BMGT 380: Introduction to Business Law
This course is designed to enhance your understanding of various legal principles and
issues that affect business practices and decisions and their application to in business
environments. The focus of the course is to identify and examine legal risk and liabilities
in operating a business and explore how to minimize and resolve problems associated
with risk and liabilities
The BMGT 380 course is structured as a continuous course project comprised of five
(5) themes, including overview of the legal system, business organizational structures,
torts and product liability, contracts, and agency.
General Introduction: BMGT 380 Course Project
Starting a new business or expanding an existing business requires a great deal of
preparation, market and industry analysis, legal consultation, and examination of the
legal factors relevant to a specific business. It is particularly important to understand
potential legal risk and liabilities for a new business operating within a specific industry.
Using a real-life business scenario, the 380 course project focuses on a start-up
business developed by four owners.
____________________________________________________________
The BMGT 380 course centers on the story of a company, The Largo Group (TLG), a
business consulting and research company based in Maryland that advises and
conducts research for potential owners considering start-up businesses. You and your
classmates will be active participants in the story acting as consultant-employees of
TLG assigned to complete consulting-related and/or research assignments and projects
for TLG clients throughout the course.
Your TLG assignments begin with an overview of the legal system that is important
background for business owners. Other TLG assignments will concentrate on four (4)
categories of business law principles that present significant risks and liabilities for startup businesses:
(1) tort law, including negligence, premises liability, and product liability,
(2) contract law, including Uniform Commercial Code sales and lease contracts, and econtracts,
(3) agency law, and
(4) business organizational structures, sometimes called business forms.
Starting a new business requires extensive preparation, market research, and
examination of the legal environment of business. Identifying the nature and scope of
legal risks and liabilities that affect business practices and decisions is essential before
organizing a business. Exploring ways to prevent, minimize and resolve risks and
liabilities is also important in forming a new business.
The primary focus for the 380 course and assignments for TLG clients will center on the
question:
How can a business owner identify and minimize legal risks and liabilities
associated with operating a business?
____________________________________________________________
Background: The Largo Group (TLG)
After graduating with a B.S. in Management, you have been working for TLG for three
years as an assistant consultant for Winnie James and Ralph Anders, senior
consultants who jointly direct the commercial trades and service industry consulting
division for TLG.
Winnie and Ralph have assigned you to assist them advising their new client, a start-up
commercial cleaning company named Green Clean.
Background: Green Clean
Connor, Ali, Madison and Sam are all successful business owners who are friends or
professional acquaintances in the business community. Connor has been the project
manager for ten years for a construction company owned by a general contractor. Ali
has been the Director of Marketing for a Mid-Atlantic-based carpet cleaning company
with franchises on the East Coast. Madison owns a mid-sized, successful residential
remodeling business. Sam owns a residential cleaning service business.
The four recently attended a Chamber of Commerce presentation about “green”
businesses. This spurred their interest and they went to dinner following the Chamber
event to discuss possible business opportunities. After several meetings, they decided
to start a business together. The group decided that a commercial cleaning business
would be a good fit for their professional experiences, skills, and interests. They agreed
to pursue the possibility of launching a Maryland-based "green" commercial cleaning
service business that they would like to name Green Clean (GC). They are committed
to operating the new business as an environmentally responsible company using only
chemical-free cleaning products in the new business.
The four met several times with a business consultant to complete an analysis of market
trends and demands in the cleaning industry and confirm whether GC would likely be a
viable business. The market analysis showed an increased demand and need for
environmentally responsible cleaning businesses in the region. Consequently, the
group decided to move forward with their idea to establish and market GC as a green
business.
The group plans to purchase cleaning supplies from Environmental Pro, Inc. (EPI), a
mid-sized manufacturer incorporated in a nearby state, that produces chemical-free
environmentally-friendly cleaning products. The four are familiar with the corporation as
each has purchased EPI products for their respective current businesses. The four
friends intend to resell certain EPI products directly to GC clients. The GC group plans
to market and advertise their services and re-sell EPI products through print, television,
radio media, and via internet sales.
GC will be headquartered in a local shopping center. GC headquarters will include
private business management offices, a reception area, and conference meeting and
planning space to which potential and existing customers will be invited to discuss
proposals for cleaning jobs, cleaning products, and to complete contracts for sales and
services. The business space also will be open to the public to collect information and
inquire about GC services, examine cleaning supply displays, and view photos and
exhibits from ongoing and past commercial jobs.
The potential GC owners recently attended a start up business seminar sponsored by
the local chapter of the Small Business Administration. Following the seminar, the
owners began to define the nature and scope of the work necessary to prepare a plan
for the start-up business. They realize this process requires time, thoughtful analysis,
and clear guidelines.
They also recognize the need for professional business consultants, such as TLG, to
guide their start-up for Green Clean. Consequently, the four have hired TLG to advise
and guide them through the start-up process for GC.
Green Clean Owner Profiles:
Connor:
He wants an initial 30%-40% interest in GC but wants to limit his future capital
commitment until he is certain the business is operating smoothly and profitably. He
does, however, want the option to acquire others’ interests if they die or leave the
business for any reason. He also wants to take out money from the business, in the
form of salary, benefits, expenses, and/ dividends, as appropriate, as soon as GC has a
healthy net profit margin.
