Case Study LAW-101: Legal Environment of Business Case Study John, Lesa, and Trevor form a limited liability company. John contributes 60 percent of the c

Case Study LAW-101: Legal Environment of Business Case Study
John, Lesa, and Trevor form a limited liability company. John contributes 60 percent of the capital, and Lesa and Trevor each contribute 20 percent. Nothing is decided about how profits will be divided. John assumes that he will be entitled to 60 percent of the profits, in accordance with his contribution. Lesa and Trevor, however, assume that the profits will be divided equally. A dispute over the profits arises, and ultimately a court has to decide the issue.
What will be the result?
How could this dispute have been avoided in the first place?
Action Items

Read the case study above.
By the due date, submit your answers to the case study questions. Justify your answers. Chapter 02
Business Ethics

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 2 Case Hypothetical and Ethical Dilemma

As hiring coordinator for Hennessey Networking Solutions, Inc. (Hennessey), Andrea
Templeton knew that her position was of utmost importance to her company in terms of

hiring candidates who were well-qualified, and who would best contribute to the company’s
overall success. On her desk was the employment application and resume of Timothy

Carraway. Andrea had just finished her interview of Timothy, who was the last in a long line
of interviewees who had applied for an entry-level information technology (IT) position at

Hennessey. Hennessey only had one (1) opening available. During Timothy’s interview, the
candidate revealed that seven (7) years ago, he had been tried and convicted in federal court
for selling a significant amount of cocaine. Timothy had also revealed the conviction on his

employment application. Timothy went to great lengths to explain to Andrea that he
sincerely regretted the indiscretions of his youth, and that he had spent the last seven (7)
years of his life “paying penance,” and reforming his life. After serving three (3) years in

federal penitentiary, Timothy had earned his bachelor’s degree in Information Technology,
graduating with honors.

Timothy’s interview had gone very well. In fact, Andrea felt that in terms of his personality
and education, he was the best “fit” for the position. Andrea was obviously concerned about
Timothy’s criminal background, but she was also concerned about the young man should he

not find an employment opportunity after graduating from college. Without a legitimate
employment option, would Timothy revert back to his “criminal ways?

Does Andrea Templeton and Hennessey Networking Solutions, Inc. have an ethical
obligation to hire Timothy Carraway? Should Andrea’s “hire” decision be based exclusively

on Timothy’s qualifications for the job? Why or why not?


Chapter 2 Ethical Dilemma

What is the best source for ethical business practices: The
individual employee, or the business organization itself? To
what extent should individual employees be allowed to lend

input in the creation of a code of ethics for a business
organization? In the event that an individual employee’s
ethical standards differ from his/her employer’s code of

ethics, what can/should be done to resolve those differences?


Business Ethics and Social

■ Ethics: The study and practice of decisions about what
is good or right

■ Business Ethics: The application of ethics to the
problems and opportunities experienced by

■ Ethical Dilemma: A problem about what a firm should
do for which no clear, right decision is available

■ Social Responsibility of Business: Expectations that the
community imposes on firms doing business inside its


The “WPH” Process of Ethical Decision
Making: W—WHO (Stakeholders)

■ Consumers
■ Owners or Investors
■ Management
■ Employees
■ Community
■ Future Generations


The “WPH” Process of Ethical Decision
Making: P—PURPOSE (Values)

■ Freedom
■ Security
■ Justice
■ Efficiency


Primary Values and Business Ethics:

■ To act without restriction from rules imposed by

■ To possess the capacity or resources to act as
one wishes

■ To escape the cares and demands of this world


Primary Values and Business Ethics:

■ To possess a large enough supply of goods and
services to meet basic needs

■ To be safe from those wishing to interfere with
your property rights

■ To achieve the psychological condition of self-
confidence to such an extent that risks are


Primary Values and Business Ethics:

■ To receive the products of your labor
■ To treat all humans identically, regardless of

race, class, gender, age, and sexual preferences
■ To provide resources in proportion to need
■ To possess anything that someone else is willing

to grant you


Primary Values and Business Ethics:

