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O
ne of the important functions
of law in any society is to
provide stability, predictability,
and continuity so that people can know
how to order their affairs. If any society
is to survive, its citizens must be able
to determine what is legally right and
legally wrong. They must know what
sanctions will be imposed on them if they
commit wrongful acts. If they suffer harm
as a result of others’ wrongful acts, they
must know how they can seek redress.
By setting forth the rights, obligations,
and privileges of citizens, the law enables
individuals to go about their business
with confidence and a certain degree of
predictability. The stability and predictability created by the law provide an
essential framework for all civilized
activities, including business activities.
What do we mean when we speak
of “the law”? Although the law has
various definitions, they are all based
on the general observation that law
consists of enforceable rules governing
relationships among individuals and
between individuals and their society.
These “enforceable rules” may consist
of unwritten principles of behavior established by a nomadic tribe. They may
be set forth in a law code, such as the
Code of Hammurabi in ancient Babylon
(c. 1780 B.C.E.) or the law code of one
of today’s European nations. They
may consist of written laws and court
decisions created by modern legislative
and judicial bodies, as in the United
States. Regardless of how such rules
are created, they all have one thing in
common: they establish rights, duties,
SECTION 1
BUSINESS ACTIVITIES AND
THE LEGAL ENVIRONMENT
As those entering the world of business will learn,
laws and government regulations affect virtually all
business activities—from hiring and firing decisions
to workplace safety, the manufacturing and marketing of products, business financing, and more. To
make good business decisions, a basic knowledge
of the laws and regulations governing these activities is beneficial—if not essential. Realize also that
in today’s world, a knowledge of “black-letter” law
is not enough. Businesspersons are also pressured to
and privileges that are consistent with
the values and beliefs of their society
or its ruling group.
In this introductory chapter, we first
look at an important question for any
student reading this text: How does
the legal environment affect business
decision making? We next describe the
major sources of American law, the
common law tradition, and some basic
schools of legal thought. We conclude
the chapter with sections offering
practical guidance on several topics, including how to find the sources of law
discussed in this chapter (and referred
to throughout the text) and how to
read and understand court opinions.
make ethical decisions. Thus, the study of business
law necessarily involves an ethical dimension.
Many Different Laws May
Affect a Single Business Transaction
As you will note, each chapter in this text covers a
specific area of the law and shows how the legal rules
in that area affect business activities. Though compartmentalizing the law in this fashion promotes
conceptual clarity, it does not indicate the extent to
which a number of different laws may apply to just
one transaction.
Consider an example. Suppose that you are the
president of NetSys, Inc., a company that creates
2
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C HAPTE R 1
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Business and Its Legal Environment
and maintains computer network systems for business firms, and also markets related software. One
day, Hernandez, an operations officer for Southwest
Distribution Corporation (SDC), contacts you by
e-mail about a possible contract concerning SDC’s
computer network. In deciding whether to enter into
a contract with SDC, you should consider, among
other things, the legal requirements for an enforceable contract. Are there different requirements for
a contract for services and a contract for products?
What are your options if SDC breaches (breaks, or
fails to perform) the contract? The answers to these
questions are part of contract law and sales law.
Other questions might concern payment under
the contract. How can you ensure that NetSys will be
paid? For example, if payment is made with a check
that is returned for insufficient funds, what are your
options? Answers to these questions can be found in
the laws that relate to negotiable instruments (such
as checks) and creditors’ rights. Also, a dispute may
occur over the rights to NetSys’s software, or there
may be a question of liability if the software is defective. Questions may even be raised as to whether
you and Hernandez had the authority to make the
deal in the first place. A disagreement may arise from
other circumstances, such as an accountant’s evaluation of the contract. Resolutions of these questions
may be found in areas of the law that relate to intellectual property, e-commerce, torts, product liability, agency, business organizations, or professional
liability.
Finally, if any dispute cannot be resolved amicably, then the laws and the rules concerning courts
and court procedures spell out the steps of a lawsuit.
Exhibit 1–1 below illustrates the various areas of law
that may influence business decision making.
Ethics and Business Decision Making
Merely knowing the areas of law that may affect a
business decision is not sufficient in today’s business
world. Businesspersons must also take ethics into
account. As you will learn in Chapter 4, ethics generally is defined as the study of what constitutes right
or wrong behavior. Today, business decision makers
need to consider not just whether a decision is legal,
but also whether it is ethical.
Throughout this text, you will learn about the
relationship between the law and ethics, as well as
about some of the types of ethical questions that
E X H I B I T 1–1 • Areas of the Law That May Affect Business Decision Making
Contracts
Courts and
Court Procedures
Sales
Negotiable
Instruments
Professional
Liability
Business
Decision
Making
Business
Organizations
Creditors’
Rights
Intellectual
Property
Agency
E- Commerce
Torts
Product
Liability
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4
UNIT ONE
TH E FOU N DATIONS
often arise in the business context. For example,
the unit-ending Focus on Ethics features are devoted
solely to the exploration of ethical questions pertaining to topics treated within the unit. We have also
included Ethical Dimension questions for selected
cases that stress the importance of ethical considerations in today’s business climate and Insight into
Ethics features that appear in selected chapters. A
Question of Ethics case problem is included at the
conclusion of every chapter to introduce the ethical
aspects of specific cases involving real-life situations.
Additionally, Chapter 4 offers a detailed look at the
importance of ethical considerations in business
decision making.
SECTION 2
SOURCES OF AMERICAN LAW
There are numerous sources of American law.
Primary sources of law, or sources that establish the
law, include the following:
1. The U.S. Constitution and the constitutions of
the various states.
2. Statutory law—including laws passed by Congress,
state legislatures, or local governing bodies.
3. Regulations created by administrative agencies,
such as the Food and Drug Administration.
4. Case law and common law doctrines.
We describe each of these important sources of law
in the following pages.
Secondary sources of law are books and articles that
summarize and clarify the primary sources of law.
Examples include legal encyclopedias, treatises, articles in law reviews, and compilations of law, such as
the Restatements of the Law (which will be discussed
shortly). Courts often refer to secondary sources of
law for guidance in interpreting and applying the
primary sources of law discussed here.
Constitutional Law
The federal government and the states have separate written constitutions that set forth the general
organization, powers, and limits of their respective
governments. Constitutional law is the law as
expressed in these constitutions.
According to Article VI of the U.S. Constitution,
the Constitution is the supreme law of the land. As
such, it is the basis of all law in the United States. A
law in violation of the Constitution, if challenged,
will be declared unconstitutional and will not be
enforced, no matter what its source. Because of its
importance in the American legal system, we present the complete text of the U.S. Constitution in
Appendix B.
The Tenth Amendment to the U.S. Constitution
reserves to the states all powers not granted to the
federal government. Each state in the union has its
own constitution. Unless it conflicts with the U.S.
Constitution or a federal law, a state constitution is
supreme within the state’s borders.
Statutory Law
Laws enacted by legislative bodies at any level of
government, such as the statutes passed by Congress
or by state legislatures, make up the body of law
generally referred to as statutory law. When a
legislature passes a statute, that statute ultimately is
included in the federal code of laws or the relevant
state code of laws (these codes are discussed later in
this chapter).
Statutory law also includes local ordinances—
statutes (laws, rules, or orders) passed by municipal
or county governing units to govern matters not covered by federal or state law. Ordinances commonly
have to do with city or county land use (zoning ordinances), building and safety codes, and other matters affecting the local community.
A federal statute, of course, applies to all states.
A state statute, in contrast, applies only within the
state’s borders. State laws thus may vary from state
to state. No federal statute may violate the U.S.
Constitution, and no state statute or local ordinance
may violate the U.S. Constitution or the relevant
state constitution.
UNIFORM LAWS The differences among state laws
were particularly notable in the 1800s, when conflicting state statutes frequently made trade and
commerce among the states difficult. To counter
these problems, in 1892 a group of legal scholars
and lawyers formed the National Conference of
Commissioners on Uniform State Laws (NCCUSL) to
draft uniform laws, or model laws, for the states
to consider adopting. The NCCUSL still exists today
and continues to issue uniform laws.
Each state has the option of adopting or rejecting
a uniform law. Only if a state legislature adopts a uniform law does that law become part of the statutory law
of that state. Note that a state legislature may adopt
all or part of a uniform law as it is written, or the legislature may rewrite the law however the legislature
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C HAPTE R 1
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wishes. Hence, even though many states may have
adopted a uniform law, those states’ laws may not be
entirely “uniform.”
The earliest uniform law, the Uniform Negotiable
Instruments Law, was completed by 1896 and
adopted in every state by the early 1920s (although
not all states used exactly the same wording). Over
the following decades, other acts were drawn up in a
similar manner. In all, more than two hundred uniform acts have been issued by the NCCUSL since its
inception. The most ambitious uniform act of all,
however, was the Uniform Commercial Code.
THE UNIFORM COMMERCIAL CODE The Uniform
Commercial Code (UCC), which was created
through the joint efforts of the NCCUSL and the
American Law Institute,1 was first issued in 1952. All
fifty states,2 the District of Columbia, and the Virgin
Islands have adopted the UCC. It facilitates commerce among the states by providing a uniform, yet
flexible, set of rules governing commercial transactions. The UCC assures businesspersons that their
contracts, if validly entered into, normally will be
enforced.