Connor is most concerned about liability, and although he trusts the other owners as
“straight shooters” and successful business persons, he is uneasy about working with a
group of investors with whom he has no previous business connections. He wants to
limit his liability in the business to no more than his capital contribution, and prefers
complete protection. If possible, he wants Key Man Insurance for the owners so all will
have protection if one owner can no longer contribute to business for any reason.
Connor wants a managerial position so he can make decisions for day-to-day
operations. He believes he is the best person to run the business as he currently owns
a maid service and understands how to run a successful cleaning service business.
Ali:
Ali wants a 25% interest and prefers to minimize additional investments to protect her
cash assets needed for her other businesses. Her main goal is to realize a return on
her investment as quickly as possible.
Ali wants to minimize her personal liability and protect her interests in the event of
bankruptcy or death of any of the other owners.
Ail wants to participate in long-term business decisions, and in major decisions about
spending and organizational commitments, but she does not want to be involved in dayto-day business activities. She favors hiring a general manager to run the business,
preferably one with commercial cleaning experience.
Madison:
Madison initially wants to invest up to 40% and is willing to invest another 5% because
she knows start-up businesses often need more capital. She favors a larger, rather
than a smaller, stake in the business. She wants to take out as much money as
possible from the business, as soon as financially possible.
Madison wants to minimize personal liability, as well as liability for the business. She
realizes the future of the business is uncertain and she wants maximum protection
again all pitfalls.
Madison is willing to be involved in day-to-day business operations and has the time to
do so because her other business is running smoothly with competent managers. She
wants to play a key role, along with the other owners, in establishing the structure,
business environment, and culture for Green Clean. However, she believes that a
skilled general manager with commercial cleaning experience would be optimal for the
business.
Sam:
Sam is willing to commit to an investment of 51% interest in Green Clean, but is
agreeable to a lesser interest.
Sam wants to minimize his personal liability and prefers to limit it to his capital
investment but is willing to negotiate.
With a maximum interest of 51%, Sam wants complete control over business
operations; even with a lesser interest, he wants a strong managerial position. Sam
wants all owners with a minority interest to be silent in day-to-day management of GC.
BMGT 380: Introduction to Business Law
This course is designed to enhance your understanding of various legal principles and
issues that affect business practices and decisions and their application to in business
environments. The focus of the course is to identify and examine legal risk and liabilities
in operating a business and explore how to minimize and resolve problems associated
with risk and liabilities
The BMGT 380 course is structured as a continuous course project comprised of five
(5) themes, including overview of the legal system, business organizational structures,
torts and product liability, contracts, and agency.
General Introduction: BMGT 380 Course Project
Starting a new business or expanding an existing business requires a great deal of
preparation, market and industry analysis, legal consultation, and examination of the
legal factors relevant to a specific business. It is particularly important to understand
potential legal risk and liabilities for a new business operating within a specific industry.
Using a real-life business scenario, the 380 course project focuses on a start-up
business developed by four owners.
____________________________________________________________
The BMGT 380 course centers on the story of a company, The Largo Group (TLG), a
business consulting and research company based in Maryland that advises and
conducts research for potential owners considering start-up businesses. You and your
classmates will be active participants in the story acting as consultant-employees of
TLG assigned to complete consulting-related and/or research assignments and projects
for TLG clients throughout the course.
Your TLG assignments begin with an overview of the legal system that is important
background for business owners. Other TLG assignments will concentrate on four (4)
categories of business law principles that present significant risks and liabilities for startup businesses:
(1) tort law, including negligence, premises liability, and product liability,
(2) contract law, including Uniform Commercial Code sales and lease contracts, and econtracts,
(3) agency law, and
(4) business organizational structures, sometimes called business forms.
Starting a new business requires extensive preparation, market research, and
examination of the legal environment of business. Identifying the nature and scope of
legal risks and liabilities that affect business practices and decisions is essential before
organizing a business. Exploring ways to prevent, minimize and resolve risks and
liabilities is also important in forming a new business.
The primary focus for the 380 course and assignments for TLG clients will center on the
question:
How can a business owner identify and minimize legal risks and liabilities
associated with operating a business?
____________________________________________________________
Background: The Largo Group (TLG)
After graduating with a B.S. in Management, you have been working for TLG for three
years as an assistant consultant for Winnie James and Ralph Anders, senior
consultants who jointly direct the commercial trades and service industry consulting
division for TLG.
Winnie and Ralph have assigned you to assist them advising their new client, a start-up
commercial cleaning company named Green Clean.
Background: Green Clean
Connor, Ali, Madison and Sam are all successful business owners who are friends or
professional acquaintances in the business community. Connor has been the project
manager for ten years for a construction company owned by a general contractor. Ali
has been the Director of Marketing for a Mid-Atlantic-based carpet cleaning company
with franchises on the East Coast. Madison owns a mid-sized, successful residential
remodeling business. Sam owns a residential cleaning service business.