■ To maximize the amount of wealth in society
■ To get the most from a particular output
■ To minimize costs


The “WPH” Process of Ethical Decision
Making: H—HOW (Guidelines)

■ Public Disclosure
■ Universalization
■ Golden Rule


Chapter 03
The U.S. Legal System

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3 Case Hypothetical #1

Officer Brian Perkins was having a difficult Monday morning. For the past three hours, he was responsible for
“serving process” in three (3) civil cases (As Chapter 3 indicates, service of process is the procedure by which courts

present litigation documents to defendants. Those documents typically consist of a complaint, which specifies the factual
and legal basis for the lawsuit and the relief the plaintiff seeks, and a summons, a court order that notifies the defendant of

the lawsuit and explains how and when to respond to the complaint). For the first civil case, Merriwether v. Alstott,
Officer Perkins attempted to serve the defendant Harry Alstott at his home, but no one appeared to be there. For

the second civil case, Setliff v. Sanders, the person answering the door claimed the defendant, Marshall Sanders, did
not live there, and that he did not even know who Marshall Sanders was. Leaving the premises, Officer Perkins
surmised that the residential address indicated on the summons was incorrect. Either that, or the person who

answered the door was lying.

For his third attempt at service of process that morning, in a lawsuit captioned Jackson v. Graves, Officer Perkins
drove to the home of Laticia M. Graves at 721 Magnolia Street. Officer Perkins knocked on the door of the

dilapidated house, and although no one answered the door, a second-story window opened almost immediately. A
female in the house looked down from her second story vantage point and pointedly asked Officer Perkins, “What

do you want?” Officer Perkins responded with a question, “Are you Laticia Graves,” to which the woman
responded, “Yeah. What’s it to you?”

Officer Perkins asked the not-so-polite occupant to open the door, to which she responded, “I ain’t comin’ down
there, and if you ain’t got a warrant, you ain’t comin’ in.” Frustrated, Officer Perkins replied, “Well, I have civil

papers to serve you, ma’am, and if you won’t come down to get them, I’m going to put them in your mailbox.” The
response was, “I ain’t comin’ to the door.”

Officer Perkins immediately proceeded to the mailbox, and put the complaint and summons in the matter of
Jackson v. Graves in the box. The address on the mailbox indicated 721 Magnolia Street. In his notes, Officer

Graves wrote that the defendant, Laticia Graves, had been served with process on Monday, September 13, 2010 at
11:47 a.m. As he entered his patrol car, Officer Perkins looked backed at the second-story window from which he
had received his impolite greeting. The woman had since closed the window, and was watching his every move.

Did Officer Perkins effectively serve process on the defendant, Laticia Graves? Why or why not?


Chapter 3 Case Hypothetical #2

Defendant Woodson is an African-American male accused of murdering a white
female in an apartment burglary. During the jury selection process, Prosecutor

Forbes exercises only two peremptory challenges, excusing from service the only
two African-Americans in the jury. An all-white jury is eventually empanelled, and

Defendant Woodson is convicted of first-degree murder, with life imprisonment
imposed as punishment.

After the jury verdict is announced, Prosecutor Forbes is questioned by the local
media concerning his exercise of the peremptory challenges. Prosecutor Forbes

explains that race was not a factor in his decision, but that the two potential jurors
were excused “because they have facial hair, and as a matter of practice, I do not
want individuals with facial hair serving on my jury.” Further, Prosecutor Forbes

states “I categorically deny that race played any factor whatsoever in the jury
selection process.”

On appeal, should the appellate court: 1) deem Prosecutor Forbes’ actions
reversible error, and remand the case to the trial court level to be retried; 2) vacate
(nullify) the jury verdict, and dismiss the charges against Defendant Woodson; or

3) allow the conviction to stand? Should prosecutors be allowed to consider race as
a factor in the jury selection process? Gender? Age?


