The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 1 of 1 Appendix B - The ABCs of Legal Literacy The Business Guide to Legal Literacy: What Every Manager Should Know About the Law by Hanna Hasl-Kelchner Jossey-Bass © 2006 Citation Appendix B: The ABCs of Legal Literacy Overview This legal primer is intended as a quick reference guide to assist you in connecting the dots between core legal concepts and their business applications. It is not intended to be legal advice or a substitute for competent counsel who represents you or your business. It is offered instead to provide a baseline of information to help you develop awareness of the most common legal issues to cross a manager’s desk. Industry-specific regulations are not addressed. The pages that follow introduce six core legal disciplines. Each section surveys and highlights important concepts in one legal discipline, explains their business relevance in general terms, and offers a list of questions for you to think about that will help you translate the legal concepts to your own work environment. Please note that what follows are only the ABCs. To do the whole topic justice would require an encyclopedia. The law is a nuanced endeavor. What follows is intended as a quick acid test to help you see if you are heading in the right direction and to provide a good starting point for gathering your thoughts before seeking expert counsel. Together with your counsel you can develop the foresight and peripheral vision necessary to manage your organization’s legal risk effectively. Use of content on this site is expressly subject to the restrictions set forth in the Membership Agreement. Books24x7 and Referenceware are registered trademarks of Books24x7, Inc. Copyright © 1999-2014Books24x7, Inc. - Feedback | Privacy Policy (updated 03/2005) http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 1 of 6 Appendix B - The ABCs of Legal Literacy The Business Guide to Legal Literacy: What Every Manager Should Know About the Law by Hanna Hasl-Kelchner Jossey-Bass © 2006 Citation 1. International Law When we refer to international law we are loosely referring to four things:  International treaties and conventions  The law of sovereign foreign countries  Foreign custom and religious law  Private contracts between parties in different countries This collection of rules and agreements establishes the norms of acceptable behavior, providing the certainty and stability necessary for commerce and healthy economic development. A weak or volatile rule of law increases the level of risk of doing business in a particular country. Such risk is often referred to as political risk, as distinguished from the more routine cost or difficulty associated with enforcing or defending legal rights abroad that can be attributed to unfamiliarity with the forum or sheer distance. Cultures throughout the world recognize the legal concept of justice as a combination of integrity, fairness, honesty, trust, and transparency. If we look at the rule of law country by country we see that there is a degree of consistency regarding what kinds of issues are recognized. What can vary significantly from country to country is how the issues are dealt with. At first glance it may look like treaties have very little to do with private business enterprise. After all, international treaties and conventions are international agreements entered into by recognized governments of sovereign nations. Their purpose is to harmonize substantive differences between jurisdictions and articulate a common set of rules and standards on subject matter that is of greatest common concern. These agreements lend consistency and certainty to world affairs. As a result, we typically associate such laws with public policy concerns such as the Geneva Conventions, a set of public international laws that limit the barbarity of war. Yet a great many treaties do affect trade and commerce. The Hague Convention, for example, deals with private international law and issues of commerce such as the international sale of goods, product liability, and procedural issues for the filing of suit, among others. The World Trade Organization is itself a creation of the treaty and convention process. It was established after World War II to spell out rules of trade between nations that govern goods, services, and intellectual property. When domestic legislatures ratify treaties and conventions signed by their diplomats, the countries are agreeing to conform their domestic law to the treaty standard. It is in this way that international law trickles down and has an effect on private domestic commerce—even businesses that may not be selling their goods or services in international markets. Each sovereign nation state determines the law within its territory. Treaties and conventions play a role in harmonizing laws from jurisdiction to jurisdiction, but such harmonization is not comprehensive or complete. It still leaves room for a substantial amount of nationalism. What is significant to note when dealing with foreign law is that various levels and subdivisions of government may have simultaneous jurisdiction over your business operations or transactions. These political subdivisions go by different names in different countries. They may be called states, provinces, cantons, or shires, to name a few. Certain countries may also include territories that are subject to tribal laws as well. http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 2 of 6 To calculate your legal risk exposure, you need to find out how many sets of rules govern your activities and know what those rules are. This effort can also help you prioritize compliance risks. If, for example, a chemical spill triggers federal law subjecting a company to fines and remediation, and the same event can trigger separate state and municipal fines, the trebling effect of fines increases the cost of noncompliance and simultaneously creates the opportunity for an increased return on investment of spill prevention or spill containment practices. Identifying the legal risk exposure associated with your international business operations sounds straightforward, but sometimes it’s not so simple. Events touching multiple jurisdictions invites forum shopping. Chapter Three discussed a case that involved a volatile compound shipped from Belgium to a distributor in the U.S. who repackaged it and resold it to a customer in The Netherlands who blew himself up while repackaging it on his kitchen table. Even though the product was just passing through the United States on its way back to Europe, it had sufficient contact with the forum to allow a U.S. court to exercise jurisdiction. Managing distribution channels and operations can therefore help minimize the risk associated with multiple jurisdictions, particularly unfavorable jurisdictions. Where transactions make it impossible to avoid a foreign jurisdiction, doing your homework in advance helps avoid ugly surprises. In Europe, for example, antitrust laws have been interpreted to protect competitors, not just the concept of competition per se as in the United States. That distinction allowed the proposed merger of General Electric and Honeywell to sail through U.S. pre-merger approval, only to run aground in Europe. With respect to product development and intellectual property, some countries do not allow inventors to assign their rights to companies, while others allow it but require compensation to the inventor, and still others peg the amount of compensation to the commercial success of the invention. If you don’t find out about these quirks ahead of time, you might suddenly find yourself with a business partner you hadn’t planned on. Part of the problem is that it is so easy to assume that foreign commercial law is like your own. Such assumptions are decision-making blind spots and can be costly. In one deal, for example, a U.S. company acquiring Canadian operations planned on consolidating the two and terminating Canadian employees. After the deal closed, the U.S. executives learned that Canadian employment laws operate differently from those in the United States and that their proposed shutdown needed to meet certain regulatory requirements. The prospective cost savings wound up being significantly delayed. A maze of regulatory requirements can create some counterintuitive results. When the discount store Wal-Mart entered the German market the German antitrust authorities ordered the company to raise its prices, alleging that Wal-Mart exploited its market power to sell products below cost on a continuous basis in violation of German trade laws. While such underselling benefits consumers in the short term, the government reasoned, the price squeeze forces medium and smaller competitors that can’t match the low prices out of business and therefore concentrates market power in the long term. Jurisdiction management is both a substantive issue and an operational issue, and the failure to be sensitive to such issues can have dire personal consequences. Take, for example, the case involving a U.S. executive attending a trade show in India. Unrelated to the trade show, the company was in the middle of a civil lawsuit in India, and in connection with that case the executive was arrested and detained to answer questions upon his arrival in India. Had he known about the welcoming committee he might have thought twice before boarding a plane and subjecting himself to personal jurisdiction on Indian soil. Differences in Legal Tradition Domestic legal systems are a product of different legal traditions, culture, and sometimes religion. How they developed and spread throughout the world is largely an accident of history and economic development, but there are some common traditions that help make sense of the tangled maze. Every substantive area of law, from tax to employment to intellectual property to real estate, takes on different legal dimensions once you cross a national border. Why are the legal practices so different from country to country? The basic concepts and institutions of modern Western commercial law, for example, were formed in the eleventh and twelfth centuries and are rooted in Roman law, specifically the Texts of Justinian. They are manifest in the civil code tradition represented by countries such as France, Spain, and Portugal and the common law tradition represented by countries such as England. These European legal traditions were then exported to the New World through colonial conquests. Most of the United States, for example, was originally colonized by England. But the state of Louisiana, which has French roots, still retains traces of its civil code http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 3 of 6 heritage. Most of the world follows a civil law model. It is based primarily on a systematic compendium of laws, rules, and regulations—“the code.” In comparison, the common law tradition also relies on code, or statute, but supplements it with a large body of case law that has significant precedent value. The role of case law is what makes the common law highly contextual and fact-specific. As a practical matter, the globalization of world commerce and the Internet’s acceleration of globalization have quickened the pace of harmonization between the civil law and common law legal traditions. Yet important procedural differences remain with respect to the amount of discovery that may be conducted before trial, the type of evidence that is admissible at trial, the role of witnesses, and the role of juries. In contrast, Asia has no single unifying legal tradition. East Asia is geographically and culturally very diverse. Before the expansion of Islam into central, south, and southeast Asia between the eleventh and fifteenth centuries and the arrival of the Portuguese in the late fifteenth century, east Asia was generally dominated by two traditions: the Indian Hindu Buddhist