The four recently attended a Chamber of Commerce presentation about “green”
businesses. This spurred their interest and they went to dinner following the Chamber
event to discuss possible business opportunities. After several meetings, they decided
to start a business together. The group decided that a commercial cleaning business
would be a good fit for their professional experiences, skills, and interests. They agreed
to pursue the possibility of launching a Maryland-based "green" commercial cleaning
service business that they would like to name Green Clean (GC). They are committed
to operating the new business as an environmentally responsible company using only
chemical-free cleaning products in the new business.
The four met several times with a business consultant to complete an analysis of market
trends and demands in the cleaning industry and confirm whether GC would likely be a
viable business. The market analysis showed an increased demand and need for
environmentally responsible cleaning businesses in the region. Consequently, the
group decided to move forward with their idea to establish and market GC as a green
business.
The group plans to purchase cleaning supplies from Environmental Pro, Inc. (EPI), a
mid-sized manufacturer incorporated in a nearby state, that produces chemical-free
environmentally-friendly cleaning products. The four are familiar with the corporation as
each has purchased EPI products for their respective current businesses. The four
friends intend to resell certain EPI products directly to GC clients. The GC group plans
to market and advertise their services and re-sell EPI products through print, television,
radio media, and via internet sales.
GC will be headquartered in a local shopping center. GC headquarters will include
private business management offices, a reception area, and conference meeting and
planning space to which potential and existing customers will be invited to discuss
proposals for cleaning jobs, cleaning products, and to complete contracts for sales and
services. The business space also will be open to the public to collect information and
inquire about GC services, examine cleaning supply displays, and view photos and
exhibits from ongoing and past commercial jobs.
The potential GC owners recently attended a start up business seminar sponsored by
the local chapter of the Small Business Administration. Following the seminar, the
owners began to define the nature and scope of the work necessary to prepare a plan
for the start-up business. They realize this process requires time, thoughtful analysis,
and clear guidelines.
They also recognize the need for professional business consultants, such as TLG, to
guide their start-up for Green Clean. Consequently, the four have hired TLG to advise
and guide them through the start-up process for GC.
Green Clean Owner Profiles:
Connor:
He wants an initial 30%-40% interest in GC but wants to limit his future capital
commitment until he is certain the business is operating smoothly and profitably. He
does, however, want the option to acquire others’ interests if they die or leave the
business for any reason. He also wants to take out money from the business, in the
form of salary, benefits, expenses, and/ dividends, as appropriate, as soon as GC has a
healthy net profit margin.
Connor is most concerned about liability, and although he trusts the other owners as
“straight shooters” and successful business persons, he is uneasy about working with a
group of investors with whom he has no previous business connections. He wants to
limit his liability in the business to no more than his capital contribution, and prefers
complete protection. If possible, he wants Key Man Insurance for the owners so all will
have protection if one owner can no longer contribute to business for any reason.
Connor wants a managerial position so he can make decisions for day-to-day
operations. He believes he is the best person to run the business as he currently owns
a maid service and understands how to run a successful cleaning service business.
Ali:
Ali wants a 25% interest and prefers to minimize additional investments to protect her
cash assets needed for her other businesses. Her main goal is to realize a return on
her investment as quickly as possible.
Ali wants to minimize her personal liability and protect her interests in the event of
bankruptcy or death of any of the other owners.
Ail wants to participate in long-term business decisions, and in major decisions about
spending and organizational commitments, but she does not want to be involved in dayto-day business activities. She favors hiring a general manager to run the business,
preferably one with commercial cleaning experience.
Madison:
Madison initially wants to invest up to 40% and is willing to invest another 5% because
she knows start-up businesses often need more capital. She favors a larger, rather
than a smaller, stake in the business. She wants to take out as much money as
possible from the business, as soon as financially possible.
Madison wants to minimize personal liability, as well as liability for the business. She
realizes the future of the business is uncertain and she wants maximum protection
again all pitfalls.
Madison is willing to be involved in day-to-day business operations and has the time to
do so because her other business is running smoothly with competent managers. She
wants to play a key role, along with the other owners, in establishing the structure,
business environment, and culture for Green Clean. However, she believes that a
skilled general manager with commercial cleaning experience would be optimal for the
business.
Sam:
Sam is willing to commit to an investment of 51% interest in Green Clean, but is
agreeable to a lesser interest.
Sam wants to minimize his personal liability and prefers to limit it to his capital
investment but is willing to negotiate.
With a maximum interest of 51%, Sam wants complete control over business
operations; even with a lesser interest, he wants a strong managerial position. Sam
wants all owners with a minority interest to be silent in day-to-day management of GC.
Introduction to Legal Systems, Courts, Alternative Dispute Resolution,
Constitutional Law
Introduction to Law and Legal Systems
Introduction: The legal system is a complex set of rules that provide a
framework of predictability and reasonable consistency and continuity for persons
and businesses. All laws have a purpose. Generally, laws maintain order in Society,
protect persons and property, provide guidelines for acceptable, mandatory and
prohibited conduct, and establish parameters for handling personal affairs as well
as for business transactions and operations. Laws are dynamic and evolve to
reflect changes in Societal needs, interests and demands. The primary sources of
US law include: the US Constitution, state constitutions, state statutes, federal
statutes, administrative law, treaties, and Common Law (also called case law). US
law is divided into two categories, (1) criminal law, called public law, and (2) civil
law, or private law. Criminal law governs offenses considered to be offenses
against all Society in general, not just against a specific "victim"; civil law
involves private disputes and offenses between individuals.