Types of Jurisdiction

■ Original Jurisdiction:
The power to hear and
decide cases when they
first enter the legal

■ Appellate Jurisdiction:
The power to review
previous judicial
decisions to determine
whether trial courts erred
in their decisions


Types of Jurisdiction

■ In personam jurisdiction:
The power to render a
decision affecting the
rights of the specific
persons before the court

■ Subject-matter
jurisdiction: The power
to hear certain kinds of


Subject-Matter Jurisdiction:
Exclusive Federal Jurisdiction

■ Admiralty cases
■ Bankruptcy cases
■ Federal criminal prosecutions
■ Cases in which one state sues another state
■ Claims against the United States
■ Federal patent, trademark, and copyright claims
■ Other claims involving federal statutes that specify

exclusive federal jurisdiction


Subject-Matter Jurisdiction: Concurrent
Federal and State Jurisdiction

■ Federal question cases
■ Diversity of citizenship cases


Subject-Matter Jurisdiction: State

■ All cases not falling under Exclusive Federal


The Federal Court System

■ The United States Supreme Court
■ Intermediate Courts of Appeal
■ Federal Trial Courts (U.S. District Courts)


State Court Systems

■ State Supreme Courts
■ Intermediate Courts of Appeal
■ State Trial Courts


Threshold Requirements for

■ Standing (to sue)
■ Case or Controversy (Justiciable Controversy)
■ Ripeness


Steps in Civil Litigation:
The Pretrial Stage

■ Informal Negotiations
■ Pleadings
■ Service of Process
■ Defendant’s Response
■ Pretrial Motions
■ Discovery
■ Pretrial Conference


Steps in Civil Litigation:
The Trial

■ Jury Selection
■ Opening Statements
■ Examination of Witnesses and Presentation of

■ Closing Arguments
■ Jury Instructions


Steps in Civil Litigation:
Post-Trial Motions

■ Motion For Judgment In Accordance With

■ Motion For Judgment Notwithstanding Verdict
■ Motion For New Trial


Steps in Civil
Appellate Procedure


Appellate Court Decision-Making

■ Affirmation
■ Modification
■ Reversal
■ Remand


Chapter 13
Introduction to


McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 13 Case Hypothetical

Zsa Zsa Hilton, a wealthy socialite living in Beverly Hills, was frantic. Her best friend in the
world was her pet poodle Caboodles, and Caboodles had been missing for three (3) days.

Having searched her estate exhaustively, Zsa Zsa decided that her next best option was to
post a reward for her beloved Caboodles.

Zsa Zsa carefully prepared a poster advertising a reward for the return of her pet. The
heading of the poster exclaimed “Please find Caboodles—Reward–$25,000!!!” Below the

heading was a color “glamour shot” of the animal and Zsa Zsa’s contact information,
including her address and cell phone number. After soliciting the assistance of her butler, her
maid, and her best friend Eva Ritchie, Zsa Zsa displayed and distributed one thousand of the

posters throughout the greater Beverly Hills metropolitan area.

Later in the week, Dane “Bulldog” Sheppard showed up at Zsa Zsa’s front door. When she
answered the door chime, Dane said “I am pleased to meet you, Ms. Hilton. I saw your ad

for the return of your lost poodle, and I am your man. I will find him, Ms. Hilton, and let me
say in advance that I really appreciate the $25,000 bounty, um, reward money!”

Is there a contract between Dane “Bulldog” Sheppard and Zsa Zsa Hilton?


Chapter 13 Case Hypothetical

Carter Morley and Erena Erickson live side by side in town homes joined together by a shared wall. Both
residences are in need of new exterior paint. On Monday, Morley calls a painter, Tom Sizemore, having
selected his name from the classified section of the phone directory. Morley describes his address, the

physical dimensions and structure of his home, and he agrees with Sizemore that the work will be
performed that Friday. Sizemore estimates that with his crew of five, and given the relatively small size of

the home, the work will only take one day to complete. Morley advises that although he will have to work a
fourteen-hour day on Friday, he would like to have the work completed in his absence. In passing

conversation with his neighbor Erickson, Morley advises her of his “home improvement” plans.

