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by: Dallin Olson


Dallin Olson
Texas A&M
GPA 3.85

Keith Swim

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Keith Swim
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This 15 page Class Notes was uploaded by Dallin Olson on Wednesday October 21, 2015. The Class Notes belongs to MGMT 209 at Texas A&M University taught by Keith Swim in Fall. Since its upload, it has received 18 views. For similar materials see /class/226220/mgmt-209-texas-a-m-university in Business, management at Texas A&M University.

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Date Created: 10/21/15
CHAPTER 11 CORPORATE GOVERNANCE A THE GROWTH OF THE CORPORATE FORM OF BUSN the 1St major corps were trading co s established by the larger European colonial powers to exploit the wealth of faraway lands They were difficult to form amp were limited by laws The 2 most important factors motivating the growth of the corporate form of organization were the invention of the steam engine amp the application of its technology to the railroad Until the railroad high transportation costs limited the size of market that a factory could serve limiting factory size B THE CORPORATE ENTITY in the US each corp is organized under the general incorporation law of a state which grants the organization a charter once it has compiled w simple filing procedures amp paid required fees The law of the chartering state governs the internal relations of the rm regardless of which state the firm operates in or the physical location of its headquarters C RIGHTS OF SHAREHOLDERS most important are the right to vote in election of directors as well as on certain corporate decisions amp the right to file derivative lawsuits against the management of the corporation on behalf of the corp 1 Shareholder Voting amp Proxy Regulation the right to vote is inherent in common stock ownership shareholders elect the board of directors amp vote on fundamental corporate changes sa mergers amp amendments of the Articles of incorporation shareholder meetings which happen onceyr Shareholders who can39t attend meeting can vote by proxy written authorization by the shareholder designating an agent to vote on their behalf a Proxy Solicitation the principal method of voting corporate shares in the US Securities Exchange Act of 1934 regulates the manner in which proxies are solicited this act the SEC Securities amp Exchange Commission regulations require the disclosure of specified info in the form of a proxy statement containing info about nominees for the board amp identify the interests of the party when a contested matter is being put to a shareholder vote whenever proxies are being solicited Proxy Contests a means for outsiders individuals not connected w the incumbent mgmt team to take control of the corp by convincing shareholders to vote for their slate of directors The SEC requires that the incumbents wither mail the insurgents proxy solicitation for them or provide the insurgents w the shareholder mailing list Insurgents are held to the same standards of truthfulness in their proxy statements as those of managers It is unlawful for anyone to submit a proxy statement that contains falsemisleading material fact b Shareholder Proposals shareholders have the right to make proposals meetings amp have the proposals included in the proxy materials so all shareholders can vote on them 2 Derivative Actions permits the corporation to recover damages if liability can be established happens when the corporation chooses not to bring suit against someone who has injured it shareholders must 1st make a formal demand upon the directors that the corp pursue remedies available to it if they refuse their resons become matter of record amp the shareholders can pursue derivative action Some states require that a majority vote of all outstanding voting shares 1st be obtained Some states require that a filing shareholder 1st post a security forexpenses bond which can be used to pay the legal expenses of the defendants if they should prevail in the suit D CORPORATE GOVERNANCE involves formulating overseeing amp monitoring the processes by which a corporation is governed in order to shape its strategic direction amp performance define its mission amp scope amp assess its interactions w affected groups formulating amp implementing the rights responsibilities amp accountability of 3 distinct groups win the corp stockholders board of directors amp managers officersexecutive officers Inside Directors Corporate officers who also serve on the board of directors in order to allow the board to benefit from their intimate knowledge of the corporation s busn Outside Directors Directors who are not execs of the corp 1 The PrincipalAgent Problem when the agent acts in his own best interest rather than the principal s by agreeing to the principal agent relationship the agent assumes a duciary responsibility the duty to act loyally amp in the best interests of the principal in carrying out the tasks assigned by the principal Separation of Ownership amp Control structure created by the fact that some companies are owned by hundreds of thousands of shareholders No one shareholder finds it in hisher selfinterest to monitor actively the performance of the company To keep the board of directors from doing as they please policies to encourage officers amp board members to act as faithful agents becomes very important The company has ways to eliminatereduce the salesperson s tendency to act in his best interest instead of the firm s o The firm may directly monitor the agent s behavior 0 the firm may impose control systems to audit the agent after the fact 0 the firm may develop a system of rewards amp punishments 2 o the firm may utilize legal remedies amp sue the salesperson for damages Shareholders Principals Board of Directors agents Board of Directors principals Officers agents Conflicting Interests of Shareholders Board Members amp Executive Officers Shareholders want to increase the value of the company amp the price of the company s stock Executive Officers want to maximize the financial compensation that they receive their quality of life amp their status Board Members are well compensated amp don t do a lot of work so their interest is usually to stay on the board which may mean to say no to a merger or sale of the company Sometimes the corporations rely on the CEO to suggest names of potential new board members which may make the board members feel like they can t vote against the CEO should a crisis arise E PRIVATE SOLUTIONS TO THE CORPORATE GOVERNANCE PROBLEM 1 2 Alignment of Financial Interests compensating the board members amp officers w stock instead of a salary Outside Directors to increase the power of the Outside Directors over the Inside Directors bc when officers and board members are connected sa being the same person there can be a principalagent problem 0 Separate the role of Board Chairperson amp the company s CEO the role of the board is to