As you will read in later chapters, from time to
time the NCCUSL revises the articles contained in
the UCC and submits the revised versions to the
states for adoption. During the 1990s, for example,
four articles (Articles 3, 4, 5, and 9) were revised, and
two new articles (Articles 2A and 4A) were added.
Amendments to Article 1 were approved in 2001 and
have now been adopted by a majority of the states.
Because of its importance in the area of commercial
law, we cite the UCC frequently in this text. We also
present excerpts of the UCC in Appendix C.
operations, including its capital structure and
financing, its hiring and firing procedures, its relations with employees and unions, and the way it
manufactures and markets its products. Regulations
enacted to protect the environment often play a significant role in business operations. See this chapter’s Shifting Legal Priorities for Business feature on
the following page for a discussion of the concept of
sustainability and how some environmental regulations encourage it.
FEDERAL AGENCIES At the national level, the
cabinet departments of the executive branch
include numerous executive agencies. The U.S.
Food and Drug Administration, for example, is an
agency within the U.S. Department of Health and
Human Services. Executive agencies are subject to
the authority of the president, who has the power
to appoint and remove their officers. There are also
major independent regulatory agencies at the
federal level, such as the Federal Trade Commission,
the Securities and Exchange Commission, and the
Federal Communications Commission. The president’s power is less pronounced in regard to independent agencies, whose officers serve for fixed
terms and cannot be removed without just cause.
STATE AND LOCAL AGENCIES There are administrative agencies at the state and local levels as well.
Commonly, a state agency (such as a state pollutioncontrol agency) is created as a parallel to a federal agency (such as the Environmental Protection
Agency). Just as federal statutes take precedence
over conflicting state statutes, so federal agency
regulations take precedence over conflicting state
regulations.
Administrative Law
Another important source of American law is
administrative law, which consists of the rules,
orders, and decisions of administrative agencies. An
administrative agency is a federal, state, or local
government agency established to perform a specific
function. Administrative law and procedures, which
will be examined in detail in Chapter 6, constitute
a dominant element in the regulatory environment
of business.
Rules issued by various administrative agencies now affect almost every aspect of a business’s
1. This institute was formed in the 1920s and consists of practicing
attorneys, legal scholars, and judges.
2. Louisiana has not adopted Articles 2 and 2A (covering contracts
for the sale and lease of goods), however.
Case Law and Common Law Doctrines
The rules of law announced in court decisions constitute another basic source of American law. These
rules include interpretations of constitutional provisions, of statutes enacted by legislatures, and of
regulations created by administrative agencies.
Today, this body of judge-made law is referred to as
case law. Case law—the doctrines and principles
announced in cases—governs all areas not covered
by statutory law or administrative law and is part of
our common law tradition. We look at the origins
and characteristics of the common law tradition in
some detail in the pages that follow.
See Concept Summary 1.1 on page 7 for a review of
the sources of American law.
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By now, almost everyone is aware that at the
federal, state, and local levels there are numerous statutes that deal with the environment (environmental law will be discussed in Chapter 25). In the
last few years, federal, state, and local statutes and
administrative regulations have started to embrace the
concept of sustainability.
What Does Sustainability Mean?
Although there is no one official definition, sustainability
generally has been defined as economic development
that meets the needs of the present while not compromising the ability of future generations to meet their
own needs. By any definition, sustainability is a process
rather than a tangible outcome. For business managers,
it means that they should engage in long-range planning rather than focusing only on short-run profitability.
Federal Law and Sustainability
Certain provisions of federal environmental laws
directly address the topic of sustainability. For example,
the Resource Conservation and Recovery Acta requires
waste minimization as the preferred means of hazardous waste management. Facilities that generate or
manage hazardous waste must certify that they have a
waste minimization program that reduces the toxicity
and quantity of the hazardous waste.
The Pollution Prevention Act (PPA)b requires that
facilities minimize or eliminate the release of pollutants into the environment whenever feasible. The PPA
established a national policy to recycle any pollutants
that cannot be prevented.
Finally, the federal Environmental Protection Agency
(EPA) has undertaken a major effort to encourage
sustainability. The agency’s Web site (www.epa.gov)
devotes numerous pages to sustainability, sustainable
development, and sustainable agriculture. The EPA also
has a “sector strategies program” that seeks industrywide environmental gains through innovative actions.
Other nations have enacted legislation that requires
sustainability to be taken into account when protecting the environment. An example is the Environmental
Protection and Bio-Diversity Conservation Act in
Australia.c
State Law and Sustainability
At least one state has legislatively committed itself
to the concept of sustainable policies. More than a
decade ago, the Oregon Sustainability Act was passed.
This act officially defines sustainability as:
a. 42 U.S.C. Sections 6901 et seq. (1976).
b. 42 U.S.C. Sections 13101 et seq. (1990).
c. This act became effective in 1999 and has been amended many
times since.
Using, developing, and protecting resources in
a manner that enables people to meet current
needs and provides that future generations can
also meet future needs, from the joint perspective of environmental, economic, and community objectives.
Oregon’s seven-member sustainability board
recommends and proposes sustainability legislation
and also develops policies and programs related to
sustainability.
Where Does the United States Rank
in the World Sustainability Index?
Environmental experts from Yale and Columbia
universities have created an Environmental
Sustainability Index (ESI) that ranks countries according to how well they manage their environments,
protect the global commons, and have the capacity
to improve their environmental performance. Finland
and Norway are at the top of the ESI. The United States
ranks forty-fifth. This low ranking is due mainly to
excessive waste generation and greenhouse gas emissions in this country.
Some Corporations Take
the Lead by Creating the Position
of a Chief Sustainability Officer
The giant chemical company DuPont has an official
chief sustainability officer (CSO)—a position that did
not exist a few years ago. This corporate officer is
responsible not only for ensuring that the company
complies with all federal, state, local, and international
environmental regulations, but also for discovering socalled megatrends that can affect different markets.
DuPont, though best known as a chemical company, also sells agricultural seeds and crop-protection
products. One megatrend that its CSO has identified
is a growing world population that is going to require
more production of corn, soybeans, and other crops
from limited acreage. That is where sustainability
comes in—producing more with less.
M A N AG E R I A L I M P L I C AT I O N S
Managers cannot wait until the government tells them
what sustainable business practices they must follow.
A company that adopts sustainable business practices
today not only will promote desirable economic,
social, and environmental results, but at the same time
will enhance productivity, reduce costs, and thereby
increase profitability. A company that has a clear
understanding of sustainability will be more competitive as increasing consumer demand for “green”
products and global concerns about the environment
put pressure on all producers.
6
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C HAPTE R 1
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Business and Its Legal Environment
Source
Description
Constitutional Law
The law as expressed in the U.S. Constitution and the state constitutions. The U.S.
Constitution is the supreme law of the land. State constitutions are supreme within
state borders to the extent that they do not violate a clause of the U.S. Constitution
or a federal law.
Statutory Law
Laws (statutes and ordinances) enacted by federal, state, and local legislatures and
governing bodies. None of these laws may violate the U.S. Constitution or the
relevant state constitution. Uniform laws, when adopted by a state, become
statutory law in that state.
Administrative Law
The rules, orders, and decisions of federal, state, or local government administrative
agencies.
Case Law and
Common Law Doctrines
Judge-made law, including interpretations of constitutional provisions, of statutes
enacted by legislatures, and of regulations created by administrative agencies.
SECTION 3
THE COMMON LAW TRADITION
Because of our colonial heritage, much of American
law is based on the English legal system, which originated in medieval England and continued to evolve
in the following centuries. Knowledge of this system
is necessary to understanding the American legal
system today.
Early English Courts
The origins of the English legal system—and thus
the U.S. legal system as well—date back to 1066,
when the Normans conquered England. William the
Conqueror and his successors began the process of
unifying the country under their rule. One of the
means they used to do this was the establishment of
the king’s courts, or curiae regis. Before the Norman
Conquest, disputes had been settled according to the
local legal customs and traditions in various regions
of the country. The king’s courts sought to establish a uniform set of customs for the country as a
whole. What evolved in these courts was the beginning of the common law—a body of general rules
that applied throughout the entire English realm.
Eventually, the common law tradition became part
of the heritage of all nations that were once British
colonies, including the United States.
COURTS OF LAW AND REMEDIES AT LAW The early
English king’s courts could grant only very limited
kinds of remedies (the legal means to enforce a
right or redress a wrong). If one person wronged
another in some way, the king’s courts could award
as compensation one or more of the following:
(1) land, (2) items of value, or (3) money. The courts
that awarded this compensation became known as
courts of law, and the three remedies were called
remedies at law. (Today, the remedy at law normally takes the form of monetary damages—an
amount given to a party whose legal interests have
been injured.) Even though the system introduced
uniformity in the settling of disputes, when a complaining party wanted a remedy other than economic compensation, the courts of law could do
nothing, so “no remedy, no right.”
COURTS OF EQUITY AND REMEDIES IN EQUITY
Equity is a branch of law—founded on what might
be described as notions of justice and fair dealing—
that seeks to supply a remedy when no adequate
remedy at law is available. When individuals could
not obtain an adequate remedy in a court of law,
they petitioned the king for relief. Most of these
petitions were decided by an adviser to the king,
called a chancellor, who had the power to grant
new and unique remedies. Eventually, formal chancery courts, or courts of equity, were established.
