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Chapter 22 Business Law and Government Chapter 22 Business Law and Government Regulation Regulation Copyright ©2012 Pearson Education, Inc. publishing as Prentice Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Hall 22- 22-1 The Legal Environment: Business Law and Government Regulation
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Chapter 22 Business Law and Government Chapter 22 Business Law and Government RegulationRegulation

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 22-22-11

The Legal Environment:Business Law

andGovernment Regulation

Elements of a Valid Elements of a Valid ContractContract AgreementAgreement

OfferOffer AcceptanceAcceptance

ConsiderationConsideration Contractual capacityContractual capacity LegalityLegality

Contract

Plus Two Supplemental Plus Two Supplemental Requirements:Requirements:

Genuineness of AssentGenuineness of Assent FormFormChapter 22 Business Law and Government Regulation Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Chapter 22 Business Law and Government Regulation Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

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Chapter 22 Business Law and Government Chapter 22 Business Law and Government RegulationRegulation

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AgreementAgreement

Governed by the Governed by the objective theory of objective theory of contractscontracts, which states that a , which states that a party’s intent to enter into a party’s intent to enter into a contract is measured by outward contract is measured by outward facts – words, conduct, and facts – words, conduct, and circumstances – rather than by circumstances – rather than by subjective intentionssubjective intentions

Comprised of an offer and an Comprised of an offer and an acceptanceacceptance

Chapter 22 Business Law and Government Chapter 22 Business Law and Government RegulationRegulation

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OfferOffer

A promise to do or to refrain from A promise to do or to refrain from doing something in the futuredoing something in the future

For a valid offer to exist, there must For a valid offer to exist, there must be:be: Serious objective intentSerious objective intent Reasonably certain termsReasonably certain terms Communication of the offerCommunication of the offer

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OfferOffer

Generally, an offeror can revoke an offer at Generally, an offeror can revoke an offer at any time before the offeree accepts itany time before the offeree accepts it

Two exceptions:Two exceptions: Option contract – A separate contract in Option contract – A separate contract in

which a potential buyer purchases the which a potential buyer purchases the right to keep an offer open for a specific right to keep an offer open for a specific time periodtime period

Merchant’s firm offer – Under the UCC, a Merchant’s firm offer – Under the UCC, a merchant who makes an offer in a signed merchant who makes an offer in a signed writing to sell goods cannot revoke that writing to sell goods cannot revoke that offer for the stated period, which cannot offer for the stated period, which cannot exceed 3 months exceed 3 months

Chapter 22 Business Law and Government Chapter 22 Business Law and Government RegulationRegulation

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 22-22-66

AcceptanceAcceptance

Mirror image rule - Common law Mirror image rule - Common law requires the offeree’s acceptance to requires the offeree’s acceptance to exactly match the offeror’s offerexactly match the offeror’s offer

If offeree changes the terms in the If offeree changes the terms in the offeror’s offer, he or she is making a offeror’s offer, he or she is making a counteroffer, which is a rejection of counteroffer, which is a rejection of the original offer the original offer

Generally, silence by an offeree does Generally, silence by an offeree does not indicate acceptancenot indicate acceptance

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ConsiderationConsideration

Something of Something of legallegal value, bargained value, bargained for, and given in exchange for an act for, and given in exchange for an act or a promise or a promise

Consideration does Consideration does notnot have to have have to have any economic value – just legal value any economic value – just legal value

Exception: Promissory estoppel:Exception: Promissory estoppel: Promise must be likely to induce reliancePromise must be likely to induce reliance Justifiable reliance on the promiseJustifiable reliance on the promise Justice is better served by enforcing the Justice is better served by enforcing the

promisepromise

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Contractual CapacityContractual Capacity

The ability to enter into a contractThe ability to enter into a contract Three groups:Three groups:

1.1. Minors – Most contracts that minors Minors – Most contracts that minors (those under the age of 18) create are (those under the age of 18) create are voidablevoidable at the minor’s option at the minor’s option