oversee the decisions amp policies adopted by the firm s exec officers 0 Increase the number of outside directors on the board relative to the number of inside directors Inside directors can be valuable for their knowledge of the firm but their con ict of interest sucks 0 Increase the independence amp power of the board reducing the power of the CEO in the selection of new board members Appointing business execs from other industries w no existing ties to the firm or to the CEO often brings new insights amp fresh ideas to the firm Institutional Investors amp Corporate Democracy Institutional Investor a large professionally managed provider of capital sa a pension fund insurance co or mutual fund they own 60 of the typical company listed on the NY Stock Exchange CalPERS CA Public Employees Retirement System is one of the primary leaders in the stockholders rights movement It s main goals are 0 Outside directors should constitute a majority of the board of directors 0 The chairperson of the board should be an outside director 0 The audit committee should be composed only of outside directors Typically the Corporate officials negotiate w CalPERS amp promise to adopt governance reforms if CalPERS wdraws its request for a formal vote by the shareholders bc the corp officers don t like the publicity of these shareholder votes Product Market Competition provides constraints on the CEO s ability to act in his own interest rather than the shareholders The Market for Executive Talent can induce the CEO to act as a faithful agent in fear of replacement The Market for Corporate Control a low stock price might attract the attention of other potential teams of managers who believe if they rean the corp they could do a better job Target Company the corporation in question Acquiring Company the company who wishes to take over the target company Tender Offer the AC says that if it were in control it could raise the TC s value to Xshare amp offers to buy up TC s stock at above market price essentially the AC asks the TC s shareholders to tender their shares for purchase Friendly Offer if the board concurs w the tender offer amp endorses it amp recommends its acceptance by the shareholders Unfriendly Offer when the board rejects it sometimes the board rejects the initial offer but says it ll take a higher offer 39 F PUBLIC SOLUTIONS TO THE CORPORATE GOVERNANCE PROBLEM 1 Legal Duties of Directors amp Officers the law of fiduciary duties defined thru common law decisions specifies standards of care amp loyalty a Duty of Care Directors amp Officers assume a duty of due care amp diligence interpreted to mean that they must act in good faith amp exercise a level of care that an ordinary prudent person would exercise in similar circumstances The judicial system has developed the business judgment rule to assess conflicts bw shareholders amp directorsmanagers when the shareholders disagree w a corporate decision The rule states that corporate officers amp directors are held harmless for any decisions they make in good faith after prudently exercising due care amp diligence even if those decisions later prove to have been in error In such a case Managers must prove o The action take was an informed decision There were no conflicts of interest bw the decision maker amp the corporation 0 There was a rational basis for the decision Schlensky V Wrigley Illinois39Appellate Court 1968 a minority shareholder in the Chicago Cubs sought damages amp an order that the defendant cause the installation of lights in Wrigley Field amp the scheduling of night baseball games The substance of the complaint was bc doing this would generate greater profits amp not doing it was mismanagement amp a waste of corporate assets The trial court dismissed for failure to state a claim The court applied the Business Judgment Rule to the decision by the board not to install lights at the ballpark Sullivan Justice The effect on the surrounding neighborhood might well be considered by a director who was considering the patrons who wouldwould not attend the games if the park were in a dangerous neighborhood The decision of the directors is one properly before directors amp the motives alleged in the amended complaint showed no fraud illegality or conflict of interest in their decision making The court did not agree w the plaintist contention that failure to follow the example to other major league clubs in scheduling night games constituted negligence Case Questions 0 What is the rational basis for not installing lights Wrigley Field One of the plaintist principal contentions is that bc all other major league teams play night baseball it must make wise business sense How does the court respond to this contention Lights have since been installed Wrigley Field As part of its broadcast contract w TV MLB was required to have lights on all the fields If any team made the playoffs or the World Series this would permit the games to be televised night Why could MLB do what a shareholder owner could not do There are at least 2 major policy reasons for the Business Judgment Rule Holding directors personally liable in situations where hindsight reveals that they made a mistake would make it difficult to attract top quality individual sot serve on boards of directors Second wo a business judgment rule those who agreed to serve might be unwilling to approve any venture even one that appeared to be in the best interests of the corp bc they would be worried about being held personally liable if even the surest gamble failed b Duty of Loyalty in contrast to duty of care courts are much less tolerant of deviations from the fiduciary duty of loyalty Guth VLoft Inc the rule that requires an undivided amp unselfish loyalty to the corp demands that there shall be no conflict bw duty amp selfinterest Corporate Opportunity Doctrine represents one form of fiduciary loyalty owed by the officers amp directors to the corporation It mandates that should an of cerdirector discover a business opportunity for himself he must 15t present it to the corp Under modern common law principles selfdealing transactions are not necessarily violations of the duty of loyalty Selfdealing cases involve 2 scenarios transactions bw a directorofficer of a corp amp the corp transactions bw corps w common directors The overall trend in decisions show o If the court feels the transaction to be fair to the corp it will be upheld o If the court feels that the transaction involves fraud undue overreaching or waste of corporate assets the transaction will be set aside o if the court feels that the transaction does not involve fraud overreaching or waste of corporate assets but is not convinced that the transaction is fair the transaction will be upheld only where the interested director can convincingly show that the transaction was approved ratified by a disinterested majority of the aboard wo participation by the interested director or by a majority of the shareholders after a full disclosure of all relevant facts Insider Trading