tradition and the Chinese Confucian tradition. These traditions differ fundamentally from their Western counterparts by the lack of private rights and duties typically associated with democratic forms of government. Rules relating to property, contracts, commercial transactions, and familial relations are addressed by these traditions only to the extent necessary to protect or promote state interests. It is essentially a penal law designed to perpetuate the existing political and social order. The United States as Litigation Lightning Rod The United States is an attractive forum for lawsuits because of its super-sized damage awards, including punitive damages and the general lack of liability caps. Civil law countries generally do not recognize the concept of punitive damages and often cap product liability awards, resulting in lower damage awards. As a result, lawsuits offer less financial gain, so fewer are filed. The fee structure for attorneys in the United States and the use of contingency fee arrangements is another reason the United States is more litigious than other countries. The theory behind contingency fees is to provide injured parties who have legitimate legal claims access to counsel if they can’t afford one. A contingency fee is dependent on the outcome of the case. If the plaintiff wins, counsel receives a percentage of the proceeds. If the plaintiff loses, counsel receives nothing. In some countries, a lawyer’s receiving a percentage of the client’s recovery is viewed as an unethical conflict of interest. These countries prefer to address the fee issue by requiring the losing party to pay the winner’s attorney’s fees. The prospect of paying the winner’s fee increases the cost of losing. With more to lose, plaintiffs evaluate their cases more carefully, and fewer suits of marginal merit are filed. Notes Contingency fees, typically offered by the plaintiff’s bar in product liability cases, can lead to extremely high awards in class action suits. The concept behind class actions is that the amount of damage sustained by an individual is too small to merit the filing of the case on its own. But there is strength in numbers and if enough people are similarly situated and can be certified as a “class,” then the cost-benefit analysis weighs in favor of proceeding. Although class action suits and the debate about legislative steps to rein them in are largely a U.S. phenomenon, the class action suit concept seems to have migrated overseas. International business is therefore not immune. Great Britain and Sweden have recently permitted limited forms of class actions and Italy and France are considering them. Favorable procedural practices are another factor that contributes to the U.S. legal system’s reputation as a litigation lightning rod. Smoking gun documents, for example, are bad in any language. But in the United States, generous pretrial discovery rules provide the opportunity to find more smoking guns and other damaging evidence. Civil law jurisdictions often decide the merits of the case based on the pleadings and the plaintiff’s existing files. They sharply curtail pretrial discovery or even the use of witnesses during trial. Furthermore, a judge, not a jury, may often decide the case. Different Latitude, Different Attitude Ethnic cultures, religion, and legal traditions combine to create differing frames of reference and perceptions that influence business conduct. Understanding these nuances is important because they play a significant role in our ability to manage expectations and legal risk. As summarized in Table B.1, those of us steeped in the traditions of Western countries tend to view relationships more legalistically and approach negotiations as equals with mutual rights. Those of us steeped in Eastern traditions tend to view relationships more paternalistically and approach negotiations hierarchically, expecting decisions to be guided by more unilateral http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 4 of 6 duty than by legal rights. Table B.1: Comparison of Eastern and Western Legal Systems. Open table as spreadsheet Adjudicative (“Legal”) Disciplinary (“Parental”) Essential character Confrontation between parties on equal footing Confrontation between unequals Role of rules Central and indispensable Peripheral, dispensable Most commonly observed Western countries and sports Asian and Middle Eastern countries and military Society classifications Individualistic and egalitarian (“contract oriented”) Hierarchical (“status oriented”) Societal links Mutual rights Unilateral duty Behavioral guides Please yourself but don’t break rules. Laws set standards. Please your group leaders at any cost. Leaders set standards. Essential theory Jurisprudence Unsystematic Source: Reprinted by permission of the University of Washington Press. T. Stephens, Order and Discipline in China: The Shanghi Mixed Court (1992). These differing worldviews affect perceptions and the ability to manage expectations. If they are not managed appropriately they can also set the stage for a culture clash. Understanding these nuances thereby helps you develop more effective communication strategies that build good business relationships and lead to more mutually satisfactory solutions. When operating in a foreign country it is essential to respect the local laws. However, where local business practices are rife with bribery, do you go along to get along? Extraterritorial Laws Even if local custom condones corruption and bribery, engaging in such practices while you’re away from home does not necessarily make them legal. Under U.S. law, for example, the Foreign Corrupt Practices Act (FCPA) makes it a criminal offense for U.S. businesses to bribe foreign officials to obtain a favorable advantage when bidding on government contracts. It is one of several laws that governs the conduct of U.S. companies abroad and has extraterritorial effect. Pressure to remove any hint of impropriety involving international business dealings has been further increased with the post-9/11 adoption of USA Patriot Act that mandates tighter scrutiny of cross-border dealings. As a result FCPA enforcement has been rising. Bribes are distinguishable from “facilitating payments,” which are legal under the Act. But before you conclude that such definitions are nothing more than buzzword bingo, it is wise to seek expert counsel regarding the activities or payments your company may be contemplating. The price of erring is high. In the early 1990s, for example, General Electric ultimately paid an $8 million fine and another $52 million in restitution for its involvement in bribing Israeli military officials to obtain a defense contract. Similarly, the Baxter International health care group paid $6.5 million in civil and criminal fines after it admitted to bribing Arab officials in an effort to have Baxter’s name removed from a blacklist of companies doing business with Israel. But the pain for Baxter did not stop there. When New York City Comptroller Elizabeth Holtzman heard the news, she banned Baxter from bidding on the City’s contracts. The FCPA, enacted in 1977, finds its origins in the 1974 post-Watergate era of heightened scrutiny and suspicion and the SEC’s discovery of numerous questionable payments to foreign government officials as part of company filings. Twenty years later, in 1997, the International Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, a multilateral treaty modeled on the FCPA, was adopted by the international community. It entered into force in February 1999. The ratification status of signatories to the convention is set forth in Table B.2. Thus depending on where you are doing business, engaging in local customs of bribery may be more illegal than you think. http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 5 of 6 Table B.2: OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions: Open table as spreadsheet Country Deposit of Instrument of Ratification and Acceptance Entry into Force of the Convention Entry into Force of Implementing Legislation Argentina February 8, 2001 April 9, 2001 November 10, 1999 Australia October 18, 1999 December 17, 1999 December 17, 1999 Austria May 20, 1999 July 19, 1999 October 1, 1998 Belgium July 27, 1999 September 25, 1999 April 3, 1999 Brazil August 24, 2000 October 25, 2000 June 11, 2002 Bulgaria December 22, 1998 February 20, 1999 January 29, 1999 Canada December 17, 1998 February 15, 1999 February 14, 1999 Chile April 18, 2001 June 17, 2001 October 2002 Czech Republic January 21, 2000 March 21, 2000 June 9, 1999 Denmark September 5, 2000 November 4, 2000 May 1, 2000 Estonia November 23, 2004 (accession instrument) January 22, 2005 Finland December 10, 1998 February 15, 1999 January 1, 1999 France July 31, 2000 September 29, 2000 September 29, 2000 Germany November 10, 1998 February 15, 1999 February 15, 1999 Greece February 5, 1999 April 6, 1999 December 1, 1998 Hungary December 4, 1998 February 15, 1999 March 1, 1999 Iceland August 17, 1998 February 15, 1999 December 30, 1998 Ireland September 22, 2003 November 21, 2003 November 26, 2001 Italy December 15, 2000 February 13, 1999 October 26, 2000 Japan October 13, 1998 February 15, 1999 February 15, 1999 Korea January 4, 1999 March 5, 1999 February 15, 1999 Luxembourg March 21, 2001 May 20, 2001 February 11, 2001 Mexico May 27, 1999 July 26, 1999 May 18, 1999 Netherlands January 12, 2001 March 13, 2001 February 1, 2001 New Zealand June 25, 2001 August 24, 2001 May 3, 2001 Norway December 18, 1998 February 16, 1999 January 1, 1999 Poland September 8, 2000 November 7, 2000 February 4, 2001 Portugal November 23, 2000 January 22, 2001 June 9, 2001 Slovak Republic September 24, 1999 November 23, 1999 November 1, 1999 Slovenia September 6, 2001 (accession instrument) November 5, 2001 January 23, 1999 Spain January 4, 2000 March 4, 2000 February 2, 2000 Sweden June 8, 1999 August 7, 1999 July 1, 1999 Switzerland May 31, 2000 July 30, 2000 May 1, 2000 Turkey July 26, 2000 September 24, 2000 January 11, 2003 United Kingdom December 14, 1998 February 15, 1999 February 14, 2002 United States December 8, 1998 February 15, 1999 November 10, 1998 http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 6 of 6 Between 1981 and 1986, only one indictment was brought under the FCPA. The low enforcement rate was largely attributed to poorly drafted record-keeping requirements in the original law, which made proving a case difficult. Those accounting rules have since been changed. Furthermore, we now have the transparency and accountability requirements demanded by Sarbanes-Oxley. As a result, during the first eight months of 2005 alone, three deferred or nonprosecution agreements were entered into between the Department of Justice and three different companies who admitted to making illegal payments in violation of the Act. Other U.S. laws with extraterritorial reach include antitrust, employment, and re-export laws. Price fixing conducted outside U.S. borders can still be subject to U.S. price-fixing laws if the price fixing affects U.S. commerce. Similarly, U.S. workers working for U.S. companies abroad are protected by U.S. employment laws. U.S. re-export laws, for example, don’t permit you to do indirectly what you can’t do directly. When dual-use products (those that have peaceful as well as weapons use) are sent to unfriendly nations, it can cause legal problems. A European company was fined $800,000 for re-exporting U.S. origin nuclear-related metals to countries such as North Korea. Similarly, when a U.S. company purchased a German manufacturer of truck treads, the merger didn’t raise an export eyebrow until it was realized that the truck treads could also be used on tanks—and that the company did a brisk business with Libya. Even though German export laws did not prohibit the shipment of such products to Libya, the U.S. export laws did; the change in ownership suddenly turned an asset into a potential liability. International Questions to Think About  Where are your business operations physically located? Where are you doing business? Are they the same geographic territory? Or does your product or service extend beyond its point of origin?  