The remedies granted by the equity courts became
known as remedies in equity, or equitable remedies. These remedies include specific performance
(ordering a party to perform an agreement as promised), an injunction (ordering a party to cease engaging in a specific activity or to undo some wrong or
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8
UNIT ONE
TH E FOU N DATIONS
injury), and rescission (the cancellation of a contractual obligation). We will discuss these and other equitable remedies in more detail at appropriate points in
the chapters that follow, particularly in Chapter 10.
As a general rule, today’s courts, like the early
English courts, will not grant equitable remedies
unless the remedy at law—monetary damages—is
inadequate. Suppose that Ted forms a contract (a
legally binding agreement—see Chapter 9) to purchase a parcel of land that he thinks will be just perfect for his future home. Further suppose that the
seller breaches this agreement. Ted could sue the
seller for the return of any deposits or down payment
he might have made on the land, but this is not the
remedy he really seeks. What Ted wants is to have
the court order the seller to perform the contract. In
other words, Ted wants the court to grant the equitable remedy of specific performance because monetary
damages are inadequate in this situation.
EQUITABLE MAXIMS In fashioning appropriate remedies, judges often were (and continue to be) guided
by so-called equitable maxims—propositions or
general statements of equitable rules. Exhibit 1–2
below lists some important equitable maxims. The
last maxim listed in that exhibit—“Equity aids the
vigilant, not those who rest on their rights”—merits
special attention. It has become known as the equitable doctrine of laches (a term derived from the
Latin laxus, meaning “lax” or “negligent”), and it
can be used as a defense. A defense is an argument
raised by the defendant (the party being sued) indicating why the plaintiff (the suing party) should
not obtain the remedy sought. (Note that in equity
proceedings, the party bringing a lawsuit is called
the petitioner, and the party being sued is referred
to as the respondent.)
The doctrine of laches arose to encourage people to bring lawsuits while the evidence was fresh.
What constitutes a reasonable time, of course, varies according to the circumstances of the case. Time
periods for different types of cases are now usually
fixed by statutes of limitations. After the time
allowed under a statute of limitations has expired,
no action (lawsuit) can be brought, no matter how
strong the case was originally.
Legal and Equitable Remedies Today
The establishment of courts of equity in medieval
England resulted in two distinct court systems: courts
of law and courts of equity. The courts had different
sets of judges and granted different types of remedies.
During the nineteenth century, however, most states
in the United States adopted rules of procedure that
resulted in the combining of courts of law and equity.
A party now may request both legal and equitable
remedies in the same action, and the trial court judge
may grant either or both forms of relief.
The distinction between legal and equitable remedies remains relevant to students of business law,
however, because these remedies differ. To seek the
proper remedy for a wrong, one must know what
remedies are available. Additionally, certain vestiges
of the procedures used when there were separate
courts of law and equity still exist. For example, a
party has the right to demand a jury trial in an action
at law, but not in an action in equity. Exhibit 1–3 on
the facing page summarizes the procedural differences (applicable in most states) between an action
at law and an action in equity.
The Doctrine of Stare Decisis
One of the unique features of the common law is
that it is judge-made law. The body of principles and
doctrines that form the common law emerged over
time as judges decided legal controversies.
E X H I B I T 1–2 • Equitable Maxims
1. Whoever seeks equity must do equity. (Anyone who wishes to be treated fairly must treat others fairly.)
2. Where there is equal equity, the law must prevail. (The law will determine the outcome of a controversy in which the
merits of both sides are equal.)
3. One seeking the aid of an equity court must come to the court with clean hands. (The plaintiff must have acted fairly
and honestly.)
4. Equity will not suffer a wrong to be without a remedy. (Equitable relief will be awarded when there is a right to relief and
there is no adequate remedy at law.)
5. Equity regards substance rather than form. (Equity is more concerned with fairness and justice than with legal
technicalities.)
6. Equity aids the vigilant, not those who rest on their rights. (Equity will not help those who neglect their rights for an
unreasonable period of time.)
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C HAPTE R 1
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Business and Its Legal Environment
E X H I B I T 1–3 • Procedural Differences between an Action at Law and an Action in Equity
PROCEDURE
ACTION AT LAW
ACTION IN EQUITY
Initiation of Lawsuit
By filing a complaint
By filing a petition
Parties
Plaintiff and defendant
Petitioner and respondent
Decision
By jury or judge
By judge (no jury)
Result
Judgment
Decree
Remedy
Monetary damages
Injunction, specific performance, or rescission
CASE PRECEDENTS AND CASE REPORTERS When
possible, judges attempted to be consistent and to
base their decisions on the principles suggested by
earlier cases. They sought to decide similar cases in
a similar way and considered new cases with care
because they knew that their decisions would make
new law. Each interpretation became part of the law
on the subject and served as a legal precedent—
that is, a decision that furnished an example or
authority for deciding subsequent cases involving
identical or similar legal principles or facts.
In the early years of the common law, there was
no single place or publication where court opinions,
or written decisions, could be found. By the early
fourteenth century, portions of the most important decisions from each year were being gathered
together and recorded in Year Books, which became
useful references for lawyers and judges. In the sixteenth century, the Year Books were discontinued,
and other forms of case publication became available. Today, cases are published, or “reported,” in
volumes called reporters, or reports. We describe
today’s case reporting system in detail later in this
chapter.
STARE DECISIS AND THE COMMON LAW TRADITION
The practice of deciding new cases with reference
to former decisions, or precedents, became a cornerstone of the English and American judicial systems. The practice formed a doctrine known as
stare decisis3 (a Latin phrase meaning “to stand on
decided cases”).
Under this doctrine, judges are obligated to follow the precedents established within their jurisdictions. The term jurisdiction refers to a geographic area
in which a court or courts have the power to apply
the law—see Chapter 2. Once a court has set forth a
principle of law as being applicable to a certain set
3. Pronounced ster-ay dih-si-ses.
of facts, that court and courts of lower rank (within
the same jurisdiction) must adhere to that principle
and apply it in future cases involving similar fact
patterns. Thus, stare decisis has two aspects: first,
that decisions made by a higher court are binding
on lower courts; and second, that a court should not
overturn its own precedents unless there is a compelling reason to do so.
Controlling precedents in a jurisdiction are
referred to as binding authorities. A binding
authority is any source of law that a court must
follow when deciding a case. Binding authorities
include constitutions, statutes, and regulations that
govern the issue being decided, as well as court decisions that are controlling precedents within the
jurisdiction. United States Supreme Court case decisions, no matter how old, remain controlling until
they are overruled by a subsequent decision of the
Supreme Court, by a constitutional amendment, or
by congressional legislation (that has not been held
unconstitutional).
STARE DECISIS AND LEGAL STABILITY The doctrine
of stare decisis helps the courts to be more efficient
because if other courts have carefully analyzed a
similar case, their legal reasoning and opinions can
serve as guides. Stare decisis also makes the law more
stable and predictable. If the law on a given subject
is well settled, someone bringing a case to court can
usually rely on the court to make a decision based
on what the law has been in the past.
DEPARTURES FROM PRECEDENT Although courts are
obligated to follow precedents, sometimes a court
will depart from the rule of precedent if it decides
that the precedent should no longer be followed. If a
court decides that a ruling precedent is simply incorrect or that technological or social changes have rendered the precedent inapplicable, the court might
rule contrary to the precedent. Cases that overturn
precedent often receive a great deal of publicity.
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10
UNIT ONE
TH E FOU N DATIONS
CASE IN POINT The United States Supreme Court
expressly overturned precedent when it concluded that separate educational facilities for
whites and blacks, which it had previously upheld
as constitutional,4 were inherently unequal.5 The
Court’s departure from precedent in this case
received a tremendous amount of publicity as people began to realize the ramifications of this change
in the law.
Note that judges do have some flexibility in
applying precedents. For example, a lower court may
avoid applying a precedent set by a higher court in
its jurisdiction by distinguishing the two cases based
on their facts. When this happens, the lower court’s
ruling stands unless it is appealed to a higher court
and that court overturns the decision.
WHEN THERE IS NO PRECEDENT Occasionally, the
courts must decide cases for which no precedents
exist, called cases of first impression. For example, as
you will read throughout this text, the extensive use
of the Internet has presented many new and challenging issues for the courts to decide. In deciding
cases of first impression, courts often look at persuasive authorities (precedents from other jurisdictions)
for guidance. A court may also consider a number
of factors, including legal principles and policies
underlying previous court decisions or existing statutes, fairness, social values and customs, public
policy (governmental policy based on widely held
societal values), and data and concepts drawn from
the social sciences. Which of these sources is chosen or receives the greatest emphasis depends on the
nature of the case being considered and the particular judge or judges hearing the case.
Stare Decisis and Legal Reasoning
Legal reasoning is the reasoning process used
by judges in deciding what law applies to a given
dispute and then applying that law to the specific
facts or circumstances of the case. Through the use
of legal reasoning, judges harmonize their decisions
with those that have been made before, as the doctrine of stare decisis requires.
