Jurisdiction

The concept of jurisdiction is exceedingly simple, yet at the same time exceedingly complex. At its simplest level, 

jurisdiction

 is the power of the courts to hear a case and render a decision that is binding on the parties. Jurisdiction is complex, however, because there are several types of jurisdiction that a court must have if it is to hear a case.

jurisdiction

The power of a court to hear a case and render a binding decision.

Original versus Appellate Jurisdiction

Perhaps the simplest type of jurisdiction to understand is the distinction between original and appellate jurisdiction, which refers to the role the court plays in the judicial hierarchy. A court of 

original jurisdiction

, usually referred to as a trial court, has the power to initially hear and decide a case. It is in the court of original jurisdiction that a case originates; hence its name.

original jurisdiction

The power to initially hear and decide (try) a case.

A court with 

appellate jurisdiction

 has the power to review a previously made decision to determine whether the trial court erred in making its initial decision.

appellate jurisdiction

The power to review a decision previously made by a trial court.

Critical Thinking about the Law

Our American legal system can seem confusing at first. Using your critical thinking skills to answer the following questions as you read this chapter will help you understand how our legal system operates.

1. Critical thinkers recognize that ambiguous words—words that have multiple possible meanings—can cause confusion. Sam boldly asserts that the court of common pleas has jurisdiction over Jones v. Smith, while Clara asserts equally strongly that the court of common pleas does not have jurisdiction over the case. Explain the ambiguity that allows these two apparently contradictory statements to both be true.

Clue: 

Is it possible for a court to have one type of jurisdiction and not another?

2. Our legal system contains numerous procedural requirements. Which of the primary values is furthered by these requirements?

Clue:  Review the four primary values described in 

Chapter 1

.

3. Many say that the adversary system is consistent with the American culture. What value that is furthered by our adversary system is important to our culture?

Clue:  Can you go beyond the four primary values described in 
Chapter 1
 and think of any other important values?

Jurisdiction over Persons and Property

Before the court can render a decision affecting a person, the court must have 

in personam jurisdiction

 (jurisdiction over the person). In personam jurisdiction is the power to render a decision affecting the specific persons before the court. When a person files a lawsuit, that person, called the 

plaintiff

, gives the court in personam jurisdiction over him or her. By filing a case, the plaintiff is asking the court to make a ruling affecting his or her rights. The court must acquire jurisdiction over the party being sued, the 

defendant

, by serving him or her with a copy of the plaintiff’s complaint and a summons. The 

complaint

, discussed in more detail later in this chapter, is a detailed statement of the basis for the plaintiff’s lawsuit and the relief being sought. The 

summons

 is an order of the court notifying the defendant of the pending case and telling him or her how and when to respond to the complaint.

in personam jurisdiction

Jurisdiction over the person; the power of a court to render a decision that affects the legal rights of a specific person.

plaintiff

Party on whose behalf the complaint is filed.

defendant

Party against whom an action is being brought.

complaint

The initial pleading in a case that states the names of the parties to the action, the basis for the court’s subject matter jurisdiction, the facts on which the party’s claim is based, and the relief that the party is seeking.

summons

Order by a court to appear before it at a certain time and place.

Personal 

service

, whereby a sheriff or other person appointed by the court hands the summons and complaint to the defendant, has been the traditional method of service. Today, other types of service are more common. Residential service may be used, whereby the summons and complaint are left by the representative of the court with a responsible adult at the home of the defendant. Certified mail or, in some cases, ordinary mail are also used to serve defendants. Once the defendant has been properly served, the court has in personam jurisdiction over him or her and may render a decision affecting his or her legal rights, regardless of whether the defendant responds to the complaint.

service

Providing the defendant with a summons and a copy of the complaint.

When one thinks about how the rules of service would apply to a suit against a corporation, the question arises: How do you serve a corporation? The legal system has solved this question. Most states require that corporations appoint an agent for service when they are incorporated. This agent is a person who has been given the legal authority to receive service for the corporation. Once the agent has been served, the corporation is served. In most states, service on the president of the corporation also constitutes service on the corporation.

A court’s power is generally limited to the borders of the state in which it is located. So, traditionally, a defendant had to be served within the state in which the court was located in order for the court to acquire jurisdiction over the person of the defendant. This restriction imposed severe hardships when a defendant who lived in one state entered another state and injured the plaintiff. If the

Technology and the Law Electronic Service of Process?

While the federal courts have updated their practices significantly to make use of new technologies by doing such things as having websites for federal courts, allowing federal filing, and allowing Internet streaming of court coverage, there is one surprising gap in the federal system’s use of technology: there is no provision in the Federal Rules of Evidence for regular use of electronic means for service of process on defendants.

In 2012, in the case of Chase Bank USA v. Fortunato,

1

 a district court judge refused the application of Chase Bank to authorize either email or Facebook message as an alternative means of service on a third party defendant who had used false addresses to fraudulently secure multiple credit cards and whom the bank had been unable to locate physically. In denying the request, the court said that the bank had had not given the court “a degree of certainty” about the defendant’s alleged Facebook profile and the email address attached to that profile that would ensure that the defendant would receive and read the notice. Oddly, the court did allow notice by publication “in two newspapers, at least one in the English language, designated in the order as most likely to give notice to the person to be served, for a specified time, at least once in each of four successive weeks.”

1 

Not Reported in F.Supp.2d, 2012 WL 2086950 (S.D.N.Y.).

The federal courts however, on occasion, have allowed electronic service as an alternative in international cases under Fed. R. Civ. p. 4(f)(3), which governs service internationally. For example, in 2001, the court allowed service of Osama Bin Laden and the Taliban via television (including the Turkish version of CNN International and BBC World) for deaths resulting from the 9/11 attacks.

There have also been a limited number of states that have authorized electronic service under limited circumstances. For example, a Minnesota state court in May 2011 allowed service of process via email, Facebook, MySpace, or any other social networking site in a divorce proceeding, when the wife had not seen her husband in years, and believed he had returned to Africa’s Ivory Coast.

South Carolina permits electronic service of process only on corporations and partnerships (but not individuals), and all registered corporations and partnerships are required to register an email address with the Secretary of State (SCRCP 4(d)(3) 4(d)(8) and 5(b)(1)). To use electronic service of process in South Carolina under this program, however, a party cannot just send an email to a potential defendant; it must utilize a “certifying” authority such as the U.S. Postal Service’s “Electronic Post Mark” or “EPM.”

defendant never again entered the plaintiff’s state, the plaintiff could bring an action against the defendant only in the state in which the defendant lived. Obviously, this restriction would prevent many legitimate actions from being filed.

To alleviate this problem, most states enacted 
long-arm statutes
, which enable the court to serve a defendant outside the state as long as the defendant has engaged in certain acts within the state. Those acts vary from state to state, but most statutes include such acts as committing a tort within the state or doing business within the state. The following case demonstrates the application of such a statute.

long-arm statute

A statute authorizing a state court to obtain jurisdiction over an out-of-state defendant when that party has sufficient minimum contacts with the state.

 Case 3-1 World-Wide Volkswagen Corp. v. Woodson, District Judge of Cook County

Supreme Court of the United States 444 U.S. 286 (1980)

Mr. and Mrs. Robinson, the plaintiffs in the original case, filed a product liability action against defendant World-Wide Volkswagen in a state court in Oklahoma to collect compensation for damages they incurred as a result of an accident involving an automobile they had purchased in New York. The defendants in that case, the retailer and the wholesaler of the car, were both New York corporations.

Defendants claimed that the Oklahoma court could not exercise jurisdiction over them because they were nonresidents and they lacked sufficient “minimum contacts” with the state to be subject to its in personam jurisdiction.

The trial court rejected defendant petitioner’s claims. The Oklahoma Supreme Court likewise rejected their claims, and so they petitioned the U.S. Supreme Court. Note that the case that went to the Supreme Court is against the trial court, because the issue on appeal is whether the trial court acted properly in asserting jurisdiction.

Justice White

The issue before us is whether, consistently with the Due Process Clause of the Fourteenth Amendment, an Oklahoma court may exercise in personam jurisdiction over a nonresident automobile retailer and its wholesale distributor in a products liability action, when the defendants’ only connection with Oklahoma is the fact that an automobile sold in New York to New York residents became involved in an accident in Oklahoma.

As has long been settled, and as we reaffirm today, a state court may exercise personal jurisdiction over a nonresident defendant only so long as there exist “minimum contacts” between the defendant and the forum State. The concept of minimum contacts, in turn, can be seen to perform two related, but distinguishable, functions. It protects the defendant against the burdens of litigating in a distant or inconvenient forum. And it acts to ensure that the States, through their courts, do not reach out beyond the limits imposed on them by their status as coequal sovereigns in a federal system.

The protection against inconvenient litigation is typically described in terms of “reasonableness” or “fairness.” We have said that the defendant’s contacts with the forum State must be such that maintenance of the suit “does not offend ‘traditional notions of fair play and substantial justice’.?”

The limits imposed on state jurisdiction by the Due Process Clause, in its role as a guarantor against inconvenient litigation, have been substantially relaxed over the years. This trend is largely attributable to a fundamental transformation in the American economy.

Today many commercial transactions touch two or more States and may involve parties separated by the full continent. With this increasing nationalization of commerce has come a great increase in the amount of business conducted by mail across state lines. At the same time modern transportation and communication have made it much less burdensome for a party sued to defend himself in a State where he engages in economic activity.

Nevertheless, we have never accepted the proposition that state lines are irrelevant for jurisdictional purposes, nor could we, and remain faithful to the principles of interstate federalism embodied in the Constitution.

Applying these principles to the case at hand, we find in the record before us a total absence of those affiliating circumstances that are a necessary predicate to any exercise of state court jurisdiction. Petitioners carry on no activity whatsoever in Oklahoma. They close no sales and perform no services there. They avail themselves of none of the privileges and benefits of Oklahoma law. They solicit no business there either through salespersons or through advertising reasonably calculated to reach the State; nor does the record show that they regularly sell cars at wholesale or retail to Oklahoma customers or residents or that they indirectly, through others, serve or seek to serve the Oklahoma market. In short, respondents seek to base jurisdiction on one isolated occurrence and whatever inferences can be drawn therefrom: The fortuitous circumstance that a single Audi automobile sold in New York to New York residents happened to suffer an accident while passing through Oklahoma.

It is argued, however, that because an automobile is mobile by its very design and purpose it was “foreseeable” that the Robinsons’ Audi would cause injury in Oklahoma. Yet “foreseeability” alone has never been a sufficient benchmark for personal jurisdiction under the Due Process Clause.

If foreseeability were the criterion, a local California tire retailer could be forced to defend in Pennsylvania when a blowout occurs there, a Wisconsin seller of a defective automobile jack could be hauled before a distant court for damage caused in New Jersey, or a Florida soft-drink concessionaire could be summoned to Alaska to account for injuries happening there.

This is not to say, of course, that foreseeability is wholly irrelevant. But the foreseeability that is critical to due process analysis is not the mere likelihood that a product will find its way into the forum State. Rather, it is that the defendant’s conduct and connection with the forum State are such that he should reasonably anticipate being hauled into court there. When a corporation “purposefully avails itself of the privilege of conducting activities within the forum State,” it has clear notice that it is subject to suit there and can act to alleviate the risk of burdensome litigation by procuring insurance, passing the expected costs on to customers, or, if the risks are too great, severing its connection with the State. Hence, if the sale of a product of a manufacturer or distributor such as Audi or Volkswagen is not simply an isolated occurrence but arises from the efforts of the manufacturer or distributor to serve directly or indirectly the market for its product in other States, it is not unreasonable to subject it to suit in one of those States if its allegedly defective merchandise has there been the source of injury to its owner or to others.

But there is no such or similar basis for Oklahoma jurisdiction over World-Wide or Seaway in this case. Seaway’s sales are made in Massena, New York. World-Wide’s market, although substantially larger, is limited to dealers in New York, New Jersey, and Connecticut. There is no evidence of record that any automobiles distributed by World-Wide are sold to retail customers outside this tristate area. It is foreseeable that the purchasers of automobiles sold by World-Wide and Seaway may take them to Oklahoma. But the mere “unilateral activity of those who claim some relationship with a nonresident defendant cannot satisfy the requirement of contact with the forum State.”

*

* 

World-Wide Volkswagen Corp. v. Woodson, District Judge of Cook County. Supreme Court of the United States 444 U.S. 286 (1980).

Reversed in favor of World-Wide Volkswagen Corporation

Contrast the facts in the foregoing case with those in the 2010 case of Southern Prestige Industries, Inc. v. Independence Plating Co.,2 in which the court came to a contrary decision. In this case, the plaintiff, a North Carolina company, filed an action for breach of contract in a North Carolina court against the defendant, a company whose only offices and personnel were located in New Jersey. Both parties admitted that they had an ongoing business relationship that included 32 purchase orders over an eight-month period. In accordance with these orders, the plaintiff would ship parts to the defendant, who would oxidize them and ship them back. The defendant filed a motion to dismiss on grounds that there were insufficient minimum contacts to satisfy due process. In upholding the trial court’s denial of the defendant’s motion, the appellate court said that in order to establish the minimum contacts between the nonresident defendant and the forum state, such that the maintenance of the suit does not offend “traditional notions of fair play and substantial justice,” “the defendant must have purposefully availed itself of the privilege of conducting activities within the forum state and invoked the benefits and protections of the laws of North Carolina. The relationship between the defendant and the forum state must be such that the defendant should reasonably anticipate being hauled into a North Carolina court.”

3

2 

690 S.E.2d 768 (2010).

3 

Id.

To determine whether those minimum contacts existed, the court looked at “(1) the quantity of the contacts, (2) the nature and quality of the contacts, (3) the source and connection of the cause of action to the contacts, (4) the interest of the forum state, and (5) the convenience to the parties.”

4 

†

 Using those factors, the court determined that the defendant had indeed availed itself of the benefits of doing business in North Carolina and should have anticipated being hauled into a North Carolina court.

4 
Id.

† 

Southern Prestige Industries, Inc. v. Independence Plating Corporation, Court of Appeals of North Carolina.

Applying the Law to the Facts . . .

Now that you have seen cases that have come to different conclusions, how would you apply the law to the following set of facts? A California resident files suit against Harrah’s and several other Nevada casino operators in a California state court for unfair competition, breach of contract, and false advertising. The defendants advertised their casinos extensively in California, had an interactive website and also offered promotional activities for California residents. Harrah’s also had a subsidiary marketing corporation that maintained offices in California to “assist customers from California who contacted them” and “attempted to attract a limited number of high-end gaming patrons to Harrah’s properties.” The district court initially dismissed the case due to lack of personal jurisdiction. How would you apply the law to the facts and decide the case if you were on the court of appeals? (Snowney v. Harrah’s Entertainment, Inc., 11 Cal. Rptr. 3d 35 [Cal. Ct. App. 2004].)

In Rem Jurisdiction

If a defendant has property within a state, the plaintiff may seek to bring the action directly against the property rather than against the owner. For example, if a Michigan defendant owned land in Idaho on which taxes had not been paid for 10 years, the state could bring an action to recover those taxes. The Idaho court would have 

in rem jurisdiction

 over the property and, in an in rem proceeding, could order the property sold to pay the taxes. Such proceedings are often used when the owner of the property cannot be located for personal service.

in rem jurisdiction

The power of a court to render a decision that affects property directly rather than the owner of the property.

Subject Matter Jurisdiction

One of the most important types of jurisdiction is 

subject matter jurisdiction

, the power of the court to hear certain kinds of cases. Subject matter jurisdiction is extremely important because if a judge renders a decision in a case over which the court does not have subject matter jurisdiction, the decision is void or meaningless. The parties cannot give the court subject matter jurisdiction. It is granted by law, as described in the subsequent sections.

subject matter jurisdiction

The power of a court to render a decision in a particular type of case.

At the beginning of this chapter, you learned that the United States has a dual court system, comprised of both a state and a federal system. The choice of the system in which to file a case is not purely a matter of deciding which forum is most convenient or which judge would be most sympathetic. Subject matter jurisdiction determines which court may hear the case. When you think about the concept of subject matter jurisdiction, it is easiest to think of it in two steps. First, within which court system does the case fall? Once you know which court system has jurisdiction over the case, you then need to ask whether there is a special court within that system that hears that specific type of case. When asking which court system has subject matter jurisdiction, there are three possible answers: state jurisdiction, exclusive federal jurisdiction, or concurrent federal jurisdiction (

Exhibit 3-1

).

State Jurisdiction

The state court system has subject matter jurisdiction over all cases not within the exclusive jurisdiction of the federal court system. Only a very limited number of cases fall within the exclusive jurisdiction of the federal courts. Consequently, almost all cases fall within the 

state court jurisdiction

.

Exhibit 3-1 Subject Matter Jurisdiction

Suits for breach of contract, product liability actions, and divorces are just a few of the types of cases falling within the state court system’s jurisdiction. However, it is important to remember that when we say that the state court system has jurisdiction, it is not just any state’s court system, but only the court system of the state whose law will be used to decide the case. So if there is a breach of contract case arising out of a contract made in Ohio, Ohio’s law would govern the contract, so the state court system of Ohio would have jurisdiction over the case.

state court jurisdiction

Applies to cases that may be heard only in the state court system.

Exclusive Federal Jurisdiction

A few types of cases may be heard only in the federal courts. Such cases are within the exclusive jurisdiction of the federal court system. If these cases were tried in a state court, any decision rendered by the judge would be void. Cases that fall within the exclusive jurisdiction of the federal courts include such matters as admiralty, bankruptcy, federal criminal prosecutions, claims against the United States, and claims arising under those federal statutes that include a provision for 

exclusive federal jurisdiction

. Many of these latter cases are of particular concern to businesspeople. For example, one statute that gives exclusive jurisdiction to the federal court system is the National Environmental Policy Act, discussed in 

Chapter 22

. Cases brought under this act must be filed in a federal district court.

exclusive federal jurisdiction

Applies to cases that may be heard only in the federal court system.

Concurrent Federal Jurisdiction

Many cases may be heard in either a federal or a state court. These cases are said to fall within the federal court’s 

concurrent jurisdiction

, meaning that both court systems have jurisdiction, so the plaintiff may file in the trial court of either system. There are two types of such cases. The first are federal question cases. If a case requires an interpretation of the U.S. Constitution, a federal statute, or a federal treaty, it is said to involve a federal question and may be heard in either state or federal court. Many people make the mistake of thinking that when a person believes his or her rights under the federal Constitution have been violated, the case must go to the federal courts. They are wrong. Such a case involves a federal question and is, therefore, within the concurrent jurisdiction of both court systems.

concurrent jurisdiction

Applies to cases that may be heard in either the federal or the state court system.

The second means by which a case may fall within the federal court’s concurrent jurisdiction is through diversity of citizenship. If the opponents in a case are from different states, there is said to be diversity of citizenship. The diversity must be complete. If any two parties on opposing sides reside in the same state, diversity is lost. For example, if the plaintiff is an Ohio resident and one of the defendants lives in Michigan and the other in Indiana, diversity exists. If, however, an Ohio plaintiff is bringing an action against a Michigan defendant and an Ohio defendant, there is not complete diversity and therefore no concurrent federal jurisdiction. When the basis for federal jurisdiction is diversity of citizenship, an amount in excess of $75,000 must be in controversy.

When one of the parties to a case is a corporation, there is sometimes a question as to which state constitutes the corporation’s residence. In 

Case 3-2

, the U.S. Supreme Court explains how to solve that issue.

 Case 3-2 Hertz Corporation v. Friend

United States Supreme Court 130 S. Ct. 1181 (2010)

Plaintiffs, California citizens, sued Hertz Corporation for state law violations in a California State Court. Defendant Hertz filed a motion to remove the case to federal court on diversity of citizenship grounds, claiming that it was not a resident of California, the residence of all the plaintiffs. Plaintiffs argued that Hertz was a California citizen, like themselves, and that, hence, diversity jurisdiction was lacking under § 1332(c)(1), which provides that “a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business.”

To show that its “principal place of business” was in New Jersey, not California, Hertz submitted a declaration stating, among other things, that it operated facilities in 44 States, that California accounted for only a portion of its business activity, that its leadership is at its corporate headquarters in New Jersey, and that its core executive and administrative functions are primarily carried out there. The District Court concluded that it lacked diversity jurisdiction because Hertz was a California citizen under Ninth Circuit precedent, which asks, inter alia, whether the amount of the corporation’s business activity is “significantly larger” or “substantially predominates” in one State. Finding that California was Hertz’s “principal place of business” under that test because a plurality of the relevant business activity occurred there, the District Court remanded the case to the state court. The Ninth Circuit affirmed. Hertz appealed to the United States Supreme Court.

