Chapter 1 Legal and Constitutional Foundations of Business

Chapter 1: Legal and Constitutional Foundations of Business

Chapter Objectives

By the end of this chapter, you should be able to:

• Explain how common law and civil law differ.
• Explain the creation and development of the common law.
• Explain the creation and development of statutory law.
• Explain how common law and civil law systems differ.
• List sources of administrative law.
• Define stare decisis.

Importance of Legal and Constitutional Foundations for Business

• Understanding these foundations is crucial for businesses to operate lawfully and effectively.
• Scenario Example: If a car company releases a new electric car prematurely without sufficient testing, various laws would be applied to determine liability and impact on the business. This highlights the practical need for legal reasoning and application in business decisions.

Sources of American Law

American law is derived from four primary sources:

• Constitutional Law
  • Based on the U.S. Constitution, which is the supreme law of the land.
  • Provides the fundamental framework for all other statutes and regulations.
  • States also have their own constitutions, as affirmed by the 10^{th} Amendment.
• Statutory Law
  • Laws enacted by legislative bodies at federal, state, and local levels.
  • Local Ordinances: Laws created by municipal or county governing bodies that address matters not covered by federal or state law (e.g., zoning regulations, building codes).
  • Applicability of Statutes: Statutes can have broad implications, as seen in Example 1.1 concerning "Sanctuary Cities."
  • Uniform Laws: Developed by the National Conference of Commissioners on Uniform State Laws (NCCUSL) to foster uniformity in trade and commerce among states.
  • The Uniform Commercial Code (UCC): A highly significant uniform law governing commercial transactions, adopted by all 50 states.
• Administrative Law
  • Consists of the rules, orders, and decisions issued by administrative agencies.
  • Examples of Agencies: Federal agencies include the Food and Drug Administration (FDA), Securities and Exchange Commission (SEC), and Federal Communications Commission (FCC).
  • Agency Creation: Agencies are created through enabling legislation, which grants them authority (e.g., Example 1.2 regarding the Federal Trade Commission (FTC)).
  • Agency Functions:
    • Rulemaking: Agencies create:
      • Legislative Rules: Legally binding rules that are as authoritative as congressional statutes.
      • Interpretive Rules: Non-binding rules indicating how an agency plans to interpret and enforce its statutory authority.
    • Enforcement and Investigation: Agencies possess both investigatory and prosecutorial powers to enforce their own rules.
    • Adjudication: Agencies conduct trial-like hearings before an administrative law judge (ALJ); courts typically give significant weight to ALJs' decisions.
• Case Law and Common Law Doctrines
  • This body of law governs all areas not covered by constitutional, statutory, or administrative law.
  • It is a fundamental part of the common law tradition, developed from judicial decisions.

The Common Law Tradition

• Early English Courts: The common law system originated in England around 1066 as a system of general rules developed by royal courts.
• Stare Decisis: A cornerstone of the common law, meaning "to stand on decided cases" or "let the decision stand."
  • Controlling Precedents: Judges are obligated to follow precedents (prior judicial decisions) established in previous cases within their jurisdiction.
  • Legal Stability: Stare decisis contributes to legal stability and predictability, ensuring that similar cases are treated similarly.
  • Departures from Precedent: While generally adhered to, courts can depart from precedent if they decide that the precedent is incorrect or that technological or social changes have rendered it inapplicable. A notable example is Case Example 1.5 Brown v. Board of Education of Topeka, which overturned the "separate but equal" doctrine.
  • When There Is No Precedent: In cases of "first impression," courts look to other legal jurisdictions, social policies, and ethical principles to make a decision.
  • Stare Decisis and Legal Reasoning: It guides judicial decision-making through logical analysis, ensuring consistent application of the law.
• Knowledge Check: Stare decisis involves binding decisions, promotes efficiency and stability, and decisions can be overturned under specific circumstances, thus "All of the above" describes its characteristics.
• Discussion on Fairness: The adherence to legal precedents is generally considered fair and reasonable as it promotes consistency and predictability. For instance, in a contract dispute, stare decisis would ensure that similar contract terms are interpreted consistently with past rulings.