Students of business law and the legal environment also engage in legal reasoning. For example,
you may be asked to provide answers for some of
4. See Plessy v. Ferguson, 163 U.S. 537, 16 S.Ct. 1138, 41 L.Ed. 256
(1896). A later section in this chapter explains how to read legal
citations.
5. Brown v. Board of Education of Topeka, 347 U.S. 483, 74 S.Ct. 686,
98 L.Ed. 873 (1954).
the case problems that appear at the end of every
chapter in this text. Each problem describes the
facts of a particular dispute and the legal question
at issue. If you are assigned a case problem, you will
be asked to determine how a court would answer
that question, and why. In other words, you will
need to give legal reasons for whatever conclusion
you reach.6 We look here at the basic steps involved
in legal reasoning and then describe some forms of
reasoning commonly used by the courts in making
their decisions.
BASIC STEPS IN LEGAL REASONING At times, the
legal arguments set forth in court opinions are relatively simple and brief. At other times, the arguments
are complex and lengthy. Regardless of the length
of a legal argument, however, the basic steps of the
legal reasoning process remain the same. These steps,
which you can also follow when analyzing cases and
case problems, form what is commonly referred to
as the IRAC method of legal reasoning. IRAC is an
acronym formed from the first letters of the following words: Issue, Rule, Application, and Conclusion. To
apply the IRAC method, you would ask the following questions:
1. What are the key facts and issues? Suppose that a
plaintiff comes before the court claiming assault
(the act of wrongfully and intentionally making
another person fearful of immediate physical
harm—part of a class of actions called torts). The
plaintiff claims that the defendant threatened her
while she was sleeping. Although the plaintiff
was unaware that she was being threatened, her
roommate heard the defendant make the threat.
The legal issue, or question, raised by these facts
is whether the defendant’s action constitutes the
tort of assault, given that the plaintiff was not
aware of that action at the time it occurred.
2. What rules of law apply to the case? A rule of law
may be a rule stated by the courts in previous
decisions, a state or federal statute, or a state or
federal administrative agency regulation. In our
hypothetical case, the plaintiff alleges (claims)
that the defendant committed a tort. Therefore,
the applicable law is the common law of torts—
specifically, tort law governing assault (see
Chapter 12 for more detail on intentional torts).
Case precedents involving similar facts and issues
thus would be relevant. Often, more than one
rule of law will be applicable to a case.
6. See Appendix A for further instructions on how to analyze case
problems.
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C HAPTE R 1
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Business and Its Legal Environment
3. How do the rules of law apply to the particular facts
and circumstances of this case? This step is often the
most difficult because each case presents a unique
set of facts, circumstances, and parties. Although
cases may be similar, no two cases are ever identical in all respects. Normally, judges (and lawyers
and law students) try to find cases on point—
previously decided cases that are as similar as possible to the one under consideration. (Because of
the difficulty—and importance—of this step in
the legal reasoning process, we discuss it in more
detail in the next subsection.)
4. What conclusion should be drawn? This step normally presents few problems. Usually, the conclusion is evident if the previous three steps have
been followed carefully.
FORMS OF LEGAL REASONING Judges use many
types of reasoning when following the third step of
the legal reasoning process—applying the law to the
facts of a particular case. Three common forms of
reasoning are deductive reasoning, linear reasoning,
and reasoning by analogy.
Deductive Reasoning. Deductive reasoning is
sometimes called syllogistic reasoning because it
employs a syllogism—a logical relationship involving a major premise, a minor premise, and a conclusion. For example, consider the hypothetical case
presented earlier. In deciding whether the defendant committed assault by threatening the plaintiff while she was sleeping, the judge might point
out that “under the common law of torts, an individual must be aware of a threat of danger for the
threat to constitute assault” (major premise); “the
plaintiff in this case was unaware of the threat at the
time it occurred” (minor premise); and “therefore,
the circumstances do not amount to an assault”
(conclusion).
Linear Reasoning. A second form of legal reasoning that is commonly employed might be thought
of as “linear” reasoning because it proceeds from one
point to another, with the final point being the conclusion. To understand this form of reasoning, imagine a knotted rope, with each knot tying together
separate pieces of rope to form a tightly knotted
length. As a whole, the rope represents a linear progression of thought logically connecting various
points, with the last point, or knot, representing the
conclusion. For example, a tenant in an apartment
building sues the landlord for damages for an injury
resulting from an allegedly inadequately lit stairway.
The court may engage in a reasoning process involving the following “pieces of rope”:
1. The landlord, who was on the premises the evening the injury occurred, testifies that none of the
other nine tenants who used the stairway that
night complained about the lights.
2. The fact that none of the tenants complained
is the same as if they had said the lighting was
sufficient.
3. That there were no complaints does not prove
that the lighting was sufficient but does prove
that the landlord had no reason to believe that it
was not.
4. The landlord’s belief was reasonable because no
one complained.
5. Therefore, the landlord acted reasonably and was
not negligent with respect to the lighting in the
stairway.
From this reasoning, the court concludes that the
tenant is not entitled to compensation on the basis
of the stairway’s allegedly insufficient lighting.
Reasoning by Analogy. Another important type
of reasoning that judges use in deciding cases is
reasoning by analogy. To reason by analogy is to
compare the facts in the case at hand to the facts
in previous cases and, to the extent that the patterns are similar, to apply the same rule of law to the
present case. To the extent that the facts are unique,
or “distinguishable,” different rules may apply. For
example, in Case A, the court held that a driver who
crossed a highway’s center line was negligent. Case B
involves a driver who crossed the line to avoid hitting a child. In determining whether Case A’s rule
applies in Case B, a judge would consider what the
reasons were for the decision in A and whether B is
sufficiently similar for those reasons to apply. If the
judge holds that B’s driver is not liable, that judge
must indicate why Case A’s rule is not relevant to the
facts presented in Case B.
There Is No One “Right” Answer
Many people believe that there is one “right” answer
to every legal question. In most legal controversies,
however, there is no single correct result. Good
arguments can often be made to support either side
of a legal controversy. Quite often, a case does not
involve a “good” person suing a “bad” person. In
many cases, both parties have acted in good faith in
some measure or in bad faith to some degree.
Additionally, each judge has her or his own personal beliefs and philosophy (see the discussion of
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12
UNIT ONE
TH E FOU N DATIONS
schools of jurisprudential thought later in this chapter), which shape the process of legal reasoning, at
least to some extent. This means that the outcome of
a particular lawsuit before a court cannot be predicted
with absolute certainty. In fact, in some cases, even
though the weight of the law would seem to favor
one party’s position, judges, through creative legal
reasoning, have found ways to rule in favor of the
other party in the interests of preventing injustice.
Legal reasoning and other aspects of the common
law tradition are reviewed in Concept Summary 1.2
below.
The Common Law Today
Today, the common law derived from judicial decisions continues to be applied throughout the United
States. Common law doctrines and principles, however, govern only areas not covered by statutory or
administrative law. In a dispute concerning a particular employment practice, for example, if a statute
regulates that practice, the statute will apply rather
than the common law doctrine that applied prior to
the enactment of the statute.
COURTS INTERPRET STATUTES Even in areas governed by statutory law, though, judge-made law
continues to be important because there is a
significant interplay between statutory law and the
common law. For example, many statutes essentially
codify existing common law rules, and regulations
issued by various administrative agencies usually are
based, at least in part, on common law principles.
Additionally, the courts, in interpreting statutory
law, often rely on the common law as a guide to
what the legislators intended.
Furthermore, how the courts interpret a particular statute determines how that statute will be
applied. If you wanted to learn about the coverage
and applicability of a particular statute, for example,
you would necessarily have to locate the statute and
study it. You would also need to see how the courts
in your jurisdiction have interpreted and applied
the statute. In other words, you would have to learn
what precedents have been established in your jurisdiction with respect to that statute. Often, the applicability of a newly enacted statute does not become
clear until a body of case law develops to clarify how,
when, and to whom the statute applies.
RESTATEMENTS OF THE LAW CLARIFY AND
ILLUSTRATE THE COMMON LAW The American Law
Institute has drafted and published compilations of
the common law called Restatements of the Law, which
generally summarize the common law rules followed
by most states. There are Restatements of the Law in the
Aspect
Description
Origins of the
Common Law
The American legal system is based on the common law tradition, which originated
in medieval England. Following the conquest of England in 1066 by William the
Conqueror, king’s courts were established throughout England, and the common
law was developed in these courts.
Legal and
Equitable Remedies
The distinction between remedies at law (money or items of value, such as land)
and remedies in equity (including specific performance, injunction, and rescission of
a contractual obligation) originated in the early English courts of law and courts of
equity, respectively.
Case Precedents
and the Doctrine
of Stare Decisis
In the king’s courts, judges attempted to make their decisions consistent with previous decisions, called precedents. This practice gave rise to the doctrine of stare
decisis. This doctrine, which became a cornerstone of the common law tradition,
obligates judges to abide by precedents established in their jurisdictions.
Stare Decisis and
Legal Reasoning
Legal reasoning is the reasoning process used by judges in applying the law to the
facts and issues of specific cases. Legal reasoning involves becoming familiar with
the key facts of a case, identifying the relevant legal rules, applying those rules to
the facts, and drawing a conclusion. In applying the legal rules to the facts of a case,
judges may use deductive reasoning, linear reasoning, or reasoning by analogy.