profiting from trading in the company s stock based on info they have acquired as agents of the shareholders An insider is anyone who has access to confidential corporate info including employees officers directors amp outside experts sa lawyers accountants or investment bankers who may learn about such info in the course of their dealings w the info Directors amp officers face liability under the federal securities regulations should they utilize insider info to profit from stock transactions 2 Regulatory Controls Securities Act of 1933 regulates the initial sale of securities to the public requires that sellers of securities bonds common stock preferred stock etc to the public must file a registration statement w the SEC Security any contract transaction or scheme whereby a person invests his money in a common enterprise amp is led to expect profits solely from the efforts of a promoter or third party Should the registration statement contain a material misrepresentation an investor who suffers a loss may sue any underwriter corporate director or corporate officer who signed the document for statutory fraud Securities Exchange Act of 1934 focuses on regulating the sale of previously issued securities on 2ndary markets One portion of the act regulates the activities of stock exchanges Stockbrokers stock dealers amp other market professionals to ensure that they do not engage in fraudulent deceptive or unfair practices Know Thy Customer Rule brokers are required to ascertain whether particular investments are appropriate for a client before recommending it to him The 1934 act also deals w the securities themselves All securities traded on public exchanges must be registered w the SEC amp their issuers must file periodic reports to the SEC detailing their financial performance on a timely basis Companies are also required to disclose any material item as such events occur The goal is to ensure that investors are provided any amp all info that may be relevant to their decisions a Liability for ShortSwing Profits Inside Info refers to any info that is not yet publicly available The Securities Exchange Act prohibits corporate insiders from profiting on short term investments in their own company which is the general antifraud provision of the SEA is also aimed at the prohibition of insider trading Corporate insiders are all directors all officers and any shareholders that own 10 or more of the corporation s shares ShortSwing Profits a capital gain made by insiders buying amp selling the company stock win any 6 month period the gain must be returned to the company s treasury There are no defenses to this provision The corp is supposed to bring suit against any inside investor to recapture any short swing profits earned by them Shareholders may file a derivative action lawsuit for the recovery of profits in the event the corporation refuses to sue one of its officers Resigning from the board is not a way to avoid liability As long as the sale or purchase happens while the person is member of the board or a 10 stockholder there is liability However a purchase that makes an owner a 10 shareholder does not trigger the shortswing provision tender offer purchases b Insider Trading another form of selfdealing that is prohibited by federal statute The SEC expanded the ShortSwing Profits laws to include almost anyone who gains insider info except there is no 6 month term after which trades are legit trading on insider info is legal only after a reasonable time elapses after the info becomes public It shall be unlawful for any person directlyindirectly by any means 0 to employ any device scheme or artifice to defraud to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made in the light of the circumstances under which they were made not misleading or o to engage in any act practice or course of business which operates or would operate as a fraud or deceit upon any person in connection wl the purchase or sale of any security To decide whether a tip from an insider constitutes a breach of duty depends on the purpose of the disclosure The test is whether the insider personally will benefit directly or indirectly from his disclosure Absent a breach by the insider there is no derivative breach by the tipee Carpenter V US US SC 1987 Defendant Winans wrote articles for a Wall Street Journal investment advice column The column had an impact on the market prices of the securities it discussed Winans passed info before it was published to a stockbroker Carpenter They were convicted in fed district court of violations of the federal mail amp wire fraud statutes as well as SEC Rule 10b5 SC upheld Case Questions o If con dentiality had not been a policy of the Wall Street Journal would conviction under Section 10b have been justified Why o How was the Wall Street Journal injured by Carpenter s behavior Who else was injured c Reporting Requirements for Insiders the SEC requires that corporate officers directors amp large shareholders 10 or more must inform the SEC on a timely basis regarding any purchase or sale of stock made by them as well as the source of the funds made to purchase the stock amp the person s reason for purchasing the stock 3 The SEC s Role in the Market for Corporate Control SEC regulations are designed to ensure that investors are provided w necessary amp accurate info regarding the terms amp implications of any takeover Williams Act of 1968 compels any prospective purchaser of more than 5 of a public company s stock to file a tender offer w the SEC The prospective purchaser must also inform the target company amp its shareholders about the terms of the proposed purchase If the board is opposed it too must file statements before the SEC All takeover offers must be put on the table for at least 20 days amp shareholders who agreed to sell their shares have 7 days after the offer expires to wdraw their shares from sale If the acquiring company sweetens the deal shareholders who sold their shares to the co at a lower price have a chance to get the same offer The Impact of the SEC on US Competitiveness in World Markets The SEC plays a major role in the formulation of the GAAP that US firms must use in their accounting statements making it easier for outsiders to understand how the company is doing An increasing number of foreign companies are using GAAP so that US lenders will invest The Enron Debacle amp the SarbanesOxley Act of 2002 aka Public Company Accounting Reform amp Investor Protection Act of 2002 a seeks to strengthen corporate governance of publicly traded corps by imposing new requirements on auditors members of the company s boards amp corporate execs The audit committee of the company s board must oversee the hiring amp performance of its outside auditors not the company39s managers Only outside auditors can serve on the audit committee The CEO amp CFO must certify that certain financial statements issued by the corp fairly present in all material respects the operations amp financial condition of the corp b