Equitable Remedies and Courts of Equity

• Historically, separate courts of law and courts of equity provided different types of remedies.
  • Courts of Law: Focused on monetary damages.
  • Courts of Equity: Provided non-monetary relief when monetary damages were inadequate, such as specific performance, injunctions, or rescission.
• Remedies in Equity: These are typically issued when a legal remedy (money damages) is insufficient to make the injured party whole. Plaintiffs (the party initiating the lawsuit) and defendants (the party being sued) may seek equitable relief.
  • Example 1.6 Elena v. Rowan: Illustrates a situation where equitable relief might be sought.
• The Merging of Law and Equity: In most modern legal systems, courts are empowered to grant both legal and equitable remedies. Businesses and their attorneys must understand the types of remedies available for specific harms to request the appropriate relief.

Classifications of Law

• Substantive Law: Defines, describes, regulates, and creates legal rights and obligations (e.g., contract law, tort law).
• Procedural Law: Establishes the methods of enforcing the rights established by substantive law (e.g., rules for court proceedings).
• Cyberlaw: Pertains specifically to legal issues arising from online transactions and the Internet environment.
  • Example 1.7 Worker’s Compensation: This is an example of substantive law, defining rights and obligations regarding workplace injuries.
• Civil Law vs. Criminal Law:
  • Civil Law: Deals with disputes between private parties, where one party (the plaintiff) seeks to remedy a wrong committed by another party (the defendant). Examples include breach of contract or negligence causing injury.
  • Criminal Law: Deals with acts against society as a whole, prosecuted by the state or federal government. Examples include financial fraud and kidnapping.
• National Law vs. International Law:
  • National Law: The law of a particular nation, applicable within its borders.
  • International Law: Governs relations among nations, often established through treaties and international customs.

The Constitutional Powers of Government

• A Federal Form of Government: The U.S. operates under a federal system, dividing power between the national (federal) government and individual state governments.
  • Federal Powers: The enumerated powers granted to the federal government by the U.S. Constitution.
  • Regulatory Powers of the States: Known as police powers, states have broad authority to regulate for the health, safety, order, and morals of their citizens.
• Separation of Powers: The U.S. Constitution divides governmental power among three branches, preventing any single branch from becoming too powerful:
  • Legislative Branch: Congress (makes laws).
  • Executive Branch: President (enforces laws).
  • Judicial Branch: Courts (interprets laws).
  • This system is maintained by a series of checks and balances.
• The Commerce Clause: Article I, Section 8, Clause 3 of the U.S. Constitution grants Congress the power "to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes."
  • Expansion of Federal Powers: Historically, the Commerce Clause has been broadly interpreted, significantly expanding federal regulatory power to include activities that substantially affect interstate commerce.
    • Case Example: Heart of Atlanta Motel v. United States (page 16) demonstrated this, upholding the Civil Rights Act of 1964 based on Congress's power to regulate accommodations affecting interstate travel.
  • The "Dormant" Commerce Clause: Even when the federal government has not acted, states cannot pass laws that unduly burden or discriminate against interstate commerce.
• The Supremacy Clause: Article VI of the U.S. Constitution states that the Constitution, and the laws of the United States made pursuant to it, shall be the supreme law of the land.
  • Preemption: When federal law and state law conflict, federal law can preempt (take precedence over) state law.
  • Congressional Intent: Courts determine whether federal law preempts state law by examining congressional intent.
  • Classic Case Example 1.9 Medical Device Amendments: Illustrates federal preemption in the context of medical device regulations.

Business and the Bill of Rights

• The Bill of Rights (the first ten Amendments to the U.S. Constitution) protects individuals from various actions of the federal government.
• Corporate Personhood: Importantly, corporations are recognized as separate legal entities, or "legal persons," and thus enjoy many of the same protections under the Bill of Rights as natural persons.
• Limits on Federal and State Actions: The Fourteenth Amendment extends many of the Bill of Rights protections to state government actions through its Due Process and Equal Protection Clauses. This is a result of judicial interpretation over time.