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C HAPTE R 1
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Business and Its Legal Environment
areas of contracts, torts, agency, trusts, property, restitution, security, judgments, and conflict of laws. The
Restatements, like other secondary sources of law, do
not in themselves have the force of law, but they are
an important source of legal analysis and opinion on
which judges often rely in making their decisions.
Many of the Restatements are now in their second,
third, or fourth editions. We refer to the Restatements
frequently in subsequent chapters of this text, indicating in parentheses the edition to which we are
referring. For example, we refer to the third edition
of the Restatement of the Law of Contracts as simply
the Restatement (Third) of Contracts.
SECTION 4
SCHOOLS OF
JURISPRUDENTIAL THOUGHT
How judges apply the law to specific cases, including disputes relating to the business world, depends
in part on their philosophical approaches to
law. Part of the study of law, often referred to as
jurisprudence, involves learning about different
schools of jurisprudential thought and discovering
how the approaches to law characteristic of each
school can affect judicial decision making.
Clearly, a judge’s function is not to make the
laws—that is the function of the legislative branch
of government—but to interpret and apply them.
From a practical point of view, however, the courts
play a significant role in defining the laws enacted
by legislative bodies, which tend to be expressed in
general terms. Judges thus have some flexibility in
interpreting and applying the law. It is because of
this flexibility that different courts can, and often do,
arrive at different conclusions in cases that involve
nearly identical issues, facts, and applicable laws.
The Natural Law School
An age-old question about the nature of law has to
do with the finality of a nation’s laws, such as the
laws of the United States at the present time. For
example, what if a particular law is deemed to be a
“bad” law by a substantial number of that nation’s
citizens? Those who adhere to the natural law
theory believe that a higher or universal law exists
that applies to all human beings and that written
laws should imitate these inherent principles. If a
written law is unjust, then it is not a true (natural)
law and need not be obeyed.
The natural law tradition is one of the oldest and
most significant schools of jurisprudence. It dates
back to the days of the Greek philosopher Aristotle
(384–322 B.C.E.), who distinguished between natural law and the laws governing a particular nation.
According to Aristotle, natural law applies universally to all humankind.
The notion that people have “natural rights” stems
from the natural law tradition. Those who claim that
a specific foreign government is depriving certain citizens of their human rights are implicitly appealing
to a higher law that has universal applicability. The
question of the universality of basic human rights
also comes into play in the context of international
business operations. For example, U.S. companies
that have operations abroad often hire foreign workers as employees. Should the same laws that protect
U.S. employees apply to these foreign employees? This
question is rooted implicitly in a concept of universal
rights that has its origins in the natural law tradition.
The Positivist School
In contrast, positive, or national, law (the written
law of a given society at a particular point in time)
applies only to the citizens of that nation or society. Those who adhere to legal positivism believe
that there can be no higher law than a nation’s positive law. According to the positivist school, there is
no such thing as “natural rights.” Rather, human
rights exist solely because of laws. If the laws are not
enforced, anarchy will result. Thus, whether a law is
“bad” or “good” is irrelevant. The law is the law and
must be obeyed until it is changed—in an orderly
manner through a legitimate lawmaking process.
A judge with positivist leanings probably would be
more inclined to defer to an existing law than would
a judge who adheres to the natural law tradition.
The Historical School
The historical school of legal thought emphasizes the evolutionary process of law by concentrating on the origin and history of the legal system.
This school looks to the past to discover what the
principles of contemporary law should be. The legal
doctrines that have withstood the passage of time—
those that have worked in the past—are deemed best
suited for shaping present laws. Hence, law derives
its legitimacy and authority from adhering to the
standards that historical development has shown to
be workable. Adherents of the historical school are
more likely than those of other schools to strictly
follow decisions made in past cases.
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14
UNIT ONE
TH E FOU N DATIONS
Legal Realism
SECTION 5
In the 1920s and 1930s, a number of jurists and
scholars, known as legal realists, rebelled against the
historical approach to law. Legal realism is based
on the idea that law is just one of many institutions
in society and that it is shaped by social forces and
needs. The law is a human enterprise, and judges
should take social and economic realities into
account when deciding cases. Legal realists also
believe that the law can never be applied with total
uniformity. Given that judges are human beings
with unique personalities, value systems, and intellects, different judges will obviously bring different
reasoning processes to the same case.
Legal realism strongly influenced the growth of
what is sometimes called the sociological school
of jurisprudence. This school views law as a tool
for promoting justice in society. In the 1960s, for
example, the justices of the United States Supreme
Court played a leading role in the civil rights movement by upholding long-neglected laws calling for
equal treatment for all Americans, including African
Americans and other minorities. Generally, jurists
who adhere to this philosophy of law are more likely
to depart from past decisions than are those jurists
who adhere to the other schools of legal thought.
Concept Summary 1.3 below reviews the schools of
jurisprudential thought.
CLASSIFICATIONS OF LAW
The law may be broken down according to several
classification systems. For example, one classification system divides law into substantive law and
procedural law. Substantive law consists of all
laws that define, describe, regulate, and create legal
rights and obligations. Procedural law consists of
all laws that delineate the methods of enforcing the
rights established by substantive law. Other classification systems divide law into federal law and state
law, private law (dealing with relationships between
private entities) and public law (addressing the relationship between persons and their governments),
and national law and international law. Here we
look at still another classification system, which
divides law into civil law and criminal law, as well as
at what is meant by the term cyberlaw.
Civil Law and Criminal Law
Civil law spells out the rights and duties that
exist between persons and between persons and
their governments, as well as the relief available
when a person’s rights are violated. Typically, in a
civil case, a private party sues another private party
School of Thought
Description
Natural Law School
One of the older and more significant schools of legal thought. Those who believe
in natural law hold that there is a universal law applicable to all human beings.
This law is discoverable through reason and is of a higher order than positive
(national) law.
Positivist School
A school of legal thought centered on the assumption that there is no law higher
than the laws created by the government. Laws must be obeyed, even if they are
unjust, to prevent anarchy.
Historical School
A school of legal thought that stresses the evolutionary nature of law and looks
to doctrines that have withstood the passage of time for guidance in shaping
present laws.
Legal Realism
A school of legal thought that advocates a less abstract and more realistic and
pragmatic approach to the law and takes into account customary practices and
the circumstances surrounding the particular transaction. Legal realism strongly
influenced the growth of the sociological school of jurisprudence, which views
law as a tool for promoting social justice.
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C HAPTE R 1
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Business and Its Legal Environment
(although the government can also sue a party for
a civil law violation) to make that other party comply with a duty or pay for the damage caused by
failure to comply with a duty. Much of the law that
we discuss in this text is civil law. Contract law, for
example, covered in Chapters 9 and 10, is civil law.
The whole body of tort law (see Chapter 12) is also
civil law.
Criminal law, in contrast, is concerned with
wrongs committed against the public as a whole.
Criminal acts are defined and prohibited by local,
state, or federal government statutes. Criminal
defendants are thus prosecuted by public officials,
such as a district attorney (D.A.), on behalf of the
state, not by their victims or other private parties.
(See Chapter 7 for a further discussion of the distinction between civil law and criminal law.)
Cyberlaw
As mentioned, the use of the Internet to conduct
business transactions has led to new types of legal
issues. In response, courts have had to adapt traditional laws to situations that are unique to our age.
Additionally, legislatures at both the federal and
the state levels have created laws to deal specifically
with such issues. Frequently, people use the term
cyberlaw to refer to the emerging body of law that
governs transactions conducted via the Internet.
Cyberlaw is not really a classification of law, nor is it
a new type of law. Rather, it is an informal term used
to describe both new laws and modifications of traditional laws that relate to the online environment.
Throughout this book, you will read how the law in
a given area is evolving to govern specific legal issues
that arise in the online context.
SECTION 6
HOW TO FIND PRIMARY
SOURCES OF LAW
This text includes numerous references, or citations,
to primary sources of law—federal and state statutes,
the U.S. Constitution and state constitutions, regulations issued by administrative agencies, and court
cases. A citation identifies the publication in which
a legal authority—such as a statute or a court decision or other source—can be found. In this section,
we explain how you can use citations to find primary sources of law. Note that in addition to being
published in sets of books, as described next, most
federal and state laws and case decisions are available online.
Finding Statutory
and Administrative Law
When Congress passes laws, they are collected in a
publication titled United States Statutes at Large. When
state legislatures pass laws, they are collected in similar state publications. Most frequently, however, laws
are referred to in their codified form—that is, the
form in which they appear in the federal and state
codes. In these codes, laws are compiled by subject.
UNITED STATES CODE The United States Code (U.S.C.)
arranges all existing federal laws by broad subject.
Each of the fifty subjects is given a title and a title
number. For example, laws relating to commerce
and trade are collected in Title 15, “Commerce and
Trade.” Titles are subdivided by sections. A citation
to the U.S.C. includes both title and section numbers. Thus, a reference to “15 U.S.C. Section 1”
means that the statute can be found in Section 1 of
Title 15. (“Section” may be designated by the symbol §, and “Sections,” by §§.) In addition to the print
publication of the U.S.C., the federal government
provides a searchable online database of the United
States Code at www.gpoaccess.gov/uscode.
