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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