Justice Holland

The federal diversity jurisdiction statute provides that “a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business.” We seek here to resolve different interpretations that the Circuits have given this phrase. In doing so, we place primary weight upon the need for judicial administration of a jurisdictional statute to remain as simple as possible. And we conclude that the phrase “principal place of business” refers to the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities. Lower federal courts have often metaphorically called that place the corporation’s “nerve center.”

We begin our “principal place of business” discussion with a brief review of relevant history. The Constitution provides that the “judicial Power shall extend” to “Controversies . . . between Citizens of different States.”. . . In 1928 this Court made clear that the “state of incorporation” rule was virtually absolute. It held that a corporation closely identified with State A could proceed in a federal court located in that State as long as the corporation had filed its incorporation papers in State B, perhaps a State where the corporation did no business at all. . . . Subsequently, many in Congress and those who testified before it pointed out that this interpretation was at odds with diversity jurisdiction’s basic rationale, namely, opening the federal courts’ doors to those who might otherwise suffer from local prejudice against out-of-state parties. . . . [i]n 1958, Congress both codified the courts’ traditional place of incorporation test and also enacted into law a slightly modified version of the Conference Committee’s proposed “principal place of business” language. A corporation was to “be deemed a citizen of any State by which it has been incorporated and of the State where it has its principal place of business.”

The phrase “principal place of business” has proved more difficult to apply than its originators likely expected. . . . In an effort to find a single, more uniform interpretation of the statutory phrase, we have reviewed the Courts of Appeals’ divergent and increasingly complex interpretations. Having done so, we now return to, and expand, Judge Weinfeld’s approach, as applied in the Seventh Circuit. . . . We conclude that “principal place of business” is best read as referring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. It is the place that Courts of Appeals have called the corporation’s “nerve center.” And in practice it should normally be the place where the corporation maintains its headquarters—provided that the headquarters is the actual center of direction, control, and coordination, i.e., the “nerve center,” and not simply an office where the corporation holds its board meetings (e.g., attended by directors and officers who have traveled there for the occasion).

Three sets of considerations, taken together, convince us that this approach, while imperfect, is superior to other possibilities. First, the statute’s language supports the approach. The statute’s text deems a corporation a citizen of the “State where it has its principal place of business.” The word “place” is in the singular, not the plural. The word “principal” requires us to pick out the “main, prominent” or “leading” place. And the fact that the word “place” follows the words “State where” means that the “place” is a place within a State. It is not the State itself.

A corporation’s “nerve center,” usually its main headquarters, is a single place. The public often (though not always) considers it the corporation’s main place of business. And it is a place within a State. By contrast, the application of a more general business activities test has led some courts, as in the present case, to look, not at a particular place within a State, but incorrectly at the State itself, measuring the total amount of business activities that the corporation conducts there and determining whether they are “significantly larger” than in the next-ranking State. This approach invites greater litigation and can lead to strange results, as the Ninth Circuit has since recognized.

Second, administrative simplicity is a major virtue in a jurisdictional statute. . . . Simple jurisdictional rules also promote greater predictability. Predictability is valuable to corporations making business and investment decisions. . . .

A “nerve center” approach, which ordinarily equates that “center” with a corporation’s headquarters, is simple to apply comparatively speaking. The metaphor of a corporate “brain,” while not precise, suggests a single location. By contrast, a corporation’s general business activities more often lack a single principal place where they take place. That is to say, the corporation may have several plants, many sales locations, and employees located in many different places. If so, it will not be as easy to determine which of these different business locales is the “principal” or most important “place.”

Third, the statute’s legislative history, for those who accept it, offers a simplicity-related interpretive benchmark. . . .

We recognize that there may be no perfect test that satisfies all administrative and purposive criteria. We recognize as well that, under the “nerve center” test we adopt today, there will be hard cases. . . . Our approach provides a sensible test that is relatively easier to apply, not a test that will, in all instances, automatically generate a result.

Petitioner’s unchallenged declaration suggests that Hertz’s center of direction, control, and coordination, its “nerve center,” and its corporate headquarters are one and the same, and they are located in New Jersey, not in California. Because respondents should have a fair opportunity to litigate their case in light of our holding, however, we vacate the Ninth Circuit’s judgment and remand the case for further proceedings consistent with this opinion.

*

* 

Hertz Corporation v. Friend, United States Supreme Court 130 S. Ct. 1181 (2010).

Judgment reversed, in favor of Hertz Corporation

When a case falls within the federal court’s concurrent jurisdiction because of either a federal question or diversity of citizenship, the suit may be filed in either state or federal court. If the case is filed in state court, the defendant has a right of removal, which means that he or she may have the case transferred to federal court. All the defendant has to do is file a motion with the court asking to exercise his or her right of removal. Thereupon, the case must be transferred to federal court; the judge has no discretion but must comply with the request.

Critical Thinking about the Law

Justice Breyer is focusing on fairness to the parties in a case where state courts may provide a jury panel that is more homogeneous and perhaps rural than would give the litigants a fair hearing for their arguments. But notice that his reasoning also pays attention to other ethical norms that guide courts when they make legal decisions.

1. What legal norms in addition to fairness does Justice Breyer reference explicitly or implicitly?

Clue: Return to the discussion of legal norms in 
Chapter 1
. Then go through each of Justice Breyer’s arguments for the nerve center test, asking yourself: does this reasoning point to any of the four primary legal norms that shape judicial decision making.

2. Justice Breyer admits that there will probably be some tough cases in the future that will push the boundaries of the nerve center test. Try to create a set of facts that would result in highlighting the ambiguity in the nerve center test.

Clue: Make a list of all the factors that lead to the conclusion that a particular state is the nerve center of a business. Now design your set of facts around a situation where some factors are present in one state, while others are present in another state.

3. Justice Breyer can form his reasoning based only on the information he has, not the information he might wish to have but lacks. Justice Breyer spells out his reasoning in an orderly fashion. Choose one of his reasons. What facts, were they true, would damage at least one of Justice Breyer’s reasons for the nerve center test.

Clue: Look at his discussion of potential jury bias. What fact would make this reasoning invalid in the Hertz decision?

The right of removal arises only when the case is filed in state court; there is no right of removal to state court. As a result, whenever a case is under concurrent jurisdiction, if either party wants the case heard in federal court, it will be heard there.

Why should both parties have the right to have such a case heard in federal court? In certain cases, a party may fear local prejudice in a state court. Juries for a state court are generally drawn from the county in which the court is located. The juries for federal district courts are drawn from the entire district, which encompasses many counties. Juries in state court are, therefore, usually more homogeneous than those in a district court. One problem that this homogeneity may present to the out-of-state corporate defendant occurs when the county in which the court is located is predominantly rural. If the case involves an injury to a member of this rural community, the defendant may feel that the rural jurors would be more sympathetic to the local injured party, whereas jurors drawn from a broader area, including cities, may be more likely to view the victim less sympathetically. City residents are also more likely to work for a corporation, and thus may not regard corporations as unfavorably as might rural residents.

Some people also believe that federal judges are better qualified to hear cases that involve a federal question, because they have more experience in resolving questions that require an interpretation of federal statutes. Finally, if a party anticipates that it may be necessary to appeal the case to the U.S. Supreme Court, bringing the case first in a federal district court may save one step in the appeals process.

Venue

Subject matter jurisdiction should not be confused with venue. Once it is determined which court system has the power to hear the case, 

venue

 determines which of the many trial courts in that system is appropriate. Venue, clearly prescribed by statute in each state, is a matter of geographic location. It is usually based on the residence of the defendant, the location of the property in dispute, or the location in which the incident out of which the dispute arose occurred. When there are multiple defendants who reside in various geographic locations, the party filing the lawsuit may usually choose from among the various locales.

venue

Where a case is brought (usually the county of the trial court); prescribed by state statute.

If the location of the court in which the case is filed presents a hardship or inconvenience to one of the parties, that person may request that the case be moved under the doctrine of forum non conveniens, which simply means that the location of the trial court is inconvenient. The judge in the case will consider the party’s request and decide whether to grant the party’s request. Unlike the right of removal, the request for change of venue is granted at the judge’s discretion. There will usually be a hearing on the issue of whether the judge should grant the motion, because the plaintiff generally files the case in a particular court for a reason and will, therefore, be opposed to the defendant’s motion.

Technology and The Legal Environment The Internet and In Personam Jurisdiction

Is the sponsor of a website that can be visited from every state subject to in personam jurisdiction in every state? As long as the sponsor is not conducting any business or trying to reach customers in a state, many courts have held that mere access to the website is not sufficient to grant in personam jurisdiction.

One case that illustrates this point involved two organizations that both used the name Carefirst. Carefirst of Maryland, a nonprofit insurance company, accused Carefirst Pregnancy Center (CPC), a Chicago-based nonprofit organization, of trademark infringement.

a

 Carefirst of Maryland operated a website from which the company promoted its products to consumers who are located primarily in the mid-Atlantic region, with the majority of its consumers living in Maryland. CPC also operated a website, which was accessible anywhere in the world, for the purpose of promoting its services for women with pregnancy-related crises and to generate donations for the organization. CPC’s operations were confined almost entirely to the state of Illinois.

a 

Carefirst of Maryland, Inc. v. Carefirst Pregnancy Centers, Inc., 334 F.3d 390 (4th Cir. 2003).

Since CPC began using the name Carefirst, the Chicago-based organization received only one donation from a Maryland resident via the company’s website. From 1991 to 2001, CPC claimed that only 0.0174 percent of its donations came from Maryland residents. The only means through which CPC has contact with Maryland residents is CPC’s website. Therefore, a district court in Maryland and the appellate court both dismissed the case for lack of personal jurisdiction, concluding that even though CPC’s website could be contacted from anywhere, its purpose was to provide information about the organization and solicit donations primarily from Illinois residents. Although the court noted that the donations received from Maryland residents were negligible, the court also held that CPC made no effort to target Maryland donors. Furthermore, the court observed that CPC had no agents, employees, or offices located in Maryland. Hence, there was not sufficient contact with Maryland to support personal jurisdiction.

If the potential defendant, however, is actively trying to do business in other states via a website, the outcome of a case may be different. For example, in 

Gator.com

 Corp. v. L.L. Bean, Inc.,b the Ninth Circuit Court of Appeals held that L.L. Bean was subject to in personam jurisdiction in California. 
Gator.com
, a company that develops software for consumers who make online purchases, also created pop-up coupons that would appear on L.L. Bean’s website for L.L. Bean’s competitors, such as Eddie Bauer. In response to its receiving a cease-and-desist letter from L.L. Bean, 
Gator.com
 sought a declaratory judgment that its actions were not illegal according to state and federal laws. L.L. Bean filed a motion to dismiss, after which a district court in California ruled that the court did not have in personam jurisdiction. The Ninth Circuit reversed on appeal, noting that 6 percent of L.L. Bean’s $1 billion in annual sales is attributable to California customers. The court also observed that L.L. Bean “targets” California consumers with its direct email solicitations, and by maintaining a highly interactive website, from which numerous California customers make online purchases and interact with L.L. Bean sales representatives. The Ninth Circuit found these email solicitations and website services to California consumers to be sufficient minimum contacts for in personam jurisdiction.

b 

341 F.3d 1072 (9th Cir. 2002).

One example of a case in which a party sought to have the trial location changed due to forum non conveniens is Ex parte Kia Motors America, Inc.
5 In this case, four people were riding in Florida in a 1998 Kia Sephia that was involved in a high-speed car accident; the car was forced from the road, caught fire, and burned. Three of the four passengers did not survive. The families of the deceased sued Kia for product liability and negligence, among other claims, in the Alabama courts. Kia filed a motion for forum non conveniens to have the case moved to Florida, stating that the car was purchased in Florida, the deceased were residents of Florida, the claims were to be tried according to Florida law, and 25 of the witnesses were also Florida residents. The Supreme Court of Alabama ruled that the motion for forum non conveniens was appropriate and the case should be moved to Florida.

5 

881 So. 2d 396 (Ala. 2003).

Applying the Law to the Facts . . .

Before we leave this section of the chapter, ask yourself which court (or courts) would have subject matter jurisdiction and venue in the following situation. Jenny is a resident of Wayne County, Michigan. She is driving through Lucas County, Ohio, when she is hit by another driver who ran a red light. The driver who hit her is a resident of Wood County, Ohio. How would your answer change if the driver who hit her was driving a truck owned by his employer, who is located in Wayne County, Michigan?

The Structure of the Court System

As noted previously, our system has two parallel court structures, one federal system and one state system. Because of subject matter jurisdiction limitations, one often does not have a choice as to the system in which to file the case. Once a case is filed in a system, it will stay within that system, except for appeals to the U.S. Supreme Court. The following sections set forth the structure of the two systems. As you will see, they are indeed very similar. Their relationship is illustrated in 

Exhibit 3-2

.

The Federal Court System

Federal Trial Courts

As you already know, trial courts are the courts of original jurisdiction. In the federal court system, the trial courts are the U.S. district courts. The United States is divided into 96 districts, and each district has at least one trial court of general jurisdiction. General jurisdiction means that the court has the power to hear cases involving a wide variety of subject matter and that it is not limited in the types of remedies it can grant. All cases to be heard in the federal system are filed in these courts, except those cases for which Congress has established special trial courts of limited jurisdiction.

Trial courts of limited jurisdiction in the federal system are limited in the type of cases they have the power to hear. Special federal trial courts of limited jurisdiction have been established for bankruptcy cases; claims against the U.S. government; and copyright, patent, and trademark cases. In an extremely limited number of cases, the U.S. Supreme Court also functions as a trial court of limited jurisdiction. Such cases include controversies between two or more states and suits against foreign ambassadors.

Intermediate Courts of Appeal

The second level of courts in the federal system is made up of the U.S. circuit courts of appeal. The United States is divided into 12 geographic areas, including the District of Columbia, each of which has a circuit court of appeals. 
Exhibit 3-2
 illustrates this division. There is also a federal circuit court of appeals and a U.S. Veterans Court of Appeals. Each circuit court of appeals hears appeals from all of the district courts located within its geographic area. These courts also hear appeals from administrative agencies located within their respective circuits. In some cases, appeals from administrative agencies are heard by the Federal Circuit Court of Appeals. The Veterans Court of Appeals hears appeals of benefits decisions made by the Veterans Administration.

Court of Last Resort

The U.S. Supreme Court is the final appellate court in the federal system. In a limited number of instances, discussed in the last section of this chapter, the U.S. Supreme Court also hears cases from the court of last resort in a state system. As previously noted, the U.S. Supreme Court also functions as a trial court in a limited number of cases. The federal court system is illustrated in 

Exhibit 3-3

.

State Court Systems

There is no uniform state court structure because each state has devised its own court system. Most states, however, follow a general structure similar to that of the federal court system.

State Trial Courts

In state court systems, most cases are originally filed in the trial court of general jurisdiction. As in the federal system, state trial courts of general jurisdiction are those that have the power to hear all the cases that would be tried in the state court system, except those cases for which special

Exhibit 3-2 Geographic Boundaries of United States Courts of Appeals and United States District Courts

trial courts of limited jurisdiction have been established. These trial courts of general jurisdiction are distributed throughout each state, usually by county. The names of these courts vary from state to state but are usually called courts of common pleas or county courts. New York uniquely calls its trial courts of general jurisdiction supreme courts. In some states, these courts may have specialized divisions, such as domestic relations or probate.

Exhibit 3-3 The Structure of the Court System

Most states also have trial courts of limited jurisdiction. These courts are usually limited in the remedies they may grant. Some may not issue injunctions or orders for specific performance. A common court of limited jurisdiction in most states is the small claims court, which may not grant damage awards in excess of specified amounts. Some courts of limited jurisdiction are limited to certain types of cases, such as traffic cases. Some criminal courts of limited jurisdiction may be limited to hearing misdemeanors. It is difficult to generalize about these courts because they vary so much from state to state. The main distinction between trial courts of general and limited jurisdiction, however, is that the former hear almost all types of cases that are filed in the state system and are unlimited in the remedies they can provide, whereas the latter hear only a particular type of case or may award only limited remedies.

Intermediate Courts of Appeal
 

Intermediate courts of appeal, analogous to the federal circuit courts of appeal, exist in approximately half the states. These courts usually have broad jurisdiction, hearing appeals from courts of general and limited jurisdictions, as well as from state administrative agencies. The names of these courts also vary by state. They may be called courts of appeal or superior courts.

Courts of Last Resort

In almost all cases filed in the state court system, the last appeal is to the state court of last resort. This court is frequently called the supreme court. In some states, it is known as the court of appeals. In approximately half of the states, it is the second court to which an appeal can be made; in the remaining states, it is the only appellate court.

The Actors in the Legal System and Their Relationship to the Business Community

The Attorney

An understanding of the structure of the legal system would be incomplete without an awareness of the primary actors within the system. The party with whom businesspersons usually have the most frequent contact is the attorney. Although the exact qualifications for being an attorney vary from state to state, most require that an attorney have a law degree, have passed the state’s bar examination, and be of high moral character. Attorneys are the legal representatives of the parties before the court. Some corporations have full-time attorneys, referred to as in-house counsel. Other corporations send all their legal work to an outside law firm. Many larger businesses have in-house counsel and also use outside counsel when a problem arises that requires a specialist.

Attorney–Client Privilege

The attorney can provide effective representation only when he or she knows all the pertinent facts of the case. The businessperson who withholds information from his or her attorney may cause irreparable harm if the hidden facts are revealed by the opposing side in court. To encourage client honesty, the 

attorney–client privilege

 was established. This privilege provides that information furnished in confidence to an attorney, in conjunction with a legal matter, may not be revealed by that attorney without permission from the client. There is, however, an important exception to this rule. If the lawyer knows that the client is about to commit a crime, the lawyer may reveal confidential information in order to prevent the commission of that crime. Revealing such information, however, is not required of the attorney; it is simply allowed. This protection also extends to the attorney’s work product under what is known as the 

work-product doctrine

. Work product includes both formal and informal documents prepared by the attorney in conjunction with a client’s case.

attorney–client privilege

Provides that information furnished by a client to an attorney in confidence, in conjunction with a legal matter, may not be revealed by the attorney without the client’s permission.

work-product doctrine

Provides that formal and informal documents prepared by an attorney in conjunction with a client’s case are privileged and may not be revealed by the attorney without the client’s permission.

One of the problems arising out of use of the attorney–client privilege in the corporate setting is the definition of the client. The client is the corporation, but the communication sought to be protected is that between the attorney and upper-, middle-, or lower-level employees of the corporation. In such cases, the corporate attorney usually tries to rely on the work-product doctrine to protect the information that he or she has gathered from employees, especially when such information is in the form of written communications. Such an approach has generally been successful, but the courts have not yet precisely defined the parameters of the attorney–client privilege and the work-product doctrine as they apply to the corporate setting.

Additional Functions of the Attorney

Attorneys are probably best known for representing clients in litigation, but they also provide many other services for business clients. Attorneys represent their clients not only in courtroom litigation but also before administrative boards. Attorneys may be called on to represent their corporate clients in negotiations with labor unions or with other firms.

Corporate attorneys also serve as advisors or counselors, reviewing proposed corporate activities and advising management of legal problems that may arise as a result of such activities. In-house counsel familiar with the various activities of the firm are often in the best position to fulfill this role. Thus, businesspersons should attempt to establish a good working relationship with in-house counsel, using them as a resource whenever legal issues arise. Managers should not assume that they know all the legal ramifications of all the business activities in which they engage. Most in-house counsel would prefer to be consulted before an activity is undertaken rather than after it results in a legal problem.

Finally, the attorney may serve as a draftsperson, drawing up contracts, deeds, the corporate charter, securities registration statements, and all other legal documents needed by the corporation. Thus, it is clear that the attorney is one actor in the American legal system who is of special importance to the business manager.

The Judge

The role of the judge is especially important in our legal system. The judge’s function depends on whether he or she is a trial or appellate court judge. A trial court judge presides over the trial, making sure the case is heard with reasonable speed; rules on all motions made in the case; and decides all questions of law. One of the most crucial functions of the trial court judge is ruling on whether evidence is admissible. A judge’s failure or refusal to admit certain items into evidence may determine the outcome of a case, and a judge’s ruling on any particular piece of evidence may subsequently become the basis for the appeal of an unfavorable decision. If the parties waive their rights to a jury trial, or if they are not entitled to a jury, the judge also decides the facts in the case and renders a decision accordingly. A single judge presides over each case.

Appellate judges serve on panels. They review lower-court cases to determine whether errors of law were committed by the lower courts. Their review consists primarily of reading the transcript of the trial, reading written arguments by counsel for both parties, and sometimes hearing oral arguments from both parties’ attorneys.