addressed perceived problems win the public accounting profession It created the Public Company Accounting Oversight Board that establishes amp enforces ethical amp auditing standards for auditors of public companies Accounting firms are forbidden to provide certain types of consulting services to firms which they are serving as auditors CHAPTER 10 BUSINESS ENTITIES Picking an appropriate form of business entity depends on several factors 1 Ease of operation set up costs amp difficulty of operation Desired length of existence of the business Personal Liability Taxation Ease of sale of business Ease of raising capital There are 3 major types of business entities and a new for that is becoming very popular LLC A B CORPORATION most popular for large businesses a separate legal entity amp is created by a state statute taxed H SOLE PROPRIETORSHIP no formalities assuming you have the legal right to open the business it s very difficult to get investors to invest PARTNERSHIP can still operate with no formalities but that39s not best separately easy to raise capital double taxation income the corporation makes is taxed and income it distributes gets taxed again limited liability owners liability is limited to the extent of their investment LIMITED PARTNERSHIP LP created by state statute amp requires a filing of documents to create the LP Certificate of Limited Partnership similar to the filing in a corporation w appropriate state official General Partners must have at least one unlimited liability Limited Partners only an investor prohibited in taking part in the management of the LP if he involves himself in the management of the company he becomes a General Partner amp has unlimited joint amp severable liability CLOSELY HELD CORPORATIONS aka family corporations close corporations privately held corporations still a corporation created under state corporate status but the shares are held by a small number of ppl that are personally known to each other or by one family not publicly traded operated as a soleproprietorship or partnership but uses corporate form to take advantage of limited liability 9Limitation on transferability of shares as stated in the Articles of Incorporation S CORPORATION closely held avoid double taxation as well as some other tax benefits of the normal corps amp allow shareholders to have limited liability The following must be present 1 The corporation must be a domestic American corporation 2 The corporation must not be a corporation that is affiliated w a group of corporations can not be wholly owned b y another corp that is owned by another corp etc 3 The Shareholders can only be individuals w certain very limited exceptions like estates or some trusts 4 The corp can have no more than 100 shareholders 5 There can only be one class of shareholders 6 Shareholders must not be non resident aliens PROFESSIONAL CORPORATION PC normally available to professionals like attorneys doctors dentists amp accountants limited liability professionals are not allowed to avoid liability for malpractice of the other professionals in their prof organization but the shareholders can be insulated from torts of their partners LIMITED LIABILITY COMPANIES LLCs 1 History amp Purposes of LLCs created in Germany in the late 18005 then WY The National Conference of Commissioners on Uniform Laws created the Uniform Limited Liability Act of 1996 ULLCA but not all states have adopted it only 20 very popular can be a term LLC that specifies the date when the LLC will terminate usually 30 yrs or an at will LLC where events that lead to the termination of the LLC are specified by the LLC can have limited liability but is only taxed once like a partnership still a separate legal entity 2 Creation of the LLC created by filing Articles of Organization w proper state official Sec of State in TX Once they re filed the state official will issue a Certificate of Organization attached to the A00 amp returned to the organizers The A00 must contain 1 the name of the LLC which normally has to include the words LLC or LC or the abbreviations or Ltd Co 2 the period of duration which can be perpetual 3 the purpose of the LLC which can be for all lawful business purposes 4 the address amp name of the registered agent 5 if the LLC is to have managers a statement to that effect amp the names amp addresses of the managers or if the LLC will not have managers a statement that there will be no majagers amp the names amp addresses of the initial members Owners 6 Name amp address of each organizer of an LLC literally the ppl who organize it amp can be future members or professionals hired to organize the LLC 3 Structure of the LLC owners are called members can have 1 or unlimited members members can be individuals corporations or other LLCs Members can enter into an Operating Agreement aka Company Agreement or Company Regulations that can only be amended w consent of all of the members amp should specify the division of the income of the members how a membership is transferred what happens up on dissolution of the LLC amp other important matters 4 Governance of the LLC MemberManaged self explanatory more closely resembles the partnership structure each member gets one vote in the busn decisions amp the members are agents of the LLC but still have limited liability amp do not have personal liability for LLC debts or the debts of other members ManagerManaged the organizers choose to have managers the managers are agents for the LLC amp the members no longer have the responsibilityright to govern the LLC Managers can be members or nonmembers human or nonhuman corp or other LLC 5 Dissolution of the LLC upon dissolution amp resulting winding up of the LLC creditors are paid first then members When winding up is over Articles of Dissolution are to be filed amp then the state official shall issue a Certificate of Dissolution which terminates the LLC Dissolution happens when 1 At the end of the fixed period if any when the duration of the LLC expires 2 The occurrence of specified events in the operation agreement or Articles of Incorporation 3 Action of the members to dissolve the LLC 4 When the LLC has no members 5 Entry of a decree ofjudicial dissolution 6 Advantages of the LLC 1 Limited liability for the members 2 Easier to operate than a corporation 3 shareholder meetings board meetings amp the required minutes of a corporation are generally not required in a LLC a 4 can be taxed like a partnership there by no double taxation or the LLC can opt to be taxed like a corp if that is more advantageous 5 has flexibility in management member managed or managermanaged 6 no limit on the or whowhat can be members 7 Disadvantages 1 being state law LLCs are not uniform throughout the states 2 some types of businesses in some states amp under IRS rules are barred from using the LLC busn form sa state banks insured by the FDIC joint stock assoc39s certain foreign entities amp insurance 00 s 3 victim of the unknown in that the body of law on LLCs is very limited due to its