Courts and the Legal System, Alternative Dispute Resolution
Introduction: The US legal system is based on the old English Common Law
system, and thus, the US system is often called a "common law system", meaning
we derive laws from various sources such as statutes and constitutions, but also
from case decisions/rulings that are referred to as "case law". Case law is an
important source of US law that is derived from court cases in which the
appropriate court reviews the facts, applies and interprets the relevant law(s) to
render a decision, that is, a ruling or holding. Court decisions have the same force
and effect of a law from any other source.
There is a court system for each state, plus the District of Columbia system, as
well as a federal court system. These court systems include trial level courts,
intermediate appellate courts, and superior/supreme courts. There are also
specialty federal level courts such as US Bankruptcy Court, US Tax Court, Court of
Federal Claims, and the Court of International Trade. The US Supreme Court is
considered the supreme “court in the land”.
Alternative dispute resolution (ADR) provides an alternative to litigation and the
court system in order to resolve civil disputes. It is most useful for family
disputes of all types, neighbor and property disputes, and some employment
disputes; it is not appropriate for all types of cases. ADR is advantageous because
it can be more flexible, less costly, and less time consuming than litigation. Types
of ADR include negotiation, mediation, non-binding arbitration, and binding
arbitration.
Constitutional Authority to Regulate Business
Introduction: Article VI of the US Constitution, referred to as the “supremacy
clause”, establishes the US Constitution as the supreme law of the land, and
neither the US Congress nor any state may enact a law that conflicts with the US
Constitution. Constitutional authority to regulate business activities comes from
several sources. One source of authority derives from the Tenth Amendment that
grants to the states so-called “police powers” to regulate private activities to
protect the general health, safety, and welfare of the public. Another source of
authority comes from Article 1, Section 8, of the US Constitution that empowers
the federal government to regulate interstate, and to some extent intrastate,
commerce; states are prohibited from enacting laws that unduly interfere with
interstate commerce and trade. The Bill of Rights protects businesses from undue
governmental interference in business activities, but also permits some restrictive
regulation related to commercial speech, political speech and property searches
and seizures. (Clarkson, K., Miller, R., & Cross, F., 2012, pp. 74-85)
Reference: Clarkson, K., Miller, R., & Cross, F. (2012), Business Law Text and Cases. Mason,
OH: South-Western, Cengage Learning.
Product Liability**
Product liability, sometimes called strict product liability refers to cases in which a
person is injured by a product, or use of a product because the product is
defective in some way. When a product is defective it may become abnormally
dangerous although the product, when not defective, may be safe.
Definitions of a Defective Product in Product Liability
Products may become defective because of:
1) defective manufacture (so the product is "broken", not perfectly made, i.e., a product
is manufactured so that the electric wiring is improperly made/attached, etc. and may
cause a fire or cause electric shock, or burn the user, etc.
2) failure to adequately warn of how to properly use a product, or potential dangers from
misuse, i.e., a warning to not use an electric hair dryer in the shower,
3) defective design, i.e., an electric lawn mower on which the blade is not covered so
that it can easily cut a foot when in use,
4) defective packaging, i.e., packaging for food that can be easily tampered with, and
5) breach of warranty of merchantability so that a product does not function for the
purpose for which it was intended, i.e., a car that does not operate/drive (breach of
warranty of merchantability does not always cause harm, except perhaps economic
harm because a user paid for a product that does not work as intended).
A product can be simultaneously defective in several ways. For example, a car that does
not operate/drive is not merchantable for its intended purpose but is also defectively
manufactured in some way so that it does not operate.
Everyone in the chain of distribution (from manufacturer to consumer) may be
liable for harm caused by a defective product. The chain of distribution
includes manufacturers, suppliers to manufacturers, lessors of a product, distributors of
products from manufacturers to wholesalers, distributors to other middle-persons (such
as vending machine product distributors, shippers, distribution to retailers and other
sellers, consumers, and innocent bystanders who may be injured by another's use of a
defective product.
All parties in the chain of distribution may be sued for the injuries caused by a
product, but not all these parties will necessarily be found liable. For example, assume
a toaster catches fire and burns a consumer who attempts to make toast. Clearly, the
toaster is defective because toasters should not catch fire. An injured consumer could
sue all in the chain of distribution, but probably only the manufacturer will be held
liable. The defect is likely due to faulty wiring inside the toaster, and this defect is not
reasonably discoverable by others in the chain of distribution.
Parties Who Can Recover for Product Liability – Anyone injured by a product,
including a product user, and usually an innocent third party bystander, can sue
under product liability. An injured party does not have to have a contractual
relationship with anyone in the chain of distribution to sue for injuries. For
example, assume a consumer is properly using his new gas grill at a tailgate party when
the grill spontaneously explodes. The consumer and two friends standing nearby are
injured. Only the consumer has a contractual relationship (a sales contract created to
purchase the grill from a retailer) with either the manufacturer or retailer, but all three
injured parties may sue. All will likely recover damages for injuries received from the
defective grill.
