Legal Foundations and Thinking Strategically

Chapter Learning Objectives

• Articulate a working definition of law and explain its basis.
• Categorize various laws and articulate the functions of law and legal systems.
• Explain the importance and benefits of legal awareness for business owners and managers in creating strategy and adding value to a company and the role of counsel in decision-making.
• Differentiate between and provide examples of primary and secondary sources of American law.
• Apply the legal doctrine of stare decisis in a business context.

What is Law?

• Definition of Law: A body of binding rules of action or conduct established by a controlling legal authority.
• Formation of American Law:
  • Established by elected legislators.
  • Interpreted by the courts (judiciary).
• Functionality of Law: Law creates duties, obligations, and rights, which are classified by subject matter:
  • For example, rules regarding agreements are classified as contract law; rules regulating the rights of employees fall under employment law.

Categories of Law

• Criminal Law:
  • Purpose: Protection of society.
  • Examples: Homicide, robbery, theft.
• Civil Law:
  • Purpose: Compensate parties for loss or damage.
  • Examples: Negligence that causes a personal injury.
• Substantive Law:
  • Purpose: Provides individuals with rights and creates specific duties.
  • Example: A state law that allows recovery for losses in a shipping contract.
• Procedural Law:
  • Purpose: Structure of rules ensuring rights.
  • Example: A state law that sets the time limit for filing a lawsuit after an injury.
• Public Law:
  • Definition: Established by a government entity.
  • Examples: Federal statutes (e.g., Patent Act) or state statutes (e.g., business corporation law).
• Private Law:
  • Definition: Arising from private agreements.
  • Example: Contract for services between a vendor and a business.

The Language of Law

• Legal Terms: Legal terms have significant specific meanings that must be learned alongside the application of legal doctrines in business contexts.
• Linguistic Roots: American law incorporates terms from early and modern English, French, and Latin.
• Authoritative Source: Black’s Law Dictionary is cited as the authoritative source for legal definitions.

Functions of Law

• Provides a system of order by defining rules of conduct and punishing violations.
• Promotes justice and equality in various societal sectors, particularly in education and the workplace.
• Establishes mechanisms for resolving disputes involving legal interests and rights.
• Acts as a catalyst for commerce, encouraging good faith dealings among merchants and consumers, and offering reliability in business planning and transactions.

Defining Strategy in the Context of Law

Law Trends for Business

• Increased regulation both domestically and internationally.
• Variability in international trade and intellectual property laws.
• Introduction of high and strict penalties for noncompliance.
• Increased liability for corporate officers and directors.
• Growth in the number of attorneys serving as directors on U.S. corporate boards.
• Changing legal landscapes, particularly in response to events like COVID-19.

Using Strategy in Legal Decisions

• Definition of Business Strategy: A set of guideposts formulated to achieve overarching objectives.
• Uncertain Legal Environment: Characterized by limited resources, opportunistic behavior, and asymmetrical information.
• Four Major Categories of Legal Strategies:
  • Noncompliance: Ignoring laws and accepting penalties as a cost of doing business.
  • Avoidance: Strategies to structure business practices to operate legally in a manner that avoids applicable laws.
  • Prevention: Implementing practices to adhere to existing laws and avoid violations.
  • Value Creation or Legal Competitive Advantage: Leveraging legal frameworks to create value, such as maintaining trade secrets.

Role of Business Legal Counsel

• Supports management in reviewing the legality of decisions.
• Advises on strategies to ensure compliance and avoid legal violations.
• Analyzes legal impacts of laws and changes in law on the firm.
• Prepares and files necessary legal documents.
• Defends the business in courts or before regulatory bodies.
• Seeks court relief for violations of the firm’s rights or damages incurred.
• Engages in lobbying legislators to effect changes in public policy.

Primary Sources of American Law

1. Constitutional Law:
   • Establishes governmental structures.
   • Grants specific powers to the government.
   • Provides rights and procedural protections.
   • Each state has its constitution, which must align with federal law.
   • Key issues include Congress’ power to regulate interstate commerce, commercial speech, and limitations on state authority regarding regulation and taxation of goods and services.
   • Supreme Law: In the United States, constitutional law is recognized as the supreme law of the land.

Case 1.1: Kelo v. City of New London

• Holding: The City of New London, Connecticut, was constitutionally authorized to take a homeowner’s property for just compensation under the Fifth Amendment, even if the intent was for economic revitalization rather than traditional public projects (e.g., highways).

1. Statutory Law:
   • Law enacted in accordance with constitutional provisions.
   • Includes federal statutes, state statutes, and local ordinances.

Case 1.2: United States v. Ulbricht

• Holding: The money laundering statute encompasses the use of Bitcoins in financial transactions. Bitcoins serve both as a direct payment method and a medium of exchange convertable into traditional currency, signifying their only value derives from their ability to facilitate payment.

1. Administrative Law:

   • Statutes that delegate rule-making authority to executive branch agencies and independent government entities.
   • Agencies manage federal statutes according to the stipulated laws and enforce regulations within their jurisdiction.
   • Courts typically defer to agency decisions concerning regulation enforcement and implementation.

2. Common Law:

   • American law, barring Louisiana, primarily stems from English Common Law.
   • Referred to as “Judge Made Law,” it is founded on centuries of judicial precedent, where judges apply past rulings to current cases with similar facts.

Examples of Laws That Impact Business

Law and Equity

• Remedies: Judicial actions to make up for civil legal injuries.
  • Remedies at Law: Typically consist of money damages; payments made by the wrongdoer to compensate the injured party for losses.
  • Equitable Relief: Provides relief when monetary damages are insufficient, which may include injunctions (requiring a party to stop certain actions) or specific performance (mandating a party fulfill contract obligations).

Case 1.3: Wilcox Investment, L.P. v. Brad Wooley Auctioneers, Inc.

• Holding: The auctioneers were not obligated to halt the auction, and since the bidder's action was genuine and independent, specific performance was found appropriate when money was not an adequate remedy.

Secondary Sources of Law

• Courts often refer to secondary sources when interpreting statutory law or applying judicially created law.
• Key Secondary Sources:
  • Restatements of the Law: Collections of uniform legal principles within traditional areas of state law.
  • Model State Statutes: Drafted by legal experts as templates for individual state legislatures to adopt.

Stare Decisis and Precedent

• Definition: Stare decisis refers to the doctrine whereby courts adhere to established precedents in making decisions.
• Stability of Precedent: Courts seldom alter precedent unless compelling circumstances necessitate a change for the sake of justice and society.

Case 1.4: South Dakota v. Wayfair, Inc.

• Holding: The Supreme Court determined that a business could maintain a meaningful presence in a state via virtual interactions without physical presence, negating previous rulings which didn't acknowledge significant virtual connections.

Thinking Strategically with Legal Strategies

Examples of Businesses Adopting Legal Strategies

• Noncompliance: Some shipping companies in New York may park illegally and simply account for parking fines as acceptable business costs.
• Avoidance: A large U.S. corporation might merge with a smaller foreign company, allowing the foreign entity to avoid U.S. taxes on future earnings.
• Prevention: Businesses frequently utilize legal disclaimers in consumer contracts to minimize liability.
• Value Creation: Companies leverage unique assets such as the Coca-Cola formula or Google's search algorithm to gain a competitive edge without breaching legal boundaries.