2.2. Intoxicated people – If a person’s Intoxicated people – If a person’s reason and judgment were so impaired reason and judgment were so impaired by alcohol or drugs at the time of by alcohol or drugs at the time of creating a contract that he cannot creating a contract that he cannot understand its consequences, the understand its consequences, the contract is voidablecontract is voidable

Chapter 22 Business Law and Government Chapter 22 Business Law and Government RegulationRegulation

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Contractual CapacityContractual Capacity

The ability to enter into a contractThe ability to enter into a contract Three groups:Three groups:

3.3. People with mental incapacities – People with mental incapacities – Depending on the mental state of the Depending on the mental state of the person, a contract can be void, person, a contract can be void, voidable, or valid voidable, or valid

A person who is insane cannot create a A person who is insane cannot create a valid contract; these contracts are voidvalid contract; these contracts are void

Chapter 22 Business Law and Government Chapter 22 Business Law and Government RegulationRegulation

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LegalityLegality

The purpose of the parties’ contract The purpose of the parties’ contract must be legalmust be legal

Laws vary from one state to Laws vary from one state to another, but issues include: another, but issues include: Contracts that violate usury lawsContracts that violate usury laws Sabbath (Blue) lawsSabbath (Blue) laws Gambling contractsGambling contracts

Chapter 22 Business Law and Government Chapter 22 Business Law and Government RegulationRegulation

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 22-22-1111

Genuineness of Genuineness of AssentAssent Verifies that the parties’ Verifies that the parties’

agreement is genuineagreement is genuine MistakesMistakes MisrepresentationMisrepresentation FraudFraud DuressDuress Undue influence Undue influence

Chapter 22 Business Law and Government Chapter 22 Business Law and Government RegulationRegulation

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 22-22-1212

FormForm

Writing requirement – “statute of Writing requirement – “statute of frauds”frauds”

Contracts required to be in writing:Contracts required to be in writing: Sale of landSale of land Other interests in landOther interests in land Contracts that cannot be performed Contracts that cannot be performed

within one year of their formationwithin one year of their formation Collateral contracts Collateral contracts Administrator of an estate to pay a debt Administrator of an estate to pay a debt

of the deceased of the deceased Sale of goods priced at $500 or moreSale of goods priced at $500 or more

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Contract PrinciplesContract Principles

A written contract is preferred to an oral A written contract is preferred to an oral contract; however, most oral contracts are contract; however, most oral contracts are just as enforceable as written onesjust as enforceable as written ones

Oral agreements should be followed up by Oral agreements should be followed up by written confirmationswritten confirmations

A contract for the sale of goods priced at A contract for the sale of goods priced at $500 or more $500 or more mustmust be in writing be in writing

Contract terms should be clear and specificContract terms should be clear and specific Any handwritten changes to a written Any handwritten changes to a written

contract should be initialed by both partiescontract should be initialed by both parties

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A complete contract covers all material A complete contract covers all material items to be enforceditems to be enforced

Past contractual practices have legal Past contractual practices have legal weight in a contract disputeweight in a contract dispute

As a buyer, you can reject goods that do As a buyer, you can reject goods that do not meet specifications or are defectivenot meet specifications or are defective

As a seller, you are entitled to prompt As a seller, you are entitled to prompt notification of shipment acceptance or notification of shipment acceptance or rejectionrejection

Courts will likely interpret unclear terms Courts will likely interpret unclear terms against the party who wrote the contractagainst the party who wrote the contract

Contract PrinciplesContract Principles

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The Uniform The Uniform Commercial Code (UCC)Commercial Code (UCC)

A comprehensive document drafted in A comprehensive document drafted in the 1940s that assembled a uniform the 1940s that assembled a uniform set of laws across the states to govern set of laws across the states to govern routine business transactions. Its routine business transactions. Its provisions reflect the way people provisions reflect the way people conduct businessconduct business