Damages Recoverable for Product Liability – Typically, injured parties may collect
damages to compensate for their personal injuries, such as medical
costs. Property owners may also collect damages to compensate for harm to their
property, such as costs to repair a garage door damaged in a fire caused by a defective
lawn mower. So-called punitive damages, over and above actual compensation
damages, may be awarded in some very serious cases to “punish” the manufacturer or
others in the chain of distribution. Punitive damages tend to be arbitrary and the trend in
the courts is to limit punitive damages to only the most extreme cases.
Typically, consumers return defective products to the seller and a monetary refund for
the product, rather than collecting the cost of the product in court.
Types of Product Defects:
1. Defect in Manufacture
When the manufacturer fails to properly assemble, test, or check quality of a product,
there may be a defect in manufacture.
For example, a cup of coffee containing a piece of metal is defective and abnormally
dangerous as the metal could injure an unsuspected consumer drinking the coffee. Or,
an electric food processor is defective and abnormally dangerous if the top and blade fly
off when the mixer is turned on.
2. Defect in Design
When a product is designed so that faulty design causes the product to become
dangerous, the product is defective.
For example, a power table saw is designed so a safety guard surrounding the
blade can be removed and the saw will still operate. This becomes abnormally
dangerous and likely to injure users. The safer design would have been for the
saw to lock and not operate with the safety guard removed.
3. Failure to adequately Warn
Most products carry warnings, so the key word is "adequately". A warning can be
included but may not adequately warn of risks for various reasons:
1) a warning may not be reasonably accessible or easily visible to consumers;
2) a warning may not clearly or adequately describe the risks;
3) a warning may not include all possible dangers.
Manufacturers and sellers of products are, by law, required to provide certain warnings
on most products. Products that are inherently dangerous, such as knives, power tools,
etc., must warn of these dangerous propensities. If an electric knife does not carry a
warning, it becomes abnormally dangerous with potential to serious injure a user.
4. Defect in Packaging
Manufacturers owe a duty to design and provide safe tamperproof packaging. Failure to
meet this duty may make a product abnormally dangerous and defective. For example,
an over-the-counter medication for which the packaging can be opened and re-closed
without notice by consumers, is potentially abnormally dangerous. The packaging could
be opened, the medication poisoned or contaminated, without being visible to a
consumer.
Possible Defenses to Product Liability
Defenses to claims of strict product liability may minimize damages or result in a
favorable ruling for a defendant, but this is not a given. Defenses often fail in product
liability cases as the liability is so broad.
Defenses are raised only by defendants.
Possible Defenses:
Generally Known Dangers –If the product is known to the general population to be
inherently dangerous, such as guns, sellers typically may not be held strictly liable for
failure to adequately warn.
Assumption of Risk – A defendant who claims this defense must show that the plaintiff
knew and understood the risk, and then voluntarily assumed it anyway, and carelessly.
Misuse of Product – Defendants using this defense will not be held liable if the
plaintiff ’s misuse was unforeseeable and gross misuse. For example, if a consumer puts
wet in a microwave to dry them, and the microwave explodes, this is unforeseeable,
gross misuse and any injuries are the fault of the consumer.
Correction of a Product Defect – Manufacturers that become aware of a product’s
defect must make reasonable efforts to notify purchasers and users and correct the
defect. Failure on the part of a user to have the defect corrected, after notice, may be
raised as a defense in an action brought against the manufacturer. This will not always
absolve the manufacturer of liability, but may mitigate damages or result in a ruling for
the defendant, depending on circumstances and type of defect.
Supervening Event – If a product has been materially modified or altered by a
consumer, and the modification alteration is the direct cause of the injuries, the
defendant(s) may not be held liable. The modification or alteration is considered an
event that occurred after manufacturing and before injury.
**Strict product liability is often confused with the separate common law tort
of strict liability, sometimes referred to as “liability without fault”. Strict liability
applies only to a small category of abnormally dangerous activities, such as use of
explosives, fireworks, and stunt flying. Regardless of how careful these activities are
handled, there is a high risk of accident and injury. If there is injury to a third party
resulting from one of these activities, the "actor" responsible for these activities will be
liable for any injuries. The injured party only must show the injury occurred from the
dangerous activity and does not have to prove that the defendant was at fault by acting
carelessly.
Warranties and Products Liability Case Example:
Following is a court opinion for a product liability case that will illustrate application
of product liability law.
Liriano v. Hobart Corp. 92 N.Y.2d 232 (1998) Court of Appeals of the State of
New York (failure to adequately warn, defective and negligent design)
Facts:
In 1961, Liriano, a 17 year-old employee in the meat department at Super Associated
grocery store (Super), was injured on the job while feeding meat into a commercial
meat grinder whose safety guard had been removed. His right hand and lower forearm
were amputated.
The meat grinder was manufactured and sold by Hobart Corporation (Hobart) with an
affixed safety guard that prevented the user's hands from coming into contact with the
grinder. No warnings were on the machine or otherwise provided to state it was
dangerous to operate the machine without the safety guard in place. Subsequently,
Hobart became aware that a significant number of purchasers of its meat grinders had
removed the safety guards; in 1962, Hobart began issuing warnings on its meat
grinders concerning removal of the safety guard.