What laws affect your business? Are any of them extraterritorial?  How can you limit contact with unfavorable jurisdictions?  If contact can’t be limited, what steps can be taken to ensure compliance and avoid unnecessary legal liabilities?  How are you managing expectations in international business relationships to avoid a clash of cultures?  Is your business engaged in local practices abroad that are in conflict with the laws of your home country? If so, what implications would these activities have for the company’s legal risk exposure and reputation should they be brought to light? Use of content on this site is expressly subject to the restrictions set forth in the Membership Agreement. Books24x7 and Referenceware are registered trademarks of Books24x7, Inc. Copyright © 1999-2014Books24x7, Inc. - Feedback | Privacy Policy (updated 03/2005) http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 1 of 7 Appendix B - The ABCs of Legal Literacy The Business Guide to Legal Literacy: What Every Manager Should Know About the Law by Hanna Hasl-Kelchner Jossey-Bass © 2006 Citation 2. Contracts Deal making is the lifeblood of commerce. Merchant trade law, the law of contracts, was therefore one of the earliest laws to evolve. The need for stability and trust in transactions demands that the law of contracts be predictable. Essentially, a contract is a promise or set of promises that when breached give rise to a remedy and the performance of which creates a duty. Unlike consumer agreements that are subject to legal protections designed to save unwary consumers from harm, business agreements are deemed to be between sophisticated equals even if the size of the companies varies. As a result, if you sign a contract on behalf of your employer you are deemed to have read it, even if you really didn’t. Contract issues fall into three broad categories:  Contract formation and enforceability: If there’s no contract, there’s nothing to enforce. The basic requirements of a contract must be fully met, without loopholes  Contract interpretation and performance: Having established the existence of a valid, binding contract we now need to know what it says and what it means. Who is responsible for doing what? When? Where? And how?  Contract breach and remedies: Having determined the rights and duties of the parties to the agreement we then need to ask whether the performance of the parties measures up or falls short and, if the contract is breached, what remedies are appropriate. Contract Formation Contract formation requires the existence of an offer, an acceptance of the offer, and some form of consideration or inducement for entering into the agreement, typically some form of payment. In the United States the three elements of offer, acceptance, and consideration are sufficient to create a valid contract. International contracts require a fourth element: price. The contract formation process is often characterized by a series of offers and counteroffers. What is the legal effect of a counteroffer? It serves as a rejection of the offer. Once rejected the offer is legally dead. In the course of testing boundaries during negotiations, however, a party may initially reject an offer only to want it back later on in the process. What happens then? It all depends on whether both parties want the deal. The rejecting party can offer the rejected terms as a counteroffer and hope the original offeror accepts. Or the original offeror could reissue the offer. What’s important to note is that a rejection creates no legal duty or contract. The parties are free to walk away. Contract formation happens only when there has been a true meeting of the minds. As a practical matter, however, the parties may feel a moral duty to resurrect a prior offer— but that’s a different story. Enforceability Just because a valid contract has been created does not necessarily mean it is enforceable. Factors that interfere with the parties’ state of mind such as mistake, fraud, duress or undue influence, or lack of competency can make a contract voidable. Impossibility can have the same effect. Impossibility occurs, for example, in service contracts when the incapacity or death of a performer, such as an actor or singer, makes it http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 2 of 7 impossible for the show to go on. A natural disaster can have the same impact on the delivery of goods, say if a manufacturing plant is destroyed by a tsunami. That’s one reason purchase agreements typically include a force majeure provision. It excuses nonperformance for events beyond the seller’s control without invalidating or jeopardizing the enforceability of the entire agreement. Public policy concerns can also affect the enforceability of private contracts by making them void right from the start. A contract to engage in an unlawful act, to deal in stolen goods and other contraband, or to commit a crime is unenforceable as a matter of public policy. Contracts that are unconscionable, that shock the public conscience and offend our notion of fairness and ethics, are also unenforceable. Do contracts have to be in writing? It depends on the type of agreement you’re talking about. Some transactions are too important to be left to verbal agreements and may be voidable if not commemorated in writing. The purpose of a written document is to reduce the potential for fraud by providing tangible proof of the deal. Indeed, the Statute of Frauds specifically sets forth what type of contracts must be in writing to be enforceable. It can vary from state to state, but typically includes real estate transactions, service agreements that cannot be performed in less than a year, and the sale of goods valued at more than $500. The classic handshake, or verbal gentlemen’s agreement, involving subject matter not falling into the above categories would be enforceable. But as a practical matter, establishing the exact terms of the contract presents evidentiary problems. What exactly are the terms of the verbal agreement? Transactions are often dynamic. They evolve over time along with the expectations and recollections of the parties. If these processes are not managed well there is plenty of room for disappointment and disagreement. At that point the gloves come off and gentlemen often stop being gentlemen. A written document helps avoid such misunderstandings. It commemorates the understanding and gently refreshes faded memories. Having a written document makes the evidentiary burden of proof much easier when compared to a verbal agreement. It also helps manage the moving target of evolving expectations and evolving transactions with what is called an “integration clause.” An integration clause is typically found at the end of the agreement where miscellaneous legalese is lumped together. The purpose of the clause is to recognize that the written contract represents the full and complete embodiment of the deal. It’s all the prior understandings rolled up into one. If at a later date the parties choose to renegotiate, that’s fine. But until there is a new meeting of the minds, the existing contract terms as written are the promises the parties have agreed to live by. It establishes a baseline. Some people deride contracts, saying they’re not worth the paper they are printed on. Someone who is determined to break a promise, the theory goes, will do so whether or not it’s written down. That may be true, but if that happens the real problem lies with the contracting party, not the contract or the contracting process. Contracts are not a substitute for integrity. It therefore behooves us to conduct the appropriate due diligence beforehand to know who we’re dealing with and whether they have the wherewithal to keep their promises. Otherwise, you may be in for a surprise. Besides memorializing the intent of the parties, the written contract benefits from the negotiation process necessary to create the document. Working through the detail helps clarify expectations, build relationships, develop trust, and open lines of communication that are invaluable when unexpected events later require some deal mending. The best contracts are the ones that are thoroughly negotiated, signed, put in a drawer, and never looked at again—not because they’re forgotten but because the relationship of the parties is so strong that resorting to the contract terms is not necessary. The parties understand the rules, respect each other, and negotiate in good faith to find mutually acceptable solutions to problems. If they do need to refer to the contract, a good agreement sets forth the rights and duties of the parties in clear and unambiguous language. It operates as a reminder, not a baseball bat. Someone who has no prior knowledge of the deal should be able to pick up the document and be able to read it and understand it. Clarity is essential. It is particularly crucial for avoiding misunderstandings in conditional contracts. These are contracts that shift the burden of who does what before a corresponding duty of performance is owned. A condition can precede acceptance, called a condition precedent, such as when a retailer requires the presenter of a promotional coupon, for example, to buy a certain quantity of the specified product before paying the coupon amount. Conditions can also occur after contract formation. Insurance policies fall into this category. You buy a policy and pay a premium. You have a binding contract. But before you can receive the full benefit of the contract http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 3 of 7 you must submit a claim in a timely fashion. The claim can be disallowed and coverage denied if it is filed late. The underlying insurance policy, the contract, is still intact, but the full benefit is not received. Similarly, a confidentiality agreement that requires information exchanged under the agreement to be reduced to writing and marked “CONFIDENTIAL” must meet those requirements before the information is legally protected under the agreement. The failure to meet these requirements has the net effect of making the information public. Why? A secret stops being a secret if you tell someone and they don’t have a duty to keep it quiet. If a contract defines “secret” as only those pieces of information that are written and marked confidential, then everything else is not secret. The contract establishes a black-and-white dichotomy between what’s protected and what’s not. That’s not a loophole. That’s merely understanding the substance of the contract terms. Obtaining the full benefit of a contract requires discipline and good procedures to ensure that conditions subsequent are properly met. Discipline can be particularly challenging in long-term contracts where the relationship of the parties creates a comfort level and makes legal formalities feel out of place. Don’t be hypnotized. The relationship is only as good as the person filling the position. If your counterpart moves on and leaves the company, your business relationship must be rebuilt. What if you don’t get along as well with the successor? Contracts hedge the risk associated with changing the guard by providing a baseline performance standard that binds the company. That’s why contracts are a good legal risk management tool. The enforceability of a contract can also be affected by how long you wait before trying to enforce it. You can’t wait forever. It wouldn’t be fair. There has to be a point where if a problem exists and nothing happens it’s over. It’s not right to keep dragging up past wrongs. The law determines that point in time with a mechanism called the statute of limitations. If you haven’t brought