State court judges are usually elected, although some are appointed, whereas federal court judges are appointed by the president with the advice and consent of the Senate. This appointment process is a good example of how the legislative and executive branches serve as checks on each other. The president has the greatest role because he makes the nomination, but he cannot choose just anyone. The president will usually select a list of potential nominees who will then be rated by a committee of the American Bar Association. The bar association looks at the nominees’ legal experience and reads their written opinions and published articles in an attempt to ensure that only the most qualified candidates will be named to the federal bench. The Senate also scrutinizes the list and gives the president some idea, in advance, of whether the various potential nominees have a high likelihood of being confirmed.

Once the president actually makes a nomination, the Senate judiciary subcommittee holds formal hearings on the nominee’s fitness for office. After the hearings, the full Senate votes on the nomination. Although the president generally tries to nominate someone with an ideological background similar to his own, if the Senate is dominated by the opposite political party, a nominee who has too strong an ideology is not likely to be confirmed. In recent years, the appointment process has become familiar to most Americans as the hearings on Supreme Court nominees have been televised. Federal court judges serve for life, whereas state court judges generally serve definite terms, the length of which varies from state to state.

There is a lot of debate over whether judges should be appointed for life or elected for specific terms. The rationale behind appointment for life is that it takes the politics out of the judicial process. A judge will be selected based on his or her credentials as opposed to the quality of his or her campaign skills or the size of the campaign budget. Once in office, the judge is free to make honest decisions without having to worry about the impact of any decision on reelection.

Of course, this independence is just what makes some people prefer elected judges. They point out that the members of every other branch of government are elected and are, therefore, forced to represent the will of the people; they argue that judges should represent the people no less than members of the other branches.

The Power of Judicial Review

One very important power that judges have is the power of judicial review, that is, the power to determine whether a law passed by the legislature violates the Constitution. Any law that violates the Constitution must be struck down as null and void. The justices of the U.S. Supreme Court are the final arbiters of the constitutionality of our statutory laws.

This power of judicial review was not explicitly stated in the Constitution. Rather, it was established in the classic 1803 case of Marbury v. Madison,
6 wherein the Supreme Court stated:

6 

5 U.S. 137 (1803).

It is emphatically the province and duty of the judicial department to say what the law is. Those who apply the rule to particular cases must of necessity expound and interpret that rule. If two laws conflict with each other, the courts must decide which of these conflicting rules governs the case. This is of the very essence of judicial duty.
*

* 
Marbury v. Madison, 5 U.S. (1 Cranch) 137; 2 L. Ed. 60 (1803).

When individual justices exercise this power of judicial review, they do so with different philosophies and attitudes. Their philosophies can have a powerful effect on how they make decisions. One distinction frequently made with respect to judicial philosophies is the difference between a judge who believes in judicial activism and one who believes in judicial restraint.

A judge who believes in 

judicial restraint

 believes that the three branches are coequal, and the judiciary should refrain from determining the constitutionality of an act of Congress unless absolutely necessary, to keep from interfering in the congressional sphere of power. These judges tend to believe that social, economic, and political change should result from the political process, not from judicial action. They consequently give great deference to actions of the state and federal legislatures.

judicial restraint

A judicial philosophy that says courts should refrain from determining the constitutionality of a legislative act unless absolutely necessary and that social, political, and economic change should be products of the political process.

Those who believe in judicial restraint are much less likely to overturn an existing precedent. They tend to focus much more on the facts than on questioning whether the law should be changed. They tend to uphold lower-court decisions unless those decisions are clearly wrong on the facts.

In contrast, 

judicial activists

 tend to see a need for the courts to take an active role in encouraging political, economic, and social change, because the political process is often too slow to bring about necessary changes. They believe that constitutional issues must be decided within the context of today’s society and that the framers meant for the Constitution to be an evolving document.

judicial activism

A judicial philosophy that says the courts should take an active role in encouraging political, economic, and social change.

Judicial activists are much less wedded to precedent and are more result oriented. They are much more likely to listen to arguments about what result is good for society. Activist judges have been responsible for many social changes, especially in the civil rights area.

The Jury

The jury is the means by which citizens participate in our judicial system. It had its roots in ancient Greek civilization, and it is often seen as the hallmark of democracy. A jury is a group of individuals, selected randomly from the geographic area in which the court is located, who will determine questions of fact. There are two types of juries: petit and grand.

Petit Juries

Businesspersons are primarily concerned with 

petit juries

. These juries serve as the finders of fact for trial courts. Though originally composed of 12 members, most juries in civil cases are allowed to have fewer members in many jurisdictions. Traditionally, jury decisions had to be unanimous. Today, however, more than half the jurisdictions no longer require unanimity in civil cases. This change in the jury system has been made primarily to speed up trial procedures.

petit jury

A jury of 12 citizens impaneled to decide on the facts at issue in a criminal case and to pronounce the defendant guilty or not guilty.

An important decision to be made by any corporate client and his or her attorney is whether to have a jury. In any civil action in which the plaintiff is seeking a remedy at law (money damages), a jury may hear the case. If both parties to the case agree, however, the jury may be waived, and a judge decides the facts of the case. There is no hard-and-fast rule about when a businessperson should opt for a jury, but a few factors should frequently be considered. One is the technical nature of the case. If the matter is highly technical, a judge may be able to decide the case more fairly, especially if that judge has expertise in the area in dispute. Another factor is the emotional appeal of the case. If the opponent’s arguments in the case may have strong emotional appeal, a judge may render a fairer decision.

Grand Juries

Grand juries are used only in criminal matters. The Fifth Amendment requires that all federal prosecutions for “infamous” crimes (including all federal offenses that carry a term of imprisonment in excess of one year) be commenced with an 

indictment

 (a formal accusation of the commission of a crime, which must be made before a defendant can be tried for the crime) by a 

grand jury

. This jury hears evidence presented by the prosecutor and determines whether there is enough evidence to justify charging a defendant. The prudent business manager who carefully heeds the advice of an attorney should not be faced with a potential indictment by a grand jury. Increasingly, however, corporate managers are facing criminal charges for actions taken to benefit their corporate employers. Such cases are discussed in 

Chapter 6

.

indictment

A formal written accusation in a felony case.

grand jury

A group of 12 to 23 citizens convened in private to decide whether enough evidence exists to try the defendant for a felony.

The Adversary Process

Our system of litigation is accurately described as an adversary system. In an 

adversarial system

, a neutral factfinder, such as a judge or jury, hears evidence and arguments presented by both sides and then makes an objective decision based on the facts and the law as presented by the proponents of each side. Strict rules govern the types of evidence that the factfinder may consider.

adversarial system

System of litigation in which the judge hears evidence and arguments presented by both sides in a case and then makes an objective decision based on the facts and the law as presented by each side.

Theoretically, the adversary system is the best way to bring out the truth, because each side will aggressively seek all the evidence that supports its position. Each side attempts to make the strongest possible argument for its position.

Criticisms of the Adversary System

Many people criticize this system. They argue that because each side is searching only for evidence that supports its position, a proponent who discovers evidence helpful to the other side will not bring such evidence to the attention of the court. This tendency to ignore contrary evidence prevents a fair decision—one based on all the available evidence—from being rendered.

Another argument of the critics is that the adversary process is extremely time-consuming and costly. Two groups of “investigators” are seeking the same evidence. Thus, there is a duplication of effort that lengthens the process and unnecessarily increases the cost.

Others argue that the adversary system, as it functions in this country, is unfair. Each party in the adversarial process is represented by an attorney. Having the most skillful attorney is a tremendous advantage. The wealthier a party is, the better the attorney she or he can afford to hire; hence, the system unjustifiably favors the wealthy.

Law professor Marc Galanter has written an interesting critique of our adversary system that has generated a lot of discussion.

7

 He argues that, given the structure of our system, certain parties tend to have a distinct advantage. Galanter divides litigants into two groups: the repeat players (RPs), those who are engaged in similar litigations over time; and the one-shotters (OSs), those who have only occasional recourse to the courts. RPs would typically be large corporations, financial institutions, landlords, developers, government agencies, and prosecutors. Typical OSs would be debtors, employees with grievances against their employers, tenants, and victims of accidents.

7 

Marc Galanter, “Why the Haves Come Out Ahead: Speculation on the Limits of Legal Change,” J. L. & Soc. Rev. 9: 96 (1974).

According to Galanter, the RPs have a distinct advantage over the OSs in litigation. Because of their experience, RPs are better prepared for trial; they know what kinds of records to keep and how to structure transactions so that they will have an advantage in court. RPs will have developed expertise in the area and will have access to specialists. They will have low “start-up costs” for a case because they have been through it before. RPs will have developed helpful informal relationships with those at the courthouse. RPs know the odds of success better because of their experience and can use that knowledge to calculate whether to settle. Finally, RPs can litigate for favorable rulings or for an immediate outcome.

Thus, in a typical case involving an RP and an OS, the RP has a distinct advantage. Some people believe this advantage is significant enough to prevent our current system from dispensing justice in these cases.

Steps in Civil Litigation and the Role of Businesspersons

The Pretrial Stage

Every lawsuit is the result of a dispute. Business disputes may result from a breach of contract, the protested firing of an employee, or the injury of a consumer who uses the corporation’s product. This section focuses on dispute resolution in this country under the adversary system. It examines the procedure used in a civil case, the stages of which are outlined in 

Exhibit 3-4

. The rules that govern such proceedings are called the 

rules of civil procedure

. There are federal rules of civil procedure, which apply in all federal courts, as well as state rules, which apply in the state courts. Most of the state rules are based on the federal rules.

rules of civil procedure

The rules governing proceedings in a civil case; federal rules of procedure apply in all federal courts, and state rules apply in state courts.

Informal Negotiations

For the businessperson involved in a dispute, the first step is probably to discuss the dispute directly with the other party. When it appears that the parties are not going to be able to resolve the problem

Exhibit 3-4 Anatomy of a Civil Lawsuit

themselves, the businessperson will then discuss the dispute with an attorney. It is important that the attorney be given all relevant information, even if it does not make the businessperson look good. The more relevant facts the attorney has, the better the attorney’s advice will be. Together, the attorney and the client may be able to resolve the dispute informally with the other party

.

Initiation of a Legal Action

Once a party decides that an informal resolution is not possible, the parties enter what is often called the pleading stage of the lawsuit. 

Pleadings

 are papers filed by a party in court and then served on the opponent. The basic pleadings are the complaint, the answer, the counterclaim, and the motion to dismiss. 

Exhibit 3-5

 provides an illustration of a typical complaint. The attorney of the businessperson who feels that he or she has been wronged initiates a lawsuit by filing a complaint in the appropriate court. A complaint is a document that states the names of the parties to the action, the basis for the court’s subject matter jurisdiction, the facts on which the party’s claim is based, and the relief that the party is seeking. Remember that the party

Exhibit 3-4 Anatomy of a Civil Lawsuit
themselves, the businessperson will then discuss the dispute with an attorney. It is important that the attorney be given all relevant information, even if it does not make the businessperson look good. The more relevant facts the attorney has, the better the attorney’s advice will be. Together, the attorney and the client may be able to resolve the dispute informally with the other party
Initiation of a Legal Action
Once a party decides that an informal resolution is not possible, the parties enter what is often called the pleading stage of the lawsuit. 
Pleadings
 are papers filed by a party in court and then served on the opponent. The basic pleadings are the complaint, the answer, the counterclaim, and the motion to dismiss. 
Exhibit 3-5
 provides an illustration of a typical complaint. The attorney of the businessperson who feels that he or she has been wronged initiates a lawsuit by filing a complaint in the appropriate court. A complaint is a document that states the names of the parties to the action, the basis for the court’s subject matter jurisdiction, the facts on which the party’s claim is based, and the relief that the party is seeking. Remember that the party

Exhibit 3-5 Complaint

on whose behalf the complaint is filed is the plaintiff, and the defendant is the party against whom the action is being brought.

pleadings

Papers filed by a party in court and then served on the opponent in a civil lawsuit.

In determining the appropriate court in which to file the complaint, the attorney must determine which court has subject matter jurisdiction over the case. Once that determination has been made, the attorney must ascertain the proper venue for the case. The means used by the attorney to determine subject matter jurisdiction and venue were discussed earlier in this chapter.

Service of Process

Once the complaint is filed, the court serves a copy of the complaint and a summons on the defendant. The reader should remember that service is the procedure used by the court to ensure that the defendant actually receives a copy of the summons and the complaint. Service of process gives the court in personam jurisdiction over the defendant and provides the notice of the charges required by the defendant’s due process rights.

Defendant’s Response

Once the defendant has been properly served, he or she files an answer and possibly a counterclaim. The answer is a response to the allegations in the plaintiff’s complaint. The answer must admit, deny, or state that the defendant has no knowledge about the truth of each of the plaintiff’s allegations. The answer may also contain affirmative defenses, which consist of facts that were not stated in the complaint that would provide justification for the defendant’s actions and a legally sound reason to deny relief to the plaintiff. These defenses must be stated in the answer. If they are not raised in the answer, the court may choose not to allow these defenses to be raised later. The defendant is required to plead his or her affirmative defenses in the answer in order to give the plaintiff notice of all the issues that will be raised at the trial.

As an illustration, two affirmative defenses to a breach-of-contract action might be that the plaintiff procured the defendant’s signature on the contract through fraud and that the contract was illegal because its enforcement would result in a violation of the antitrust laws. As another example, suppose that a manufacturer is being sued because the plaintiff was injured by the manufacturer’s negligently produced defective product. The defendant manufacturer might raise the affirmative defense of contributory negligence, arguing that the plaintiff’s injury would not have occurred if the plaintiff had not also been negligent. Notice the use of an affirmative defense in the sample answer in 

Exhibit 3-6

. It is important that the businessperson who is being sued immediately try to think of any potential affirmative defenses that might excuse his or her actions.

Upon receiving the complaint, a defendant may believe that even if all of the plaintiff’s factual allegations were true, the plaintiff would still not be entitled to a favorable judgment. In that situation, the defendant may file a 

motion to dismiss

. No factual issues are being debated, so the judge accepts the facts as stated by the plaintiff and makes a ruling on the legal questions in the case. Judges are generally not receptive to such motions, granting them only when it appears beyond doubt that the plaintiff can prove no set of facts, in support of his or her claim, that would entitle him or her to relief.

motion to dismiss

Defendant’s application to the court to put the case out of judicial consideration because even if the plaintiff’s factual allegations are true, the plaintiff is not entitled to relief.

If the defendant believes that he or she has a cause of action against the plaintiff, this will be included as a 

counterclaim

. The form of a counterclaim is just like that of a complaint. The defendant states the facts supporting his or her claim and asks for the relief to which he or she feels entitled. 
Exhibit 3-6
 also contains a counterclaim.

counterclaim

Defendant’s statement of facts showing cause for action against the plaintiff and a request for appropriate relief.

If the defendant files a counterclaim, the plaintiff generally files a reply. A reply is simply an answer to a counterclaim. In the reply, the plaintiff admits, denies, or states that he or she is without knowledge of the truth of the facts asserted by the defendant in the counterclaim. Any affirmative defenses that are appropriate must be raised in the reply.

Exhibit 3-6 Affirmative Defenses and Counterclaim

Pretrial Motions

The early pleadings just described serve to establish the legal and factual issues of the case. Once these issues have been established, either the plaintiff or the defendant may file a motion designed to bring the case to an early conclusion or to gain some advantage for the party filing the motion. A motion is simply a party’s request for the court to do something. A party may request, or move, that the court do almost anything pertaining to the case, such as a motion for some form of temporary relief until a decision has been rendered. For example, if a suit is brought over the right to a piece of property, the court may grant a motion prohibiting the current possessor of that property from selling it. A party may file a motion to proceed in forma pauperis, which is a motion to proceed without payment of fees if the party feels it has good reasons for why the court should allow the case to proceed even if it does not have the money to pay the fees up front (the assumption being that after successful suit the party will be able to pay the fees). As noted earlier, a defendant may believe that even if everything the plaintiffs plead in their complaint were true, there would still be no legitimate basis for a lawsuit. In such a situation, the defendant may file a motion to dismiss.

Many of the really frivolous lawsuits that are filed are dismissed in response to pretrial motion. For example, in 2007, Jehovah J. God, Jesus J. Christ, the Jehovah Witness Foundation Inc., and William E. Moore filed a $9 million lawsuit against the University of Arizona, arguing that the university was using God’s autobiography, the Bible, without paying him royalties. In dismissing the case upon hearing of the motion to proceed in forma pauperis, the court said that the allegations were “both fanciful and factually frivolous,” a finding that is made when the facts alleged by the plaintiff rise to the level of the irrational or wholly incredible, whether or not there are judicially recognized facts available to contradict them.

8

8 

God, et al. v. Arizona State University, U.S. Dist. LEXIS 38679 (2007).

When a party files any motion with the court, a copy is always sent to the opposing attorney. That attorney may respond to the motion, usually by requesting that the judge deny the motion. In many cases, the judge will simply rule on the motion, either granting or denying it. In some cases, the judge may hold a hearing at which the two sides orally present arguments.

Discovery

Once the initial pleadings and motions have been filed, the parties gather information from each other through 

discovery

. As a result of discovery, each party should have knowledge of most of the facts in the case. This process is supposed to prevent surprises from occurring in the courtroom.

discovery

The pretrial gathering of information from each other by the parties.

At this stage, the businessperson is frequently asked by his or her attorney to respond to the opponent’s discovery requests. There are a number of tools of discovery. One of the most common is interrogatories, which are a series of written questions that are sent to the opposing party, who must truthfully answer them under oath. The interrogatories are frequently accompanied by a request to admit certain facts. The attorney and the client work together to answer these interrogatories and requests for admission of facts.

Another discovery tool is the request to produce documents or other items. Unless the information requested is privileged or is irrelevant to the case, it must be produced. Photographs, contracts, written estimates, and forms that must be filed with governmental agencies are among the items that may be requested. One party may also request that the other party submit to a mental or physical examination. This motion will be approved only when the party’s mental or physical health is at issue in the case.

Finally, testimony before trial may be obtained by taking a 

deposition

. At a deposition, a witness is examined under oath by attorneys. A court reporter (stenographer) records every word spoken by the attorneys and witnesses. The testimony is usually transcribed so that both parties have a written copy. If a businessperson is to be deposed in a case, it is very important that he or she and the attorney talk extensively about what kinds of questions may come up at the deposition and how such questions are to be answered. The party who requested the deposition is not only seeking information, but is also laying the groundwork for identifying any inconsistencies that may arise between a person’s testimony at the deposition and in court. If such inconsistencies exist, they will be brought to the attention of the factfinder and may result in a loss of credibility for the courtroom testimony.

deposition

Pretrial testimony by witnesses who are examined under oath.

Depositions may also be used when a potential witness is old or ill and may die before the trial. They are useful if witnesses may be moving or for some other reason may not be available at the time of the trial.

Parties must comply with discovery requests, or the court may order that the facts sought to be discovered be deemed admitted. Thus, it is important that the businessperson involved in litigation produce for the attorney all requested discovery material. An attorney who feels that certain material should not be discovered makes arguments about its lack of relevance to the case, but if the court disagrees, the information must be supplied.

Pretrial Conference

If the judge finds that questions of fact do exist, he or she usually holds a pretrial conference. This is an informal meeting of the judge with the lawyers representing the parties. At this meeting, they try to narrow the legal and factual issues and work out a settlement if possible. When a lawsuit begins, there are many conflicting assertions as to what events actually led up to the lawsuit. Questions about what actually happened are referred to as questions of fact. Many times, as a result of discovery, parties come to agree on most of the facts. Remaining factual disputes may often be resolved at the conference. Then the only questions left are how to apply the law to the facts and what damages, if any, to award.

By the time of the pretrial conference, the businessperson should have determined the limits on any settlement to which he or she is willing to agree and should have communicated those limits to his or her attorney, who may be able to reach a settlement at the conference. Judges frequently try very hard to help the parties reach agreement before trial. If no settlement can be reached, the attorneys and the judge discuss the administrative details of the trial, its length, the witnesses, and any pretrial stipulations of fact or law to which the parties can agree.

The Trial

Once the pretrial stage has concluded, the next step is the trial. As stated previously, if the plaintiff is seeking a legal remedy (money damages), he or she is usually entitled to a jury trial. The judge is the factfinder when an equitable remedy (an injunction or other court order) is being sought or the parties have waived their right to a jury. For example, when a plaintiff in a product liability action requests a judgment for $10,000 in medical expenses, he or she would be seeking a legal remedy and would be entitled to a jury trial. However, a plaintiff seeking an injunction, under the antitrust laws, to prohibit two defendant corporations from merging would be requesting an equitable remedy and thus would not be entitled to a jury. It is important for the business manager to determine at the outset whether a jury is desirable, because a jury must be demanded in the complaint.

