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Chapter 1

Introduction to Law

L E A R N I N G O B J E C T I V E S

After reading this chapter, you should be able to understand the nature and sources of law, and the

concept of the rule of law and how it affects business and economic prosperity. At the conclusion of this

chapter, you should be able to answer the following questions:

1. What is the law?

2. Where does our law come from?

3. What is a rule of law?

4. How is the law relevant to business?

5. How does the study of the legal environment of business create a foundation for future business courses?

You might be wondering what the law has to do with you. You try to follow the rules. You don’t get into

any trouble. You want to engage in honest dealings in business. Besides, you can always hire an attorney if

you need legal help.

This may all be true. However, it is imperative for those in the business world to understand the legal

environment in which they are operating. While you may have the best inte ntions and be truly diligent in

your efforts to do business fairly, inevitably conflicts will arise in everyday business dealings. For example,

what does it mean to do business “fairly”? Fair to whom? Fair to your shareholders? Fair to your

employees? Fair to the consumers who will purchase your products? Through which ethical lens will you

contemplate these issues? Trade -offs are a part of business. If you want to increase shareholder profits,

you may need to reduce labor costs. One way to reduce labor cos ts is to use cheaper labor. If you pay your

employees less, your employees will be less well off, but your shareholders may be happier.

Consider the credit crisis that came to the world’s attention in October 2008 and nearly toppled the U.S.

economy into d epression. Hundreds of thousands of homes were foreclosed by banks ( Figure 1.1 "The

Credit Crisis" ), leading to a vicious cycle of depressed housing prices, shattered consumer confidence, and

business retrenchment. You may be thinking that this has little to do with you or with the study of the Saylor URL: http://www.saylor.org/books Saylor.org

legal environment of business. Think again. The credit crisis affected everyone. And the nature of the

crisis implicated several legal environment issues.

Figure 1.1 The Credit Crisis

Source: Photo courtesy of Bren del, http://en.wikipedia.org/wiki/File:Foreclosedhome.JPG .

In a nutshell, the U.S. financial system nearly collapsed under the weight of high default rates among

mortgagees, the issuance of excessive subprime mortgages to unqualified debtors, collateralized debt

obligations (CDOs) that were not being serviced and could not be sold, and a mortgage banking system

with flawed incentive structures from the bottom to the top. The mortgage industry created incentives for

those who worked in that industry to act in their own self -interest to make a profit, even at the exp ense of

the long -term health of the institutions for which they were working.

Considering this flawed incentive system, the results were not surprising to many economists, who know

that people tend to act in their own self -interest, even at the expense of their institutions’ goals. Mortgage

brokers had very strong incentives to approve every mortgage applicant, regardless of creditworthiness or Saylor URL: http://www.saylor.org/books Saylor.org

ability to service the mortgage. This was because the lenders were pressuring them for more mortgages, so

that the lenders themselves could sell those mortgages for a profit. And this pressure for “more” was

endemic at every level of the mortgage industry, from the would -be homeowner who wanted more house

than he or she could afford to the investment bankers who wante d more CDOs on which they could profit.

However, excessive risk was undertaken, and when mortgagees began defaulting on their mortgages, the

market became flooded with houses that had been foreclosed. As supply of houses increased and demand

for them fell, housing prices plummeted, which meant that not only were the investors not receiving

income on their investments, but also homeowners were losing the value of their investments, since their

house prices were plummeting. The end result was that many homeow ners were “upside down” on their

obligations, meaning that they owed more on their houses than what the houses were worth. This created

an incentive for mortgagees to abandon their debt obligations. When the investors did not receive income

on their invest ments, they also were not receiving the cash flow to cover their debts, and they could not

service their obligations under their CDOs. Parties at every level began clamoring for protection from

their creditors from the U.S. bankruptcy courts by filing peti tions for bankruptcy.

Hyperlink: Credit Crisis

http://vimeo.com/3261363

This video explains the credit crisis and will help you begin thinking about the intersection between the

legal environment of business and the role of government in regulating business.

After watching the video in Note 1.2 "Hyperlink: Credit Crisis" , consider the intersection between law and

economics. Former Federal Reserve Chairman Alan Greenspan had consistently maintained tha t private

regulation (that is, self -regulation by private industry) was better at containing risk than government

regulation. But when the 2008 credit crisis manifested, Greenspan retracted this belief, at least in part.