The UCC contains ten articles, but The UCC contains ten articles, but Article 2Article 2, which governs the , which governs the sale of sale of goodsgoods, affects many small businesses, affects many small businesses

Chapter 22 Business Law and Government Chapter 22 Business Law and Government RegulationRegulation

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The UCC applies to The UCC applies to everyevery sale of sale of goods, but it imposes a higher goods, but it imposes a higher standard on professional merchant standard on professional merchant sellers and sometimes includes rules sellers and sometimes includes rules that vary slightly or substantially from that vary slightly or substantially from basic contract lawbasic contract law

The Uniform The Uniform Commercial Code (UCC)Commercial Code (UCC)

Chapter 22 Business Law and Government Chapter 22 Business Law and Government RegulationRegulation

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Who Is a Who Is a Merchant?Merchant?

1. A merchant is one who deals in goods of 1. A merchant is one who deals in goods of the kind involved in the sales contract (e.g., a the kind involved in the sales contract (e.g., a sporting goods retailer buying sporting sporting goods retailer buying sporting goods)goods)2. A merchant is one who, by occupation, 2. A merchant is one who, by occupation, holds himself out as having knowledge or skill holds himself out as having knowledge or skill pertaining to the practices or goods in the pertaining to the practices or goods in the sale (e.g., a bank selling a repossessed car)sale (e.g., a bank selling a repossessed car)3. A person who employs a merchant as a 3. A person who employs a merchant as a broker or an agent has merchant status for broker or an agent has merchant status for that transaction (e.g., “gentleman farmer” that transaction (e.g., “gentleman farmer” who hires a broker to buy livestock for him)who hires a broker to buy livestock for him)

The UCC defines a merchant in three The UCC defines a merchant in three

ways:ways:

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Sales WarrantySales Warranty

A promise or a statement of fact A promise or a statement of fact by a seller that a product will by a seller that a product will meet certain standardsmeet certain standards

Types of warranties:Types of warranties: Express warrantiesExpress warranties Implied warrantiesImplied warranties

Warranty of titleWarranty of title Warranty of merchantabilityWarranty of merchantability Warranty of fitness for a particular Warranty of fitness for a particular

purposepurpose

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Product LiabilityProduct Liability

Negligence – when a manufacturer or Negligence – when a manufacturer or seller fails to do something that a seller fails to do something that a reasonable person would do reasonable person would do Negligent designNegligent design Negligent manufacturingNegligent manufacturing Failure to warnFailure to warn

Strict liability – when a manufacturer is Strict liability – when a manufacturer is liable for its actions no matter what its liable for its actions no matter what its intentions or the extent of its negligence intentions or the extent of its negligence

Source: "Product Liability Cases Commenced," Judicial Business of the United States Courts 2009.

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Protecting Intellectual Protecting Intellectual Property RightsProperty Rights

Three important tools:Three important tools: PatentsPatents Trademarks and service marksTrademarks and service marks CopyrightsCopyrights

Chapter 22 Business Law and Government Chapter 22 Business Law and Government RegulationRegulation

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 22-22-2222

PatentsPatents

Patent Patent - a grant from the U.S. - a grant from the U.S. Patent and Trademark Office Patent and Trademark Office (PTO) to the inventor of a (PTO) to the inventor of a product, giving the exclusive product, giving the exclusive right to make, use, or sell the right to make, use, or sell the invention in the U.S. for 20 years invention in the U.S. for 20 years from the date of filing the patent from the date of filing the patent applicationapplication

P.T.O. has issued more than 7 P.T.O. has issued more than 7 million patents to date million patents to date

Source: U.S. Patent and Trademark Office.