newness amp there is virtually no case law to explain some of the statutory provisions LIMITED LIABILITY PARTNERSHIPS LLPs relatively new TX was the 1st to create it amp other states quickly followed first used only by professionals created by state law created to avoid earlier tax problems of the LLCs which have now been done away with but there are still advantages lt s created like a partnership but allows the LLP to have the tax advantages of the partnership no double taxation and profits are distributed to the partners who pay tax amp there are limits on the personal liability of the partners The partner does have unlimited liability if he is directly involved in the wrongful activity or had notice or knowledge of the wrongful activity amp failed to take reasonable steps to correct it Created by registering w appropriate state official busn name must include LLP or its abbreviation amp must file annual reports w the state to maintain its status A partnership fee must be paid each year by each partner but the partners do not have to be listed like LLC organizers State law normally requires that the partnership have liability insurance or have separate funds available in case the partnership or one of the partners gets sued LLP gives ALL of the partners limited liability LIMITED LIABILITY LIMITED PARTNERSHIP LLLP a type of limited partnership that tries to combine the LP form w the LLP form the general partner has the same liability as the limited partner limited liability relatively limited amp untested CHAPTER 13 EMPLOYMENT REGULATION A UNREGULATED MARKETS GLOW BOYS amp GLOW GIRLS WVORKER SAFETY Occupational Safety amp Health Act OSHA passed after WWII ship workers exposed to asbestos became very ill to monitor workplace safety amp provide workers w info about workplace health risks B FAIR LABOR STANDARDS ACT FLSA most significant aspect is that it provides for a minimum wage for most all American workers amp mandated that employees working over 40 hoursweek be paid overtime at rate of 15 times their basic wage amp has some restrictions on the use of child labor FLSA was passed during the Great Depression when employees had virtually no bargaining power w unemployment at 30 Living Wage a wage that will bring a person above the poverty line since the minimum wage does not do this C EMPLOYMENTATWILL 1 Overview EmploymentAtWill was expressed in 1884 by the TN SC an employer can fire his employee at any time for any reason with no notice and an employee can quit at any time for any reason with no notice 2 State Court Intervention the recent trend is shifting away from employmentat will the prominent basis for state court intervention is where the discharge is deemed to contravene public policyquot EX employers firing their employees for being out on jury duty employers firing their employee for refusing to do a criminally illegal act Phipps V Clark Oil amp Re ning Corp SC of Minnesota 1987 Mark Phillips a full service Clark Oil gas station worker refused to put leaded gas into a woman s car bc her car only took unleaded amp would break federal law 3 Montana Statute Montana is the only state to provide all employees comprehensive protection from employment at will an employee s discharge is unlawful if it was against public policyquot in violation of employer written personnel policy or not good for causequot assuming that the employee has passed the employer s probationary period in exchange Montana generally limits the amount of damages an employee can recover from a quotwrongful discharge to 4 yrs interest Montana Wrongful Discharge From Employment Act if there is no specified term of employment the employee can be terminated at will of employer or employee on notice can39t be fired for doing anything legal while not on the clock not at work discharge is only wrongful if it was for refusal to break a law not for good cause not during a probationary period or employer violated its own written personnel policy Employees can win 4 years of wages fringe benefits 4 OffDuty Conduct Statutes laws that prohibit employers from firing or even refusing to hire an employee bc he or she is a smoker D EMPLOYMENT DISCRIMINATION 1 Overview E EQUAL PAY ACTCOMPARABLE WORTH Equal Pay Act EPA one of the 1st anti discrimination laws prohibits employers from discriminating against employees by paying lower wages to employees of one sex vs the other sex for the same or equal work mandates that men and women doing the same job must receive the same rate of pay Comparable Worth jobs that are evaluated to be comparable should be paid the same even if it s not the same job designed to prevent discrimination against women in female dominated jobs that are comparable to maledominated jobs has not yet been adopted in the US F TITLE VII 1 Overview deals w employment discrimination prohibits discrimination in hiring termsconditions of employment referral of applicants etc US Equal Employment Opportunity Commission EEOC enforces Title VII applies to all US employers w 15 or more employees employers includes professional partnerships for the purposes of the Act 2 Disparate Treatment V Disparate Impact Disparate Treatment it is unlawful to treat employees disparater or differently on the bases of their blahblahblah Disparate Impact far more controversial there may be some employer practices that although neutral on their face have an illegal discriminatory impact Griggs V Duke Power Co US SC 1971 duke openly discriminated against blacks in hiring decisions Black employees challenged the requirement of a HS diploma or passing intelligence test for certain jobs SC ruled that the employer had not shown the business necessity of these requirements the use of such criteria was held to have an unlawful disparate impactquot on a protected class Case Questions After Griggs are height amp weight requirements unlawful What permissible requirements could be substituted Comment on the proposition that the rule of law derived in Griggs can be summarized as any test used must measure the person for the job and not the person in the abstract G SEX DISCRIMINATION Title VII prohibits treating employees differently based on sex in terms of hiring promotions firing etc The EEOC amp courts have uniformly held that Title VII does not apply to homosexuals or transsexuals Sexual Harassment included in Title VII Quid Pro Sexual Harassment unless you have sex with me I m going to fire you Environmental Sexual Harassment where sexual harassment is pervasive enough in nature ex sexual comments jokes amp innuendos amp the display of sexually oriented pictures in the office EEOC V Mercy Health Center DCWD Oklahoma 1982 Males weren39t hired as nurses in the labor amp delivery area EEOC challenged this policy the court held that the personalsexual privacy rights of the patients permit the hospital to adopt a policy whereby gender is a bona fide occupational qualification thus the hospitals policies were upheld Case Questions Do you agree Do you find it interesting perhaps