Business Law Exam 2

Most people and business have to deal with agencies much more than the three branches of government in the Constitution

True

Agencies may be known as…

departments, commissions, authorities, boards, bureaus

Purpose of administrative agency

To administer and implement statutes (state and federal legislation) through issuance of regulations

Administrative agencies can…

• Research issues

• Propose regulations

• Conduct hearings

• Issue regulations

• Enforce and implement regulations

How do administrative agencies combine legislative, executive, and judicial functions? (unique)

• Legislative= create regulations

• Executive= enforce regulations

• Judicial= hear disputes and determine if you are guilty of violating regulations

On average, there are ____ regulations for every statute

56

The secretary/head of federal agencies form the ______

President’s cabinet

How many US agencies are there?

>2,000

Agencies are often created because there was a pressing national need or some event/tragedy that led to the creation of one

True

Were administrative agencies envisioned in the U.S. Constitution?

No

Why has the number of administrative agencies grown significantly since the Woodrow Wilson and FDR administrations?

Increasingly complex national problems required specialized government expertise and regulation.

What legislative power has Congress delegated to administrative agencies? What executive power?

• The authority to make regulations (rulemaking) that carry the force of law

• The authority to enforce and implement regulations (executive branch silos the enforcement function)

Why did Woodrow Wilson support administrative agencies?

He believed government should rely on experts to create and administer policy

What does it mean that agency regulations have the "force of law"?

Regulations issued by agencies are legally binding and must be followed

Who are often criticized as "unelected bureaucrats"?

Government officials and agency employees who exercise authority without being elected by voters

What is the ongoing debate surrounding administrative agencies?

What the proper amount of government regulation should be and how much power agencies should have

Open records- what act?

Freedom of Information Act (FOIA) ensures federal agency and state agency records are available to the public (media, NGOs, individuals) upon request

Exemptions from disclosure (or redaction)

• Individual invasion of privacy

• Competitive/proprietary information

• Sources and methods of intelligence agencies (do not want to reveal the names of our spies/other country’s spies)

Open meetings

The Sunshine Act requires all agency meetings to be open to the public

Public Announcement (proposed regulation)

• The agency writes a proposed rule

• The Federal Register Act requires the agency to publish the proposed rule in the Federal Register

• The Federal Register is basically the federal government’s daily publication for proposed rules, notices, and other agency actions

Public Comment

• Citizens, businesses, interest groups, and experts can read the proposal and submit comments

• The public comment period lasts for at least 30 days after the proposed rule is published

• The agency reviews these comments before finalizing the rule (adopt, modify and republish, withdraw)

  • Modifying does not happen as much as it should

Final Regulation

Final agency regulations are compiled in a central repository called the Code of Federal Regulations (CFR)

6 Rulemaking principles

1. Agencies conduct research (usually uses third-parties)

2. Public comment period

3. Regulation must be authorized by the law creating the agency (agency can only make rules that Congress has empowered it to make)

4. If an agency establishes “rational basis” for its ruling, courts usually defer to the agency’s judgement (since they are the experts)

5. Actions taken by a agency must not be arbitrary or capricious

• Action that is unreasonable, irrational, random, or unsupported by evidence

What is a “rational basis” for an agency justification

A reasonable justification supported by evidence or expertise

• Courts usually side with the agency is rational basis exists

Executive Power of Agency

Enforcement or execution of the law

• Inspections of premises

• Aerial inspections

  • Subject to aerial inspections without a warrant (because they are in plain view)

• Production of documents

• Compliance verification (when inspector returns)

Enforcement (Judicial Power of the Agency)

Someone files a report claiming that a private individual or agency violated a law / broke a regulation

Therefore a case begins

Will be brought to an administrative hearing

Administrative Hearing

• With a Administrative Law Judge (ALJ)