The stages of the trial are (1) jury selection, (2) the opening statements, (3) the plaintiff’s case, (4) the defendant’s case, (5) the conference on jury instructions, (6) closing arguments, and (7) posttrial motions.

Jury Selection

An important part of a jury trial is the selection of the jury. A panel of potential jurors is selected randomly from a list of citizens. In the federal court system, voter lists are used. In a process known as 
voir dire
, the judge or the attorneys, or both, question potential jurors to determine whether they could render an unbiased opinion in the case.

voir dire

Process whereby the judge and/or the attorneys question potential jurors to determine whether they will be able to render an unbiased opinion in the case.

When a juror’s response to a question causes an attorney to believe that this potential juror cannot be unbiased, the attorney will ask that the potential juror be removed “for cause.” For example, in an accident case, a potential juror might reveal that he had been in a similar accident, or the potential juror may have filed a similar lawsuit against one of the defendant’s competitors five years ago. Attorneys are given an unlimited number of challenges for cause. In most states, each attorney is allowed to reject a minimal number of potential jurors without giving a reason. These rejections are called peremptory challenges.

The legitimate rationale for “peremptories” is that they recognize and accommodate (to a certain extent) a lawyer’s “gut reaction” to a potential juror who does not say anything that technically reveals a bias. Nevertheless, there has been some abuse of peremptories in the past. One potential source of abuse was to use peremptories to discriminate against certain classes of people, such as by race or gender.

In 1986, in the case of Batson v. Kentucky,

9
 the U.S. Supreme Court ruled that prosecutors could not use race-based peremptory challenges in criminal cases. Subsequently, the Supreme Court extended the ban to the use of race-based challenges by either party in civil cases. Several unsuccessful attempts were made to extend the prohibition to challenges based on gender. Finally, in 1994, the Court in the following case extended the equal protection guarantee to cover gender.

9 

476 U.S. 79 (1986).

Case 3-3 J.E.B. v. Alabama, ex rel. T.B.

Supreme Court of the United States 511 U.S. 127 (1994)

On behalf of T.B., the unwed mother of a minor child, the State of Alabama filed a complaint for paternity and child support against J.E.B. A panel of 12 males and 24 females was called by the court as potential jurors. After the court removed three individuals for cause, only 10 males remained. The state used its peremptory challenges to remove nine male jurors and J.E.B. removed the tenth, resulting in an all-female jury. The court rejected J.E.B.’s objection to the gender-based challenges, and the jury found J.E.B. to be the father.

J.E.B. appealed to the court of appeals, who affirmed the trial court’s decision that the Equal Protection Clause does not prohibit gender-based challenges. The Alabama Supreme Court denied certiorari, and J.E.B. then appealed to the U.S. Supreme Court.

Justice Blackmun

Today we reaffirm what should be axiomatic: Intentional discrimination on the basis of gender by state actors violates the Equal Protection Clause, particularly where, as here, the discrimination serves to ratify and perpetuate invidious, archaic, and overbroad stereotypes about the relative abilities of men and women.

Discrimination on the basis of gender in the exercise of peremptory challenges is a relatively recent phenomenon. Gender-based peremptory strikes were hardly practicable for most of our country’s existence, since, until the 20th century, women were completely excluded from jury service.

Many States continued to exclude women from jury service well into the present century, despite the fact that women attained suffrage upon ratification of the Nineteenth Amendment in 1920.

Despite the heightened scrutiny afforded distinctions based on gender, respondent argues that gender discrimination in the selection of the petit jury should be permitted, though discrimination on the basis of race is not. Respondent suggests that “gender discrimination in this country . . . has never reached the level of discrimination” against African-Americans, and therefore gender discrimination, unlike racial discrimination, is tolerable in the courtroom.

While the prejudicial attitudes toward women in this country have not been identical to those held toward racial minorities, the similarities between the experiences of racial minorities and women, in some contexts, “overpower those differences.” Certainly, with respect to jury service, African-Americans and women share a history of total exclusion.

Discrimination in jury selection, whether based on race or on gender, causes harm to the litigants, the community, and the individual jurors who are wrongfully excluded from participation in the judicial process. The litigants are harmed by the risk that the prejudice which motivated the discriminatory selection of the jury will infect the entire proceedings. The community is harmed by the State’s participation in the perpetuation of invidious group stereotypes and the inevitable loss of confidence in our judicial system that state-sanctioned discrimination in the courtroom engenders.

When state actors exercise peremptory challenges in reliance on gender stereotypes, they ratify and reinforce prejudicial views of the relative abilities of men and women. Because these stereotypes have wreaked injustice in so many other spheres of our country’s public life, active discrimination by litigants on the basis of gender during jury selection “invites cynicism respecting the jury’s neutrality and its obligation to adhere to the law.”

In recent cases we have emphasized that individual jurors themselves have a right to nondiscriminatory jury selection procedures.

As with race-based Batson claims, a party alleging gender discrimination must make a prima facie showing of intentional discrimination before the party exercising the challenge is required to explain the basis for the strike. When an explanation is required, it need not rise to the level of a “for cause” challenge; rather, it merely must be based on a juror characteristic other than gender, and the proffered explanation may not be pretextual.

Equal opportunity to participate in the fair administration of justice is fundamental to our democratic system. It reaffirms the promise of equality under the law—that all citizens, regardless of race, ethnicity, or gender, have the chance to take part directly in our democracy. When persons are excluded from participation in our democratic processes solely because of race or gender, this promise of equality dims, and the integrity of our judicial system is jeopardized.

In view of these concerns, the Equal Protection Clause prohibits discrimination in jury selection on the basis of gender, or on the assumption that an individual will be biased in a particular case for no reason other than the fact that the person happens to be a woman or happens to be a man. As with race, the “core guarantee of equal protection, ensuring citizens that their State will not discriminate . . ., would be meaningless were we to approve the exclusion of jurors on the basis of such assumptions, which arise solely from the jurors’ [gender].”
*

* 
J.E.B. v. Alabama, ex rel. T.B, Supreme Court of the United States 511 U.S. 127 (1994).

Reversed and remanded in favor of Defendant, J.E.B.

Justice Scalia

, Dissenting

Today’s opinion is an inspiring demonstration of how thoroughly up-to-date and right-thinking we Justices are in matters pertaining to the sexes, and how sternly we disapprove the male chauvinist attitudes of our predecessors. The price to be paid for this display—a modest price, surely—is that most of the opinion is quite irrelevant to the case at hand. The hasty reader will be surprised to learn, for example, that this lawsuit involves a complaint about the use of peremptory challenges to exclude men from a petit jury. To be sure, petitioner, a man, used all but one of his peremptory strikes to remove women from the jury (he used his last challenge to strike the sole remaining male from the pool), but the validity of his strikes is not before us. Nonetheless, the Court treats itself to an extended discussion of the historic exclusion of women not only from jury service, but also from service at the bar (which is rather like jury service, in that it involves going to the courthouse a lot). All this, as I say, is irrelevant since the case involves state action that allegedly discriminates against men.

The Court also spends time establishing that the use of sex as a proxy for particular views or sympathies is unwise and perhaps irrational. The opinion stresses the lack of statistical evidence to support the widely held belief that, at least in certain types of cases, a juror’s sex has some statistically significant predictive value as to how the juror will behave. This assertion seems to place the Court in opposition to its earlier Sixth Amendment “fair cross-section” cases. (“Controlled studies . . . have concluded that women bring to juries their own perspectives and values that influence both jury deliberation and result.”)

Of course the relationship of sex to partiality would have been relevant if the Court had demanded in this case what it ordinarily demands: that the complaining party have suffered some injury. Leaving aside for the moment the reality that the defendant himself had the opportunity to strike women from the jury, the defendant would have some cause to complain about the prosecutor’s striking male jurors if male jurors tend to be more favorable towards defendants in paternity suits. But if men and women jurors are (as the Court thinks) fungible, then the only arguable injury from the prosecutor’s “impermissible” use of male sex as the basis for his peremptories is injury to the stricken juror, not to the defendant. Indeed, far from having suffered harm, petitioner, a state actor under precedents, has himself actually inflicted harm on female jurors. The Court today presumably supplies petitioner with a cause of action by applying the uniquely expansive third-party standing analysis of according petitioner a remedy because of the wrong done to male jurors. Insofar as petitioner is concerned, this is a case of harmless error if there ever was one; a retrial will do nothing but divert the State’s judicial and prosecutorial resources, allowing either petitioner or some other malefactor to go free.

The core of the Court’s reasoning is that peremptory challenges on the basis of any group characteristic subject to heightened scrutiny are inconsistent with the guarantee of the Equal Protection Clause. That conclusion can be reached only by focusing unrealistically upon individual exercises of the peremptory challenge, and ignoring the totality of the practice. Since all groups are subject to the peremptory challenge (and will be made the object of it, depending upon the nature of the particular case), it is hard to see how any group is denied equal protection.

Even if the line of our later cases guaranteed by today’s decision limits the theoretically boundless Batson principle to race, sex, and perhaps other classifications subject to heightened scrutiny, much damage has been done. It has been done, first and foremost, to the peremptory challenge system, which loses its whole character when (in order to defend against “impermissible stereotyping” claims) “reasons” for strikes must be given. The right of peremptory challenge “is,” as Blackstone says, “an arbitrary and capricious right; and it must be exercised with full freedom, or it fails of its full purpose.”

And damage has been done, secondarily, to the entire justice system, which will bear the burden of the expanded quest for “reasoned peremptories” that the Court demands. The extension of Batson to sex, and almost certainly beyond, will provide the basis for extensive collateral litigation. . . . Another consequence, as I have mentioned, is a lengthening of the voir dire process that already burdens trial courts.

The irrationality of today’s strike-by-strike approach to equal protection is evident from the consequences of extending it to its logical conclusion. If a fair and impartial trial is a prosecutor’s only legitimate goal; if adversarial trial stratagems must be tested against that goal in abstraction from their role within the system as a whole; and if, so tested, sex-based stratagems do not survive heightened scrutiny—then the prosecutor presumably violates the Constitution when he selects a male or female police officer to testify because he believes one or the other sex might be more convincing in the context of the particular case, or because he believes one or the other might be more appealing to a predominantly male or female jury. A decision to stress one line of argument or present certain witnesses before a mostly female jury—for example, to stress that the defendant victimized women—becomes, under the Court’s reasoning, intentional discrimination by a state actor on the basis of gender.
*

* 
J.E.B. v. Alabama, ex rel. T.B, Supreme Court of the United States 511 U.S. 127 (1994).

I dissent.

Critical Thinking About The Law

The reasoning in 

Case 3-3

 is played out with Batson v. Kentucky standing tall and visible in the background. The legal system reinforces our ethical preference for order. The resulting dependability of our legal rules serves as a guide for business decisions, facilitating the many transactions required by modern business.

Nevertheless, the courts recognize that rules must evolve as our social needs and understandings change. Hence, the courts must struggle with achieving a balance between order and flexibility. J.E.B. provides an opportunity to use our critical thinking skills to see this tension in action.

1. What facts in our society have become more visible such that Justice Blackmun feels it appropriate to expand the application of Batson?

Clue: What about our history makes Blackmun’s reasoning less likely to have been the basis for a Supreme Court decision in 1950?

2. Justice Blackmun disagrees with the respondent concerning the comparative “level of discrimination” experienced by nonwhites and women. Legal reasoning frequently contains phrases like level of discrimination that require some numerical determination—but recognize that clear numbers measuring such a level are hard to come by.  As critical thinkers, you can often see soft spots in reasoning by asking, “Now, how are they measuring that concept?” Could you help Justice Blackmun measure “level of discrimination” by suggesting what data might be useful for this determination?

Clue: Start with the number of people potentially affected, the probability that they would be affected, and the extent of the harm.

3. Justice Scalia does not categorically disagree with extension of Batson. What facts would have had to be different for Scalia to have concurred with the majority?

Clue: Find the section in his dissent in which he explains the inadequacies in the majority’s reasoning.

The voir dire process has changed significantly over the years, and to many lawyers, a successful voir dire is the essential element in winning a case. Jury selection today has become a “science,” and in most cases involving large potential judgments, at least one side, and often both, use a professional jury selection service. An example of one such service is Litigation Sciences, a firm established in 1979. By 1989, 10 years later, the firm claimed to have handled more than 900 cases, with a win figure of 90 to 95 percent. It employed a full-time staff of more than 100, and the average cost of its services was approximately $200,000, although some cases ran into the millions.

10

 Its clients include both major law firms and corporations.

10 

Maureen E. Lane, “Twelve Carefully Selected Not So Angry Men: Are Jury Consultants Destroying the American Legal System?” Suffolk U. L. Rev. 32: 463 (1999).

Some of the services include identifying demographic data to help lawyers build a profile of the ideal juror, helping design questions for the lawyers to ask during voir dire, and providing such post–voir dire services as mock juries and shadow juries.

A 

mock jury

 is a body of individuals whose demographic makeup matches that of the actual jury. The lawyers practice their case before the mock jury to find out how receptive the “jurors” are to their arguments and how the mock jurors relate to the witnesses. Lawyers can gain valuable information about what they need to change before actually presenting the case. Depending on how much money a client has, lawyers may go through multiple “trials” before a mock jury.

mock jury

Group of individuals, demographically matched to the actual jurors in a case, in front of whom lawyers practice their arguments before presenting the case to the actual jury.

A 

shadow jury

 again matches the demographics of the real jury, but the shadow jury actually sits in the courtroom during the trial. They “deliberate” at the end of each day, so the lawyer has an ongoing idea of how the case is faring. The shadow jury’s deliberations may let a lawyer know when damage has been done to the case that should be repaired. After the trial is finished, the shadow jury deliberates for a predetermined, brief period. Their “verdict” then helps the lawyer decide whether to try to settle the case before the jury comes back with a verdict. (Remember, the parties can agree to settle at any time until the judge hands down the final decision in the case.)

shadow jury

Group of individuals, demographically matched to the actual jurors in a case, that sits in the courtroom during a trial and then “deliberates” at the end of each day so that lawyers have continuous feedback as to how their case is going.

You can see from this brief discussion how valuable a jury selection service can be. You can also see why many argue that such services should not be allowed. After all, they give a tremendous advantage to the client with more money to spend on the trial.

Opening Statements

Once a jury has been impaneled, or selected, the case begins with the opening statements. Each party’s attorney explains to the judge and the jury what facts he or she intends to prove, the legal conclusions to which these facts will lead, and how the case should be decided.

Plaintiff’s Case

The plaintiff then presents his or her case, which consists of examining witnesses and presenting evidence. The procedure for each witness is the same. First, the plaintiff’s attorney questions the witness in what is called direct examination. The plaintiff’s lawyer asks questions designed to elicit from the witnesses facts that support the plaintiff’s case. The opposing counsel may then cross-examine the witness, but may ask only questions pertaining to the witness’s direct examination. The purpose of cross-examination is often to “poke holes” in the witness’s testimony or to reduce the credibility of the witness. The plaintiff’s attorney then has the opportunity for 

redirect examination

 to repair any damage done by the cross-examination. The opposing counsel then has a last opportunity to cross-examine the witness to address facts brought out in redirect examination. This procedure is followed for each of the plaintiff’s witnesses.

redirect examination

Questioning by the directing attorney following cross-examination. The scope of the questions during redirect is limited to questions asked in the cross-examination.

Immediately following the plaintiff’s case, the defendant may make a motion for a directed verdict. In making such a motion, the defendant is stating to the court that even if all the plaintiff’s factual allegations are true, the plaintiff has not proved his or her case. For example, as will be discussed in 

Chapter 11

, to prove a case of negligence, the plaintiff must prove that the defendant breached his or her duty to the plaintiff, causing compensable injury. If the plaintiff offers no evidence of any compensable injury, then there can be no judgment for the plaintiff. In such a case, a motion for a directed verdict would be granted, and the case would be dismissed. Such motions are rarely granted, because the plaintiff usually introduces some evidence of every element necessary to establish the existence of his or her case.

A motion for a directed verdict also may be made by either party after the presentation of the defendant’s case. The party filing the motion (the moving party) is saying that even if the judge looks at all the evidence in the light most favorable to the other party, it is overwhelmingly clear that the only decision the jury could come to is that the moving party is entitled to judgment in his or her favor.

Defendant’s Case

If the defendant’s motion for a directed verdict is denied, the trial proceeds with the defendant’s case in chief. The defendant’s witnesses are questioned in the same manner as were the plaintiff’s, except that it is the defendant’s attorney who does the direct and redirect examinations, and the plaintiff’s attorney is entitled to cross-examine the witnesses.

Conference on Jury Instructions

If the case is being heard by a jury, the attorneys and the judge then retire for a conference on jury instructions. Jury instructions are the court’s explanation to the jury of what legal decision they must make if they find certain facts to be true. Each attorney presents to the judge the set of jury instructions he or she feels will enable the jury to accurately apply the law to the facts. Obviously, each attorney tries to state the law in the manner most favorable to his or her client. The judge confers with the attorneys regarding their proposed instructions and then draws up the instructions for the jury.

Closing Arguments

The attorneys’ last contact with the jury then follows, as they present their closing arguments. The party who has the burden of proof, the plaintiff, presents the first closing argument; the defendant’s closing argument follows. Finally, the plaintiff is entitled to a 

rebuttal

. The judge then reads the instructions to the jury, and the jurors retire to the jury room to deliberate. When they reach a decision, the jurors return to the courtroom, where their verdict is read.

rebuttal

A brief additional argument by the plaintiff to address any important matters brought out in the defendant’s closing argument.

Posttrial Motions

The party who loses has a number of options. A motion for a judgment notwithstanding the verdict may be made. This motion is a request for the judge to enter a judgment contrary to that handed down by the jury on the ground that, as a matter of law, the decision could only have been different from that reached by the jury. For example, if a plaintiff requests damages of $500 but introduces evidence of only $100 in damages, the jurors cannot award the plaintiff the $400 for unsubstantiated damages. If they do so, the defendant would file a motion for a judgment notwithstanding the verdict. Alternatively, the dissatisfied party may file a motion for a new trial, on the ground that the verdict is clearly against the weight of the evidence. If neither of these motions is granted and the judge enters a judgment in accordance with the verdict, the losing party may appeal the decision.

Appellate Procedure

As explained earlier, the court to which the case is appealed depends on the court in which the case was originally heard. If a case was heard in a federal district court, it is appealed to the U.S. Circuit Court of Appeals for the geographic region in which the district court is located. If heard in a state trial court, the case is appealed to that state’s intermediate appellate court or, if none exists, to the state’s final appellate court.

Applying the Law to the Facts . . .

Let’s say that Annie’s case is heard in a federal district court in Connecticut. During the case Annie is in the process of moving to Oregon. After the judge dismisses her case, she seeks to appeal the case in the 9th Circuit Court of Appeals, because she now lives in the 9th Circuit. Is Annie allowed to do this? Does the location of the court to which she can appeal change because of her move?

To appeal a case, the losing party must allege that a prejudicial error of law occurred during the trial. A prejudicial error is one that is so substantial that it could have affected the outcome of the case. For example, the judge may have ruled as admissible in court certain evidence that had a major impact on the decision, when that evidence was legally inadmissible. Or the party may argue that the instructions the judge read to the jury were inaccurate and resulted in a misapplication of the law to the facts.

When a case is appealed, there is not a new trial. The attorney for the appealing party (the appellant) and the attorney for the party who won in the lower court (the appellee) file briefs, or written arguments, with the court of appeals. They also generally present oral arguments before the appeals court. The court considers these arguments, reviews the record of the case, and renders a decision. The decisions of the appellate court can take a number of forms. The court may accept the decision of the lower court and 

affirm

 that decision. Alternatively, the appellate court may conclude that the lower court was correct in its decision, except for granting an inappropriate remedy, and so it will 

modify

 the remedy. If the appellate court decides that the lower court was incorrect in its decision, that decision will be 

reversed

. Finally, if the appeals court feels that an error was committed, but it does not know how that error would have affected the outcome of the case, it will 

remand

 the case to the lower court for a new trial.

affirm

Term for an appellate court’s decision to uphold the decision of a lower court in a case that has been appealed.

modify

Term for an appellate court’s decision that, although the lower court’s decision was correct, it granted an inappropriate remedy that should be changed.

reverse

Term for an appellate court’s decision that the lower court’s decision was incorrect and cannot be allowed to stand.

remand

Term for an appellate court’s decision that an error was committed that may have affected the outcome of the case and that the case should therefore be returned to the lower court.

Although the appeals procedure may sound relatively simple compared with the initial trial procedure, appeals require a great deal of work on the part of the attorneys. They are consequently expensive. Thus, when deciding whether to appeal, the businessperson must consider how much money he or she wishes to spend. If a judgment is rendered against a businessperson, it may be less expensive to pay the judgment than to appeal.