Early Friday morning, Sizemore and his team arrive at the address, but by mistake, they begin work on
Erickson’s side of building. Although Erena is home, she does not object to the work, nor does she inform
Sizemore and his crew of the mistake. Midway through the day, she offers them fresh-squeezed lemonade

and ham sandwiches, and they heartily accept.

Upon completion of the work at 7:00 p.m. Friday evening, Sizemore knocks on Erena’s door and asks if
“the man of the home” is present, that he would like Morley to review the work and pay the agreed-upon

price for the work. Erena chuckles, and “breaks the news” that the painting crew has made a mistake, one
to her benefit. Erickson proclaims “I do not owe you one dime, because you do not have a contract with
me; I will give you ten minutes to remove yourself and your materials from my property, or I will call the


Do Erickson and Sizemore have a contract? If so, why? If not, are there any other theories of recovery
available to Sizemore?


Contract (Definition):

A legally enforceable agreement


Elements Required For Contract Formation

■ Agreement (Offer and Acceptance)

■ Mutual Consideration (Value Given By Both Parties)

■ Legal Purpose and Subject Matter (Object)

■ Legal Capacity (Ability to Understand Terms and Nature of
Contract; legal ability to enter into binding contract)


Defenses to Enforcement of Contract

■ Lack of genuine assent (fraud, duress, undue influence,

■ Lack of proper form requirements (statute of frauds
writing requirement)


The Objective Theory of Contracts

■ Existence and interpretation of contract based on
outward manifestations of intent by parties (objective,
“reasonable person” standard of contract formation
and interpretation)

■ Subjective (individual) intent generally irrelevant


Sources of Contract Law

■ State common law

■ The Uniform Commercial Code (Article 2)

■ Governs contracts for the sale of goods


Classification of Contracts:
Bilateral or Unilateral

■ “Bilateral” Contract: Exchange of promises

■ “Unilateral” Contract: Promise in return for
performance of act


Classification of Contracts:
Express or Implied

■ “Express” Contract: Based on written or spoken words

■ “Implied” Contract: Based on conduct or actions

■ “Quasi-Contract” (“Implied-in-law” contract): Imposed in
certain cases to avoid unjust enrichment, even if all elements of
contract formation not satisfied


Classification of Contracts:
Valid, Void, or Voidable

■ “Valid” Contract: All elements of contract formation satisfied

■ “Void” Contract: Illegal purpose/subject matter; unenforceable

■ “Voidable” Contract: One or both parties can withdraw from


Classification of Contracts:
Executed or Executory

■ “Executed” Contract: All terms of contract fully performed

■ “Executory” Contract: Some duties under contract not
performed by one/both parties


Classification of Contracts:
Formal or Informal

■ “Formal” Contract: Must meet special form requirements

■ Examples: Contracts under seal, “recognizances,” letters of credit,
and negotiable instruments

■ “Informal” Contract: No formalities required in making; a “simple”


Interpretation of Contracts
■ Contract interpreted to give effect to parties’ intentions at time they entered

into contract

■ If multiple interpretations possible, adopt interpretation that would make
contract lawful, operative, definite, reasonable, and capable of being effected

■ If contract contains ambiguity, judge should interpret it against interests of

■ Handwritten provisions prevail over preprinted terms

■ Numbers written in words prevail over numerals

■ Specific terms prevail over general terms

■ Technical words are generally interpreted in accordance with industry standard


Chapter 14

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 14 Case Hypothetical

Tom Garrity, Bill Simmons, and Edward Yang were close friends. Their friendship had developed over
their mutual love for vintage stereo equipment, and the three often spent hours with each other, admiring

their electronic collections, monitoring online auctions for vintage receivers and speakers, and playing
music. On several occasions, Edward expressed his interest in a particular stereo receiver Tom owned, the

classic Marantz Model 4400. Edward often told Tom that if he ever wanted to sell the receiver, he would
like to be first considered as the buyer.