a claim in x amount of time you lose your right to do so. The statute of limitations for a breach of contract may vary slightly from jurisdiction to jurisdiction, but what’s important to note is that the time frame is measured in years. Some contracts, however, may seek to limit the statutory rights you already have. Can they do that? Yes, you can give up existing rights as long as the purpose for doing so isn’t illegal—that would come under the illegality exception to contract formation discussed earlier. The way the statute of limitations is modified is through language found at the end of the agreement and often dismissed as boilerplate—standardized material used over and over and alleged to be insignificant. It might, for example, say, “All court actions or proceedings with respect to this agreement must be filed within one year.” Wow! In large organizations you might still be trading telephone calls and trying to negotiate the problem after one year. Not being aware of a shorter contractual time frame can prematurely cut off your legal rights and increase the amount of risk you absorb. Interpretation—Battle of the Forms The most common contract issues involve “standard” form agreements. A standard preprinted form with terms and conditions on the back and a few fill-in-the-blank fields on the front make it easy to focus on the variables: the name and item being ordered, the quantity, price, and delivery date. They simplify the order placement and acceptance process. Sellers have their terms and conditions of sale. Buyers have their terms and conditions of purchase. But if you put them side by side, the legal language is rarely a perfect match. Some terms are mutually consistent and others don’t match at all. Ironically, what’s “standard” isn’t too standard. This situation is commonly referred to as the battle of the forms. Many managers dismiss the fine print of a contract as legal boilerplate, believing there is little if anything they can be done about it. That may be true for consumer purchases. A consumer’s lack of bargaining power is why legislatures step in and enact consumer protection laws. Business-to-business transactions are different. You’re expected to stand up for your business rights—to negotiate. If you don’t negotiate, you may get stuck with more risk than you want or need. How do you know what the real terms of an allegedly standard deal are? To answer that question requires looking at all the terms on both the buyer’s and seller’s preprinted forms. The common law operates under a “last in time rule.” In other words, what happened last, the offer or the acceptance? The party who had the last say is the party whose terms and conditions rule. It may be the buyer’s or it may be the seller’s. http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 4 of 7 How can that be? It all depends on how the events are characterized and how the transaction is initiated. Is the seller making an offer to sell? Or is the buyer making an offer to buy? It can get confusing. If one set of terms specifically disallows inconsistent terms or the parties exchange “order acknowledgments” that trump the last set of terms and conditions, it gets even more confusing. All the twists and turns of the contracting process need to be looked at before you can identify the exact dimensions of a particular contract. It is a very fact-specific exercise. Luckily, common law contract doctrines limit the interpretation of the contract to the “four corners of the document.” In other words, all the contract clauses are read together, not out of context, to determine the party’s intent. If multiple preprinted forms or acknowledgments are involved in the duel, all of those documents are within the “four corners” and examined in total to determine the real deal. Limiting interpretation to the four corners is a good thing because if a particular risk is not addressed in the agreement a common law court is most likely to conclude that the parties would have included it if they wanted to. In contrast, a civil law court would be more inclined to rewrite the agreement and that could lead to unintended results. That is why most international commercial contracts include a common law jurisdiction as the choice of law. What do you do if you don’t have time to scrutinize or negotiate every so-called standard transaction? What can you do to minimize risk exposure in a common law jurisdiction? Procedurally, you can look at your processes and maximize your opportunities for being the last to present your terms and conditions in the contract formation dance. You can also be mindful of the other party’s order acknowledgments that try to negate your terms. Substantively, you can strive for reasonable terms and conditions in standard form agreements rather than lopsided ones that invite comment and controversy. Overreaching by one party forces the other side to push back. Egregiously lopsided terms are unfair. They also cast a shadow on trustworthiness and integrity. Besides, negotiating the same issues over and over again chews up your time and is tiresome. If negotiations keep smoothing over the same rough edge, why keep it? Reasonable language is more likely to match up with the other side’s standard form, less likely to be challenged, provides more consistency from contract to contract, and presents less of an administrative burden. Administratively, you can examine the terms and conditions of the most important standard contracts. That’s one way to manage the risk associated with the battle of the forms. How do you prioritize standard form transactions? Orders can be priori-tized in several ways. The size of an order, for example, may merit a closer look at the deal terms. Most businesses are unwilling to subject a large chunk of their total sales to unfavorable contract terms. Similarly, the importance of the customer is another factor meriting a closer look. Even though a single order may not be particularly large, if the aggregate number of orders represents a sizable amount of total sales, unfavorable contract terms can be the equivalent of death by a thousand cuts. What your product is being used for and where it’s being shipped to might also deserve a closer look. Special product usage, for example, might trigger warranty issues that need further discussion. Similarly, shipments abroad are prime candidates for standardized language that could inject a foreign choice of law provision, or a foreign conflict resolution provision. Such changes can represent hidden costs that change the value of the deal. A top-line review of any contract should scan the terms and conditions with an eye toward seven hot buttons. First, does the agreement accurately capture and describe the business deal, how it’s supposed to work, and who does what, when they do it, how they do it, and where they do it? What does it say about the transfer of title and the risk of loss while the product is en route to the customer? What about the delivery date? If a contract includes language that time is of the essence, beware! Those five little words have a very precise legal meaning in the common law tradition. Reasonableness generally governs the interpretation of contracts. It would probably be reasonable, for example, to deliver a turnkey manufacturing project two weeks late given the size and complexity of such a task. However, if the installation contract specified that “time is of the essence,” the due date is etched in stone and delivering even a stroke past midnight gives the buyer the legal right to walk away. Second, what are the termination provisions and what are the conflict resolution provisions? If things aren’t http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 5 of 7 going well you’ll want to know how to cut your losses and move on. Termination provisions can be quite creative. Some agreements only allow termination for “cause,” such as a material breach of the agreement. Some contracts are “evergreen,” automatically renewing from year to year unless notice is given pursuant to the termination clause. Some may allow for termination only during narrow windows of time. For example, a clause may say: “Notice of termination may only be given within ninety (90) days of the contract anniversary date and absent such notice will automatically renew for a successive twelve (12) month period.” Make sure you understand how you can terminate, or can get terminated, and what the hidden costs associated with it are. Some of these costs may be pure business issues, such as midproject termination and work-in-process costs. Other costs may be statutory. In some jurisdictions, for example, terminating a distributor, as opposed to letting a contract expire, can trigger the payment of money damages by operation of law! Conflict resolution may also harbor hidden costs. If the contract provides that suit can only be filed overseas, the cost of bringing a claim or defending one away from home just went up exponentially. The speed, convenience, and out-of-pocket costs associated with conflict resolution should be considered in evaluating what kind of conflict resolution makes the most sense for the contract at hand. Is it a court of law? Is it some form of alternative dispute resolution? Arbitration? Mediation? Should it be binding or nonbinding? How will it work? Who bears the costs? No one likes to think about conflict when negotiating a deal. But prudent risk managers recognize the value of planning ahead and establishing procedures to manage those costs effectively. Third, is there any intellectual property involved in the transaction? Intellectual property is an asset. Often in our zeal to please a customer, by customizing an application, for example, it’s easy to lose sight of the “thing” that is being created and its transferability to other industries. Who owns the “thing”? The customer may want the exclusive right to use “it” in their industry, or they may want to own it outright. If “it” has widespread commercial value, the failure to spell out past, present, and future ownership rights and license rights is a legal nightmare waiting to happen. Fourth, what warranties are being made? A warranty is an assurance of quality. It’s important to know what you’re promising because if something bad happens, the warranty standard is what your business will be held to. Warranties are express and implied. Express warranties typically refer to the specifications and the scope of service performance criteria set forth in the agreement. Yet you may not realize that the sale of goods in the United States automatically carries with it two implied warranties: the warranty of merchantability, which provides that goods be fit for the ordinary purposes such goods are used for, and the warranty for fitness for a particular purpose, which applies if the seller knows or has reason to know that the buyer wants the goods for a particular purpose and is relying on the seller’s skill or knowledge to select them. If you don’t wish to make these implied quality assurances your contract terms must conspicuously disclaim the warranties. Fifth, what do the indemnity provisions call for in the agreement? Indemnities address to what extent you agree to be accountable if something goes wrong. This is a form of liability limitation. Will damages be limited to the value of the contract? Or all damages sustained by the injured party? Will it include their attorney’s fees too? The answers to these questions go to the heart of the liability and the risk embodied in the contract-and conversely your profit margin. Sixth, what is the choice of law? Whose laws will govern the interpretation of the contract? Parties whose contract is silent on the choice of law issue will have it decided for them by a court based on which jurisdiction has more contacts with the subject matter. When contacts cross state lines or sovereign borders it can get very complicated very quickly. Sorting it out is time-consuming and expensive. Besides making the question subject to judicial interpretation, not specifying the choice of law subjects the business to the risk of substantive differences in the law between jurisdictions. If, for example, in a technology development agreement the inventor’s rights can’t be assigned to the company, the choice of law can frustrate the essential business purpose of the agreement. Thus the provision is more than legalese. It can have serious substantive implications for business operations. Finally, the assignability of the contract is an important term to be familiar and comfortable with. Assignability refers to a party’s ability to let someone else stand in their shoes with respect to contract performance. A contract is assignable unless its wording specifies otherwise. If, for example, the contract is a confidentiality agreement you may want notice of any intent to assign the agreement and the right to terminate the agreement if the assignee is not to your liking. Otherwise you could have your trade secrets assigned to your competitor. http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 6 of 7 Here is a summary of the seven hot button issues. 