Another factor to consider when one is deciding whether to appeal is the precedential value of the case. The case may involve an important issue of law that a party hopes may be decided in her or his favor by an appeals court. If she or he anticipates similar suits arising in the future, it may be important to get a favorable ruling, and if the case appears to be strong, an appeal may be desirable.

Appellate courts, unlike trial courts, are usually composed of a bench of at least three judges. There are no juries. The decision of the appeals court is determined by the majority of the judges. One of the judges who votes with the majority records the court’s decision and their reasons in what is called the majority opinion. These have precedential value; they are used by judges to make future decisions and by attorneys in advising their clients as to the appropriate course of behavior in similar situations. If any of the judges in a case agrees with the ultimate decision of the majority but for different reasons, he or she may write a concurring opinion, stating how this conclusion was reached. Finally, the judge or judges disagreeing with the majority may write dissenting opinions, giving their reasons for reaching a contrary conclusion. Dissenting opinions may be cited in briefs by attorneys arguing that the law should be changed. Dissents may also be cited by an appellate judge who decides to change the law.

For most cases, only one appeal is possible. In some states in which there is both an intermediate and a superior court of appeals, a losing party may appeal from the intermediate appellate court to the state supreme court. In a limited number of cases, a losing party may be able to appeal from a state supreme court or a federal circuit court of appeals to the U.S. Supreme Court.

Appeal to the U.S. Supreme Court

Every year, thousands of individuals attempt to have their appeals heard by the U.S. Supreme Court. The Court hears, however, only about 80 cases every year on average. When a party wishes to have its case heard by the highest court in the nation, it files a petition with the Court, asking it to issue a writ of certiorari, which is an order to the lower court to send the record of the case to the Supreme Court.

As you may guess from the number of cases heard by the Supreme Court, very few writs are issued. The Justices review the petitions they receive and will issue a writ only when at least four Justices vote to hear the case. The Court is most likely to issue a writ when (1) the case presents a substantial federal question that has not yet been addressed by the Supreme Court; (2) the case involves a matter that has produced conflicting decisions from the various circuit courts of appeal and is, therefore, in need of resolution; (3) a state court of last resort holds that a federal law is invalid or upholds a state law that has been challenged as violating federal law; or (4) a federal court has ruled that an act of Congress is unconstitutional.

It is often difficult to predict whether the Court will hear a case. In the first instance in the preceding list, for example, a federal question is simply an issue arising under the federal Constitution, treaties, or statutes. Substantiality is more difficult to define. If the decision would affect a large number of people or is likely to arise again if not decided, it may be considered substantial. Sometimes, however, a case may in fact involve a very important federal question of statutory interpretation, yet the Supreme Court may believe that the problem was unclear drafting by Congress, and so it may choose not to hear the case in anticipation of an amendment of the federal statute whose interpretation is at issue. If the Supreme Court refuses to hear a case, this refusal has no precedential effect.

Class Actions

In discussing the stages of civil litigation, we have been talking as if there were only one plaintiff and one defendant, but multiple parties may join as plaintiffs and multiple parties may be named or joined as defendants. For example, if a person gets injured using a defective product, he or she would probably sue both the manufacturer and the retailer.

There is a special kind of case, however, in which the plaintiff is not a single party, or even a few parties, but rather a large group of individuals who may not even know each other but who all share a common complaint against the defendant. This kind of case is referred to as a class action. For example, all of the shareholders of a corporation may want to sue a member of the board of directors. One of the most common class actions involves product liability cases, situations in which numerous people injured by the same product join together to sue the manufacturer of that product. Other kinds of cases that may give rise to class action suits include discrimination claims and antitrust claims. Sometimes, people come together to bring a class action because their individual claims are so small that separate litigation really is not feasible; when all the claims are combined, though, the amount is large enough that it will be profitable for a lawyer to take the case.

Some see class actions as efficient because, instead of all the individuals filing and trying individual cases based on the same issue, all of the claims can be dealt with in one action. This efficiency seems even more significant when complex issues are involved and the costs of trial preparation are high. When a class action is brought, the case is usually filed in the name of one or two of the parties and all others who are similarly situated. The named plaintiffs in the case have to pay all the court costs, including the costs of finding the names and addresses of everyone in the class and notifying them.

The first step in a class action suit, which differentiates it from other suits, is certification of the class. The court will review the claims to ensure that all the named plaintiffs indeed share a common interest that can adequately be raised by the named plaintiffs. Defendants will often challenge the certification of the class, knowing that if the class does not get certified, the named plaintiffs may not have the resources to bring their cases as separate, individual actions.

The following Supreme Court case illustrates how difficult it sometimes is to meet the standard for class certification.

 Case 3-4 Wal-Mart Stores Inc. v. Dukes

United States Supreme Court 131 S. Ct. 254 (2011)

Three current or former Wal-Mart employees represented 1.5 million claimants who alleged that the company discriminated against them on the basis of sex. They claimed that local managers’ discretion over pay and promotions is exercised disproportionately in favor of men, leading to an unlawful disparate impact on female employees, and they sought injunctive and declaratory relief, punitive damages, and back pay.

The District Certified the class, and a divided appellate court upheld the certification. The majority concluded that the respondents’ evidence of commonality was sufficient to “raise the common question of whether Wal-Mart’s female employees nationwide were subjected to a single set of corporate policies (not merely a number of independent discriminatory acts) that may have worked to unlawfully discriminate against them in violation of Title VII.” Wal-Mart appealed the decision.

Justice Scalia

Importantly for our purposes, respondents claim that the discrimination to which they have been subjected is common to all Wal-Mart’s female employees. The basic theory of their case is that a strong and uniform “corporate culture” permits bias against women to infect, perhaps subconsciously, the discretionary decision-making of each one of Wal-Mart’s thousands of managers—thereby making every woman at the company the victim of one common discriminatory practice. Respondents therefore wish to litigate the Title VII claims of all female employees at Wal-Mart’s stores in a nationwide class action.

. . . Under Rule 23(a), the party seeking certification must demonstrate, first, that: “(1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.”

Second, the proposed class must satisfy at least one of the three requirements listed in Rule 23(b). Respondents rely on Rule 23(b)(2), which applies when “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.

. . . [R]espondents moved . . . to certify a plaintiff class consisting of [a]ll women employed at any Wal-Mart domestic retail store at any time since December 26, 1998, who have been or may be subjected to Wal-Mart’s challenged pay and management track promotions policies and practices. As evidence that there were indeed “questions of law or fact common to” all the women of Wal-Mart, . . . respondents relied chiefly on three forms of proof: statistical evidence about pay and promotion disparities between men and women at the company, anecdotal reports of discrimination from about 120 of Wal-Mart’s female employees, and the testimony of a sociologist, Dr. William Bielby, who conducted a “social framework analysis” of Wal-Mart’s “culture” and personnel practices, and concluded that the company was “vulnerable” to gender discrimination.

The crux of this case is commonality—the rule requiring a plaintiff to show that “there are questions of law or fact common to the class.” That language is easy to misread, since [a]ny competently crafted class complaint literally raises common questions. For example: Do our managers have discretion over pay? . . . Reciting these questions is not sufficient to obtain class certification. Commonality requires the plaintiff to demonstrate that the class members have suffered the same injury . . . This does not mean merely that they have all suffered a violation of the same provision of law . . . Their claims must depend upon a common contention—for example, the assertion of discriminatory bias on the part of the same supervisor. That common contention, moreover, must be of such a nature that it is capable of classwide resolution—which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.

“What matters to class certification . . . is not the raising of common ‘questions’—even in droves—but, rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation. Dissimilarities within the proposed class are what have the potential to impede the generation of common answers.”

. . . Here respondents wish to sue about literally millions of employment decisions at once. Without some glue holding the alleged reasons for all those decisions together, it will be impossible to say that examination of all the class members’ claims for relief will produce a common answer to the crucial question why was I disfavored.

Falcon suggested two ways in which that conceptual gap might be bridged. First, if the employer “used a biased testing procedure to evaluate both applicants for employment and incumbent employees, a class action on behalf of every applicant or employee who might have been prejudiced by the test clearly would satisfy the commonality and typicality requirements. . . .” Second, “[s]ignificant proof that an employer operated under a general policy of discrimination conceivably could justify a class of both applicants and employees if the discrimination manifested itself in hiring and promotion practices in the same general fashion, such as through entirely subjective decision-making processes.”

We think that statement precisely describes respondents’ burden in this case. The first manner of bridging the gap obviously has no application here; Wal-Mart has no testing procedure or other companywide evaluation method that can be charged with bias. The whole point of permitting discretionary decision-making is to avoid evaluating employees under a common standard. The second manner of bridging the gap requires “significant proof” that Wal-Mart “operated under a general policy of discrimination.” That is entirely absent here. Wal-Mart’s announced policy forbids sex discrimination . . . and as the District Court recognized the company imposes penalties for denials of equal employment opportunity. The only evidence of a “general policy of discrimination” respondents produced was the testimony of Dr. William Bielby. Relying on “social framework” analysis, Bielby testified that Wal-Mart has a “strong corporate culture,” that makes it “‘vulnerable’” to “gender bias.” He could not, however, “determine with any specificity how regularly stereotypes play a meaningful role in employment decisions at Wal-Mart. . . . [W]e can safely disregard what he has to say. It is worlds away from “significant proof” that Wal-Mart “operated under a general policy of discrimination.”

The only corporate policy that the plaintiffs’ evidence convincingly establishes is Wal-Mart’s “policy” of allowing discretion by local supervisors over employment matters. On its face, of course, that is just the opposite of a uniform employment practice that would provide the commonality needed for a class action. . . . It is also a very common and presumptively reasonable way of doing business—one that we have said should itself raise no inference of discriminatory conduct.

. . . Respondents have not identified a common mode of exercising discretion that pervades the entire company. . . . In a company of Wal-Mart’s size and geographical scope, it is quite unbelievable that all managers would exercise their discretion in a common way without some common direction. Respondents attempt to make that showing by means of statistical and anecdotal evidence, but their evidence falls well short. The statistical evidence consists primarily of regression analyses performed by Dr. Richard Drogin. . . . Drogin concluded that “there are statistically significant disparities between men and women at Wal-Mart . . . [and] these disparities . . . can be explained only by gender discrimination”. . . . Bendick compared workforce data from Wal-Mart and competitive retailers and concluded that Wal-Mart “promotes a lower percentage of women than its competitors.” Even if they are taken at face value, these studies are insufficient to establish that respondents’ theory can be proved on a classwide basis.

In Falcon, we held that one named plaintiff’s experience of discrimination was insufficient to infer that “discriminatory treatment is typical of [the employer’s employment] practices.” . . . A similar failure of inference arises here. . . . A regional pay disparity, for example, may be attributable to only a small set of Wal-Mart stores, and cannot by itself establish the uniform, store-by-store disparity upon which the plaintiffs’ theory of commonality depends.

There is another, more fundamental, respect in which respondents’ statistical proof fails. . . . Other than the bare existence of delegated discretion, respondents have identified no “specific employment practice”—much less one that ties all their 1.5 million claims together. Merely showing that Wal-Mart’s policy of discretion has produced an overall sex-based disparity does not suffice. Respondents’ anecdotal evidence suffers from the same defects, and in addition is too weak to raise any inference that all the individual, discretionary personnel decisions are discriminatory. . . .

In sum, we agree with Chief Judge Kozinski that the members of the class: “held a multitude of different jobs, at different levels of Wal-Mart’s hierarchy, for variable lengths of time, in 3,400 stores, sprinkled across 50 states, with a kaleidoscope of supervisors (male and female), subject to a variety of regional policies that all differed. . . . Some thrived while others did poorly. They have little in common but their sex and this lawsuit.”

Rule 23(b)(2) applies only when a single injunction or declaratory judgment would provide relief to each member of the class. It does not authorize class certification when each individual class member would be entitled to a different injunction or declaratory judgment against the defendant.
*

* 
Wal-Mart Stores Inc. v. Dukes, United States Supreme Court, 131 S. Ct. 254 (2011).

Reversed, in favor of Defendant Wal-Mart

Once the class has been certified, the parties often enter into settlement negotiations. The court will approve a classwide settlement only if it is fair and equitable and benefits the entire class, not just the named plaintiffs and their lawyers. Once a settlement has been approved by the court, it legally satisfies the claims of all the class members.

In an effort to reform class action lawsuits, Congress passed, and President Bush signed, the Class Action Fairness Act of 2005. The Class Action Fairness Act had several intended goals. First, it sought to limit the enormous legal fees attorneys representing plaintiff classes frequently receive as part of their service. Second, the act was written to allow the defendants in class action lawsuits to have greater access to federal courts. Finally, the act was intended to protect the interests of the individual class members and guarantee them equitable compensation.

As part of the new regulations on attorney fees, attorneys now receive compensation based on the actual amount class members claim as compensation, rather than on the gross sum awarded to the plaintiff class. In addition, the court must first approve the award the plaintiff class members are to receive to ensure that the award does not violate the defendants’ due process rights. If the attorney’s fees are not to be determined by the amount of the award, the attorney’s compensation is to be limited to actual time spent working on the case.

Moving beyond attorney’s fees, the Class Action Fairness Act changes the requirements for diversity of citizenship in class actions, as well as the general requirements for federal jurisdiction. The act provides federal courts with jurisdiction over any class action where there is partial diversity of citizenship; that is, if any of the class members is a citizen of a different state than any of the defendants, the federal courts have jurisdiction. The federal courts also have jurisdiction whenever any plaintiff or defendant is a foreign state or the citizen of a foreign state. There must also be at least $5 million in controversy. These new requirements under the act allow more class actions to fall within federal jurisdiction and make it much harder for plaintiffs to pursue their actions in state courts. Business defendants are typically happy with this last change, as they tend to face smaller awards in federal courts than in state courts.

Despite the greater access to federal courts, the act also allows federal courts some discretion in accepting jurisdiction. A district court can choose not to accept jurisdiction over a class action if between one-third and two-thirds of the plaintiff class members and the primary defendants are citizens of the same state. There are also two situations in which the federal court has no choice regarding jurisdiction. When fewer than one-third of the plaintiff class members are residents of the same state as the primary defendants, then the class action will be subjected to federal jurisdiction. If more than two-thirds of the plaintiff class members are residents of the same state as the primary defendants, however, there will be no federal jurisdiction in the case.

As mentioned previously, the act contains a number of provisions that are intended to protect the interests of the individual plaintiff class members. For example, the act forbids any settlement that would result in a net loss to the class members. That is, class members cannot accept a settlement that does not cover their damages, unless the court decides that other, nonmonetary benefits are valuable enough to outweigh the net monetary loss. In addition, class members cannot be awarded different monetary amounts based upon their geographical location. All class members, barring differences in their actual damages, are awarded the same monetary amount.

Global Dimensions of the American Legal System

This chapter has focused on the American legal system. With the growth of multinational corporations and trade among nations, Americans will likely increasingly become involved in disputes in foreign nations, and foreigners will likely increasingly become involved in disputes with Americans and American corporations.

When parties make international agreements, they can incorporate as a term of the agreement their choice of which nation’s court will hear any disputes arising under the agreement. Because of differences between the U.S. litigation system and others, it is important to compare the procedures in each country before choosing a forum. For example, in Japan, there is no procedure comparable to discovery, so parties go to trial not knowing what evidence the other side has.

Linking Law and Business Management

In your management class, you may have learned about a concept known as cost-benefit analysis. This idea is defined as the process by which managers weigh the benefits or revenues of a particular activity in comparison to the costs of performing the action. Usually, managers will decide to pursue an action if the benefits outweigh the costs.

Managers or other decision makers can effectively come to a conclusion as to which alternative to pursue only after the options have been evaluated. Management texts often state that there are three basic steps decision makers should follow in this evaluation: (1) Estimate, as accurately as possible, the potential effects of each of the possible actions. (2) Assign probabilities to each of the expected effects of each decision if the idea were implemented. (3) Compare the possible effects of each alternative decision and the probabilities of each. Meanwhile, consideration should be given to organizational objectives. After taking these three steps, managers will have a better understanding about the benefits and risks of alternative decisions. Therefore, it is hoped that they will be able to understand which choice will be most advantageous to the organization.

A cost-benefit analysis can also be done when a businessperson is faced with the decision of whether to appeal a court decision. The businessperson should examine the costs of the appellate procedures, the probability of the outcome in the appeals court, and the time involved with the appeals process. Thereafter, the businessperson can choose the course that will potentially be most beneficial.

COMPARATIVE LAW CORNER The Judicial System in Germany

The United States and Germany are major trading partners and have many similarities, but the German judicial system is very different from the American judicial system. German law is based on a civil-law tradition rather than a common-law tradition. The United States has a common-law system, which relies on precedents set by previous cases to rule on current cases. German judges make decisions based on the country’s extensive civil codes, rather than previous decisions. German judges are not elected as many American judges are; instead, most are appointed for life, after a probationary period.

The judicial system is a federal system, as in the United States, but German courts are separated by field. The ordinary courts hear most criminal and civil cases, each specialty court (for labor, patents, social, administrative, and fiscal issues) hears cases related to its individual area, and constitutional courts hear cases involving constitutional issues. The courts all have local, land (state), and federal levels. The highest court in Germany is the Bundesverfassungsgericht, the Federal Constitutional Court, which deals only with constitutional issues, unlike the U.S. Supreme Court. Each specialty court has its own highest court of appeals, such as the Federal Court of Germany for the ordinary courts.

Germany does not have any jury trials; all cases are heard by a judge or a panel of judges. Also, the judges are the primary questioners of witnesses. Lawyers can question witnesses after the judges have finished. This legal factfinding method differs from the American method of examination and cross-examination.

With the increase in trade, many foreigners now purchase American goods. Because of differences between court systems, many citizens of foreign countries who have allegedly been injured by U.S. corporations prefer to sue in the United States. In Japan, for example, there are no contingency fees, and an injured plaintiff must pay his or her lawyer’s fees up front, at a cost of 8 percent of the proposed recovery plus nonrefundable court costs. Also, in Japan, there are no class actions.

Summary

Our American legal system is really composed of two systems: a federal system and a state system. When one has a legal dispute, subject matter jurisdiction determines which court system will hear the case. Almost all cases fall within the state court’s jurisdiction. Only the limited number of cases within the exclusive jurisdiction of the federal courts do not. A case may be heard in either court when there is concurrent jurisdiction. Concurrent jurisdiction exists when (1) the case involves a federal question, or (2) there is diversity of citizenship between the plaintiff and the defendant. Besides having subject matter jurisdiction, a court must also have in personam jurisdiction and proper venue to hear a case.

Cases are filed in courts of original jurisdiction. In the state system, these courts are usually called the courts of common pleas or county courts. In the federal system, the courts of original jurisdiction are called the district courts. In the state system, state courts of appeals and state supreme courts have appellate jurisdiction. Depending on the state, there may be either one or two levels of appeal. In the federal system, cases are appealed to the circuit court of appeals and then to the U.S. Supreme Court.

Cases are guided through the courts by attorneys. Juries act as finders of fact in trials. Judges resolve questions of law and, in bench trials, also serve as finders of fact.

There are four basic stages in a lawsuit. (1) In the pretrial stage, there are (a) informal negotiations, (b) pleadings, (c) pretrial motions, (d) discovery, and (e) a pretrial conference. (2) Next comes the trial, with (a) jury selection, (b) opening statements, (c) the plaintiff’s case, (d) the defendant’s case, (e) jury instructions, and (f) closing arguments. (3) Third are the posttrial motions, which may include a motion for a judgment notwithstanding the verdict or a motion for a new trial. (4) The final stage is the appellate stage, during which the party who lost at the trial appeals the case.

. Thinking Critically about Relevant Legal Issues

The Election of Judges

Despite a lack of consensus among legal commentators, there is a clear answer to the debate about whether judges should be elected or appointed. America is a democracy; it is only right that the American people should get to elect all judges. Like the legislative and executive branches of government, the judicial branch functions to provide services to the American people. Those very people deserve to elect their judges just as they elect members of Congress and the president. One of the keys to democracy is having a responsible and responsive government. Judges will be neither responsible nor responsive unless they must face the American people periodically and ask for their votes.

Part of holding judges accountable for their legal decisions is not only choosing to elect or reelect them, but also having the ability to remove a judge who is not performing his duty adequately. The American people should have the option of removing judges who fail to uphold the standards and morals of the community. Accordingly, allowing voters to have recall elections would further prevent judges from engaging in undue judicial activism. Judges who are appointed for life terms are beholden to no one; that life tenure challenges the very essence of democracy.

Sometimes a judge’s ideology or judicial philosophy will change over time; this change affects the decisions the judge will make. When a judge changes her decision-making process, she is no longer staying true to why she was elected in the first place. One way to fix unexpected changes is to have periodic elections for judges. These elections will help to keep judges consistent in their rulings and interpretations, while also preventing surprises for the American people who elected the judges in the first place.