Commercial publications of federal laws and regulations are also available. For example, West Group
publishes the United States Code Annotated (U.S.C.A.).
The U.S.C.A. contains the official text of the U.S.C.,
plus notes (annotations) on court decisions that
interpret and apply specific sections of the statutes.
The U.S.C.A. also includes additional research aids,
such as cross-references to related statutes, historical notes, and library references. A citation to the
U.S.C.A. is similar to a citation to the U.S.C.: “15
U.S.C.A. Section 1.”
STATE CODES State codes follow the U.S.C. pattern of
arranging law by subject. They may be called codes,
revisions, compilations, consolidations, general statutes, or statutes, depending on the preferences of
the states. In some codes, subjects are designated by
number. In others, they are designated by name. For
example, “13 Pennsylvania Consolidated Statutes
Section 1101” means that the statute can be found
in Title 13, Section 1101, of the Pennsylvania code.
“California Commercial Code Section 1101” means
that the statute can be found under the subject
heading “Commercial Code” of the California code
in Section 1101. Abbreviations are often used. For
example, “13 Pennsylvania Consolidated Statutes
Section 1101” is abbreviated “13 Pa. C.S. § 1101,”
and “California Commercial Code Section 1101” is
abbreviated “Cal. Com. Code § 1101.”
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16
UNIT ONE
TH E FOU N DATIONS
ADMINISTRATIVE RULES Rules and regulations
adopted by federal administrative agencies are initially published in the Federal Register, a daily publication of the U.S. government. Later, they are
incorporated into the Code of Federal Regulations
(C.F.R.). Like the U.S.C., the C.F.R. is divided into
fifty titles. Rules within each title are assigned section numbers. A full citation to the C.F.R. includes
title and section numbers. For example, a reference
to “17 C.F.R. Section 230.504” means that the rule
can be found in Section 230.504 of Title 17.
Finding Case Law
Before discussing the case reporting system, we need
to look briefly at the court system (which will be discussed in detail in Chapter 2). There are two types of
courts in the United States, federal courts and state
courts. Both the federal and the state court systems
consist of several levels, or tiers, of courts. Trial courts,
in which evidence is presented and testimony given,
are on the bottom tier (which also includes lower
courts that handle specialized issues). Decisions
from a trial court can be appealed to a higher court,
which commonly is an intermediate court of appeals,
or an appellate court. Decisions from these intermediate courts of appeals may be appealed to an even
higher court, such as a state supreme court or the
United States Supreme Court.
STATE COURT DECISIONS Most state trial court decisions are not published in books (except in New York
and a few other states, which publish selected trial
court opinions). Decisions from state trial courts are
typically filed in the office of the clerk of the court,
where the decisions are available for public inspection. Written decisions of the appellate, or reviewing, courts, however, are published and distributed
(both in print and via the Internet). As you will note,
most of the state court cases presented in this book
are from state appellate courts. The reported appellate decisions are published in volumes called reports
or reporters, which are numbered consecutively.
State appellate court decisions are found in the state
reporters of that particular state. Official reports are
published by the state, whereas unofficial reports are
privately published.
Regional Reporters. State court opinions appear
in regional units of the National Reporter System,
published by West Group. Most lawyers and libraries have the West reporters because they report cases
more quickly and are distributed more widely than
the state-published reporters. In fact, many states
have eliminated their own reporters in favor of West’s
National Reporter System. The National Reporter
System divides the states into the following geographic areas: Atlantic (A. or A.2d), North Eastern (N.E.
or N.E.2d), North Western (N.W. or N.W.2d), Pacific (P.,
P.2d, or P.3d), South Eastern (S.E. or S.E.2d), South Western
(S.W., S.W.2d, or S.W.3d), and Southern (So., So.2d, or
So.3d). (The 2d and 3d in the preceding abbreviations
refer to Second Series and Third Series, respectively.) The
states included in each of these regional divisions are
indicated on the facing page in Exhibit 1–4, which
illustrates West’s National Reporter System.
Case Citations. After appellate decisions have
been published, they are normally referred to (cited)
by the name of the case; the volume, name, and
page number of the state’s official reporter (if different from West’s National Reporter System); the
volume, name, and page number of the National
Reporter; and the volume, name, and page number of any other selected reporter. (Citing a reporter
by volume number, name, and page number, in
that order, is common to all citations; often, as in
this book, the year the decision was issued will be
included in parentheses, just after the citations to
reporters.) When more than one reporter is cited
for the same case, each reference is called a parallel
citation.
Note that some states have adopted a “public
domain citation system” that uses a somewhat
different format for the citation. For example,
in Wisconsin, a Wisconsin Supreme Court decision might be designated “2010 WI 40,” meaning
that the case was decided in the year 2010 by the
Wisconsin Supreme Court and was the fortieth decision issued by that court during that year. Parallel
citations to the Wisconsin Reports and West’s North
Western Reporter are still included after the public
domain citation.
Consider the following case citation: State v.
Favoccia, 119 Conn.App. 1, 986 A.2d 1081 (2010).
We see that the opinion in this case can be found
in Volume 119 of the official Connecticut Appellate
Reports, on page 1. The parallel citation is to Volume
986 of the Atlantic Reporter, Second Series, page 1,081.
In presenting appellate opinions in this text (starting in Chapter 2), in addition to the reporter, we
give the name of the court hearing the case and
the year of the court’s decision. Sample citations to
state court decisions are explained in Exhibit 1–5 on
pages 18–20.
FEDERAL COURT DECISIONS Federal district (trial)
court decisions are published unofficially in West’s
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Business and Its Legal Environment
E X H I B I T 1–4 • West’s National Reporter System—Regional/Federal
Coverage
Beginning
1885
Regional Reporters
Atlantic Reporter (A. or A.2d)
North Eastern Reporter (N.E. or N.E.2d)
North Western Reporter (N.W. or N.W.2d)
1885
1879
Pacific Reporter (P., P.2d, or P.3d)
1883
South Eastern Reporter (S.E. or S.E.2d)
South Western Reporter (S.W., S.W.2d, or
S.W.3d)
Southern Reporter (So., So.2d, or So.3d)
1887
1886
Coverage
Connecticut, Delaware, District of Columbia, Maine, Maryland,
New Hampshire, New Jersey, Pennsylvania, Rhode Island, and Vermont.
Illinois, Indiana, Massachusetts, New York, and Ohio.
Iowa, Michigan, Minnesota, Nebraska, North Dakota, South Dakota, and
Wisconsin.
Alaska, Arizona, California, Colorado, Hawaii, Idaho, Kansas, Montana,
Nevada, New Mexico, Oklahoma, Oregon, Utah, Washington, and Wyoming.
Georgia, North Carolina, South Carolina, Virginia, and West Virginia.
Arkansas, Kentucky, Missouri, Tennessee, and Texas.
1887
Alabama, Florida, Louisiana, and Mississippi.
Federal Reporters
Federal Reporter (F., F.2d, or F.3d)
1880
Federal Supplement (F.Supp. or F.Supp.2d)
1932
Federal Rules Decisions (F.R.D.)
1939
Supreme Court Reporter (S.Ct.)
Bankruptcy Reporter (Bankr.)
1882
1980
Military Justice Reporter (M.J.)
1978
U.S. Circuit Courts from 1880 to 1912; U.S. Commerce Court from 1911 to
1913; U.S. District Courts from 1880 to 1932; U.S. Court of Claims (now called
U.S. Court of Federal Claims) from 1929 to 1932 and since 1960; U.S. Courts
of Appeals since 1891; U.S. Court of Customs and Patent Appeals since 1929;
U.S. Emergency Court of Appeals since 1943.
U.S. Court of Claims from 1932 to 1960; U.S. District Courts since 1932;
U.S. Customs Court since 1956.
U.S. District Courts involving the Federal Rules of Civil Procedure since 1939
and Federal Rules of Criminal Procedure since 1946.
United States Supreme Court since the October term of 1882.
Bankruptcy decisions of U.S. Bankruptcy Courts, U.S. District Courts, U.S.
Courts of Appeals, and the United States Supreme Court.
U.S. Court of Military Appeals and Courts of Military Review for the Army,
Navy, Air Force, and Coast Guard.
NATIONAL REPORTER SYSTEM MAP
WASH.
MONTANA
VT.
N. DAK.
ME.
MINN.
OREGON
IDAHO
WIS.
S. DAK.
WYOMING
NEBR.
NEVADA
IOWA
PA.
ILL.
UTAH
CALIF.
N.Y.
MICH.
IND.
COLORADO
OHIO
W.VA.
KANSAS
MO.
N.H.
MASS.
R.I.
CONN.
N.J.
DEL.
MD.
VA.
KY.
N. CAR.
ARIZONA
N. MEXICO
OKLA.
TENN.
ARK.
S. CAR.
MISS. ALA.
GA.
TEXAS
LA.
FLA.
ALASKA
Pacific
North Western
South Western
North Eastern
Atlantic
South Eastern
Southern
HAWAII
Federal Supplement (F.Supp. or F.Supp.2d), and opinions from the circuit courts of appeals (reviewing
courts) are reported unofficially in West’s Federal
Reporter (F., F.2d, or F.3d). Cases concerning federal
bankruptcy law are published unofficially in West’s
Bankruptcy Reporter (Bankr. or B.R.).