1. Are the key deal points accurately described? Including delivery? The passing of title and the risk of loss during the title transfer process? 2. What are the contract termination and conflict resolution provisions? Are there any hidden costs associated with either event? 3. How are intellectual property rights addressed? Are they adequately protected? 4. What express or implied warranties are being made? 5. What do the indemnity provisions provide? What other limitation of liability provisions are included? 6. What choice of law has been selected? How does it affect the substantive business terms of the agreement? 7. How is assignability handled? Does the assignor require prior written consent of the other party to the agreement? Contract Drafting Considerations “It’s only a contract; what’s the big deal?” Plenty. A well-written contract that’s plain on its face doesn’t leave much room for interpretation. A party who breaches the agreement will have a legal problem. As the finder of fact a court can exercise some discretion. But unless the court abuses its discretion or misinterprets the law there’s not much to appeal to a higher authority. That means you will be stuck with the contract terms you negotiated. It therefore makes sense to understand and manage contract risk and the jurisdiction risk associated with it. What about drafting control? Can’t I save money by letting the other side do the first draft? Contracts are construed strictly against the drafter. That means inconsistent terms will be interpreted in favor of the nondrafting party and may initially lead you to believe that letting someone else create the document is a brilliant cost saving. But ceding drafting control has its downside. It’s the difference between building a house and renovating an existing one. When you build a house you determine the footprint and establish the parameters. When you renovate, additions don’t always flow smoothly with the existing floor plan. It may require knocking down a wall or two. If that wall is a load-bearing wall you’ll have a problem. In one merger agreement I reviewed, the drafter had a penchant for carving out exceptions and would nest multiple exceptions into exceptions all within one paragraph. It was very convoluted and confusing. No one could read the indemnity provision just once and have a clear understanding of what was going on. After the fourth layer of exceptions you reached for a pen to diagram it. The same substance could have been stated more clearly and more elegantly in positive terms. But after hammering the language and living with it a few weeks the parties thought they knew what it meant. Besides, fixing the problem would have entailed a major rewrite of that particular section and some other sections that were interdependent. It would also have delayed the talks and jeopardized the momentum of the discussions. No one wanted to take that chance. The deal was finalized with the horrible language in place. It was a target-rich environment for multiple interpretations that haunted the business for several years. Remedies Money damages are often the first thing that comes to mind when we think of contract remedies. The goods were delivered, but the customer didn’t pay—a collection issue. But sometimes disputes arise as to what remedies are appropriate. Money doesn’t always solve everything. Sometimes resolving the problem requires an equitable remedy. Specific performance is one remedy used where money damages would be inadequate compensation. In the battle to enforce a child custody agreement, for example, the failure to allow visitation with a child is an issue more appropriately remedied with an order for specific performance rather than money damages. The destruction of counterfeit goods is another example where monetary damages alone would not be a sufficient. Only destruction would ensure that the offending product could never reenter the stream of commerce to disenfranchise and defraud customers who think they’re buying a genuine product. http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 7 of 7 Injunctive relief, a court order prohibiting someone from doing a spec-ified act, would be appropriate if a trademark licensee, for example, abuses the license privileges and sells product into nonlicensed territories. Besides seeking to recoup lost sales, you would want to force the licensee to stop selling beyond the territory set forth in the license. Quantum meruit is an equitable remedy derived from the Latin, meaning “as much as deserved.” It is a measure of recovery used in implied contracts. Finally, the remedy of rescission is used to cancel a contract for a material default by a party, and reformation is used to fix legal errors in an agreement to reform it and align it with the original intent of the parties. Contracts are fabulous tools for managing legal risk. When artfully employed, contingencies, indemnities, and warranties are vehicles for shifting, reducing, or eliminating legal risk. Key contract principles are summarized in Table B.3. Contracts, however, are also living documents. The dynamic nature of contracts means we must be mindful of legal risks at the formation stage as well as during the life cycle of the deal. It’s a threedimensional process. The failure to meet contract obligations entitles the other party to remedies that increase the cost of doing business. Table B.3: Contract Overview. Open table as spreadsheet Basic Building Blocks Basic Stumbling Blocks Remedies Offer Mistake Damages Fraud Specific performance Duress Quantum meruit Undue influence Rescission Consideration Competency Injunction Price Impossibility Illegality Unconscionability Statute of frauds Statute of limitations Reformation  precedent condition Acceptance  condition subsequent Contract Questions to Think About  What is your contract, or deal, trying to accomplish? Do the contract terms accurately reflect the business transaction?  Do you understand the terms of your most important contracts?  What are the hidden costs? How are they managed?  What is the business on the hook for? What did it promise to deliver, warrant, indemnify?  What systems or procedures are in place to ensure the performance of contract contingencies? How do we minimize potential loss due to nonperformance?  What happens if the transaction outgrows the contract? What mechanisms are in place to keep the contracts in synch with business realities and amend contract provisions if necessary?  How is the contract going to be amended? Can one party do it uni-laterally? Or does it require mutual consent? Is there room for surprise?  How do you unwind or terminate the agreement? Does it automatically renew? Use of content on this site is expressly subject to the restrictions set forth in the Membership Agreement. Books24x7 and Referenceware are registered trademarks of Books24x7, Inc. Copyright © 1999-2014Books24x7, Inc. - Feedback | Privacy Policy (updated 03/2005) http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 1 of 4 Appendix B - The ABCs of Legal Literacy The Business Guide to Legal Literacy: What Every Manager Should Know About the Law by Hanna Hasl-Kelchner Jossey-Bass © 2006 Citation 3. Product Liability Product liability is an obligation incurred by manufacturers and sellers that occurs when damages or injuries result from defective or unreasonably dangerous goods. The term is an umbrella that encompasses a range of defects under three legal theories: breach of contract warranty, negligence, and strict liability. The United States has no single product liability law. Instead, it is a creature of state law. It has a reputation for generating high damage awards, including punitive damages, and is the poster child for U.S. litigiousness. Its reputation therefore makes it one of the scarier areas of U.S. law. However, if we peel back the legal layers and examine how products turn into ticking liabilities we can develop processes and procedures to defuse them sooner rather than later. Breach of Contract Warranty When the breach of a contract warranty—those express or implied warranties discussed earlier—involves a product, it can create product liability. This latent liability raises the importance of managing customer expectations well through clear, concise contract language and not promising more than can reasonably be delivered. Whenever a breach of warranty occurs the natural inclination is to ask why? What happened? Negligence If the mishap was due to the failure to exercise a reasonable standard of care, the company may find itself defending against a charge of negligence. Negligence is a private or civil wrong that is independent of a contract claim that results from a breach of a legal duty. A business is negligent if it “knew or should have known” that its product could cause injury. The famous case of the McDonald’s coffee involving a woman who scalded herself after a cup of coffee purchased at a drive-through window spilled in her lap is a case based on negligence that made headlines, with McDonald’s getting slammed with a $2.9 million damage award that included a $2.7 punitive damage award. How could that be? Yes, the woman contributed to her injuries by balancing hot coffee precariously in her lap as the passenger of a moving vehicle. But the evidence also showed that the company knew for more than ten years that it sold its coffee at significantly hotter temperatures than its competitors did. Yet it didn’t turn down the heat. The few extra degrees of heat made the difference between third-degree burns and second-degree burns during the time it would take to wipe up a spill. The jury realized that coffee can be hot without being scalding and damaging skin. The punitive damages were in response to what the court perceived was a callous company attitude. McDonald’s had enough information to know that someone could get badly burned. Not doing anything about it made the company negligent. The damage award represented two days worth of McDonald’s coffee sales at the time. It was later reduced to six figures on appeal. What some managers fail to realize is that a misbehaving product that causes injury or damage can generate two causes of action: a contract claim and a tort claim. Avoiding the problem in the first place therefore has a multiplier effect on risk reduction. Strict Liability Besides negligence, a manufacturer of a defective product can be liable for damage caused by the defect under the tort theory of strict liability. Unlike negligence, whose standard involves a shred of knowledge and intent— http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 2 of 4 the knowing disregard of a risk—strict liability has no such intent requirement. It’s