By having elections, out-of-touch judges who do not reflect the current social climate can be removed in favor of judges who are in touch with the American people. This last point has the added benefit of possibly bringing younger people to the bench, thus opening up the possibility for a wider group of Americans to shape the law.

1. How would you frame the issue and conclusion of this essay?

2. What ethical norms does the author primarily rely on in arguing for why judges should be elected?

3. Part of being a critical thinker is avoiding the temptation to dichotomize (look at everything as an either-or situation) and to look for other reasonable alternatives. Does the author engage in any dichotomous thinking? If so, what are other reasonable alternatives?

Assignment On The Internet

As you learned in this chapter, the question of jurisdiction determines whether a court has the power to render a meaningful decision. The growth of Internet commerce, however, brings additional jurisdictional questions and concerns that have yet to be resolved. Use the website corporate.findlaw .com. Search “standards for internet jurisdiction,” then scroll down to the section titled “Other Legal Research.” Click on the first link, titled “Standards for Internet Jurisdiction.” Read this article in order to familiarize yourself with the interactive and passive-use distinctions made in cases of Internet jurisdiction.

Next, apply this distinction to the case of Barton Southern Co., Inc. v. Manhole Barrier Systems, Inc. and JFC Co., 318 F. Supp. 2d 1174 (N.D. Ga. 2004), which can be found using 

findlaw.com

 or through the LexisNexis database. Does the interactive/passive distinction help resolve the issue of jurisdiction in this case? Why or why not?

Clue:  What either-or situations does the author create, and are there third and fourth possibilities?

4. Write an essay that someone who holds an opinion opposite to that of the essay author might write.

Clue:  What other ethical norms could influence an opinion on this issue?

b>b>b>2>Chapter Seven Ethics, Social Responsibility, and the Business Manager

On December 2, 1984, in Bhopal, India, lethal methylisocyanate (MIC) gas leaked from a chemical plant owned by Union Carbide India Ltd., killing approximately 2,000 people and injuring thousands more, many of whom are still receiving treatment. Union Carbide’s chairman, Warren Anderson, a lawyer, flew to India with a pledge of medical support and interim assistance totaling $7 million. He was arrested and deported from the country. Lawsuits on behalf of the deceased and injured were brought by U.S. law firms as well as by the government of India. Litigation continues in Indian courts.

The price of Union Carbide stock dropped from $48 to $33. In August 1984, GAF Corporation attempted to take over Union Carbide. Union Carbide successfully fought off the takeover attempt in 1985. On May 13, 1986, a federal court judge dismissed the personal injury and wrongful death actions, stating that the complaints should be more properly heard in a court in India. The judge attached certain conditions to the dismissal, one of which was that Union Carbide would have to agree to pay any damages awarded by an Indian court. The trial began in August 1988 in a New Delhi court amidst rumors that a former disgruntled employee had sabotaged Union Carbide’s Bhopal plant, causing the gas leakage. In January 1988, Union Carbide shares traded on the New York Stock Exchange for $49, and the much leaner company was one of the 30 companies making up the composite Dow Jones Industrial Average. It might be helpful to read this case, set out in edited form in 

Chapter 8

. For additional and updated facts through 2010, see the comments after 

Case 8-3

.

The Bhopal incident in 1984, along with a stream of insider trading cases, as well “bank bailouts” and as a number of white-collar crime cases (highlighted in 

Chapter 6

) have brought a heightened awareness of the need for debate as to whether the business community has a responsibility solely to shareholders or to other stakeholders as well. Such cases force us to ask ourselves, what should be the legal rules that businesses must obey in their daily operations? Additionally, there are ethical questions that force us to consider how we should behave if we are to live in a better world. Business ethics is the study of the moral practices of the firms that play such an important role in shaping that better world.

Below are results of a 2012 survey ranking countries by executives of companies as to the least corrupt or most corrupt.

Whenever you wonder whether a business decision requires us to think about ethics, simply ask yourself, will this decision affect the quality of life of other people? If the answer is yes, the decision involves ethics. We think you will agree that business ethics is an extremely important aspect of our environment because almost all business decisions influence the quality of our lives.

This chapter presents material on business ethics in a neutral way. Readers are left to make their own choices about what part ethics should play in business decision making and about whether the business community, the trade groups that represent it, and individual managers should act in a “socially responsible” manner. This chapter includes (1) a broad definition of ethics and social responsibility; (2) some recognized theories of ethical thought and their application to business problems; (3) a discussion of individual, corporate, trade association, and professional ethical codes; and (4) schools of social responsibility as applied to business problems. The chapter ends with a brief discussion of some current trends in the area of ethics and social responsibility, as well as some proposals now being debated, which, if implemented, would change the structure of corporate governance.

Critical Thinking About The Law

Business ethics is perhaps one of the most personal and emotional areas in business decision making. Business ethics can be confusing and complex because a right or wrong answer often does not exist. Because this area is so emotional and controversial, it is extremely important to use your critical thinking skills when responding to questions about business ethics. It would be very easy to make arguments based on your gut reaction to cases such as the Bhopal gas incident. You should, however, carefully use your critical thinking skills to draw an informed conclusion. The following questions can help you begin to understand the complexity surrounding business ethics.

1. As critical thinkers, you have learned that ambiguous words—words that have multiple possible meanings—can cause confusion in the legal environment. Perhaps the best example of ambiguity in the legal environment is the phrase social responsibility. What definitions of responsibility can you generate?

Clue: Consider the Bhopal incident. Do you think Union Carbide would have the same definition of social responsibility as the families of the Indian accident victims?

2. It is common for individuals, businesses, judges, and juries each to use different meanings of the phrase social responsibility. Preferences for certain ethical norms might account for these different meanings. If executives of a company thought that security was extremely important, how might their definition of social responsibility be affected?

Clue: Remember the definitions of security in 

Chapter 1

. If Union Carbide valued security, how might the company treat the victims of the Bhopal incident?

3. Your friend discovers that you are taking a class on the legal environment of business. He says, “I’m extremely angry at the cigarette companies. They knew that cigarettes cause cancer. Don’t those companies have a responsibility to protect us?” Because you are trained in critical thinking, you know that his question does not have a simple answer. Keeping your critical thinking skills in mind, how would you intelligently respond to his question?

Clue: Consider the critical thinking questions about ambiguity, ethical norms, and missing information set out in 
Chapter 1
 of this text.

Definition of

Business Ethics

and the Social Responsibility of Business

Business Ethics

Ethics

 is the study of good and bad behavior. 

Business ethics

 is a subset of the study of ethics and is defined as the study of what makes up good and bad business conduct. This conduct occurs when the firm acts as an organization, as well as when individual managers make decisions inside the organization. For example, there may be differences between the way Warren Anderson personally looked at the Bhopal tragedy (a failure of the plant to implement company operating standards) and the way the corporation’s board of directors and the chemical industry did (the Indian government allowed people to live too close to the plant). It is important to look at “business” ethics not as a single monolithic system, but from the perspective of individual managers, corporations, and industrywide ethical concerns. Each may view and judge a particular happening in a different way.

ethics

The study of what makes up good and bad conduct, inclusive of related actions and values.

business ethics

The study of what makes up good and bad conduct as related to business activities and values.

How these groups think depends on their ethical norms and on their philosophy or theory of ethics. To help you understand their thinking, we include a discussion of three schools of ethical thought. Individual managers, corporations, or industries may belong to any one of the schools, as each school has its advocates and refinements. In addition, each school attempts to explain why an action is right or wrong and how one knows it to be right or wrong.

The Social Responsibility of Business

The 

social responsibility

 of business is defined as a concern by business about both its profit-seeking and its non-profit-seeking activities and their intended and unintended impacts on groups and individuals other than management or the owners of a corporation (e.g., consumers, environmentalists, and political groups). Since the late 1960s, an outcry has arisen for businesses to be more socially responsible. This expression of public concern has resulted in part from three factors:

social responsibility

Concern of business entities about profit-seeking and non-profit-seeking activities and their unintended impact on others directly or indirectly involved.

1. The complexity and interdependence of a postindustrial society. No individual or business is an island. If a company builds a chemical plant in Bhopal, India, and its primary purpose is to make profits for its shareholders, can it be held responsible to the public that lives around the plant when there is a gas leak? The public is dependent on the firm’s good conduct, and the firm is dependent on the public and its political representatives to supply labor, an adequate water supply, tax forgiveness, roads, and so on.

2. Political influence that has translated public outcry for socially responsible conduct into government regulation. Whether a malfunction occurs at a nuclear plant at Three Mile Island or a human disaster is caused by a gas leak in Bhopal, India, the political arm of government at all levels sees the solution as more regulation. This attitude pleases the government’s constituents and makes its officials more electable.

3. Philosophical differences about what the obligations of business should be. Neoclassical economic theory would argue that the sole purpose of business is to make a profit for its investing shareholders, who in turn reinvest, creating expanded or new businesses that employ more people, thus creating a higher standard of living.

Different people hold different theories of social responsibility. Some argue for a managerial or coping approach; that is, “throw money” at the problem when it occurs, such as the Bhopal disaster, and it will go away. Others subscribe to a more encompassing theory of social responsibility, holding that business, like any other institution in our society (e.g., unions, churches), has a social responsibility not only to shareholders (or members or congregations) but also to diverse groups, such as consumers and political, ethnic, racial-group, and gender-oriented organizations. These and other schools of social responsibility are discussed later in this chapter.

The following case offers several possible theories of social responsibility as applied to a controversial factual situation.

 Case 7-1 In re Exxon Valdez

U.S. District Court, District of Alaska 296 F. Supp. 2d 107 (2004)

On Good Friday, March 24, 1989, the oil tanker Exxon Valdez was run aground on Bligh Reef in Prince William Sound, Alaska. On March 24, 1989, Joseph Hazelwood was in command of the Exxon Valdez. Defendant Exxon Shipping [Company] owned the Exxon Valdez. Exxon employed Captain Hazelwood, and kept him employed knowing that he had an alcohol problem. The captain had supposedly been rehabilitated, but Exxon knew better before March 24, 1989. Hazelwood had sought treatment for alcohol abuse in 1985 but had “fallen off the wagon” by the spring of 1986. Yet, Exxon continued to allow Hazelwood to command a supertanker carrying a hazardous cargo. Because Exxon did nothing despite its knowledge that Hazelwood was once again drinking, Captain Hazelwood was the person in charge of a vessel as long as three football fields and carrying 53 million gallons of crude oil. The best available estimate of the crude oil lost from the Exxon Valdez into Prince William Sound is about 11 million gallons. Commercial fisheries throughout this area were totally disrupted, with entire fisheries being closed for the 1989 season. Subsistence fishing by residents of Prince William Sound and Lower Cook Inlet villages was also disrupted. Shore-based businesses dependent upon the fishing industry were also disrupted as were the resources of cities such as Cordova. Exxon undertook a massive cleanup effort. Approximately $2.1 billion was ultimately spent in efforts to remove the spilled crude oil from the waters and beaches of Prince William Sound, Lower Cook Inlet, and Kodiak Island. Also, Exxon undertook a voluntary claims program, ultimately paying out $303 million, principally to fishermen whose livelihood was disrupted. [Lawsuits] (involving thousands of plaintiffs) were ultimately consolidated into this case.

The jury awarded a breathtaking $5 billion in punitive damages against Exxon. Exxon appealed the amount of punitive damages [to the U.S. Court of Appeals for the Ninth Circuit]. [T]he Ninth Circuit Court of Appeals in this case reiterated [that] the guideposts for use in determining whether punitive damages are grossly excessive [include] the reprehensibility of the defendant’s conduct. The court of appeals remanded the case [and] unequivocally told this court that “[t]he $5 billion punitive damages award is too high” and “[i]t must be reduced.”

Justice Holland

[T]he reprehensibility of the defendant’s conduct is the most important indicium [indication] of the reasonableness of a punitive damages award. In determining whether a defendant’s conduct is reprehensible, the court considers whether “The harm caused was physical as opposed to economic; the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; the target of the conduct had financial vulnerability; the conduct involved repeated actions or was an isolated incident; and the harm was the result of intentional malice, trickery, or deceit, or mere accident.”

The reprehensibility of a party’s conduct, like truth and beauty, is subjective. One’s view of the quality of an actor’s conduct is the result of complex value judgments. The evaluation of a victim will vary considerably from that of a person not affected by an incident. Courts employ disinterested, unaffected lay jurors in the first instance to appraise the reprehensibility of a defendant’s conduct. Here, the jury heard about what Exxon knew, and what its officers did and what they failed to do. Knowing what Exxon knew and did through its officers, the jury concluded that Exxon’s conduct was highly reprehensible.

Punitive damages should reflect the enormity of the defendant’s offense. Exxon’s conduct did not simply cause economic harm to the plaintiffs. Exxon’s decision to leave Captain Hazelwood in command of the Exxon Valdez demonstrated reckless disregard for a broad range of legitimate Alaska concerns: the livelihood, health, and safety of the residents of Prince William Sound, the crew of the Exxon Valdez, and others. Exxon’s conduct targeted some financially vulnerable individuals, namely subsistence fishermen. Plaintiffs’ harm was not the result of an isolated incident but was the result of Exxon’s repeated decisions, over a period of approximately three years, to allow Captain Hazelwood to remain in command despite Exxon’s knowledge that he was drinking and driving again. Exxon’s bad conduct as to Captain Hazelwood and his operating of the Exxon Valdez was intentionally malicious.

Exxon’s conduct was many degrees of magnitude more egregious [flagrant] [than defendant’s conduct in other cases]. For approximately three years, Exxon management, with knowledge that Captain Hazelwood had fallen off the wagon, willfully permitted him to operate a fully loaded crude oil tanker in and out of Prince William Sound—a body of water which Exxon knew to be highly valuable for its fisheries resources. Exxon’s argument that its conduct in permitting a relapsed alcoholic to operate an oil tanker should be characterized as less reprehensible than [in other cases] suggests that Exxon, even today, has not come to grips with the opprobrium [disgracefulness] which society rightly attaches to drunk driving. Based on the foregoing, the court finds Exxon’s conduct highly reprehensible.

[T]he court reduces the punitive damages award to $4.5 billion as the means of resolving the conflict between its conclusion and the directions of the court of appeals.

[T]here is no just reason to delay entry of a final judgment in this case. The Court’s judgment as to the $4.5 billion punitive damages award is deemed final.

*

* 

In re Exxon Valdez, U.S. District Court, District of Alaska 296 F. Supp. 2d 107 (2004).

Comment:

In February 2008, the U.S. Supreme Court heard oral arguments on appeals from the U.S. Court of Appeals (D.C. Circuit), which had affirmed the U.S. District Court. The United States Supreme Court affirmed the lower courts (S. Ct. 2008).

Theories of Ethical Thought

Consequential Theories

Ethicists, businesspeople, and workers who adhere to a consequential theory of ethics judge acts as ethically good or bad based on whether the acts have achieved their desired results. The actions of a business or any other societal unit are looked at as right or wrong only in terms of whether the results can be rationalized (

Table 7-1

).

This theory is best exemplified by the utilitarian school of thought, which is divided into two subschools: act utilitarianism and rule utilitarianism. In general, adherents of this school judge all conduct of individuals or businesses on whether that conduct brings net happiness or pleasure to a society. They judge an act ethically correct after adding up the risks (unhappiness) and the benefits (happiness) to society and obtaining a net outcome. For example, if it is necessary for a company to pay a bribe to a foreign official in order to get

Table 7-1 Theories of Ethical Thought

Linking Law and Business Business Ethics

Managers often attempt to encourage ethical practices in the workplace. A significant reason for managers’ concern with ethics is to portray their organizations in a favorable light to consumers, investors, and employees. As a means of creating an ethical workplace, there are several methods that managers should implement that you may recall from your management class:

1. Create a code of ethics, which is a formal statement that acts as a guide for making decisions and actions within an organization. Distribution and continual improvement of the code of ethics are also important steps.

2. Establish a workplace or office for the sole purpose of overseeing organizational practices to determine if actions are ethical.

3. Conduct training programs to encourage ethical practices in the organization.

4. Minimize situations in which unethical behavior is common and create conditions in which people are likely to behave ethically. Two practices that often result in unethical behavior are to give unusually high rewards for good performance and uncommonly harsh punishments for poor performance. By eliminating these two causal factors of unethical behavior, managers are more likely to create conditions in which employees choose to behave ethically within the organization. Therefore, a manager’s hope to represent the organization in a respectable manner may be achieved through the institution and implementation of these methods.

Source: S. Certo, Modern Management (Upper Saddle River, NJ: Prentice Hall, 2000), 66–69.

several billion dollars’ worth of airplane contracts, utilitarians would argue, in general, that the payment is ethically correct because it will provide net happiness to society; that is, it will bring jobs and spending to the community where the airplane company is located. If the bribe is not paid, the contracts, jobs, and spending will go to a company somewhere else.

Act utilitarians determine if an action is right or wrong on the basis of whether that individual act (the payment of a bribe) alone brings net happiness to society, as opposed to whether other alternatives (e.g., not paying the bribe or allowing others to pay the bribe) would bring more or less net happiness. Rule utilitarians argue that an act (the payment of the bribe) is ethically right if the performance of similar acts by all similar agents (other contractors) would produce the best results in society or has done so in the past. Rule utilitarians take the position that whatever applicable rule has been established by political representatives must be followed and should serve as a standard in the evaluation of similar acts. If payment of bribes has been determined by the society to bring net happiness, and a rule allowing bribes exists, then rule utilitarians would allow the bribe. In contrast, the Foreign Corrupt Practices Act of 1977, as amended in 1988, which forbids paying bribes to foreign government officials to get business that would not have been obtained without such a payment, is an example of a standard that rule utilitarians would argue must be followed but that would lead to a different result. Hence, the act utilitarians might get the airplane plant, but the rule utilitarians, if they were following the Foreign Corrupt Practices Act, would not.

We must note that both act and rule utilitarians focus on the consequences of an act and not on the question of verifying whether an act is ethically good or bad.

1

 Either one of these theories can be used by individuals or businesses to justify their actions.

2

 Act utilitarians use the principle of utility (adding up the costs and benefits of an act to arrive at net happiness) to focus on an individual action at one point in time. Rule utilitarians believe that one should not consider the consequences of a single act in determining net happiness, but instead should focus on a general rule that exemplifies net happiness for the whole society. 

Case 7-1

 illustrates a rule-utilitarian view of jurisprudence.

1 

W. Lacroix, Principles for Ethics in Business (rev. ed.), 6 (Washington, DC: University Press, 1979).

2 

B. Brennan, “Amending the Foreign Corrupt Practices Act of 1977: Clarifying or Gutting a Law,” Journal of Legislation 2 (1984), for an examination of the rule and act utilitarian schools of thought within the context of the proposed amendment of the 1977 Foreign Corrupt Practices Act.

Deontological Theories

Deontology is derived from the Greek word deon, meaning “duty.” For advocates of deontology, rules and principles determine whether actions are ethically good or bad. The consequences of individual actions are not considered. The golden rule, “Do unto others as you would have them do unto you,” is the hallmark of this theory.

Absolute deontology claims that actions can be judged ethically good or bad on the basis of absolute moral principles arrived at by human reason regardless of the consequences of an action, that is, regardless of whether there is net happiness.

3

 Immanuel Kant (1724–1804) provided an example of an absolute moral principle in his widely studied “categorical imperative.” He stated that a person ought to engage only in acts that he or she could see becoming a universal standard. For example, if a U.S. company bribes a foreign official to obtain a contract to build airplanes, then U.S. society and business should be willing to accept the principle that foreign multinationals will be morally free to bribe U.S. government officials to obtain defense contracts. Of course, the reverse will be true if nonbribery statutes are adopted worldwide. Kant, as part of his statement of the categorical imperative, assumed that everyone is a rational being having free will, and he warned that one ought to “treat others as having intrinsic values in themselves, and not merely as a means to achieve one’s end.”

4

 For deontologists such as Kant, ethical reasoning means adopting universal principles that are applied to everyone equally. Segregation of one ethnic or racial group is unethical because it denies the intrinsic value of each human being and thus violates a general universal principle.

3 

Lacroix, supra note 1, at 13.

4 

R. Wolff, ed., Foundations of the Metaphysics of Moral Thought and Critical Essays 44 (Bobbs-Merrill, 1964).

Humanist Theories

A third school of thought, the humanist school, evaluates actions as ethically good or bad depending on what they contribute to improving inherent human capacities such as intelligence, wisdom, and self-restraint. Many natural law theorists (examined in 

Chapter 2

) believe that humans would arrive by reason alone at standards of conduct that ultimately derive from a divine being or another ultimate source such as nature. For example, if a U.S. business participates in bribing a foreign official, it is not doing an act that improves inherent human capacities such as intelligence and wisdom; thus, the act is not ethical. In a situation that demanded choice, as well as the use of the intelligence and restraint that would prevent a violation of law (the Foreign Corrupt Practices Act of 1977), the particular business would have failed ethically as well as legally.