  • Judge that specializes in agency disputes

• Both sides can present evidence

• Witnesses can testify

• Due process is provided (chance to defend yourself

BUT

• No jury

• Rules of evidence are less formal

• Process is usually faster and simpler

Administrative Law Judge Decision

Possible outcomes

• Dismissal

• Cease-and-Desist Order with penalties

  • These get published to the public

  • You cannot get the same citation for 20 years (fine will be much higher)

• Consent Decree

  • Informal settlement

• Appeal

Appeal to Administrative Court

• More likely than not you’re not going to succeed

Most likely to overturn the agency if:

• Agency made procedural mistakes

• Agency acted beyond the jurisdiction of the agency

  • Exceeded the powers they’re given by law

• Arbitrary and capricious rulings (unreasonable/lacked evidence)

Historical vs Recent Supreme Court Decisions

• Historically (due to the Chevron Doctrine), courts often deferred to agencies when laws were ambiguous

  • Chevron Doctrine gave federal agencies the broad authority to implement regulations

• Now, courts must use their own independent judgment to determine whether an agency acted within its statutory authority

Rule of 72

#of years = 72/Rate of return

Corruption Perception Index

• Heatmap created annually by an NGO

• There is more corruption in underdeveloped countries

  • A lot of them have to give something to government officials in order to retain business

  • North Korea, Yemen, South Sudan, Syria

• Scandinavian countries are typically the least corrupt

What % of trade is conducted by cargo ships?

80%

International trade can occur at any time through the flash points (canals, straits)

Ensuring payments for international trade (Letters of Credit)

Guarantees payment to overseas seller

• Bank pays obligations of buyer on a pre-determined credit amount (amount that will cover the goods that you are transporting)

Once goods get put on a ship, the shipper will issue a document called ________

Bill of Lading

• Certification that goods are in transit

• Once Bill of Lading is given to bank they will pay you on the credit balance

WTO was called _____

GATT (after WWII)

GATT

General Agreement on Tariffs and Trades

• Multilateral trade treaty

Purpose of GATT

• Reestablish global trade

• Have as much free trade as possible

  • Free trade: lowering tariffs as much as possible

• Goal: eventually there will be no tariffs

In 1947 tariffs were 22% and now they are 5%

True

GATT represents _____ of global trade

98%

Most Favored Nations requirement (as created by GATT)

• Once you sign onto this treaty, it is agreed that all countries must receive the same tariff and the same tariff schedule

GATT Tariff Schedule

• On one axis, you have all the countries A-Z

• On the other axis, you have all of the goods (tens of thousands, ranging from apples to zinc)

• The intersection of the country you want to trade with and the good you want to trade will be the % tariff you must pay to ship the good

Do goods that are essential to a certain economy have a higher or lower tariff?

Higher

• Ex: wine in France

Countries sometimes use tariffs as political retribution, BUT

this violates the most favored nations treaty

Does it violate the most favored nations treaty if you offer a lower deal to certain countries?

No.

This is because the purpose of GATT is to lower tariffs

United States Free Trade Agreements

Increases free trade between countries

US/Mexico/Canada Trade Agreement

Reduce tariffs between Mexico, Canada, and the US

International Money Fund

Facilitate expansion and balanced growth of international trade

Organization of Petroleum Exporting Countries (OPEC)

Control oil production and exploration

• This is a cartel

• Cartel: countries agree with each other to, on a quarterly basis, control the production of a certain natural resource and agree on the price

• This is illegal in the US (anti-trust law)

  • Colluding

Export Sales

• Direct sales from business to international customer- no “middleman”

  • US manufacturer sells to a French buyer

• There is no local taxation on seller because typically the title to goods passes in the US

  • There is a US taxation

  • Once the French buyer buys, they are responsible for everything else (putting on a ship, customs)

• Low profit margin

  • Since the French buyer is taking on all the risk

Domestic business works with foreign business to sell or produce product

• Subject to taxation overseas and subjecting yourself to be called into court

• Agency, foreign distributorship, licensing and franchising

Agency

Agent sells and earns commissions for local (overseas sales). The sellers must pay local taxes.