hypocritical that the hospital involved permitted male doctors in the labordelivery room but not male nurses What might be the justification for this policy difference H RELIGIOUS DISCRIMINATION Title VII prohibits it amp in general employers are required to reasonably accommodate employee religious requirements unless such accommodation constitutes undue hardship EOCC V Sambo s of GA Inc ND GA 1981 Mr Tucker applied for manager at Sambo s Restaurant where it is required no facial hair but Tucker was a practicing Sikh that forbids the shaving of facial hair amp requires wearing a turban Court held that concerns for sanitation amp adverse consumer reaction permitted the restaurant not to accommodate Tucker The restaurant was justified in wanting to have a clean cutquot image Case Questions Do you think the EEOC was out of line in bringing this case to federal court in the first place What types of reasonable accommodations of employee religious beliefs make sense to you Should a retail chain store accommodate an employee who cannot work on Saturdays bc it is her Sabbath by having her work weekday evenings instead How might other employees view such accommodations RACE DISCRIMINATION Affirmative Action Executive Order 11246 by Johnson mandated to companies that hold fairly significant federal govt contracts covers about 22 of the civilian labor force in the US J AGE DISCRIMINATION Age Discrimination in Employment Act ADEA protects older workers 40 from employment discrimination such workers are deemed to e win the protected age groupquot One important exception a provision that allows for a mandatory retirement age of 65 for individuals employed in a bona fide executive or high policy making position K DISABILITIES DISCRIMINATION Americans wl Disabilities Act ADA prohibits employers w 15 or more employees from discriminating against disabled individuals who w or wo reasonable accommodations are qualified to perform the essential functions of the job If you use illegal drugs you are not covered but if you re an alcoholic you are covered L EMPLOYER RETALIATION amp TITLE VII Retaliation if they complain about employment discrimination to the EEOC or another entity amp the employer fires or demotes him M ALTERNATE DISPUTE RESOLUTION ADR amp THE EEOC today a large of cases filed w the EEOC do not go to litigation but are settled this way Employers are allowed to make employees sign new hire agreements whereby newly hired employees agree that any employment related disputes they have are to go to ADRarbitration rather than to court Chapter 5 Torts 1 Torts a Civil wrong otherthan a breach of contract for which the courts will provide a remedy in the form of damages to compensate the injured party 2 Introduction to the law of torts Tortwrong against a private party 1 Not intended to punish defendants but to compensate injured plaintiffs through a monetary reward Intentional tort involves a deliberate action which involves an injury 1 Company makes false statements about quality of competitors product Negligent tort negligence unintentional tort that arises from the failure to use reasonable care towards one to whom a duty is owed in which injury results 1 Slip and fall in showrooms defectively designed products Strict Liability liability without tort 1 You do the acts that result in the harm E 3 Purpose ofthe law of torts i Provides a set of legal rules that allow parties injured as a result of actions of others to collect damages b Compensation and Appeasement i Appeasement purpose of the law is to limit the negative impact ofthe infliction of injury to the event ofthe injury itself 1 Receipt of compensation 2 Knowledge ofthe fact that the transgressor is punished by being required to pay c Justice i Ethical retributionpayment of compensation is harmful to the offender and that justice requires the offender to suffer from payingthis ii Ethical Compensation payment of compensation is a benefit to the victim ofthe wrong d Deterrence i Tort law designed to alterthe incentives of future conduct between parties to prevent deter incidents from occurring ii Two types of cost associated with accidents 1 Cost of preventing accidents 2 Cost of accidental injuries e Social Insurance i Party who is in best position to spread the loss ofthe injury should be held liable ii Deep pocket theory business has greater wealth therefore they must pay to the injured consumer 4 Damages a Compensatory damages Damages awarded are to make the plaintiff whole again i Medical ii Economic iii Future pain and suffering b Punitive damages awards designed to punish individual defendants i Awarded for intentional torts and negligence cases 5 How businesses are involved in tort a Involvement i Due to actions of its employees ii Own actions against another business iii Due to it s products b Reasonable person standard i Court takes into question what a reasonable person would do in a given situation and base a decision off ofthat choice 6 Intentional torts in a business setting a Harm doesn t have to happenjust injury flowing from intentional act i Pulling chair out and breaking fat womans pelvis example b Personal intentional torts i Assault and Battery 1 Assaultintentional action that places a person in fear or apprehension of immediate bodily harm or offensive contact a Can be threat would a normal person be scared of the event happening b Victim must know of intentional act c Business can become involved security guard harassing customer 2 Battery intentional act of physical contact or offensive touching of someone else wo hisher permission a Person hits another in an offensive manner b Person shoots another person c Person commands dog to attack someone d Throw a rock and hit someone e All you have to do is unlawfully or offensively touch someone wo their permission 3 Defenses to assault and battery a Defenselegal justification to commit what otherwise would be a tort Consent expressed or implied sporting events Tortfeasor one committing the tortif they go beyond level of consent the tort will then occur Privilegeallows the individual to commit the tort due to who heshe is when acting win scope of official capacity 1 Police men gov officials E Selfdefense defend yourself as well as others 1 Deadly force can be used if first used against you 2 Cannot use deadly force in protection of property ii False Imprisonment 1 Defined as intentionally causingthe confinement of another person wo consent or legal reason 2 Physically restraining an individual 3 Using threatening force to restrain 4 Using force or threat of force against property to restrain them 5 Refusing to release a person from confinement when there is duty to release iii Intentional nfiction of Mental distress 1 Defined as the intentional or reckless causing of severe mental suffering in another by means of extreme conduct or language a Outrageous or extreme conduct by defendant b Which causes emotional and mental distress to plaintiff c Manifested by some form of physical injury to plaintiff heart attack