At trial, Super conceded the safety guard was intact at the time it acquired the grinder
and that the guard was removed while in its possession. It is further conceded that
Hobart actually knew, before the accident, that removals of this sort were occurring
and that use of the machine without the safety guard was highly dangerous.
Liriano sued Hobart for negligence and strict product liability for defective product
design and failure to warn. The case was removed to the United States District Court
for the Southern District of New York, and Super was impleaded as a third-party
defendant, seeking indemnification and/or contribution.
The District Court dismissed all of Liriano's claims except those based on failure to
warn. The trial court ruled failure to warn was the proximate cause of Liriano's
injuries and apportioned liability 5% to Hobart and 95% to Super. On partial retrial,
Liriano was assigned 33 1/3% of the responsibility.
Hobart and Super appealed, arguing that they had no duty to warn, as a matter of law,
and that the case should have been decided in their favor.
Opinion:
The appellate court agreed, essentially, with the rationale of the lower courts on the
issues of Hobart’s and Super’s liability.
The Court discussed the responsibility to warn of inherent dangers. The Court
declared, “A manufacturer who places a defective product on the market that causes
injury may be liable for the ensuing injuries.***A product may be defective when it
contains a manufacturing flaw, is defectively designed or is not accompanied by
adequate warnings for the use of the product.***A manufacturer has a duty to warn
against latent dangers resulting from foreseeable uses of its product of which it knew
or should have known.***A manufacturer also has a duty to warn of the danger of
unintended uses of a product provided these uses are reasonably foreseeable.”
The Court further reasoned, “A manufacturer is not liable for injuries caused by
substantial alterations to the product by a third party that render the product defective
or unsafe.***Where, however, a product is purposefully manufactured to permit its
use without a safety feature, a plaintiff may recover for injuries suffered as a result of
removing the safety feature.”
Furthermore, the Court stated, “…Unlike design decisions that involve the
consideration of many interdependent factors, the inquiry in a duty to warn case is
much more limited, focusing principally on the foreseeability of the risk and the
adequacy and effectiveness of any warning. The burden of placing a warning on a
product is less costly than designing a perfectly safe, tamper-resistant product. Thus,
although it is virtually impossible to design a product to forestall all future riskenhancing modifications that could occur after the sale, it is neither infeasible nor
onerous, in some cases, to warn of the dangers of foreseeable modifications that pose
the risk of injury.”
Manufacturer liability may exist under a failure-to-warn theory in cases in which the
substantial modification defense would preclude liability under a design defect theory.
Strict Liability for Abnormally Dangerous Activities Case Example:
Following is a court opinion for a common law strict liability case that will illustrate
application of strict liability law regarding abnormally dangerous activities. Please
note: this is NOT a strict product case.
Klein v. Pyrodyne Corporation
817 P.2d 1359 (strict liability)
Supreme Court of Washington
Facts:
The plaintiffs in this case are persons injured when an aerial shell at a public
fireworks exhibition went astray and exploded near them. The defendant is the
pyrotechnic company, Pyrodyne Corp., hired to set up and discharge the
fireworks. All operators of the fireworks display were Pyrodyne employees acting
within the scope of their employment duties at the time of the accident.
During the fireworks display, a 5-inch mortar was knocked into a horizontal position
so that an aerial shell inside was ignited and discharged. The shell flew 500 feet and
exploded near the crowd of onlookers. Plaintiffs Danny and Marion Klein were
injured by the explosion.
The issue before this court is whether Pyrodyne is strictly liable for damages caused
by fireworks displays.
Kleins contend that strict liability is the appropriate standard to determine the
culpability of Pyrodyne because Pyrodyne was participating in an abnormally
dangerous activity.
Pyrodene moved for summary judgment which the court denied.
Opinion:
The Court reasoned, “Section 520 of the Restatement lists six factors that are to be
considered in determining whether an activity is "abnormally dangerous". The factors
are as follows: (a) existence of a high degree of risk of some harm to the person, land
or chattels of others; (b) likelihood that the harm that results from it will be great; (c)
inability to eliminate the risk by the exercise of reasonable care; (d) extent to which
the activity is not a matter of common usage; (e) inappropriateness of the activity to
the place where it is carried on; and (f) extent to which its value to the community is
outweighed by its dangerous attributes.”
The Court also considered who should bear the loss when an innocent person is
injured through the nonculpable but abnormally dangerous activities of another. The
Court concluded that in the case of fireworks displays, it is most fair for the
pyrotechnicians who present the displays to bear the loss rather than the injured
parties.
Pyrodyne argued that even if there is strict liability for fireworks, it is not liable under
the facts of this case because of the manufacturer's negligence in producing the
fireworks. According to Pyrodyne, a shell detonated without leaving the mortar box
because it was negligently manufactured.
The Court argued, “…intervening acts of third persons serve to relieve the defendant
from strict liability for abnormally dangerous activities only if those acts were
unforeseeable in relation to the extraordinary risk created by the activity.” Given the
nature of fireworks, it is foreseeable an accident could occur.
Pyrodyne Corporation is strictly liable for all damages suffered by plaintiff as a result
of the fireworks display. Detonating fireworks displays constitutes an abnormally
dangerous activity warranting strict liability. Public policy also supports this
conclusion.