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
18
UNIT ONE
TH E FOU N DATIONS
E X H I B I T 1–5 • How to Read Citations
STATE COURTS
279 Neb. 443, 778 N.W.2d 115 (2010)a
N.W. is the abbreviation for West’s publication of state court decisions
rendered in the North Western Reporter of the National Reporter System.
2d indicates that this case was included in the Second Series of that
reporter. The number 778 refers to the volume number of the reporter;
the number 115 refers to the page in that volume on which this case begins.
Neb. is an abbreviation for Nebraska Reports, Nebraska’s official reports of the
decisions of its highest court, the Nebraska Supreme Court.
181 Cal.App.4th 161, 104 Cal.Rptr.3d 319 (2010)
Cal.Rptr. is the abbreviation for West’s unofficial reports—titled California Reporter—
of the decisions of California courts.
14 N.Y.3d 100, 896 N.Y.S.2d 741 (2010)
N.Y.S. is the abbreviation for West’s unofficial reports—titled New York
Supplement—of the decisions of New York courts.
N.Y. is the abbreviation for New York Reports, New York’s official reports of the decisions
of its court of appeals. The New York Court of Appeals is the state’s highest court,
analogous to other states’ supreme courts. (In New York, a supreme court is a trial court.)
302 Ga.App. 280, 690 S.E.2d 225 (2010)
Ga.App. is the abbreviation for Georgia Appeals Reports, Georgia’s official reports
of the decisions of its court of appeals.
FEDERAL COURTS
___ U.S. ___, 130 S.Ct. 693, ___ L.Ed.2d ___ (2010)
L.Ed. is an abbreviation for Lawyers’ Edition of the Supreme
Court Reports, an unofficial edition of decisions of the
United States Supreme Court.
S.Ct. is the abbreviation for West’s unofficial reports—titled Supreme
Court Reporter—of decisions of the United States Supreme Court.
U.S. is the abbreviation for United States Reports, the official edition of the
decisions of the United States Supreme Court. The blank lines in this citation
(or any other citation) indicate that the appropriate volume of the case reporter has
not yet been published and no page number is available.
a. The case names have been deleted from these citations to emphasize the publications. It should be kept in mind, however, that the name of a case
is as important as the specific page numbers in the volumes in which it is found. If a citation is incorrect, the correct citation may be found in a
publication’s index of case names. In addition to providing a check on errors in citations, the date of a case is important because the value of a recent
case as an authority is likely to be greater than that of older cases from the same court.
The official edition of the United States Supreme
Court decisions is the United States Reports (U.S.),
which is published by the federal government.
Unofficial editions of Supreme Court cases include
West’s Supreme Court Reporter (S.Ct.) and the Lawyers’
Edition of the Supreme Court Reports (L.Ed. or L.Ed.2d).
Sample citations for federal court decisions are also
listed and explained in Exhibit 1–5.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
C HAPTE R 1
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Business and Its Legal Environment
E X H I B I T 1–5 • How to Read Citations, Continued
FEDERAL COURTS (Continued)
590 F.3d 259 (4th Cir. 2010)
4th Cir. is an abbreviation denoting that this case was decided in the
U.S. Court of Appeals for the Fourth Circuit.
683 F.Supp.2d 918 (W.D.Wis. 2010)
W.D.Wis. is an abbreviation indicating that the U.S. District Court
for the Western District of Wisconsin decided this case.
ENGLISH COURTS
9 Exch. 341, 156 Eng.Rep. 145 (1854)
Eng.Rep. is an abbreviation for English Reports, Full Reprint, a
series of reports containing selected decisions made in English
courts between 1378 and 1865.
Exch. is an abbreviation for English Exchequer Reports, which includes the
original reports of cases decided in England’s Court of Exchequer.
STATUTORY AND OTHER CITATIONS
18 U.S.C. Section 1961(1)(A)
U.S.C. denotes United States Code, the codification of United States
Statutes at Large. The number 18 refers to the statute’s U.S.C. title number
and 1961 to its section number within that title. The number 1 in parentheses
refers to a subsection within the section, and the letter A in parentheses
to a subsection within the subsection.
UCC 2–206(1)(b)
UCC is an abbreviation for Uniform Commercial Code. The first number 2 is
a reference to an article of the UCC, and 206 to a section within that article.
The number 1 in parentheses refers to a subsection within the section, and
the letter b in parentheses to a subsection within the subsection.
Restatement (Third) of Torts, Section 6
Restatement (Third) of Torts refers to the third edition of the American
Law Institute’s Restatement of the Law of Torts. The number 6 refers to a
specific section.
17 C.F.R. Section 230.505
C.F.R. is an abbreviation for Code of Federal Regulations, a compilation of
federal administrative regulations. The number 17 designates the regulation’s
title number, and 230.505 designates a specific section within that title.
Continued
UNPUBLISHED OPINIONS Many court opinions
that are not yet published or that are not intended
for publication can be accessed through Westlaw®
(abbreviated in citations as “WL”), an online legal
database maintained by West Group. When no citation to a published reporter is available for cases cited
in this text, we give the WL citation (see Exhibit 1–5
on the next page for an example).
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
20
UNIT ONE
TH E FOU N DATIONS
E X H I B I T 1–5 • How to Read Citations, Continued
WESTLAW® CITATIONSb
2010 WL 348005
WL is an abbreviation for Westlaw. The number 2010 is the year of the document that can be found with this citation in the
Westlaw database. The number 348005 is a number assigned to a specific document. A higher number indicates that a document
was added to the Westlaw database later in the year.
UNIFORM RESOURCE LOCATORS (URLs)
http://www.westlaw.comc
The suffix com is the top level domain (TLD) for this Web site. The TLD com is an abbreviation for “commercial,”
which usually means that a for-profit entity hosts (maintains or supports) this Web site.
westlaw is the host name—the part of the domain name selected by the organization that registered the name. In this
case, West registered the name. This Internet site is the Westlaw database on the Web.
www is an abbreviation for “World Wide Web.” The Web is a system of Internet servers that support documents formatted in
HTML (hypertext markup language) and other formats as well.
http://www.uscourts.gov
This is “The Federal Judiciary Home Page.” The host is the Administrative Office of the U.S. Courts. The TLD gov is an
abbreviation for “government.” This Web site includes information and links from, and about, the federal courts.
http://www.law.cornell.edu/index.html
This part of a URL points to a Web page or file at a specific location within the host’s domain. This page
is a menu with links to documents within the domain and to other Internet resources.
This is the host name for a Web site that contains the Internet publications of the Legal Information Institute (LII), which is
a part of Cornell Law School. The LII site includes a variety of legal materials and links to other legal resources on the Internet.
The TLD edu is an abbreviation for “educational institution” (a school or a university).
http://www.ipl2.org/div/news
This part of the URL points to a static news page at this Web site, which provides links to online
newspapers from around the world.
div is an abbreviation for “division,” which is the way that ipl2 tags the content on its Web site as relating to
a specific topic.
The site ipl2 was formed from the merger of the Internet Public Library and the Librarians’ Internet Index. It is an online service
that provides reference resources and links to other information services on the Web. The site is supported chiefly by the
iSchool at Drexel College of Information Science and Technology. The TLD org is an abbreviation for “organization”
(normally nonprofit).
b. Many court decisions that are not yet published or that are not intended for publication can be accessed through Westlaw, an online legal database.
c. The basic form for a URL is “service://hostname/path.” The Internet service for all of the URLs in this text is http (hypertext transfer protocol). Because most Web
browsers add this prefix automatically when a user enters a host name or a hostname/path, we have generally omitted the http:// from the URLs listed in this text.
OLD CASE LAW On a few occasions, this text cites
opinions from old, classic cases dating to the nineteenth century or earlier; some of these are from the
English courts. The citations to these cases may not
conform to the descriptions given above because the
reporters in which they were originally published
were often known by the names of the persons who
compiled the reporters.
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C HAPTE R 1
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Business and Its Legal Environment
SECTION 7
HOW TO READ AND
UNDERSTAND CASE LAW
The decisions made by the courts establish the
boundaries of the law as it applies to almost all business relationships. It thus is essential that businesspersons know how to read and understand case law.
The cases that we present in this text have been condensed from the full text of the courts’ opinions and
are presented in a special format. In approximately
two-thirds of the cases, we have summarized the
background and facts, as well as the court’s decision
and remedy, in our own words and have included
only selected portions of the court’s opinion (“in
the language of the court”). In the remaining onethird of the cases, we have provided a longer excerpt
from the court’s opinion without summarizing the
background and facts or decision and remedy. The
following sections will provide useful insights into
how to read and understand case law.
Case Titles and Terminology
The title of a case, such as Adams v. Jones, indicates
the names of the parties to the lawsuit. The v. in the
case title stands for versus, which means “against.”
In the trial court, Adams was the plaintiff—the person who filed the suit. Jones was the defendant. If
the case is appealed, however, the appellate court
will sometimes place the name of the party appealing the decision first, so the case may be called Jones
v. Adams if Jones is appealing. Because some appellate courts retain the trial court order of names, it
is often impossible to distinguish the plaintiff from
the defendant in the title of a reported appellate
court decision. You must carefully read the facts
of each case to identify the parties. Otherwise, the
discussion by the appellate court may be difficult to
understand.
