment right to fair bail and freedom from cruel and unusual punishment. The Fourteenth Amend- ment includes both due process and equal protection clauses regu- larly applicable in both civil and criminal context. 4. Exclusionary rule. The decisions of the Supreme Court have led to the fashioning of the "exclusionary rule," which requires a court to exclude any evidence obtained (by search or confession) in violation of a constitutional right. With respect to Miranda warnings, custodial confessions have been excluded where the warnings have not been given. Violations of the Fourth Amendment also require exclusion. jrbrown C:\MyFiles\BPA faculty\Zugelder\Fall 2001\Business.PDF
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