The First Amendment—Freedom of Speech

• Protects both spoken and symbolic speech.
  • Symbolic Speech: Nonverbal expressions, such as gestures, movements, or articles of clothing (e.g., Example 1.10 Inflatable Rat).
• Reasonable Restrictions: Freedom of speech is not absolute and is subject to reasonable restrictions.
  • Content-Neutral Laws: Laws that regulate the time, place, and manner of speech, but not the content, are generally permissible if they serve a significant government interest (e.g., Case Example 1.11 Rita Ora).
  • Laws Restricting the Content of Speech: These laws are subject to strict scrutiny and are permissible only if they serve a compelling state interest and are narrowly tailored to achieve that interest (e.g., Spotlight Case Example 1.12 The Consolidated Edison Company).
• Corporate Political Speech: Corporations have First Amendment rights to engage in political speech, which is highly protected.
• Commercial Speech: Speech by businesses for profit (e.g., advertising) receives less protection than political speech but is still protected as long as it is not misleading.
• Unprotected Speech: Certain categories of speech are not protected by the First Amendment, including defamatory speech, threatening speech, and fighting words.
• Social Media and the Constitution (Group Breakout Discussion): The online environment raises questions about how traditional legal principles apply. Evaluating social media companies based on their impact as "citizens" rather than solely "consumers" suggests a broader ethical and societal perspective on free speech and online platforms.
• Ethical Issue: Employee Speech: While corporations can restrict employee speech (e.g., to protect trade secrets or prevent harassment), the ethical question arises whether they should always do so, balancing business interests with individual freedoms.

The First Amendment—Freedom of Religion

• The First Amendment contains two clauses relating to religion:
  • The Establishment Clause: Prohibits the government from establishing a religion or enacting laws that favor one religion over others (e.g., Example 1.15 Mount Soledad).
  • The Free Exercise Clause: Guarantees that people can hold any religious beliefs they choose or no religious beliefs. The government can restrict actions based on religious beliefs, but only if:
    • The restriction is necessary to achieve a compelling government interest.
    • The restriction is the least restrictive means of achieving that interest.
    • Case Example 1.16 Gregory Holt: Illustrated restrictions related to religious practice in a correctional setting.
    • Public Welfare Exception: When religious practices work against public policy and the public welfare, the government can act (e.g., Example 1.18 Muslim Woman).

Due Process and Equal Protection

• Due Process Clauses (Fifth and Fourteenth Amendments): No person shall be deprived "of life, liberty, or property, without due process of law."
  • Procedural Due Process: Requires that government decisions to take life, liberty, or property be made fairly, using fair procedures (e.g., adequate notice and an opportunity to be heard).
  • Substantive Due Process: Focuses on the content of the law itself. Laws that limit a fundamental right must have a compelling state interest; other laws must be rationally related to a legitimate government purpose.
• Equal Protection Clause (Fourteenth Amendment): States cannot "deny to any person within its jurisdiction the equal protection of the laws." This means the government must treat similarly situated individuals in a similar manner.
  • Strict Scrutiny: Applied to laws that discriminate based on a suspect classification (e.g., race, national origin) or that infringe on a fundamental right. Such laws must serve a compelling state interest and be narrowly tailored.
  • Intermediate Scrutiny: Applied to laws that discriminate based on gender or legitimacy. Such laws must be substantially related to important government objectives.
  • The "Rational Basis" Test: Applied to all other classifications. The law must have a rational relationship to a legitimate government interest (e.g., Case Example 1.22 Food Trucks).

Privacy Rights

• While not explicitly mentioned, the Supreme Court has found an implied right to privacy in the Constitution.
  • Olmstead v. United States (dissent by Judge Louis Brandeis): Described the right to privacy as "the most comprehensive of rights and the right most valued by civilized men."
• Federal Privacy Legislation:
  • Freedom of Information Act (FOIA): Allows public access to government records.
  • The Privacy Act: Regulates the collection, maintenance, use, and dissemination of information about individuals by federal agencies.
• The USA Patriot Act: Enacted after the September 11, 2001 attacks, it significantly increased the authority of government officials to monitor Internet activities and conduct surveillance, raising concerns about privacy.