liability without fault. At first glance, liability without fault sounds incredibly unfair. But a look behind the curtain shows that it applies to product defects that only the manufacturer can control. The purpose of law is to drive responsible behavior: the theory behind strict liability says society doesn’t care about excuses, make sure your product is right before it goes out the door. Recognizing what product defects trigger strict liability and managing them effectively thereby puts the business in charge of managing its own product liability risk. What about contracts? Can’t we limit the amount of damages we’re exposed to through warranty and indemnification provisions? It might help in some circumstances, but not all. Contract disclaimers typically do not prevent third parties who do not have a contractual relationship with the manufacturer, such as consumers, from recovering for personal injury. Furthermore, the adoption of strict liability laws makes breach of contract theories less important in product liability claims than they used to be, because strict liability claims are easier to prove. Types of Strict Liability Three types of defects trigger strict liability. The first is defective design. This assertion requires the plaintiff to prove that a particular design defect was the proximate cause of the damage or injury. The methods of proof include expert testimony and reports, government and industry standards and studies, the defendant’s own employees and records, and the frequency of similar incidents. To successfully defend against such accusations, or to be proactive about avoiding them, it is a good idea to document sound decision-making practices. If the best information available at the time was used, and it was reasonably relied upon to make a decision, it will be difficult to prove a defective design. Demonstrating good decision making requires evidence of objectivity, such as supportable test data by an independent or certified testing facility. If the company engages in its own testing, the test standards and methods must be able to withstand scrutiny and be comparable to those used by an independent or certified facility. Potential smoking guns must be responsibly addressed and the loop closed with documentation explaining why a particular course of action was taken and why that decision was prudent. The public policy concern—for example, not unnecessarily compromising safety in exchange for profit—is another factor to keep in mind. The second type of defect that can trigger strict liability is defective manufacture. Here again the plaintiff bears the burden of proof and uses expert testimony and reports, government and industry standards and studies, and the defendant’s own employees and records, as well as similar incidents to make the case. This is one reason quality control in manufacturing is so important. If the evidence shows that the company repeatedly allowed product that did not meet its own quality standards to get out the door, a strict liability claim will be coupled with a negligence claim on the grounds that the manufacturer knew or should have known that a product not meeting its own quality standards would fail. This is one of the issues that hounded Firestone in the tread separation recall connected with Ford Explorer roll-over accidents. The evidence showed that tire quality waned at certain Firestone plants, particularly during labor strikes when replacement workers operated the production line. Given the facts, it’s easy to understand how quality got compromised. But such understanding does not excuse the downstream consequences—particularly the lives lost in subsequent Explorer roll-over accidents if the tires were the proximate cause of the accident. What looked like a straightforward labor issue evolved into a quality issue and a huge product liability issue. The case illustrates how management’s responsibility for operational issues goes hand in hand with responsibility for legal issues too. The third type of product defect relates to defective warnings. Warnings can be defective in a number of ways. They can be misplaced on the product and hard to see. They can miscommunicate their message and be hard to read or comprehend. Warnings can also be defective if they mislead and deceive. If the nature of the defect is such that you knew or should have known that the warning was inadequate, the strict liability claim will be coupled with negligence claim. Plaintiffs’ lawyers will mix and match. Proper warning labels represent a delicate balance between giving customers the information they need to use the product safely and scaring the sauce out of them. The objective is to tell the truth well—fully and accurately, but not overdramatically. Unfortunately, business is increasingly burdened by a growing victim mentality among plaintiffs that at times suspends common sense and caters to the lowest common denominator of society. The litigation lottery mentality forces manufacturers to idiot-proof their products as much as possible. As a result, getting customers to understand product use instructions and warning labels may at times feel like a near- http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 3 of 4 impossible task. The Michigan Lawsuit Abuse Watch (M-Law), a nonprofit organization devoted to exposing frivolous lawsuits, keeps track of such suits and the crazy-sounding warning labels that result. Since 1997 M-Law has held a Wacky Warning Label Contest to highlight the absurdity. Past winners include a label on a baby stroller: “Remove child before folding,” a carpenter’s electric drill: “This product not intended for use as a dental drill,” and a massage chair: “Do not use massage chair without clothing . . . and, never force any body part into the backrest area while the rollers are moving.” See http://mlaw.org for more on this project. Ultra-Hazardous and Abnormally Dangerous Products Besides design, manufacturing, and warning defects, some business categories are subject to strict liability by virtue of their ultra-hazardous and abnormally dangerous nature. Hazardous waste disposal, pyrotechnics, and radioactive anything are examples that would fall into this category. Joint and Several Liability When the plaintiff’s injury is caused by two or more companies, the concept of joint and several liability means everyone who contributed to the problem is responsible for it and any one of them can be liable for the entire amount. The public policy theory behind it is that a little guy who is injured can’t afford to sue everyone. People can therefore recover the entire amount of their injury from any one tortfeasor. In practice, however, it motivates plaintiffs to sue the deepest pocket associated with an injury. That practice certainly makes things easier for the plaintiff but it also makes it tougher for the defendant because it places the burden on the manufacturer to seek contribution from others whose actions contributed to the plaintiff’s injury or damages. The unfairness associated with this burden has made joint and several liability a popular target of tort reform. But until reform happens, joint and several liability provides an extra incentive for avoiding product liability claims. The potential for contribution also heightens the value of contract indemnity provisions in supplier agreements. Such indemnities won’t keep a third party from suing for injury, but they provide an extra layer of protection when seeking recourse for contribution and make sure that the ultimate liability is in proportion to the proximate cause of the injury. Post-Sale Duty to Warn Managing potential product liability is a dynamic process. The duty does not stop once the product is out the door. Many states have laws requiring a post-sale duty to warn if a new safety issue is discovered or it is later learned that product warnings are inadequate. The types of information that could lead you to conclude your product may have a problem include product service histories. Are a significant number of people having the same problems? Patterns of tire tread separation in several countries tied to Ford Explorer accidents, for example, eventually led Firestone to reexamine its tires and issue a product recall. Information about problems experienced by manufacturers of similar products are also a valuable source of information. When the prescription pain medication Vioxx was withdrawn from the market after news of deaths related to its use made headlines, it prompted other manufacturers of cox-2 inhibitors, the generic class of drugs to which Vioxx belongs, to reevaluate their product liability exposure. Depending on the nature of the product and the post-sale information that becomes available, it may be necessary to consider a product recall. In other cases a design improvement may be accomplished with a retrofit kit. Post-sale duties apply even if you are no longer manufacturing the particular item. One of the biggest challenges businesses face in carrying out their post-sale duties is knowing where all their products are. Having procedures in place to gather this information and managing this data properly is extremely useful. These measures facilitate the exercise of post-sale duties and allow for targeted notices as opposed to broadcast messages that reach a wider audience than necessary. Tort Liability Exposure in the Service Sector Product liability is an umbrella term limited to products. However, as summarized in Table B.4, many of the same legal liabilities apply to the service sector as well. Service contracts are subject to the same warranty and indemnity concerns as product sales. Often the sale of products and services are mixed in one transaction. Because services are less tangible than goods, objective and measurable performance criteria are harder to http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 4 of 4 come by. It thereby increases the importance of managing expectations well. Table B.4: Comparison of Product Liability Claims to Service Liability Claims. Open table as spreadsheet Products Services Contract warranty Contract warranty Negligence Negligence and in some industries malpractice Strict liability: Fiduciary duty (certain job functions)  Design  Manufacture  Warning Joint and several liability Classic professional partnerships Besides contract warranty claims, services can also be subject to claims for negligence. In some industries or professions the failure to use certain standards of care rises to the level of malpractice. The concept of strict liability is less transferable to the service sector because the triggers of design, manufacture, and product warning don’t apply. However, a comparable concept is embodied in the notion of fiduciary duty. The concept of fiduciary duty received a significant amount of attention during the era of Enron-style business scandals. People in positions of trust and responsibility, such as corporate directors and senior management, have fiduciary duties—that is, they are required to place someone else’s interests (generally the shareholders’)—ahead of their own. The conflicts of interest resulting from self-dealing in these various accounting scandals represented a breach of the boards’ fiduciary duty to shareholders. Boards had become lapdogs instead of watchdogs. The flap led to a heightened awareness of the role of corporate governance. To summarize, product liability does not need to be a financial abyss. It largely relates to quality control in the form of product design, manufacture, and product warning, and how we manage expectations surrounding those parameters and expectations of product performance. Product Liability Questions to Think About  Are product warranties clear and accurate?  How are decisions about product design, manufacture, or warnings made? Does the company opt for the easy way out? Or does it pursue what’s morally and ethically right?  