Affirmed.
Instructions
PLEASE READ "INTRO TO 380" module in Content before
proceeding with week 1 learning activities - this is
essential.
Read in Content: Policies: Learning Activities & Discussions
- Read Me!
General Instructions for Learning Activities
•
Read/watch all assigned materials listed for the week in the Course
Content
•
Cite to assigned materials in all responses in Learning Activities
•
Use only assigned materials to complete Learning Activities; do not
use internet unless otherwise instructed
•
Include in-text citations and a Reference List for in-text citations
•
Write in correct, complete sentences, in paragraph format unless
otherwise instructed
•
Submit Learning Activities to Assignment Folder
Learning Activity: due 11:59 pm ET, Thursday
SUBMIT TO ASSIGNMENT FOLDER.
Background: TLG has explained to the GC owners that it is vital to
understand the legal system and processes, including the court
system and jurisdiction of the courts. This is especially important
as GC plans to conduct business over the internet and thus, will
have potential transactions throughout the U.S. and, possibly,
globally.
For an in initial meeting between GC owners and TLG, Winnie and
Ralph asked you to present an overview of the law and the legal
system. You explained federalism, common law (see link in
Overview), and the court system (see link in Overview in
Saylor, Advanced Business Law and the Legal Environment).
In addition, your presentation discussed the nature of law and the
legal process. Some of the points included in your presentation
are:
(1) the primary purpose of law is to establish a set of rules and
guidelines for Society to promote order and to create parameters
for acceptable and prohibited behavior;
(2) laws are inevitably subject to interpretation and
reinterpretation by courts;
(3) laws must be reasonably specific, and yet sufficiently general,
with an inherent flexibility, to withstand the rigors of
interpretation and the "test of time";
(4) laws that strike a balance as described in (3) above, usually
endure as relevant, applicable rules, even with societal changes
and reinterpretations;
•
example: the U.S. Constitution has withstood the test of time,
partly because of an inherent balance of specificity, generality, and
flexibility
(5) laws are promulgated and interpreted by human beings, and
thus, are imperfect;
(6) some laws have a worthy purpose, but are difficult to
adequately enforce, i.e., speed limit laws;
(7) all laws are not necessarily ethical; some conduct can be legal,
but considered unethical;
(8) U.S. law has a very dominant protective purpose – protecting
all citizens, as well as providing special protections for certain
groups of people, in certain circumstances, i.e., minors;
(9) fairness to all is a primary goal of law, but what is fair to one
group may be unfair to another group; what is fair in one situation
may be unfair in another situation - every right granted to an
individual or group, to some extent, impinges on the rights of
another individual or group;
(10) legislatures enacting laws, and courts interpreting laws, must
weigh and balance the right(s) granted v. the rights restricted by a
specific law to determine if the law is justifiable and fair - this
weighing and balancing involves determining if there a compelling
public interest or purpose for the law that justifies granting certain
rights while restricting other rights;
•
example: highway speed limit laws protect everyone (drivers,
passengers, and pedestrians), but also restrict the freedom of
drivers to drive at a speed of their choice - on balance, the
restriction is easily justified as there is an important purpose in
protecting drivers, passengers, and pedestrians
•
example: laws that prohibit alcohol consumption/purchase by
minors grant rights to those 21 years and older, and restrict rights
of those under 21 years - on balance, Society, legislatures, and
courts have determined this law is justified as Society has a strong
public interest in protecting minors who may not have reached a
level of maturity and judgment to handle the right to choose to
consume/purchase alcohol
(11) the familiar symbol for law and the legal system is the Scale
of Justice showing a blindfolded Lady that represents the weighing
and balancing process necessary to balance rights v. restrictions
granted and imposed by laws.
Instructions:
To explain constitutional law and how it might apply to GC
operations and transactions, you decide to prepare a hypothetical
example scenario and an accompanying analysis to present to GC
owners.
Assume the scenario you prepared follows.
Hypothetical Example Scenario:
EPI sells its green cleaning
products to customers in most states. Its biggest product sales
are in the Mid-Atlantic states.
Recently, the Delaware legislature enacted a law banning all sales
and importation of EPI’s “Brite Clean Floor Cleaner” until further
notice. It was discovered that one of the ingredients, derived from
corn, is contaminated and causes a quick-growing mold to spread
on surfaces to which it is applied. The mold can be toxic for
humans and can cause damage to floors.
EPI challenged the new law as unconstitutional.
Address the questions below.
1. Applying the doctrine of "police powers" (see link in Overview)
derived from the 10th Amendment of the U.S. Constitution,
analyze and discuss whether the Delaware court would likely
uphold the Delaware law banning importation of EPI's Brite Clean
Floor Cleaner into the state and why or why not. Explain your
conclusion in detail.
2. Create an original hypothetical scenario - in a business setting
- of a constitutional state law limiting some business
activity under the state's police power.
•
explain why the example is constitutional
Format Instructions:
Prepare the analysis in a report, addressed to Winnie and Ralph, to
be used in discussion with the GC owners.
The report should address the questions in
the Instructions above. Label each question as 1., 2. Follow the
format below.