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Obtaining a Obtaining a PatentPatent Establish noveltyEstablish novelty Document the deviceDocument the device Search existing patentsSearch existing patents Study search resultsStudy search results Submit the patent applicationSubmit the patent application Prosecute the patent applicationProsecute the patent application

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TrademarksTrademarks

TrademarkTrademark - any distinctive word, - any distinctive word, symbol, name, logo, slogan, or symbol, name, logo, slogan, or trade dress that a company uses to trade dress that a company uses to distinguish its product from other distinguish its product from other goods on the market goods on the market

Any business that claims a Any business that claims a trademark can use the trademark can use the symbol symbol

Only those businesses that have Only those businesses that have registered their trademarks with registered their trademarks with the PTO can use the the PTO can use the ®® symbol symbol

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TrademarksTrademarks

Trademarks can also cover Trademarks can also cover symbols, shapes, colors, and symbols, shapes, colors, and sounds - all part of “trade dress” sounds - all part of “trade dress”

1.5 million trademarks registered 1.5 million trademarks registered in U.S. in U.S.

A A service markservice mark, noted by the , noted by the SMSM symbol is the same as a trademark symbol is the same as a trademark except that it identifies and except that it identifies and distinguishes the source of a distinguishes the source of a service service

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CopyrightsCopyrights

CopyrightCopyright - an exclusive right that - an exclusive right that protects the creator of original protects the creator of original works of authorship, such as works of authorship, such as literary, dramatic, musical, and literary, dramatic, musical, and artistic works – e.g., a video gameartistic works – e.g., a video game

The The symbol denotes a symbol denotes a copyrighted work copyrighted work

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The Law of AgencyThe Law of Agency

Agent’s duties:Agent’s duties: LoyaltyLoyalty PerformancePerformance NotificationNotification Duty of CareDuty of Care AccountingAccounting

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The Law of AgencyThe Law of Agency

Principal’s duties:Principal’s duties: CompensationCompensation ReimbursementReimbursement CooperationCooperation Safe working Safe working

conditionsconditions

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BankruptcyBankruptcy

Chapter 7: LiquidationChapter 7: Liquidation - Most - Most common type (70% of all filings)common type (70% of all filings) Business ceases to exist after Business ceases to exist after

bankruptcy proceeding is completedbankruptcy proceeding is completed Chapter 11: ReorganizationChapter 11: Reorganization - -

Company is protected from Company is protected from creditors' legal actions while creditors' legal actions while formulating a reorganization planformulating a reorganization plan

Source: American Bankruptcy Institute, 2010.

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Government Government RegulationRegulation Small Business Administration Study: Small Business Administration Study:

Cost of complying with government Cost of complying with government regulation cost businesses $1.75 trillion regulation cost businesses $1.75 trillion per year per year

SBA study: For companies with fewer SBA study: For companies with fewer than 20 employees, costs of complying than 20 employees, costs of complying with government regulations is $10,585 with government regulations is $10,585 per employee vs. $7,755 per employee per employee vs. $7,755 per employee for large companies for large companies

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Government Government RegulationRegulation

Trade PracticesTrade Practices Sherman Antitrust ActSherman Antitrust Act Clayton ActClayton Act Federal Trade Commission ActFederal Trade Commission Act Robinson-Patman ActRobinson-Patman Act

Consumer ProtectionConsumer Protection

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Consumer CreditConsumer Credit Consumer Credit Consumer Credit

Protection Act (Truth-in-Protection Act (Truth-in-Lending Act)Lending Act)

Fair Credit Billing ActFair Credit Billing Act Equal Credit Opportunity Equal Credit Opportunity

ActAct Fair Credit Reporting ActFair Credit Reporting Act Fair Debt Collection Fair Debt Collection

Practices ActPractices Act

Government Government RegulationRegulation

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EnvironmentEnvironment Clean Air ActClean Air Act Clean Water ActClean Water Act Resource ConservationResource Conservation

and Recovery Act and Recovery Act Pollution Prevention Pollution Prevention

ActAct

Government Government RegulationRegulation

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All rights reserved. No part of this publication may All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, electronic, mechanical, photocopying, recording, or otherwise, without the prior written or otherwise, without the prior written permission of the publisher. Printed in the United permission of the publisher. Printed in the United States of America.States of America.

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