The following terms, phrases, and abbreviations
are frequently encountered in court opinions and
legal publications. Because it is important to understand what is meant by these terms, phrases, and
abbreviations, we define and discuss them here.
PARTIES TO LAWSUITS As mentioned previously, the
party initiating a lawsuit is referred to as the plaintiff
or petitioner, depending on the nature of the action,
and the party against whom a lawsuit is brought
is the defendant or respondent. Lawsuits frequently
involve more than one plaintiff and/or defendant.
When a case is appealed from the original court or
jurisdiction to another court or jurisdiction, the
party appealing the case is called the appellant.
The appellee is the party against whom the appeal
is taken. (In some appellate courts, the party appealing a case is referred to as the petitioner, and the
party against whom the suit is brought or appealed
is called the respondent.)
JUDGES AND JUSTICES The terms judge and justice
are usually synonymous and represent two designations given to judges in various courts. All members
of the United States Supreme Court, for example, are
referred to as justices, and justice is the formal title
often given to judges of appellate courts, although
this is not always the case. In New York, a justice is a
judge of the trial court (which is called the Supreme
Court), and a member of the Court of Appeals (the
state’s highest court) is called a judge. The term
justice is commonly abbreviated to J., and justices, to
JJ. A United States Supreme Court case might refer
to Justice Sotomayor as Sotomayor, J., or to Chief
Justice Roberts as Roberts, C.J.
DECISIONS AND OPINIONS Most decisions reached
by reviewing, or appellate, courts are explained in
written opinions. The opinion contains the court’s
reasons for its decision, the rules of law that apply,
and the judgment. When all judges or justices unanimously agree on an opinion, the opinion is written
for the entire court and can be deemed a unanimous
opinion. When there is not a unanimous agreement,
a majority opinion is written; the majority opinion
outlines the view supported by the majority of the
judges or justices deciding the case.
Often, a judge or justice who wishes to make or
emphasize a point that was not made or emphasized
in the unanimous or majority opinion will write a
concurring opinion. This means that the judge or justice
agrees, or concurs, with the majority’s decision, but
for different reasons. When there is not a unanimous
opinion, a dissenting opinion presents the views of one
or more judges who disagree with the majority’s decision. The dissenting opinion is important because
it may form the basis of the arguments used years
later in overruling the precedential majority opinion.
Occasionally, a court issues a per curiam (Latin for “by
the whole court”) opinion, which does not indicate
the judge or justice who authored the opinion.
A Sample Court Case
To illustrate the various elements contained in
a court opinion, we present an annotated court
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
22
UNIT ONE
TH E FOU N DATIONS
opinion in Exhibit 1–6 on pages 23–25. The opinion
is from an actual case decided by the U.S. Court of
Appeals for the Seventh Circuit in 2010.
BACKGROUND OF THE CASE Kevin T. Singer, an
inmate at a Wisconsin correctional facility, was a
devoted player of Dungeons and Dragons (D&D),
a popular fantasy role-playing game. While incarcerated, Singer was able to order and possess D&D
materials for two years. In November 2004, however,
the prison’s gang expert received an anonymous letter stating that Singer and three other inmates were
trying to recruit others to join a “gang” dedicated to
playing D&D. Prison officials immediately searched
Singer’s cell, confiscated all of his D&D materials,
and prohibited him and other inmates from playing D&D. Singer filed a lawsuit in federal district
court against the Wisconsin prison, alleging that
these actions violated his free speech and due process rights. The district court found in favor of the
prison when it concluded that the D&D ban was
rationally related to a legitimate government interest. Singer appealed to the U.S. Court of Appeals for
the Seventh Circuit.
EDITORIAL PRACTICE You will note that triple asterisks (* * *) and quadruple asterisks (* * * *) frequently
appear in the opinion. The triple asterisks indicate
that we have deleted a few words or sentences from
the opinion for the sake of readability or brevity.
Quadruple asterisks mean that an entire paragraph
(or more) has been omitted. Additionally, when the
opinion cites another case or legal source, the citation to the case or other source has been omitted to
save space and to improve the flow of the text. These
editorial practices are continued in the other court
opinions presented in this book. In addition, whenever we present a court opinion that includes a term
or phrase that may not be readily understandable, a
bracketed definition or paraphrase has been added.
BRIEFING CASES Knowing how to read and understand court opinions and the legal reasoning used by
the courts is an essential step in undertaking accurate legal research. A further step is “briefing,” or
summarizing, the case. Legal researchers routinely
brief cases by reducing the texts of the opinions to
their essential elements. Generally, when you brief
a case, you first summarize the background and
facts of the case, as we have done for the cases presented within this text. You then indicate the issue
(or issues) before the court. An important element
in the case brief is, of course, the court’s decision on
the issue and the legal reasoning used by the court
in reaching that decision. Detailed instructions on
how to brief a case are given in Appendix A, which
also includes a briefed version of the sample court
case presented in Exhibit 1–6.
THE SAMPLE COURT CASE STARTS ON THE FACING PAGE.
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C HAPTE R 1
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Business and Its Legal Environment
E X H I B I T 1–6 • A Sample Court Case
This section contains the citation—the
name of the case, the name of the court
that heard the case, the year of the decision, and reporters in which the court’s
opinion can be found.
SINGER v. RAEMISCH
United States Court of Appeals,
Seventh Circuit,
593 F.3d 529 (2010).
This line provides the name of the justice (or
judge) who authored the court’s opinion.
TINDER, Circuit Judge.
* * * *
The court divides the opinion into three
sections, each headed by a Roman numeral
and an explanatory heading. The first section summarizes the factual background of
the case.
I. Background
Kevin T. Singer is an inmate at Wisconsin’s Waupun
Correctional Institution. He is also a devoted player of D&D
[Dungeons and Dragons], a fantasy role-playing game in which
players collectively develop a story around characters whose
personae they adopt.
* * * Singer was able to order and possess his D&D
materials without incident from June 2002 until November
2004. This all changed on or about November 14, 2004,
when Waupun’s long-serving Disruptive Group Coordinator,
Captain Bruce Muraski, received an anonymous letter from
an inmate. The letter expressed concern that Singer and three
other inmates were forming a D&D gang and were trying to
recruit others to join by passing around their D&D publications and touting the “rush” they got from playing the game.
Muraski, Waupun’s expert on gang activity, decided to heed
the letter’s advice and “check into this gang before it gets out
of hand.”
On November 15, 2004, Muraski ordered Waupun staff to
search the cells of the inmates named in the letter. The search
of Singer’s cell turned up twenty-one books, fourteen magazines, and Singer’s handwritten D&D manuscript, all of which
were confiscated. * * * In a December 6, 2004, letter to Singer,
Muraski informed Singer that “inmates are not allowed to
engage in or possess written material that details rules, codes,
dogma of games/activities such as ‘Dungeons and Dragons’
because it promotes fantasy role playing, competitive hostility,
violence, addictive escape behaviors, and possible gambling.”
Continued
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
24
UNIT ONE
TH E FOU N DATIONS
E X H I B I T 1–6 • A Sample Court Case, Continued
To lodge a complaint is to file the appropriate legal documents with the clerk of a
court to initiate a lawsuit.
The First Amendment to the U.S.
Constitution guarantees the right of free
speech—to express one’s views without
governmental restrictions. The Fifth and
Fourteenth Amendments guarantee the
right to due process—to enjoy life, liberty,
and property without unfair government
interference.
An afÀdavit is a written or printed voluntary
statement of fact, confirmed by the oath or
affirmation of the party making it and made
before a person having the authority to
administer the oath or affirmation.
* * * *
* * * Singer lodged a * * * complaint in federal court
* * * . He alleged that his free speech and due process rights
were violated when Waupun officials confiscated his D&D
materials and enacted a categorical ban against D&D. * * *
Singer collected fifteen affidavits—from other inmates,
his brother, and three role-playing game experts. He contends
that the affidavits demonstrate that there is no connection
between D&D and gang activity. * * * The prison officials
countered Singer’s affidavit evidence by submitting an affidavit
from Captain Bruce Muraski * * * . Muraski testified * * *
that fantasy role-playing games like D&D have “been found
to promote competitive hostility, violence, and addictive
escape behavior, which can compromise not only the inmate’s
rehabilitation and effects of positive programming, but endanger the public and jeopardize the safety and security of the
A summary judgment is a judgment that a
court enters without continuing a trial. This
judgment can be entered only if no facts are
in dispute and the only question is how the
law applies to the facts.
institution.”
The prison officials moved for summary judgment on
all of Singer’s claims. The district court granted the motion in
full, but Singer limits his appeal to the foreclosure of his First
Amendment claims.
The second major section of the opinion
responds to the plaintiff’s appeal.
II. Discussion
* * * *
The court applies the principle established
by the Turner case—which the United
States Supreme Court decided—to the
facts of the Singer case. The rulings in
cases decided by higher courts are binding
on the decisions of lower courts, according to the doctrine of stare decisis (see
page 9).
In [Turner v. Safley], the [United States] Supreme Court
determined that prison regulations that restrict inmates’ constitutional rights are nevertheless valid if they are reasonably
related to legitimate penological interests.
* * * *
[Singer] a...