Last Saturday morning, Tom and Bill were at Tom’s house. During their conversation, Tom stated “Bill, I
know how much Edward loves my Marantz 4400 receiver, and I have too much stereo equipment in the

house. In fact, Sarah (Tom’s wife) has given me an ultimatum: Either a good portion of the receivers and
speakers go, or I go! I have decided that I will sell my Marantz 4400 to Edward for $200. It’s worth at least
$600, and it’s the only Marantz receiver that I own, but I’ve decided that I would like to continue to live in

this house, and my wife hasn’t given me any other options except to sell some of this stuff!”

Later that day, Edward appeared at Tom’s house. Edward enthusiastically proclaimed “Tom, Bill told me
about your offer, and I will take the Marantz 4400 for $200. This is the classic receiver as far as I am
concerned, and I am forever grateful to you! I promise I will take care of it, and you can have lifetime

visitation rights! Oh, and please tell Sarah I said ‘thanks’!”

Tom was perplexed. After his conversation with Bill on Saturday morning, he had decided to keep the
Marantz 4400, and sell all of his other receivers. He knew that his next statement would test Edward’s

friendship: “Edward, I’m sorry, but I have decided not to sell the Marantz 4400. We can discuss selling
any of my other receivers, but the Marantz is ‘off-limits’.” Edward’s reply? “We have an agreement, Tom.

You made me an offer, and I accepted your offer. Here is the $200. Where is the receiver?”

Is there a contract between Tom Garrity and Edward Yang?


Chapter 14 Case Hypothetical

Keith Avondale is in the market for a new “big screen” flat-panel television. While
reviewing the Sunday newspaper, he notices a full-page advertisement from

“Transistor Town.” The advertisement includes a 45-inch flat-panel television for
$299. Surprised by the remarkably low price, and eager to purchase his new luxury

item, Avondale makes plans to “open the store” on Monday morning.

Avondale is the first customer to arrive at the store on Monday, waiting outside
when the front doors open. He rushes into the store and announces to the first
sales representative he sees, “I will take a 45-inch flat-panel television for $299!”

The sales representative immediately refers Avondale to the store manager, who
directs Avondale to his office. The store manager explains to Avondale that the
advertisement was an unfortunate mistake, resulting from miscommunication

between Transistor Town and the newspaper publisher. The manager goes on to
say that the intended advertise price was $2,999, but that he would be willing to sell

the described television to Avondale for $2,449, Transistor Town’s cost for the
television. Avondale objects, demands that Transistor Town sell the television for

$299, and informs the store manager that his brother is a trial lawyer.

Who wins?


Elements of a Valid Offer

■ Manifestation of offeror’s intent to be bound

■ Intent determined by objective, “reasonable person” standard

■ Preliminary negotiations and advertisements do not constitute

■ Definite and certain terms (including subject matter, price,
quantity, quality, and parties)

■ Communication of offer to offeree (or offeree’s agent)


■ Auction With Reserve

■ Seller merely expresses intent to receive offers
■ Auctioneer (as representative of seller) may withdraw item

from auction at any time before “hammer falls”
■ Before hammer falls (signaling acceptance of offer),

bidder/offeror may revoke bid

■ Auction Without Reserve

■ Seller must accept highest bid


Termination of Offer

■ Revocation
■ Rejection
■ Counteroffer
■ Death/Incapacity of offeror
■ Destruction of subject matter of offer
■ Subsequent illegality of subject matter of offer
■ Lapse of time
■ Failure of condition(s) specified in offer



■ Definition: Representation of offeree’s intent to be bound by terms of

■ Silence generally does not constitute acceptance

■ Terms of acceptance must be identical to terms of offer (“Mirror-
Image” Rule)

■ Effective when communicated by offeree to offeror

■ If no method of communicating acceptance specified in offer, any
reasonable means of acceptance effective (Examples: telephone, mail,
fax, e-mail)


The Mailbox Rule

Acceptance by mail effective when placed in
mailbox; however, revocation of offer
effective only when received by offeree


Chapter 15

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 15 Case Hypothetical

Seattle Shoestring Sales, Inc. arranged to sell shoestrings to Victory, Inc., a tennis
shoe manufacturer. According to the terms of the deal, Seattle Shoestring Sales

committed to sell Victory whatever number of shoestrings it will produce next year,
at seventy-five cents per pair.