Applying the Law to the Facts . . .

Jordan is the CEO of a paper manufacturing company. Jordan’s business advisors inform him that there is a cigarette corporation he could take over and he would then be able to increase his profits. Jordan rejects the idea, saying that manufacturing cigarettes would bring suffering to the public. What theory of ethical thought is guiding Jordan’s actions?

Codes of Ethics

Individual Codes of Ethics

When examining business ethics, one must recognize that the corporations, partnerships, and other entities that make up the business community are a composite of individuals. If the readers of this book are asked where they obtained their ethical values, they might respond that their values come from parents, church, peers, teachers, brothers and sisters, or the environment. In any event, corporations and the culture of a corporation are greatly influenced by what ethical values individuals bring to them. Often, business managers are faced with a conflict between their individual ethical values and those of the corporation. For example, a father of three young children, who is divorced and their sole support, is asked by his supervisor to “slightly change” figures that will make the results of animal tests of a new drug look more favorable when reported to the Food and Drug Administration. His supervisor hints that if he fails to do so, he may be looking for another job. The individual is faced with a conflict in ethical values: individual values of honesty and humaneness toward potential users of the drug versus business values of profits, efficiency, loyalty to the corporation, and the need for a job. Which values should determine his actions?

Individual Ethical Codes versus Groupthink

On January 28, 1986, just 74 seconds into its launch, the space shuttle Challenger exploded, killing the first schoolteacher in space, Christa McAuliffe, and six other astronauts on board. A presidential commission set up to investigate the disaster found that faulty O-rings in the booster rockets were to blame. Two engineers testified before the commission that they had opposed the launch but were overruled by their immediate supervisor and other officials of the Thiokol Corporation that manufactured the booster rockets. The two engineers continued to warn of problems with the O-rings until the day before the launch. After the launch, one engineer was assigned to “special projects” for the firm. Another took leave and founded a consulting firm. The second schoolteacher in space, Barbara Morgan, was a backup to McAuliffe. She returned to teaching for 22 years after the Challenger incident until August 8, 2007, when she and six other astronauts were sent (successfully) to the International Space Station on the shuttle Endeavor.

a

a
W. Leary, “Teacher Astronaut to Fly Decade after Challenger,” New York Times, August 7, 2007, p. 11.

On September 11, 2001, two planes flew into the Twin Towers of the World Trade Center in New York City, one plane flew into the Pentagon in Washington, DC, and another flew into a field near Pittsburgh, Pennsylvania. Approximately 3,000 people were killed by terrorists flying the planes. Again, a presidential commission was set up. In 2004, the commission reported that the failure of intermediate-level employees to be heard within intelligence agencies, as well as the inability of agencies such as the Central Intelligence Agency (CIA), Defense Intelligence Agency (DIA), and National Security Agency (NSA) to bring early warning information forward to the decision makers (in the White House), was in part responsible for the events that took place. The CIA director resigned and other officials at some agencies retired. A new structure was set up for intelligence gathering in 2004, which allows a single individual to be responsible for intelligence provided to the president of the United States.

These factual situations are very different, but when reading the testimony presented to the presidential commissions, it appears that, in both cases, there were conflicts between individual ethical values and groupthink. Groupthink, as used here, is defined as a form of thinking that people engage in when they are involved in a cohesive in-group, striving for unanimity, which overrules a realistic appraisal of alternative courses of action. Groupthink refers to “a deterioration of mental efficiency, reality testing, and moral efficiency that results from in-group pressures.”

b

 For the engineers in the Challenger case and the middle-level managers of the intelligence agencies, the question always will remain: Were they part of a groupthink process that altered the outcome? Are there important factual differences in these cases: private-sector employment (Thiokol) as opposed to public-sector intelligence agencies? The rise of the groupthink process is currently popular. It is taught in colleges of business and in other academic sectors. For years, however, solitude had been associated with creativity. Great thinkers of our times (Moses, Buddha, writers of great books) have generally worked by themselves. A very quiet man named Steve Wozniak needed extra quietude to design the first calculators while working at Hewlett-Packard. HP made it easy for Wozniak to collaborate with his colleagues over coffee and donuts between 10 a.m. and 2 p.m. in a separate and easily accessible room. Mr. Wozniak later helped start Apple. The “New Groupthink Process” combines quietude of thinking and people engaged in a cohesive group striving for unanimity.

b
Excerpt from Victims of Groupthink by Irving L. Janis. Published by Houghton Mifflin Harcourt, © 1972.

Groupthink, however, may be necessary in our society. Without it, how would we organize our corporations, the military, and government agencies? If we allowed everyone to think independently, would anyone follow orders in the military or build rocket boosters in industry? Also, people often do not think like whistleblowers (see discussion of the Sarbanes-Oxley Act later in this chapter and in 

Chapter 23

) for fear of losing their status and their jobs, which are often necessary to support egos and families.

Before answering any of the questions posed here, return to 
Chapter 1
 and review the eight steps in critical thinking outlined there.

Corporate Codes of Ethics

The total of individual employees’ ethical values influences corporate conduct, especially in a corporation’s early years. The activities during these years, in turn, form the basis of what constitutes a corporate culture or an environment for doing business. In a free-market society, values of productivity, efficiency, and profits become part of the culture of all companies. Some companies seek to generate productivity by cooperation between workers and management; others motivate through intense production goals that may bring about high labor turnover. Some companies have marketed their product through emphasis on quality and service; others emphasize beating the competition through lower prices.

5

 Over time, these production and marketing emphases have evolved into what is called a corporate culture, often memorialized in corporate codes.

5 

C. Power and D. Vogel, Ethics in the Education of Business Managers 6 (Hastings Center, 1980).

Since the mid-1960s, approximately 90 percent of all major corporations have adopted codes of conduct. In general, the codes apply to upper- and middle-level managers. They are usually implemented by a chief executive officer or a designated agent. They tend to establish sanctions for deviant behavior, ranging from personal reprimands that are placed in the employee’s file, to dismissal. Some formal codes allow for due process hearings within the corporation, in which an employee accused of a violation is given a chance to defend himself or herself. With many employees bringing wrongful dismissal actions in courts of law, formal internal procedures are increasingly evolving to implement due process requirements. A study of corporate codes reveals that the actions most typically forbidden are:6

6 

K. Chatov, “What Corporate Ethics Statements Say,” California Management Review 22: 206 (1980).

· Paying bribes to foreign government officials

· Fixing prices

· Giving gifts to customers or accepting gifts from suppliers

· Using insider information

· Revealing trade secrets

Corporate Ethics

Internal Housecleaning Following several financial scandals involving companies such as Enron, Martha Stewart Living, Inc., ImClone Systems, WorldCom, Inc. (now MCI), and Tyco International (see

 Chapter 6

 for analysis of some of these), Congress passed the Sarbanes-Oxley Act in 2002. This act required publicly traded companies to set up confidential internal systems by April 2003 so that employees and others could have a method of reporting possible illegal or unethical auditing and accounting practices, as well as other problems such as sexual harassment.

Web reporting systems such as Ethicspoint allow employees of companies to click an icon on their computers and be linked anonymously to the reporting services. Employees may report alleged unethical or illegal activity. The reporting system then alerts a management person or the audit committee of the board of directors to any possible problem. Other systems use a special hot-line phone number (800 or 900). No system is perfect, but the key factor is that Sarbanes-Oxley has given legal impetus to “cleaning house” internally.

Whistleblowing protection under Section 806 of Sarbanes-Oxley

7

 prohibits any publicly traded company from “discharging, demoting, suspending, threatening or otherwise discriminating against an employee who provides information to the government or assists in a government investigation regarding conduct that an employee believes may be a violation of the securities laws.” As noted in 
Chapter 23
, penalties are both civil and criminal in nature.

7 

H.R. 3782, signed into law by President George W. Bush on July 30, 2002, effective on August 29, 2002. Pub. L. No. 109–204; 15 U.S.C. § 78d (I)–(3), codified in Exchange Act § 4. See

 Chapter 23

 for a full discussion.

Industry Codes of Ethics

In addition to corporate ethical codes, industry codes exist, such as those of the National Association of Broadcasters or the National Association of Used Car Dealers. In most cases, these codes are rather general and contain either affirmative inspirational guidelines or a list of “shall-nots.” A hybrid model including “dos and don’ts” generally addresses itself to subjects such as:8

8 

See R. Jacobs, “Vehicles for Self-Regulation Codes of Conduct, Credentialing and Standards,” in Self-Regulation, Conference Proceedings (Washington, DC: Ethics Resource).

· Honest and fair dealings with customers

· Acceptable levels of safety, efficacy, and cleanliness

· Nondeceptive advertising

· Maintenance of experienced and trained personnel, competent performance of services, and furnishing of quality products

Most trade associations were formed for the purpose of lobbying Congress, the executive branch, and the regulatory agencies, in addition to influencing elections through their political action committees (PACs). They have not generally been effective in monitoring violations of their own ethical codes. In light of the reasons for their existence and the fact that membership dues support their work, it is not likely that they will be very effective disciplinarians.

Some effective self-regulating mechanisms, however, do exist in industries. In 
Chapter 23
, readers will see that self-regulating organizations (SROs) such as the National Association of Securities Dealers and the New York Stock Exchange have used the authority delegated to them by the Securities and Exchange Commission (SEC) in an extremely efficient manner. In addition, the Council of Better Business Bureaus, through its National Advertising Division (NAD), has provided empirical evidence that self-regulation can be effective. The NAD seeks to monitor and expose false advertising through its local bureaus and has done an effective job, receiving commendations from a leading consumer advocate, Ralph Nader.

9

9 

See R. Tankersley, “Advertising: Regulation, Deregulation and Self-Regulation,” in Self-Regulation, Conference Proceedings, supra note 7, at 45.

Professional Codes of Ethics

Within a corporation, managers often interact with individual employees who are subject to “professional” codes of conduct that may supersede corporate or industrywide codes in terms of what activities they can participate in and still remain licensed professionals. For example, under the Model Code of Professional Responsibility, a lawyer must reveal the intention of his or her client to commit a crime and the information necessary to prevent the crime.

10

 When a lawyer, a member of the law department of Airplane Corporation X, learns that his company deliberately intends to bribe a high-level foreign official in order to obtain an airplane contract, he may be forced, under the Model Code, to disclose this intention, because the planned bribe is a violation of the Foreign Corrupt Practices Act of 1977, as amended, an act that has criminal penalties. Failure to disclose could lead to suspension or disbarment by the lawyer’s state bar. Management must be sensitive to this and to the several professional codes that exist (discussed later in this chapter).

10 

See Model Code of Professional Responsibility DR 4-401(C) and Formal Op. 314 (1965).

Professionals is an often-overused term, referring to everything from masons to hair stylists to engineers, lawyers, and doctors. When discussing professions or professionals here, we mean a group that has the following characteristics:

· Mandatory university educational training before licensing, as well as continuing education requirements

· Licensing-examination requirements

· A set of written ethical standards that is recognized and continually enforced by the group

· A formal association or group that meets regularly

· An independent commitment to the public interest

· Formal recognition by the public as a professional group

Management must often interact with the professions outlined in the following paragraphs. Each of them has a separate code of conduct. An awareness of this fact may lead to a greater understanding of why each group acts as it does.

Accounting

The American Institute of Certified Public Accountants (AICPA) has promulgated a code of professional ethics and interpretive rules. The Institute of Internal Auditors has set out a code of ethics, as well as a Statement of Responsibilities of Internal Auditors. In addition, the Association of Government Accountants has promulgated a code of ethics.

Disciplinary procedures are set forth for both individuals and firms in the Code of Professional Ethics for Certified Public Accountants (CPAs). Membership in the AICPA is suspended without a hearing if a judgment of conviction is filed with the secretary of the institute as related to the following:11

11 

See AICPA Professional Standards, vol. 2, Disciplinary Suspensions and Termination of Membership Hearings, GL 730.01. See AICPA Professional Standards, vol. 2, Disciplinary Suspensions and Termination of Membership Hearings, GL 730.01. See AICPA Professional Standards, vol. 2, Disciplinary Suspensions and Termination of Membership Hearings, GL 730.01. The United States Public Company Accounting Oversight Board was established in 2012 to oversee accounting standards. Public No. 107-204 (Codified as Exchange Act Sec. 4, 15 U.S.C. Sec. 78(d).

· A felony as defined under any state law

· The willful failure to file an income tax return, which the CPA as an individual is required to file

· Filing a fraudulent return on the part of the CPA for his or her own return or that of a client

· Aiding in the preparation of a fraudulent income tax return of a client

The AICPA Division for CPA Firms is responsible for disciplining firms, as opposed to individuals. Through its SEC practice and its private company sections, this division requires member firms to (1) adhere to quality-control standards, (2) submit to peer review of their accounting and audit practices every three years, (3) ensure that all professionals participate in continuing education programs, and (4) maintain minimum amounts of liability insurance.

Accountants’ ethical responsibility is reinforced by the Sarbanes-Oxley Act of 2002, which was passed by Congress following a series of financial scandals (see 

Chapters 6

 and 

23

).

12

 This act mandated the creation of a Public Company Accounting Oversight Board; it also included provisions requiring auditor independence. Under Section 802 of the act, accountants are required to maintain on file working papers relating to an audit or review for five years. A willful violation is subject to a fine, imprisonment for up to 10 years, or both.

12 

H.R. 3762, signed into law by President George W. Bush on July 30, 2002, effective August 30, 2002.

Other statutory provisions affecting accountants include Sections 11 and 12(2) of the 1933 Securities Act, as well as Sections 10(b) and 18 of the 1934 Securities Exchange Act. The 1933 act deals with accountant liability for false statements or omission of a material fact in auditing financial statements required for registration of securities. A defense is due diligence and a reasonable belief that the work is complete.

Under Section 10(b) of the 1934 act, accountants are liable for false and misleading statements in reports required by the act (see 
Chapter 23
). Willful violations bring criminal penalties. Additionally, provisions of the Internal Revenue Code provide (felony) criminal penalties for tax preparers who willfully prepare or assist in preparing a false return.

13

 Tax preparers who negligently or willfully understate tax liability are also subject to criminal penalties. Furthermore, failure to provide a taxpayer with a copy of his or her return may subject a tax preparer to criminal penalties.

14

13 

26 U.S.C. § 7208(2).

14 

26 U.S.C. § 7101(a)(36).

Insurance and Finance

 The American Society of Chartered Life Underwriters (ASCLU) adopted a Code of Ethics consisting of eight guides to professional conduct and six rules of professional conduct. The guides are broad in nature, whereas the rules are specific. Enforcement of the Code of Ethics is left primarily to local chapters. Discipline includes reprimand, censure, and dismissal. A local chapter can additionally recommend suspension or revocation to a national board. Very few disciplinary actions have been forthcoming.

15

15 

See R. Horn, On Professions, Professionals, and Professional Ethics 74 (Malvern, PA: American Institute for Property and Liability Underwriters, 1978).

In addition, the Society of Chartered Property and Casualty Underwriters (CPCU) has a code of ethics consisting of seven “Specified Unethical Practices,” as well as three “Unspecified Unethical Practices” of a more general nature. Upon receipt of a written and signed complaint, the president of the society appoints a three-member conference panel to hear the case. If a panel finds a member guilty of an unspecified unethical practice, the president directs the member to cease such action. If a member is found guilty of a specified unethical practice, the society’s board of directors may reprimand or censure the violator or suspend or expel her or him from membership in the society.

Law

 The American Bar Association’s Model Rules of Professional Responsibility were submitted to the highest state courts and the District of Columbia for adoption, after the association’s House of Delegates approved them in August 1983 (before then, the states had adopted the Model Code of Professional Responsibility). There are nine Canons of Professional Responsibility. From these are derived Ethical Considerations and Disciplinary Rules. The Model Rules set out a minimal level of conduct that is expected of an attorney. Violation of any of these rules may lead to warnings, reprimands, public censure, suspension, or disbarment by the enforcement agency of the highest state court in which the attorney is admitted to practice. Most state bar disciplinary actions are published in state bar journals and local newspapers, so lawyers and the public in general are aware of attorneys who have been subject to disciplinary action.

The case excerpted here illustrates some legal problems surrounding professional ethical codes when they result in price-fixing.

Schools of Social Responsibility

Early in this chapter, the social responsibility of business was defined as a concern by business about both its profit and its nonprofit activities and their intended and unintended impact on others. As you will see, theories of ethics and schools of social responsibility are not necessarily mutually exclusive. For example, the primary purpose of a steel company is to make a profit for its individual and institutional shareholders. The unintended effects of this company’s actions might be that the surrounding community has polluted waters, and homes are affected by ash that falls from the company’s smokestack. Similarly, in the Union Carbide incident described at the beginning of this chapter, the purpose of Union Carbide India Ltd. was to make a profit for its shareholders. By doing so, it was able to employ people. The unintended effect of this activity was a gas leak that killed approximately 2,000 people and injured many more. The question in both of these cases is: What responsibility, if any, do firms have for the unintended effects of their profit-seeking activity? This section discusses five views of social responsibility that seek to answer that question: profit oriented, managerial, institutional, professional obligation, and regulation (

Table 7-2

). These schools reflect the ethical values or culture of a corporation. The reader should analyze each, realizing that the answer may not lie in any one.

Profit-Oriented School

The profit-oriented school of social responsibility begins with a market-oriented concept of the firm that most readers were exposed to in their first or second course in economics. Holders of this theory argue that business entities are distinct organizations in our society and that their sole purpose is to increase profits

Table 7-2 Schools of Social Responsibility

Table 7-2 Schools of Social Responsibility

for shareholders. Businesses are to be judged solely on criteria of economic efficiency and how well they contribute to growth in productivity and technology. Corporate social responsibility is shown by managers who maximize profits for their shareholders, who, in turn, are able to reinvest such profits, providing for increased productivity, new employment opportunities, and increased consumption of goods.

Classical economists, who advocate this position, recognize that there will be unintended effects of such profit-seeking activities (externalities) that affect society and cannot be incorporated into or passed on in the price of output. They would argue that this is the “social cost” of doing business. Such social costs are a collective responsibility of the government. Individual businesses should not be expected to voluntarily incorporate in their product’s price the cost of cleaning up water or air, because this incorporation will distort the market mechanism and the efficient use of resources. Profit-seeking advocates argue that, when government must act in a collective manner, it should act in a way that involves the least interference with the efficiency of the market system, preferably through direct taxation.

In summary, efforts at pollution control, upgrading minority workers, and bringing equality of payment to the workforce are all tasks of the government and not of the private sector, which is incapable of making such choices and is not elected in a democratic society to do so. Its sole responsibility is to seek profits for its shareholders. The following box represents an important set of issues.

“Old

Joe Camel

” was adopted by R. J. Reynolds (RJR) in 1913 as the symbol for the brand Camel. In late 1990, RJR revived Old Joe with a new look in the form of a cartoon meant to appeal to young smokers.

In December 1991, the Journal of the American Medical Association (JAMA) published three surveys that found the cartoon character Joe Camel reached children very effectively.
a
 Of children between ages 3 and 6 who were surveyed, 51.1 percent recognized Old Joe Camel as being associated with Camel cigarettes. The 6-year-olds were as familiar with Joe Camel as they were with the Mickey Mouse logo for the Disney Channel.

a
K. Deveny, “Joe Camel Ads Reach Children,” Wall Street Journal, December 11, 1991, p. B-1.

An RJR spokeswoman claimed that “just because children can identify our logo doesn’t mean they will use our product.” Since the introduction of Joe Camel, however, Camel’s share of the under-18 market climbed to 33 percent from 5 percent. Among 17- to 24-year-olds, Camel’s market share climbed to 7.9 percent from 4.4 percent.

The Centers for Disease Control reported in March 1992 that smokers between ages 12 and 18 preferred Marlboro, Newport, or Camel cigarettes, the three brands with the most extensive advertising.
b

b
Id.

Teenagers throughout the country were wearing Joe Camel T-shirts. Brown & Williamson, the producer of Kool cigarettes, began testing a cartoon character for its advertisements, a penguin wearing sunglasses and DayGlo sneakers. Company spokesman Joseph Helewicz stated that the advertisements were geared to smokers between 21 and 35 years old. Helewicz added that cartoon advertisements for adults were not new and cited the Pillsbury Doughboy and the Pink Panther as effective advertising images.