How are problems addressed? Are they buried or dismissed? Are good decision-making processes used to evaluate the situation and reach a solidly defensible conclusion?  How are decision-making processes documented?  What procedures or systems are in place for gathering information about product performance problems? How is that information being used?  If the product includes ingredients or components supplied by other vendors, what steps are being taken to ensure the quality of the incorporated materials? Use of content on this site is expressly subject to the restrictions set forth in the Membership Agreement. Books24x7 and Referenceware are registered trademarks of Books24x7, Inc. Copyright © 1999-2014Books24x7, Inc. - Feedback | Privacy Policy (updated 03/2005) http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 1 of 5 Appendix B - The ABCs of Legal Literacy The Business Guide to Legal Literacy: What Every Manager Should Know About the Law by Hanna Hasl-Kelchner Jossey-Bass © 2006 Citation 4. Employment Unless you work by yourself, you have employees and have potential employment law exposures. As managers rise through the organizational ranks, the number of employees reporting to them increases and they find more and more of their time being consumed by employment matters. One employee is chronically late to work. Another spends inordinate amounts of company time surfing the Internet. The ones with children are more likely than their childless fellows to be called away from work to attend to family matters such as doctor’s appointments and school events. Still others have poor grooming habits or are territorial about sharing information and don’t play well on teams. Managing it all often feels like mediating a fight in the backseat of your car while keeping your eyes glued to the road and one hand on the wheel. What we do is often a big part of who we are. Earning a decent living, being able to support a family and pay the bills, goes straight to the heart of the needs identified in Maslow’s hierarchy. Coupled with our natural predisposition toward loss aversion, those needs mean that employment issues tend to be more emotionally charged and exhausting than any other business legal issue crossing your desk. “Any idiot can manage a crisis,” the great playwright Anton Chekov once wrote. “It’s the daily routine that’s stressful.” Employment issues are symptomatic of that daily stress. We often spend more time with coworkers than with our spouses or families, and the wear and tear of that human interaction can take its toll. Successfully navigating these sensitive waters requires consistency and an even keel, because at the heart of 99 percent of all employment disputes are perceptions of unfairness. If you can do a good job of managing each employee’s expectations of what’s fair, aiming for the spirit of the law and avoiding double standards, you will avoid a lot of headaches. Employment At Will Doctrine The common law doctrine of employment at will has defined the foundation of the employee-employer relationship in the United States since the late 1800s. As its name suggests, it means that people work at the “will” of their employers. In its early incarnation it allowed employers to reject applicants on whim, set arbitrary rules, compensate inequitably, and terminate employment without notice or reason. The economic laws of supply and demand tempered certain abuses, but the cyclical nature of supply and demand often meant that power was largely held by the employers. Over time public policy concerns injected a degree of fairness and smoothed over some of the doctrine’s rough edges. During the Industrial Revolution at the turn of the nineteenth century, for example, grave working conditions gave rise to child labor laws. Working conditions also spawned the organized labor movement, whose collective bargaining power helped level the playing field and diffused the concentration of power between employers and employees. Then individual employee rights came of age. In the 1960s, the principles of implied contract were applied to the employer-employee relationship, imposing a duty of good faith and fair dealing. The tort theory of trespass was applied and anti-harassment laws were born. The “trespass” was upon the person in the form of unwanted touching. Changing political sensitivities and the Civil Rights movement contributed antidiscrimination laws, and so the rule of law continues to evolve in response to industrialization and emerging economic needs. The at-will doctrine, albeit modified, still governs the employment relationship in many states. While that leaves http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 2 of 5 the employer in charge, employers still have plenty of reasons to take employment issues to heart. Managing these relationships successfully can unlock hidden talents and motivate employees to reach higher levels of performance. That’s good for business. Managing them poorly can lead to lawsuits—and not just lawsuits by employees against employers for alleged transgressions but lawsuits by third parties against the employer. Basis for Third-Party Suits How can an employer be held responsible by a third party for the acts of its employees? And why? Employees are agents of the company. As such they act on behalf of the company. To the outside world they are the company. When employees behave badly in their employment capacity it reflects poorly on the business and can put the company on the hook for their misbehavior. An employee maligning a competitor, for example, could subject the company to defamation or libel claims. A new employee transferring confidential information from a prior employer could subject the new employer to intellectual property infringement claims. If the company does not take the proper steps to discipline such rogue employees for violating company policy or otherwise distance itself from its rogues, it is viewed as endorsing or ratifying the behavior. It will be held accountable under the legal doctrine of respondeat superior—a Latin phrase meaning “let the master answer.” That is why having clearly articulated policies and enforcing them consistently is essential to maintaining a level playing field of employee expectations. If the company knew or should have known about an employee’s penchant for trouble (say, for example, it hires a driver without discovering that the applicant’s license was suspended for driving while under the influence of alcohol), the company may find itself facing a negligence claim if the driver hits a school bus with the company truck. Hiring without running the appropriate background checks is negligence, something the parents of the injured children are sure to mention in their lawsuit. Basis for Employee Suits Employers may find themselves at the receiving end of lawsuits from employees too. The most frequent causes of action used to base such suits are discrimination, harassment, and wrongful or constructive discharge. Discrimination When employees feel they have been treated unfairly some are quick to say they have been discriminated against. Common usage of the word discriminate means to differentiate. Discrimination, however, is a legal term of art. It has a precise meaning. Not every “discrimination” rises to the level of an actionable offense. The law in the United States protects employees against only certain types of discrimination—those based on race and color, national origin, gender, religion, age, disability, and equal pay— and even these aren’t necessarily ironclad. It is permissible, for example, to set gender-based requirements if the requirement is reasonably related to the job. The business model of Hooters restaurants is based on waitresses flaunting their assets, similar to the Playboy bunnies in their heyday. A man would simply not be able to fill out the wait staff uniform the same way. The difference would dramatically change the appeal of the restaurant. Therefore discrimination based on gender was upheld in that particular case even though gender is a protected class. When Kohler Company, the manufacturer of bathroom fixtures, imposed a height minimum of 5'4'' for all employees working on the manufacturing line, the restriction appeared to be reasonably related to the job. The policy objective was to make sure that employees could handle the required lifting and other physical labor. Unfortunately, the height restriction had a disproportionate impact on women, making them ineligible for the higher-paying production line jobs. In fact, more than two thousand women were turned down for jobs in 1994 and 1995 due to the height restriction policy. The disparity was discovered in a routine compliance review by the Office of Federal Contract Compliance Programs. Since Kohler had $27 million in government contracts it was motivated to settle to avoid any further breach of contract or a cancellation of the same. It ended up paying $886,500 in compensation to the two thousand–plus women who had been discriminated against. The Kohler case illustrates how job requirements can’t arbitrarily shut out qualified employees. The weightlifting requirement was reasonable. But height was the wrong way to measure it. It threw a wider net than necessary to achieve its goal and in the process amplified the discriminatory impact to include those who could meet the lifting requirements. That disparity is what made the requirement arbitrary and unsustainable http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 3 of 5 under the law. The Kohler case also points out how discrimination against protected classes is often subtle and indirect. Care must be taken when evaluating the consequences of reorganizations or reductions in force to see if illegal discrimination is a side effect. Look at the demographics. Are protected groups being disproportionately affected? Sometimes you don’t even have to discriminate actively to be liable. It happens indirectly. The Americans with Disabilities Act, for example, makes it illegal to fire or discriminate against someone because of a disability. But it also requires employers to make “reasonable accommodation” to compensate for employees’ disability so they may be able to do their jobs. What constitutes a reasonable accommodation is sometimes a tough judgment call. It’s those nuances again. When an employee suffering from multiple sclerosis in Florida complained to her boss about the uncovered company parking lot, asking for a covered space close to the building next to the ones reserved for management, it looked like she was angling for a perk. Her request was denied even though a doctor’s note explained that climbing into an overheated car advanced the progression of her disease. Management thought they were being fair by treating all employees the same. The jury decided they needed to make a reasonable accommodation and returned a verdict that totaled more than $600,000, including attorneys’ fees, damages, and compensation. Sexual Harassment Sexual harassment is a touchy area of the law and represents yet another potential theory of liability for which employers can be held accountable. It has serious exposure potential because employers can be liable even if they didn’t know about the harassment. It’s called vicarious liability. That’s why employers must take harassment claims seriously and investigate them. Harassment typically evokes images of executives chasing secretaries around the desk or kisses stolen in the copier room. It includes quid pro quo arrangements wherein sexual favors are unwillingly being traded for career advancement. But the law governing harassment is more sophisticated than that. It also includes a range of behaviors, not all of which are sexually charged, that contribute to a “hostile environment.” Any unwelcome behavior that is severe and pervasive and unreasonably interferes with a person’s work creates a hostile