Since entering into their agreement, the price of cotton has skyrocketed five
hundred percent. To produce shoestrings, Seattle Shoestring Sales’ cost alone will
be approximately $1.50 per pair. Seattle Shoestring Sales has informed Victory that

it cannot and will not honor the deal.

Is there an enforceable contract between Seattle Shoestring Sales, Inc. and Victory,
Inc.? Is the failure to include a quantity term in the agreement fatal to its

enforceability? What about the fact that the price of cotton dramatically increased
after the companies reached their agreement? Should a court or other arbiter
increase the per-pair contract price to account for the increase in the price of

cotton, and then enforce the agreement?


Chapter 15 Case Hypothetical and Ethical Dilemma

John Harrington, Jr. (“Junior”) is a 24-year-old, 3-pack-per-day smoker. John
Harrington, Sr. (“Senior”) is a very concerned parent. On January 1, father

announces to son, “Junior, if you will stop smoking for the entire year, I will pay
you $5,000.” Senior believes that if Junior will stop smoking for one year, he will

“kick the habit.” Junior reluctantly accepts his father’s terms, and extinguishes his
half-smoked cigarette with the heel of his boot.

On January 1 of the following year, Junior approaches Senior and says “Dad, time
to pay up.” Senior has no reason to doubt that Junior has refrained from smoking
for an entire year, but states “Son, this was for your benefit. The gift I have given
you is the gift of life, and you are now likely to enjoy that gift longer, because you

are now much less likely to contract cancer. Health statistics show that non-
smokers live ten years longer than smokers. Enjoy your newfound life, but I will

not pay you the $5,000.”

Does Senior owe Junior the $5,000? Is there an enforceable contract between father
and son? If there is not an enforceable contract, does Junior have any other legal or
equitable theory of recovery? Is Senior ethically obligated to pay Junior the $5,000?



Something of value, given in exchange for
something else of value, that is the product

of a mutually bargained-for exchange


Examples of Consideration

■ Benefit to promisor

■ Detriment to promisee

■ Promise to do something

■ Promise to refrain from doing something


Rules of Consideration

■ For a promise to be enforced legally, there must be consideration

■ Exception—Promissory Estoppel:
■ One party makes promise knowing other party will rely on it
■ Other party relies on promise (“actual reliance”)
■ Justice dictates enforcement of promise, even though it is not supported by


■ Court rarely considers adequacy of consideration

■ Illusory promise does not constitute consideration

■ Past consideration does not constitute consideration for purposes of present contract

■ Promise to do something you are already legally obligated to do is not valid consideration (“Pre-
existing duty rule”)


Uniform Commercial Code:
Requirement and Output Contracts

■ “Requirement” Contract
■ Buyer agrees to purchase all goods needed/required from

designated seller

■ “Output” Contract
■ Seller agrees to provide all it produces to designated buyer

■ No quantity specification necessary in either requirement or output

■ For both requirement and output contracts, parties must act in “good


Partial Payment of Debt

■ Liquidated Debt: No dispute as to amount of money owed

■ Unliquidated Debt: Parties either (in good faith) dispute fact money owed, or
dispute amount of money owed

■ “Accord and Satisfaction” Requirements (“Accord” represents agreement,
“satisfaction” represents payment; accord and satisfaction means partial
payment of disputed debt discharges remaining balance allegedly owed):

■ Unliquidated debt

■ Creditor agrees to accept, as full payment, less than creditor claims owed

■ Debtor pays agreed-upon amount


Chapter 16
Capacity and Legality

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 16 Case Hypothetical and Ethical Dilemma

Before her recent accident, eighty-two-year-old Lily Ledbetter was her own chauffeur. She used to drive an
automobile to fulfill her once-active senior lifestyle, including outings for bridge tournaments, water

aerobics, grocery shopping, bill-paying, and family get-togethers.

One day, Lily decided to purchase a new automobile. Although her fifty-year-old son Ron suggested that
he accompany her to the car dealership, she refused, reminding him that she was fully capable of taking

care of her own responsibilities. With the …

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