In mid-1992, then–Surgeon General Antonia Novello, along with the American Medical Association, began a campaign called “Dump the Hump” to pressure the tobacco industry to stop advertising campaigns that encourage kids to smoke. In 1993, the FTC staff recommended a ban on the Joe Camel advertisements. In 1994, then–Surgeon General Jocelyn Elders blamed the tobacco industry’s $4 billion in advertisements for increased smoking rates among teens. RJR’s tobacco division chief, James W. Johnston, responded, “I’ll be damned if I’ll pull the ads.” RJR put together a team of lawyers and others it referred to as in-house censors to control Joe’s influence. A campaign to have Joe wear a bandana was nixed, as was one for a punker Joe with pink hair.

In 1994, RJR’s CEO James W. Johnston testified before a congressional panel on the Joe Camel controversy and stated, “We do not market to children and will not,” and added, “We do not survey anyone under the age of 18.”

Internal documents about targeting young people were damaging, though. A 1981 RJR internal memorandum on marketing surveys cautioned research personnel to tally underage smokers as “age 18.” A 1981 Philip Morris internal document indicated that information about smoking habits in children as young as 15 was important, because “today’s teenager is tomorrow’s potential regular customer.” Other Philip Morris documents from the 1980s expressed concern that Marlboro sales would soon decline because teenage smoking rates were falling.

A 1987 marketing survey in France and Canada by RJR before it launched the Joe Camel campaign showed that the cartoon image with its funny and humorous image of Joe Camel attracted attention. One 1987 internal document used the phrase young adult smokers and noted a campaign targeted at the competition’s “male Marlboro smokers ages 13–24.”

A 1997 survey of 534 teens by USA Today revealed the following:

Marlboro was the brand smoked by most teens in the survey. The survey found that 28 percent of teens between ages 13 and 18 smoked—an increase of 4 percent since 1991. In 1987, Camels were the cigarette of choice for 3 percent of teenagers when Joe Camel debuted. By 1993, the figure had climbed to 16 percent.

In early 1990, the Federal Trade Commission (FTC) began an investigation of RJR and its Joe Camel advertisements to determine whether underage smokers were illegally targeted by the 10-year Joe Camel campaign. The FTC had dismissed a complaint in 1994 but did not have the benefits of the newly discovered internal memorandums.

In late 1997, RJR began phasing out Joe Camel. New Camel advertisements featured healthy-looking men and women in their twenties, in clubs and swimming pools, with just a dromedary logo somewhere in the advertisement. RJR also vowed not to feature the Joe Camel character on nontobacco items such as T-shirts. The cost of the abandonment was estimated at $250 million.

In 1996, Philip Morris proposed its own plan to halt youth smoking, which included no vending machine advertisements, no billboard advertisements, no tobacco advertisements in magazines with 25 percent or more youth subscribers, and limits on sponsorships to events (rodeos, motor sports) where 75 percent or more of attendees were adults.

In 1998, combined pressure from Congress, the state attorneys general, and ongoing class action suits produced what came to be known as “the tobacco settlement.” In addition to payment of $206 billion, the tobacco settlement in all of its various forms bars outdoor advertising, the use of human images (Marlboro Man) and cartoon characters (Joe Camel), and vending-machine sales. This portion of the settlement was advocated by those who were concerned about teenagers and their attraction to cigarettes via these advertisements and cigarettes’ availability in machines.

Comment:

Has this litigation and pressure from our elected officials at the state and federal level affected the smoking habits of teenagers today? Explain your answer, referring to 
Chapter 1
 in this text. What relevant information is missing here?

Managerial School

Advocates of the managerial school of social responsibility argue that businesses, particularly large institutions, have a number of interest groups or constituents both internally and externally that they must deal with regularly, not just stockholders and a board of directors. A business entity has employees, customers, suppliers, consumers, activist groups, government regulators, and others that influence decision making and the ability of the entity to make profits. In effect, modern managers must balance conflicting claims on their time and the company’s resources. Employees want better wages, working conditions, and pensions; suppliers want prompt payment for their goods; and consumers want higher-quality goods at lower prices. These often-conflicting demands lead advocates of a managerial theory of social responsibility to argue that the firm must have the trust of all groups, both internal and external. Thus, it must have clear ethical standards and a sense of social responsibility for its unintended acts in order to maximize profits and to survive in both the short and long runs. A firm that seeks to maximize short-run profits and ignores the claims of groups, whether they be unions, consumer activists, or government regulators, will not be able to survive in the complex environment in which business operates.

Applying the Law to the Facts . . .

Corrine was an executive at a company and was in charge of deciding whether to spend money to open more store locations. The additional locations would bring in more profits. However, Corrine was concerned about affording and protecting the high pay rates for employees, and making sure suppliers would be paid in a timely fashion. What school of responsibility is guiding Corrine’s actions?

If one reviews the Union Carbide India Ltd. incident described earlier, it is clear that the explosion in Bhopal, India, had at least three consequences: (1) It precipitated an attempt by GAF to take over the company. (2) Union Carbide made a successful but costly attempt to fight off this takeover. (3) The value of the stock decreased and, thus, the investors suffered large losses. Advocates of managerial theory would point to the investors’ trust in management’s ability to deal with this disaster as being important to how the market evaluated Union Carbide’s stock. They also would argue that when its Tylenol product was tampered with (poisoned), the management of Johnson & Johnson took decisive action and was thus perceived by investors and customers as being trustworthy.

16

 As a result, Johnson & Johnson stock value recovered relatively quickly after the incident.

16 

See M. Krikorian, “Ethical Conduct: An Aid to Management,” address at Albion College, Albion, MI, April 16, 1985.

In the next case, note the conflicting claims of stakeholders.

Institutional School

Advocates of an institutional school of social responsibility for business argue that business entities have a responsibility to act in a manner that benefits all of society, just as churches, unions, courts, universities, and governments have. Whether it is a sole proprietorship, a partnership, or a corporation, a business is a legal entity in our society that must be held responsible for its activities. Proponents of this theory argue that the same civil and criminal sanctions should be applied to business activities that injure the social fabric of a society (e.g., the pollution of water and air) as are applied to acts of individuals and of other institutions. When managers fail to deal adequately with “externalities,” they should be held accountable not only to their boards of directors, but also to government enforcement authorities and individual citizens as well.

 Case 7-2 Cooper Industries v. Leatherman Tool Group, Inc.

United States Supreme Court 121 S. Ct. 1678 (2001)

Leatherman (plaintiff) sued Cooper (defendant) in federal district court for unfair competition. Leatherman Tool Group, Inc., manufactured and sold a multifunctional tool called the PST that improved on the classic Swiss Army knife. Leatherman dominated the market for multifunctional pocket tools.

In 1995, Cooper Industries, Inc., decided to design and sell a competing multifunctional tool under the name “ToolZall.” Cooper introduced the ToolZall in August 1996 at the National Hardware Show in Chicago. At that show, Cooper used photographs in its posters, packaging, and advertising materials that purported to be a ToolZall but were actually of a modified PST. When those materials were prepared, the first of the ToolZalls had not yet been manufactured. A Cooper employee created a ToolZall “mock-up” by grinding the Leatherman trademark off a PST and substituting the unique fastenings that were to be used on the ToolZall. At least one of the photographs was retouched to remove a curved indentation where the Leatherman trademark had been. The photographs were used not only at the trade show, but also in marketing materials and catalogs used by Cooper’s sales force throughout the United States.

The lower court found for Leatherman in the amount of $50,000 in compensatory damages and $4.5 million in punitive damages. Cooper appealed, but the court of appeals affirmed the lower court’s decision, seeing no “abuse of discretion” by the lower court as to punitive damages. Cooper appealed to the U.S. Supreme Court, petitioning for a de novo review of the facts as to the size of the punitive damages.

Justice Stevens

Although compensatory damages and punitive damages are typically awarded at the same time by the same decision maker, they serve distinct purposes. The former are intended to redress the concrete loss that the plaintiff has suffered by reason of the defendant’s wrongful conduct. The latter, which have been described as “quasi-criminal,” operate as private fines intended to punish the defendant and to deter future wrongdoing. A jury’s assessment of the extent of a plaintiff’s injury is essentially a factual determination, whereas its imposition of punitive damages is an expression of its moral condemnation. The question [of] whether a fine is constitutionally excessive calls for the application of a constitutional standard to the facts of a particular case, and in this context de novo review of that question is appropriate.
*

* 
Cooper Industries v. Leatherman Tool Group, Inc., United States Supreme Court 121 S. Ct. 1678 (2001).

Reversed and remanded based on a de novo standard in favor of Cooper, to determin[e] whether the punitive damage award is excessive.

Professional Obligation School

Advocates of a professional obligation school of social responsibility state that business managers and members of boards of directors should be certified as “professionals” before they are allowed to assume managerial responsibility. In our discussion of professional ethical codes, we defined professionals as persons who are subject to (1) educational entrance requirements and continuing education standards, (2) licensing-examination requirements, (3) codes of conduct that are enforced, (4) a formal association that meets regularly, and (5) an independent commitment to the public interest. Advocates of a professional obligation theory argue that business directors and managers, like doctors and lawyers, have a responsibility to the public beyond merely making profits, and that the public must thus be able to be sure that these people are qualified to hold their positions. They should be licensed by meeting university requirements and passing a state or a national test. They should be subject to a disciplinary code that could involve revocation or suspension of their license to “practice the management of a business” if they are found by state or national boards to have failed to meet their codified responsibilities. Such responsibilities would include accountability for the unintended effects of their profit-making activities (externalities).

Regulation School

A regulation school of social responsibility sees all business units as accountable to elected public officials. Proponents of this theory argue that, because business managers are responsible only to a board of directors that represents shareholders, the corporation cannot be trusted to act in a socially responsible manner. If society is to be protected from the unintended effects of profit-making business activities (e.g., pollution, sex discrimination in the workplace, and injuries to workers), it is necessary for government to be involved.

The degree of government involvement is much debated by advocates of this theory. Some argue in the extreme for a socialist state. Others argue for government representatives on boards of directors, and still others argue that government should set up standards of socially responsible conduct for each industry. The last group advocates an annual process of reporting conduct, both socially responsible and otherwise, similar to the independent financial audits now required by the SEC of all publicly registered firms. The growth of ethics offices within corporations has played a role in dealing with ethical and legal problems. Sometimes these offices are mandated by courts when sentencing takes place in white-collar criminal cases. Often corporations set up such offices as preventive measures.

In Case 7-3 below there exists a relationship between law and ethics as

Judge Lolley

sets out in his opinion. Referring back to 
Chapter 1
, explain the relationship.

 Case 7-3 Johnson Construction Co. v. Shaffer

Court of Appeal of Louisiana, Second Circuit 87 So. 3d 203 (2012)

Atruck owned by Johnson Construction Company needed repairs. John Robert Johnson, Jr., the company’s president, took the truck with its attached 15-ton trailer to Bubba Shaffer, doing business as Shaffer’s Auto and Diesel Repair. The truck was supposedly fixed, and Johnson paid the bill. The truck continued to leak oil and water. Johnson returned the truck to Shaffer, who again claimed to have fixed the problem. Johnson paid the second bill. The problems with the truck continued, however, so Johnson returned the truck and trailer a third time. Shaffer gave a verbal estimate of $1,000 for the repairs, but he ultimately sent an invoice for $5,863.49. Johnson offered to settle for $2,480, the amount of the initial estimate ($1,000) plus the costs of parts and shipping. Shaffer refused the offer and would not return Johnson’s truck or trailer until full payment was made. Shaffer also charged Johnson a storage fee of $50 a day and 18 percent interest on the $5,863.49.

Johnson Construction filed a suit against Shaffer alleging unfair trade practices. The trial court determined that Shaffer had acted deceptively and wrongfully in maintaining possession of the trailer, on which no work had been performed. The trial court awarded Johnson $3,500 in general damages, plus $750 in attorneys’ fees. Shaffer was awarded the initial estimate of $1,000 and appealed.

Judge Lolley

At the outset, we point out that Mr. Johnson maintained he had a verbal agreement with Bubba Shaffer, the owner of Shaffer’s Auto Diesel and Repair, that the repairs to the truck would cost $1,000. Mr. Johnson also testified that he was not informed otherwise.

The existence or nonexistence of a contract is a question of fact, and the finder of fact’s determination may not be set aside unless it is clearly wrong.

At the trial of the matter, the trial court was presented with testimony from Mr. Johnson, Mr. Shaffer, and Michael Louton, a mechanic employed by Shaffer. The trial court did not believe Mr. Johnson was informed of the cost for the additional work.

We cannot say that the trial court was clearly wrong in its determination. The trial court viewed Mr. Shaffer’s testimony on the issue as “disingenuous” and we cannot see where that was an error.

So considering, we see no error in the trial court’s characterization of Shaffer’s actions with the trailer as holding “hostage in an effort to force payment for unauthorized repairs. Shaffer had no legal right to retain possession of the trailer. Thus, the trial court did not err in its determination that Shaffer’s retention of Johnson Construction’s trailer [for four years!] was a deceptive conversion of the trailer.

The state appellate court affirmed the judgment of the trial court in favor of Johnson Construction Company for $3,500, plus attorney fees and award of the original $10,000.
*

* 
Court of Appeal of Louisiana, Second Circuit 87 So.3d 203 (2012).

Affirmed for the Plaintiff.

Global Dimensions of Ethics and Social Responsibility

Code of Conduct for Transnational Corporations

A United Nations effort to prevent misconduct by transnational corporations has been promulgated. Four objectives include:

1. Respect for national sovereignty in countries where such companies operate. Often transnational companies operate in developing nations where governments are less stable and more corrupt, making this goal very difficult to achieve.

2. Adherence to sociocultural values. The code seeks to prevent transnational companies from imposing value systems that are detrimental to those of the host country.

3. Respect for human rights. Companies should not discriminate on the basis of race, color, sex, religion, language, or political or other opinion. In developing nations, achievement of this goal is sometimes very difficult when the host country does discriminate on the basis of some of these factors.

4. Abstention from corrupt practices. Transnational corporations shall refrain from the offering, promising, or giving of any payment, gift, or other advantage to a public official or refrain from performing a duty in accordance with a business transaction.

Corruption is endemic to many developing countries (e.g., Nigeria or the People’s Republic of China) and a way of doing business. The United States has set forth one approach (Foreign Corrupt Practices Act [FCPA]), and the Organization for Economic and Cultural Development another. See 
Chapter 23
 for a discussion of the Foreign Corrupt Practices Act of 1977, as amended in 1988 and 1998, and the International Securities Enforcement Cooperation Act of 1990 (ISECA).

Comment:

Has the United States been successful in preventing corruption? If not, why not? Has the People’s Republic been successful in its latest attempt to do away with corruption in many phases of its socialist system? Explain.

Explain externalities that may exist when attempting to end corruption.

Summary

We have sought to define ethics and social responsibility within the context of business associations. We examined consequential theories of ethics based on the consequences of the company’s actions. Deontological schools of ethics, in contrast, are based on duties. Humanist theories of ethics evaluate actions as good or bad based on how the actions improved inherent human capacities.

This chapter also examined codes of ethics emanating from businesses and professions. It discussed five schools of social responsibility based on the unintended effects of corporate and human conduct. Finally, global dimensions of ethical and socially responsible conduct are highlighted, through an examination of the United Nations’ Code of Conduct for Transnational Corporations.

Thinking Critically About Relevant Legal Issues

Disbarment of Lawyers and Debarment of Officers and Directors of Corporations

Egil Krogh, Jr., was admitted [to practice] law in the state of Washington on September 20, 1968. On February 4, 1974, he was suspended as a result of his having been convicted of a felony. [Krogh now appeals the disciplinary board’s decision to disbar him.]

The information referred to in the complaint charged that while the respondent was an officer and employee of the United States Government . . . and acting in his official capacity, in conjunction with others who were officials and employees of the United States Government, the defendant unlawfully, willfully and knowingly did combine, conspire, confederate and agree with his co-conspirators to injure, oppress, threaten and intimidate Dr. Lewis J. Fielding . . . in the free exercise and enjoyment of a right and privilege secured to him by the Constitution and laws of the United States, and to conceal such activities. It further charged that the co-conspirators did, without legal process, probable cause, search warrant or other lawful authority, enter the offices of Dr. Fielding in Los Angeles County, California, with the intent to search for, examine and photograph documents and records containing confidential information concerning Daniel Ellsberg, and thereby injure, oppress, threaten and intimidate Dr. Fielding in the free exercise and enjoyment of the right and privilege secured to him by the Fourth Amendment to the Constitution of the United States, to be secure in his person, house, papers and effects against unreasonable searches and seizures. . . . To all of these allegations, the respondent had pleaded guilty.

Both the hearing panel and the disciplinary board found that moral turpitude was an element of the crime of which respondent was convicted. The panel found that he has a spotless record except for the incident involved in these proceedings; that he is outstanding in character and ability; that his reputation is beyond reproach; that he acted, although mistakenly, out of a misguided loyalty to [President Nixon]; that the event was an isolated one, and that in all probability there would be no repetition of any such error on his part. The panel further found that the respondent had accepted responsibility and had made amends to the best of his ability; that he testified fully and candidly and that his attitude in the proceeding was excellent. The panel concluded that in this case which it found to be distinguishable from all other cases, the respondent apparently followed the order of a “somewhat distraught President of the United States” under the guise of national security to stop by all means further security leaks.

Th[e] rule [that attorneys are disbarred automatically when they are found guilty of a felony] still governs the disposition of such disciplinary proceedings in a number of jurisdictions. However, under our disciplinary rules, some flexibility is permitted, and the court retains its discretionary power to determine whether, on the facts of the particular case, the attorney should be disbarred.

We cannot accept the assumption that attorneys . . . can ordinarily be expected to abandon the principles which they have sworn to uphold, when asked to do so by a person who holds a constitutional office. Rather than being overawed by the authority of one who holds such an office . . . the attorney who is employed by such an officer should be the most keenly aware of the Constitution and all of its provisions, the most alert to discourage the abuse of power. In such a position those powers of discernment and reason, which he holds himself out as possessing, perform their most important function. If, when given a position of power himself, he forgets his oath to uphold the Constitution and laws of the land and instead [flouts] the constitutional rights of other citizens and holds himself above the law, can we say to the public that a person so weak in his dedication to constitutional principles is qualified to practice law?

That the reputation and honor of the bar have suffered severe damage as a result is now a matter of common knowledge. We find it difficult to believe that the respondent was not aware, when he authorized the burglary of Dr. Fielding’s office, that if his conduct became known, it would reflect discredit upon his profession.

For the reasons set forth herein, we must conclude that the respondent, in spite of his many commendable qualities and achievements, has shown himself to be unfit to practice law.

The recommendation of the disciplinary board is approved, and the respondent’s name shall be stricken from the roll of attorneys in this state. In answering these questions, refer to 
Chapter 1
 of this text.

1. What ethical norm is central to the court’s decision in this case?

2. What fact seems especially powerful in shaping the court’s reasoning?

3. What reasons does the court provide for upholding the respondent’s disbarment?

4. Outline the reasons why Egil Krogh, Jr., believed he should not be disbarred by the disciplinary board of the State of California.

Potential Debarment of Officers and Directors

In May of 2015 five of the world’s largest banks pleaded guilty to an array of antitrust and fraud charges in a criminal proceeding. For most people, pleading guilty to these felonies would have landed them in jail for several years, loss of their job, and payment of a huge fine.

The Justice Department and the SEC agreed to $1 billion of fines and a negotiated plea agreement by which a 2012 non-prosecution agreement with one of the banks was torn up. Most of the banks’ pleas were from holding companies.

1. Does the plea agreement meet the justice values set out in 
Chapter 1
? Explain this from the point of view of the five corporations, and secondly, that of the Justice Department and the SEC.

2. Should the directors or officers of the companies be fined personally or go to jail? Remember, in a previous chapter we have learned that a corporation is considered a person at law. Should the officers and directors be debarred (not disbarred) by the SEC and be prevented from serving on boards or as officers of a publicly held corporation that is regulated by the agency forever? Would these steps bring justice to the case or are there externalities that have not been considered? For example, would this proposed punishment to five large companies affect the worldwide role of banks and other financial institutions?

Source: Based on B. Protess, and M. Corkery, “Five Big Banks to Plead Guilty to Felony Charges,” New York Times, May 14, 2015, pp. B-1, B-5.

Assignment On The Internet

This chapter introduces you to three theories of ethical thought and five schools of social responsibility. Explore how the three theories of ethical thought are put into practice. Using the Internet, find the code of ethics for a business or corporation that does business in your city or town. This site provides links to codes of ethics for hundreds of corporations: 

www.business-ethics .com

.

Applying your critical thinking skills, determine if the chosen code of ethics relies more heavily on one theory of ethical thought than the others. Are there aspects of that business’s code of ethics that you would like to see changed? Why?

Grading Rubric