REPORT
TO:
Winnie James, Ralph Anders
FROM:
(your name)
DATE:
RE:
Constitutional Law and Business Regulation
1.
2.
_____________________________
Write in correct, complete sentences in paragraph format.
General Instructions for Learning Activities
•
Read/watch all assigned materials listed for the week in the Course
Content
•
Cite to assigned materials in all responses in Learning Activities
•
Use only assigned materials to complete Learning Activities; do not
use internet unless otherwise instructed
•
Include in-text citations and a Reference List for in-text citations
•
Write in correct, complete sentences, in paragraph format unless
otherwise instructed
•
Submit Learning Activities to Assignment Folder
Learning Activity: due 11:59 pm ET, Thursday
SUBMIT TO ASSIGNMENT FOLDER.
Background: With some understanding of the legal system, the GC
owners can now shift focus to examining specific areas of law that create
potential risks and liabilities for their business. The group knows from
their business experience, that businesses face serious and costly risks
and legal liabilities stemming from tort law.
Unintentional harm resulting from accidents, such as negligence, can
result in costly litigation. For example, Madison's remodeling business
was sued by a client injured when one of the roofing employees
accidentally dropped a ladder on that client’s leg.
The GC owners are concerned about the possibility of accidents
occurring during cleaning of GC clients's property, and accidents
occurring in Green Clean public offices that could create risks of
negligence and premises liability.
Instructions: Winnie and Ralph have given you the responsibility of
analyzing and summarizing potential negligence and premises liability
risks that GC might face in its business operations.
You decide to analyze a hypothetical fact scenario to present to the GC
owners to help explain GC's potential negligence liability for accidents
occurring on clients' property during cleaning. The analysis will be
presented at the next meeting with GC owners and TLG. Your analysis
will address only the tort of negligence.
Analyze the following Fact Scenario and respond to the questions
regarding the scenario.
Fact Scenario: Jack, a GC cleaning employee, was part of a team
assigned to clean Client A's office building. Jack's job was to vacuum the
floors. Jack plugged GC's large commercial style vacuum cleaner into a
nearby outlet and began vacuuming Client A's building. After vacuuming
for a few minutes, Jack tripped over the vacuum's long electrical cord,
fell, and broke his ankle. Jack went to the hospital ER via ambulance. A
walking cast was applied to the ankle after it was determined he did not
need surgery. Jack missed a week of work.
1. Will Client A be liable for negligence for Jack's injuries, and why
or why not?
2. Will GC be liable for negligence for Jack's injuries, and why or
why not?
3. Will Maryland's Workers Compensation law likely cover the
medical expenses associated with Jack's injury, and why or why
not?
Format Instructions:
Prepare the analysis in a report, addressed to Winnie and Ralph, to
be used in discussion with the GC owners.
The report should address the questions in
the Instructions above. Follow the format below.
REPORT
TO:
Winnie James, Ralph Anders
FROM:
(your name)
DATE:
RE:
Green Clean Negligence Risks and Liabilities
1.
2.
3.
___________________________
Write in correct, complete sentences in paragraph format.
SOURCES FOR EACH LEARNING ACTIVITY
If you use the books provided the citation for each (not including page numbers) is:
Advanced Business Law and the Legal Environment (2014). Washington, D.C.: The
Saylor Foundation
The Legal and Ethical Environment of Business (2014). Washington, D.C.: The
Saylor Foundation
The following will be book chapters and links that can be
used for each Learning Activity:
LA1
Saylor: Advanced Business Law and the Legal Environment
Chapters 1,3,4:
Saylor: The Legal and Ethical Environment of Business
Chapter 1:
LINKS:
Common Law v. Civil Law Systems
Police Powers of States
Alternative Dispute Resolution (ADR)
The U.S. Constitution
Jurisdiction and Internet Sales
LA2
Saylor: Advanced Business Law and the Legal Environment
Chapter 7:
LINKS:
Civil and Criminal Law Comparison
Elements of Negligence Summary
Premises liability
Introduction to Torts (video - 15 mins)
Maryland Workers' Compensation Law
LA3
Instructor Notes - very important to read!(SEE ATTACHED ON SP)
Review assigned materials in Week 2
Saylor: The Legal and Ethical Environment of Business
Chapter 17
LINKS:
Manufacturing Defect v. Design Defect
Warranties and Product Liability
Summary of Product Liability Law: click link below, please
/content/enforced/375136-M_001041-01-2192/Business Law I (Week 3)
(1).pdf
LA4
Saylor: Business Law and Legal Environment
Chapters 8,9,10,11,12:
LA5
Law for Entrepreneurs, Saylor Academy, 2012
Chapters 13, 15.1, 16.3
LINKS:
Summary of Contract Law, Statute of Frauds: click on link below, please
/content/enforced/375136-M_001041-01-2192/Business Law I (Week 5).pdf
LA6
Saylor: Advanced Business Law and the Legal Environment
Chapters 8,9,10,11
LINKS:
CISG: Guide for Business Managers and Attorneys in Applying CISG
LA7
Law for Entrepreneurs, Saylor Academy, 2012
Chapter 20, 21
Principal and Agent Relationships
Termination of Agency Relationships
LA8
Choosing a Business Structure
Partnerships
General Corporation
Limited Liability Company
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