environment. Hostile environment claims fall into three categories: third-party claims, sexual favoritism claims, and sexbased claims. Sexual conduct that is welcomed and reciprocated, for example, can create a hostile environment for coworkers. The happy couple’s exclusionary behavior, for example, can place coworkers in the uncomfortable position of watching the cooing and cuddling. Welcomed sexual conduct between consenting adults can also result in unfair treatment of others if the romance causes favoritism between the partners and disqualifies otherwise qualified candidates for promotions or job assignments. If the romance cools and one of the employees is in a supervisory capacity with a direct reporting line to the other, the soured relationship can quickly morph into a quid pro quo claim. Some companies seeking to eliminate this risk have a zero tolerance policy regarding employee fraternization. Others appreciate that the business environment represents a fertile meeting ground and that Cupid’s arrow will strike where it may. Rather than trying to prohibit nature’s call and lose valuable employees in the name of love, these companies coach such couples to be mindful and respectful of their coworkers. If direct supervisory reporting lines are involved, one of the partners is reassigned to reduce the risk of a quid pro quo claim. The risk exposure is managed, not entirely eliminated. The third form of harassment constituting a hostile environment relates to any harassing conduct that is based on gender—behavior that is often dismissed as teasing. The first female millwright working at the plant that manufactures the Jeep Grand Cherokee sport utility vehicle, for example, was the recipient of lewd poems, cartoons, pornographic Polaroid pictures, and lascivious missives all sent to her anonymously. One coworker even urinated on the clothes in her locker after she complained to human resources. Management shrugged it off. Firing all forty-two hundred workers at the plant would have been overkill and a union violation. Boys will be boys. When the woman recounted more than fifteen thousand incidents of harassment to the jury, they awarded her $20 million retroactively—with interest, the total amounted to $45 million. Regrettably, plant management failed to appreciate that what conduct is “reasonable” is viewed from the eyes of the victim. There is both a reasonable man standard and a reasonable woman standard. They are not identical. Mitsubishi experienced a similar hostile environment situation at one of its plants. Groping and lewd http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 4 of 5 photographs created an out-of-control culture and led 350 female factory works to receive a $34 million settlement. Ignoring the behavior was viewed as ratifying it. Maintaining the proper discipline is therefore an important risk management tool. Wrongful or Constructive Discharge The termination of employees can also be riddled with liability land mines. It can result in either a constructive discharge or a wrongful discharge claim. Constructive discharge occurs when the employment conditions would force a reasonable person to leave the job. Harassment, for example, could lead to a constructive discharge claim if a reasonable person believed it was the only way to escape their tormentors. The employee initiates the termination. In contrast, in a wrongful discharge claim the employer initiates the termination. If the employee was terminated unfairly, contrary to existing company policy or guidelines or contrary to an existing legal right, it may result in an added claim for wrongful discharge. Take for example the Allied Universal Corporation case involving a chemical engineer who was overcome by chlorine gas while on the job. In an effort to get some air he stood on his desk to open an air conditioning vent but got lightheaded and passed out from the gas. The next thing he remembers is waking up in a pool of blood and the commotion of coworkers. His fall caused serious injury to his teeth, face, neck, and back. Unfortunately, he had difficulty identifying dentists who were willing to do the work under the meager compensation reimbursement rate schedule. His extensive dental injuries were not all covered by workers’ compensation insurance. With medical bills mounting the engineer hired a lawyer to help him with the workers’ compensation claim. Two days later he was called by the compensation carrier and then into his boss’s office and fired. The pretext for terminating the employment was allegedly the engineer’s failure to obtain a professional engineer’s license and failing to meet job requirements in a timely fashion. But during the termination process his boss said, “Hiring an attorney is the worst mistake you made in your life.” The engineer’s subsequent job search was fruitless for two years. He blamed Allied for tarnishing his reputation. It didn’t help that they filed a police report the day after he was fired claiming he stole company property even though they knew it wasn’t true. The jury returned a verdict of $750,000 for emotional distress plus lost wages, accrued vacation time, and his 401(K) retirement account. The total tab was over $900,000. Poorly handled terminations can be expensive. Role of Policies Policies are road maps that help you steer clear of the legal obstacles summarized in the following list. These types of issues can occur in all phases of the employment process, from hiring to managing and disciplining to terminating. Theories of Employment Law Liability 1. Respondeat Superior 2. Negligence 3. Ratification 4. Discrimination: Race, color, national origin, gender, religion, age, disability, equal pay 5. Sexual Harassment: a. Quid Pro Quo b. Hostile Environment:  Third-party claims  Sexual favoritism claims  Sex-based claims 6. Wrongful or Constructive Discharge http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 5 of 5 Policies and guidelines provide checklists and tools designed to help make the job of managing employees easier and more consistent. Use them. They facilitate fairness. They manage expectation in employment relationships. The key to success is using them consistently. Too many exceptions to the rules create double standards. If an added layer of distinction is merited, that’s fine, but it is important to communicate how others can become eligible for the same treatment. What objective criteria are being used to establish “fairness”? If employees understand how and why distinctions are being made and why these distinctions make sense they are less likely to feel they’ve been singled out unfairly. Ask yourself: “Am I treating my least favorite employee the same as my favorite employee?” If the answer is no you may want to examine how the two are being treated differently and whether the reason for the disparate treatment has been clearly communicated, along with concrete recommendations for improvement. International Issues The growth of international commerce has made it imperative to be aware of labor idiosyncrasies in other countries. Some trading partners exploit these quirks. Japanese and Korean steel companies, for example, have been known to monitor employment situations in Australian mining and maritime industries and have used those bits of industrial intelligence to their advantage when negotiating purchases of coal and other raw materials. Employment issues are therefore more than an internal management matter. They can position a company for competitive advantage or disadvantage, and they can open the company to product liability as in the Firestone tire example. A comparison of foreign employment laws shows that management’s ability to manage employee expectations may be dampened by statutory or union constraints in other countries. The employment at-will doctrine does not reign supreme. Industrialization, market forces, and political preferences shape the legal infrastructure of employment. As a result some countries take a more socialized approach to employment law and employee rights. Unions are industry-wide as opposed to divided by occupation and often more vertically integrated in industries and in management decision-making processes. The institutionalized cooperation between labor and management in these integrated union structures centralizes decision making. Employment Questions to Think About  Are the company’s employment policies regarding hiring, disciplinary, and termination practices understood by all employees? Are they being consistently followed?  Is there favoritism, an insider’s club? If so, is it arbitrary? Or are standards and eligibility requirements clearly communicated and equal opportunity afforded to all, regardless of race, color, national origin, gender, religion, age, or disability?  Are employment decisions being clearly communicated to employees? How are expectations of fairness being managed?  What procedures are in place to evaluate latent employment liabilities?  How are harassment claims handled? Are they all investigated? Or are the victims’ requests to “not tell anyone” honored?  What processes are in place to train managers regarding the structural difference in foreign labor markets and how it can affect their day-to-day decision making? Use of content on this site is expressly subject to the restrictions set forth in the Membership Agreement. Books24x7 and Referenceware are registered trademarks of Books24x7, Inc. Copyright © 1999-2014Books24x7, Inc. - Feedback | Privacy Policy (updated 03/2005) http://library.books24x7.com.ezproxy1.apus.edu/assetviewer.aspx?bookid=16713&chu... 1/8/2014 The Business Guide to Legal Literacy: What Every Manager Should Know About the La... Page 1 of 5 Appendix B - The ABCs of Legal Literacy The Business Guide to Legal Literacy: What Every Manager Should Know About the Law by Hanna Hasl-Kelchner Jossey-Bass © 2006 Citation 5. Unfair Competition Unfair competition is an umbrella term that encompasses antitrust laws, the tortious interference with contract, disparagement of another company’s products or services, employee raiding, intellectual property infringement, unfair import competition, and gray market, also known as parallel market, goods. It is a blend of law and economics and based on the premise that economic development and social welfare are both enhanced when competitors compete fairly. What’s considered fair can be highly contextual. Some industries are more protected than others in certain countries. Some countries even tolerate anticompetitive cartel behavior, for example, the OPEC oil cartel or the diamond cartel. Yet more than a hundred countries, representing close to 95 percent of world trade, have some form of unfair trade laws. In the United States, for example, antitrust laws (statutes designed to protect commerce from unlawful restraints of trade, price discrimination, price fixing, and monopolies) can be summed up in a series of horizontal and vertical restraints that together broadly define the framework and fabric of antitrust. Horizontal Restraints Horizontal restraints refer to agreements made between you and your competitors. These types of agreements are the most closely scrutinized and most likely to be illegal on their face. Price fixing, dividing markets, allocating customers, suppressing quality competition (such as jointly restricting research and development), and refusals to deal that amount to boycotts are examples of activities that are illegal per se. In other words they are illegal by definition—no exceptions, no excuses. Don’t do it! Vertical Restraints Vertical restraints refer to the relationship between you, your suppliers, and your customers. Resale price maintenance, requiring the goods to be resold at a certain price as opposed to merely recommending a resale price, is illegal per se, as is the refusal to deal. But other restraints, such a...
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