mental breakdown etc iv Invasion of Privacy 1 Persons name or likeness is used for business purposes wo consent 2 Invasion upon individuals physical solitude illegally gaining info from breaking into a homewire tap 3 Public disclosure about a person which is offensive and objectionable true fact 4 Public disclosure about a person which places them in false light false factsdefamation a Exceptions to the rule i Unwarranted is not Unwanted ii If something is taken from public records its fair game iii Public figures give up some but not all rights of privacy v Defamation 1 Defined as publication of a false statement that tends to injure a person s reputation and good name 2 Includes Libel and Slander a Libel defamation through some permanent form in print or recording b Slanderdefamation through oral means speech 3 FOR THIS TO OCCUR STATEMENTS MUST BE FALSE AND THE ACCUSER MUST KNOW lTS FALSE WHEN STATING IT 4 Third party must hearthe defamation for it to cause harm and be considered defamation 5 Defenses to defamation a Truth and privilege are defenses i If somethings true its not defamation b Privilege ability to publish some defamatory statements furthers certain social interests Absolute privilege applies in situations where freedom of speech is required 1 Protects statements in civilcriminal action Constitutional privilege statements made by federal and state legislators and high ranking officials in performing their duties also absolute privilege vi Malicious Prosecution 1 The wrong use ofthe legal proceedings civil or criminal 2 Must win all cases brought against you then proceed to prove that the defendant s claims against you were invalid and he knew so before accusing you vii Fraudulent Misrepresentation fraud 1 AKA Fraud necessary forthere to be fraud a Misrepresentation of facts false facts b Must know facts are false when statingthem c Intend for innocent party to believe false facts d Innocent party believes false facts e Innocent party is DAMAGED 2 Puffery sellers talk telling white lies about a product usually opinion not complete false facts the tortfeasor should know the facts to be false and therefore it s not fraud 3 Misrepresentation a Turning back odometer telling lies about a carthat is shitty saying its great wholding facts about something all fraud c Business Intentional Torts i Product Disparagement 1 Elements required to prove a case of product disparagement a Defendant put out a lie about competitors plaintiff product b Defendant knew the statement was a lie c Statement made with malice to injure competitor plaintiff d Competitor plaintiff suffered damages 2 BASICALLY Badmouthing another product to persuade people not to buy it ii False Advertising 1 False statements made about your own product to make it seem superior to the competitor plaintiffs product 2 Lanham Actestablished an action for damages for any false advertising which damages competitor d Intentional Interference with Contractual Relations i Contracts are voluntary transactions that serve to move resources to their highest value 1 Breaching contract will reduce value of contracts thus reducing economy therefore it has become illegal to interfere with contracts ii Establish tort of contractual interference 1 Valid contract with other party exists 2 Defendant knew of existing contract 3 Defendant interfered with contract causing damage to plaintiff 4 MUST KNOW OF CONTRACT TO BE HIT WITH THIS TORT iii Interference with Employment 1 Employeeemployer relationship is contractual 2 Must have a contract for a specified period to work forthere to be a breach in contract if employee leaves 3 IF IF IF there is no employment contract but one company entices employees to leave a company in orderto harm that company there is tort iv Ten billion dollarjury award 1 Pennzoil and Getty and Texaco case Read pg 145 v Interference with Prospective economic advantage 1 Unruly business competition usually not found e Interference with property rights i Liability rulesintended to deter infringement upon private property rights by making infringer pay ii Property law provides a set of property rules involving an outright prohibition against interference with property rights iii Real propertyland or anything permanently attached to land iv Personal Property anything else clothes vehicle money 1 Can be tangible property you can touch it clothes car money 2 Can be intangible property can t touch stocks v Trespass to Land 1 Any unauthorized physical intrusion or entry upon land where someone else has a superior right to the property 2 IT IS DEFENSE to a case oftrespass if the trespasser went onto property of another to protect property or persons 3 ITS NOT DEFENSE if you go and trespass and improve the property 4 DOING NOTHING WHEN KNOWING OF TRESPASSER ON PROPERTY IS IMPLIED PERMISSION 5 Attractive Nuisance you must take all steps necessary to protect others when you have something on your property ex a pool that will attract people to come near YOU ARE RESPONSIBLE FOR THEIR ACTIONS vi Trespass to Personal Property 1 Wrongful invasion of ownership rights in property otherthan land 2 Stealing someone s personal property damaging it deprives owner of use ofthis property 3 DAMAGE IS INTENTIONAL Conversion 5 1 Occurs when personal property is taken by the wrongdoer and kept from its true owner a Ex Test driving a new car and never returning it 2 Permanently taking something from someone civil side of stealing viii Trespass or Conversion 1 Damage done to property How long was it gone What was inconvenience to owner of property ix Nuisance 1 Externalities activities that affect either positively or negatively other individuals and businesses 2 Nuisance any conduct which unreasonably and noncontractually interferes with enjoyment or use of land a Private nuisanceaffects only a few people b Public nuisanceaffects communitypublic at large x Infringement of Intellectual Property 1 Intellectual property created from the ideas orthought processes ofthe creator 2 Infringement someone other than owner uses these ideas a Ex Copyrights trademarks trade names trade secrets 3 Copyrightsgives the owner the exclusive right to reproduce the copyrighted work to create derivative works based on it to distribute copies to perform the work or to display it in public a Once registered the copyrighter can file suit against infringers b SONNY BONO COPYRIGHT TERM EXTENSION ACTll Copyright lasts the authors lifetime 70 years ii For a publisher it lasts 95 years after date of publication iii OR 120 years after creation of work c Compulsory licensinghas to do with owners of sound recordings granting permission to those wishing to record their music once performed in public i ASCAP and BMI are main licensing organizations d Fair Use doctrine i States that you can use copyrighted work wo paying royalties when Used for nonprofit educational reasons Nature of copyrighted work is questioned Only a percentage of total work is used book Using the work will bring profit to original work 4 