• The manufacturer ships the good overseas and bears the risk + costs

• The sales agent acts as the middleman (no ownership) to have goods, once cleared by customs, purchased by the retailer to be sold

• There is no distributor involved; they sell directly to the retailer/customer

• They receive commission for every contract they find

Foreign Distributorship

Manufacturer passes the title to goods (ownership) to distributor who in turn sells to foreign customers

• Manufacturer ships the product overseas + bears the money & risks before giving the product to distributor which sells to stores which sells to customers

Foreign Distrutorship taxes

Seller may avoid local taxes only if title to goods passes in the US

• Because the sale is conducted here

Still subject to taxation and possibility of being hauled into court

Licensing

Permission to use intellectual property (trademark, trade name, patent, copyright) for a royalty (recurring payment)

• Usually subject to local taxes

Explained

• Instead of manufacturing at home, you find someone in a foreign country who will manufacture the design for you (including trademarks, etc.)

• You earn income from the licensing

• The distributor is responsible for selling

Licensing taxes

• Pay foreign income tax to the royalty (payment) you receive from the manufacturer who is making the product for you

• Usually subject to local taxes

Franchising

Permission given to a franchisee to use a valuable trademark and operate a business model, in exchange for a franchise fee, which is usually subject to local taxes

• The magic of franchising is that every time you go into a different store, they all operate the same way

Wholly owned subsidiaries

Company that is 100% owned by its parent company

• Transactions must be at arms length -“transfer pricing”- to prevent tax evasion

  • Transfer price must be ~ what unrelated companies would charge each other

  • No fake internal prices

• DuPont example

Joint Ventures

Two parties agree to form an enterprise in a country with each performing certain functions (on a contract or equity ownership basis)

• This is often a god way of doing business if you are in a country that is very different than your home country

Before exporting, a company must determine if an _________ is needed

export license

• Common for military/defense items, high-teach products, short supply items

Sanctions from violating

• Civil charges and fines for failure to obtain license

• Trading With the Enemy Act

  • Prohibits for sending anything to a country that is deemed to be an enemy of the US

Expert Assistance

License Freight Forwards are experts on export license requirements

Protection of Intellectual Property Rights (black market & grey market)

• Black market goods: knock-off goods

• Grey-market goods: goods that are legitimate, but are diverted to a market where they were not supposed to be sold

Lanham Act

Trademark owners may prevent the importation of certain grey-market goods and counterfeit goods

Tariff & How it’s a Barrier

• Tariff is a tax on goods as they are imported

• This is the most common barrier to trade, used to protect local industry

Non-Tariff Barriers

• Import quotas

• Government subsidies of local industries

• Destruction testing and inspection

  • Destructing, testing, and inspecting: importers to another country take a certain % of goods at customs to set aside and test for safety

Antidumping laws and export subsidies

• Dumping is when a foreign competitor sells their goods in another country at below their cost to manufacture

  • Purposefully losing money so they can drive out competition and then jack up their prices

• May be subject to countervailing duties (extra tariffs)

• US producers may be entitled to damages

  • US companies harmed by dumping may be able to recover money for their losses

Retaliation Foreign Unfair Trade Restrictions

The US Trade Representative (USTR) is a cabinet level position and may respond by imposing retaliatory tariffs or trade barriers on goods

• USTR can also impose countervailing duties

When does the USTR litigate cases to the WTO?

When any party in the US believes a foreign competitor is violating GATT

• in the entire history of GATT, the US has been a plaintiff before the WTO > 100 times and has been defenses > 130 times

Expropriation

Government seizes the assets of a foreign-owned business

• Often happens when it is a new government

• US businesses have a legitimate concern about a new government in a foreign country seizing assets of a multi-national company

What industries are subject to expropriation?

Defense, power, natural resources, banking and telecommunications

Insurance and Expropriation

• Insurance will help minimize losses from expropriation

• Overseas Private Investment Corporation (OPIC): asset production insurance under control of state department

  • Very expensive

Foreign Corrupt Practices Act- civil or criminal?

Prohibits any payments to government officials to obtain or retain business

• This is a criminal law

• The US was the first country to make this a law

Loophole to FCPA

FCPA provides limited exception for "facilitating payments" (grease payments) for "routine government actions" (but this is narrowly construed)

• Small payments made to low-level government officials for the purposes of routine government action (having them do what they were supposed to do anyways)

• A lot of companies have a 0 tolerance policy and prohibit ANY gift to a government official, or that the payment/gift would have to be approved by the CEO

Misdemeanors and felonies

• Misdemeanor is punishable by a fine or less than a year in prison

• Felony is a crime that is punishable by imprisonment or death

• Felonies are more serious than misdemeanors

Crime

A conduct that is prohibited and punishable by fines or imprisonment

90% of criminal cases in the US are prosecuted in state court

True

Crimes require two elements

1. Mental state (intent)

2. Act (commission) or failure to act (omission)

Actors in a crime (will be 5 questions about this)

• Perpetrator:

  • Somebody who actually performed the criminal act

• Aider or abettor

  • Someone who assisted the perpetrator and was present at the time of the act

• Accessory:

  • Not present but encourages or directs the activity (before the fact), or aids after in helping perpetrator avoid capture

Mental State

• It does not matter if you know it was a crime, as long as you intended to commit that act

• Mens rea= guilty intent

Act (commission) or stopping a crime for being committed (omission)

Actus rea= merely thinking about it is not enough, the act must actually take place

Is harm necessary for a crime?

No. You can be charged with an attempt to harm others or conspiracy

Crimes & Corporations

• A company can only be fined rather than incarcerated

• However, the individuals who commit or participate in the crime may be fined and incarcerated

• Also, corporate officers can be held liable for the criminal acts of their employees. Liability may also attach when employees fail to act (omissions)

  • When they participate, direct, authorize, or fail to prevent the violation

  • US vs. Erickson

Omission

A failure to act when there is a duty to act

• You know someone is doing something illegal and you do nothing about it

• US vs. Park

Penalties for business and white collar crimes

• Courts apply % of revenues when calculating corporate fines and penalties

• Mandatory prison sentences for officers defined by US Sentencing Guidelines

  • Senior management that turns a blind eye from these corporate offenses are mandated to 27 to 36 months in jail

  • BEESCAM

US Sentencing Guidelines (BEESCAM)

• Bribery

• Environmental violations

• Employment crimes

• Securities violations

• Contract crimes

• Antitrust crimes

• Money laundering

Sarbanes-Oxley

• Passed after the Enron

• Focus on proper record-keeping/accounting

• Eliminate the possibility of slush funds- every dollar has to be accounted for in a public company

• Officers must certify financial statements when issued

Conspiracies

Agreement to commit a crime

Securities crimes

Insider trading

Money laundering

• Financial transactions to conceal source of funds

• Patriot Act expands coverage; banks are more involved in supervising accounts and large cash transfers (after 9/11)

  • Also maintains a running list of known terrorists

Racketeering

• Prosecute organized crime on an ongoing basis

• Witness tampering, kidnapping, extortion

Extortion

• Demand by public official

• Ex: governor demands someone builds an extension on his house in exchange for support of pending legislation

Blackmail

• Demand on public official

• Ex: support us or we will expose you as a politician

Counterfeiting

Goods or money

Forgery

Fradulently altering or signing a document

Perjury

False testimony under oath

False claims and pretenses

• False insurance claims

• Obtaining goods through misrepresentation

• False information given to banks

Embezzlement

• Stealing entrusted property

• Ex: a trustee of the money steals the funds

Larceny

• Wrongly taking title of other's property (which can include money)

• Petty larceny: inexpensive

• Grand larceny: expensive

Robbery

• Taking property by force

• Using a hammer to threaten someone

• Robbery will get you more jail time than larceny