Patents a A grant from the federal government that gives the applicant the exclusive rights to make use sell or allow others to use an invention for 20 yrs from date of filing application for patent b Process or design patents only last 14 yrs c If public has used invention for a yr prior to getting patent it cannot receive patent d All patent infringement cases are private 5 Trademarks and Service Marks a Trademark any mark logo short phrase symbol under which a business operates or markets their product b Service Marksame thing as trade mark but used to identify a service c Under Lanham Act businesses can register fortrademark by Conducting search to see if competitors use same namelogo Apply to register trademark Flags name portraits cannot be trademarked iv Once registered owner oftrademark must make it known R in a circle R it is pendingthe letters TM are used d Last for 10 yrs and can continue to renew for 10 yr periods every 5 yrs as long as still used in commerce e Trademark deemed abandoned if unused in commerce for 2 yrs f NOT REGISTERNG TRADEMARK must show secondag meaning a reasonable person can recognize the difference in the two products with similar logos don t confuse one for another g Trademark Law Revision Act i Gave business owners right to demand triple damages for comparative advertising ii Made it possible to apply fortrademark before using it h Federal Trademark Dilution act i Allows trademark owners to sue noncompetitors for blurring and tarnishing 1 Blurring using a famous name for a completely unrelated product Xerox diapers 2 Tarnishing using a word or phrase to create a negative connotation to a well known trademark coca cola cocaine santa clause example i Trademark law and the internet i Cypersquatters were registering domains with big corps names and demanding high payment forthe use ofthese domains HIGHLY ILLEGAL j Trade Dress i Stealing entire inherent distinctive look of a competitor 1 Taco Cabana Two Pesos Mexican restaurants example Look the same similar food minimal differences in restaurants Two pesos sued 6 Trade Names a Apply to a part or all of a business name i No federal protection fortrade names protection only local in nature 7 Trade Secrets a Anythingthat the business wants to keep secret i Formulas customer lists price lists research etc that if known would give competitor an advantage over you in market b Uniform trade secrets Act i Owner of trade secret can sue for misappropriation against anyone who obtains trade secret unlawfully ii If competitor obtains secret independently then its legal 7 Negligence a Deals with careless or reckless conduct rather than intentional conduct like discussed in intentional torts i DEFfailure to exercise due care when there is a foreseeable risk to others 1 Elements a Defendant has a duty to plaintiff contract i Whenever a person should foresee that his conduct will create unreasonable risk of harm to others b Defendant fails to perform duty contract breach i reasonable person of ordinary prudencequot failure to do what the ordinarily prudent person would do under similar circumstances ii Avoidance cost lowerthan expected accident cost then reasonable person would be negligible c Plaintiff has lossdamages i Physical mental emotional harm all warrant negligence ii If no harm is done then all negligence is thrown out d Defendants conduct results in the damages to plaintiff causation i Most basic element of negligence 1 Cause in fact established by evidence showingthat the complainedof act is the cause ofthe event that caused the injury a Ex row of dominos first one is toppled causing all to fall Because the first thing happened all the rest followed suit 2 Proximate Causejudicial limitation of cause in fact a Responsibility for ones actions limited to consequences that bear a reasonable relationshipto the conduct FIREWORKS TRAIN EXAMPLE PG 169 b Defense to Negligence i Two principal defenses are assumption of risk by plaintiff and plaintiff s own negligence ii Influencingthe potential plaintiff s behavior 1 Could the plaintiff have avoided the injury at a lower cost than the defendant could a If so the plaintiff would have been acting as a reasonable person and there would b no negligence iii Assumption of Risk 1 Voluntary exposure to a known risk a Electric Drill Example pg 171 b You knowthat one drill is cheaper but not meant to drill in concrete and you need to drill in concrete and you go ahead and buy cheaper drill you plaintiff assume all risk that may occur when drilling through the concrete c A person can only assume KNOWN RISKS v Contributory and Comparative Negligence H Contributory negligence failure ofthe plaintiff to exercise reasonable risk causingthe injury defendant is protected a Provides an incentive for plaintiff to take care when both parties are at a potential loss 2 Comparative negligence allows a portion ofthe damages resulting from combined negligence of the parties a Plaintiff injured due to his own negligence as well as defendant negligence and its 40 plaintiffs negligence 60 defendants negligence defendant pays 60 of damages to plaintiff 3 Moral Hazard under a simple negligence standard those at risk don t have incentive to take selfprotective or lossavoidance measures v Superseding Cause 1 Something occurs that breaks the causal connection required to have negligence 2 AKA Something interferes with the causal relationshipthat would cause the negligence a Dominos falling over boy steps in and nocks over a closer one to the end causingthe rest to fall over b Earthquake occurs at same time fireworks box fell causing the scale on deck to fall on woman vi Strict liability in Tort 1 Liability wo fault 2 Usually involving abnormal or hazardous activities 8 CHAPTER SUMMARY m P Law of torts concerns the legal rights and duties of parties to involuntary transactions that have resulted in injury to a party Efficiency perspective concentrates on the use of tort law to alter incentive structures so minimal amount of resources devoted to accidents Intentional tort is intentional invasion of some legally protection interest i Ex intentional mental distress invasion of privacy defamation assault battery Nuisance law provides a means for enforcing the right to exclusive use and enjoyment of real property Intellectual property rightswhen someone uses the intellectual property of another the innocent party can bring infringement suit against them i Ex copyrights trademarks trade secrets etc Negligence law deals with accidents which are unintentional torts i Elements are Duty breach of duty injury causation 1 Person who can avoid injury at the least cost is liable for damages ii Defenses of Negligence 1 Assumption of risk contributory negligence comparative negligence Strict Liability liability wo fault applies to activities that are recognized as hazardous but are not so risky as tojustify a prohibition i Modern standard for holding manufacturers liable for defective products


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