He expressed that he was in “a stat e of shocked disbelief” concerning the financial institutions’ inabilities

to self -regulate. [1] He always believed that the incentive of survival of the institution itself would force

banks to self -regulate. However, this “shocked disbelief” underscored a fissure within the discipline of

economics —namely, whether the same economic principles that apply to individuals also apply to

organizations. While we know from our study of economics that individuals act in their own self -interest, Saylor URL: http://www.saylor.org/books Saylor.org

the 2008 credit crisi s perhaps illustrated that people continue to act in their own self -interest, even when

working within a firm. The firm itself is only a collection of individual people, and so the firm itself does

not act in any type of organizational self -interest.

You m ight be wondering why we are discussing economics. This is because economic principles are

intertwined with economic prosperity, and economic prosperity is intertwined with business, as the

preceding example illustrates. To understand what happened in the credit crisis and, more importantly,

how to prevent something like this from happening in the future, we have to understand economic

principles that impel behavior. Additionally, we have to understand how our laws can embody the

knowledge that we have from economics to prevent situations like this from happening in the future.

Specifically, while a basic principle of economics is that individuals act in their own self -interest, they do

so within the rules of the game. That is, they do so within the paramete rs of the law. Additionally,

sometimes individuals weigh the penalties of violating the law against the chances of getting caught to

determine how they should behave. In both instances, the law is a restraint on behavior.

Reflect on the credit crisis and h ow our laws could have entirely averted or seriously mitigated the fallout

that resulted from it. For example, if the laws regulated the incentive structures that exist within private

industry, the individual incentive to make a profit would not have been allowed to overtake the financial

institutions’ need to self -preserve by limiting risk. Likewise, if our banking regulations limited the types of

services that banks could offer, perhaps the exotic financial instruments that were created as a precursor

to the credit crisis would not have been permitted in the first place. If the size of our financial institutions

had been limited by law, the dangerous fallacy that the financial institutions were too large to fail could

not have been perpetuated. If compensa tion packages were legally restricted by limitations on size or

severed from linkages to performance, then individual incentives to maximize profit could have been

restrained. Additionally, this situation raises several ethics questions. For example, was i t ethical to loan

money to people who were not able to service those debts?

As you think about these questions and the many other questions that will arise during your study of the

legal environment of business, try to set aside any fixed ideas that you ha ve already formulated about law

and the legal system. Many students who are new to the study of law find themselves sharply swayed by a Saylor URL: http://www.saylor.org/books Saylor.org

particular type of fiction that has grown around the legal system. Specifically, many students find that

they harbor a s ense of repugnance to law, because they have heard that it is filled with frivolous lawsuits

brought by a litigious public waiting to pounce at the smallest slight, along with money -grubbing

attorneys waiting to cash in. We ask that you set aside those and any other preconceived notions that you

may harbor about the law and the legal system. The law is a dynamic, sophisticated field. Frivolous

lawsuits are not permitted to advance in our legal system, and most attorneys are committed to justice

and fairness . They work hard to protect their clients’ legal interests and simply do not have the desire or

the time to pursue frivolous claims. Indeed, there is no incentive for them to pursue such claims, because

our legal system does not reward such behavior.

Most people want to conduct themselves and their business dealings within the parameters of the law.

Even if we are very cynical, barring any other compunction to behave well, we can see that it makes the

most economic sense to do so. Following the rules of the game saves us money, time, and aggravation, and

it preserves our individual and professional reputations. So if most people recognize that they have an

incentive not to run afoul of the law, why are there so many legal disputes? There are many reasons for

this, such as the fact that many of our laws are ambiguous, and reasonable people may disagree about

what is “right.” Additionally, legal injuries happen even under the best of conditions, and the aggrieved

parties need a method to press their claims to b e compensated for their damages.

A common theme in the study of the legal environment is responsibility. Much of our legal wrangling

seeks to answer the questions, “Who is responsible, and what should be done about this injury?”

Additionally, and perhaps m ore importantly for business, is the concern of how to limit liability exposure

in the first place. A solid understanding of the legal environment of business should help limit the risk of

liability and thus avoid legal disputes. Moreover, it should help y ou recognize when you need to contact

your attorney for assistance in defining the contours of the law, which are the rules of the game. The law

provides continuity and a reasonable expectation of how things will be, based on how they have been in

the past . It provides predictability and stability.

This book does not teach you how to practice law or to conduct legal research. That is the work of

attorneys. Legal research is a sophisticated method of research that seeks to determine the current state of Saylor URL: http://www.saylor.org/books Saylor.org

the law regarding narrowly defined legal issues. Legal research helps guide our behavior to help us comply

with the rules of the game. When you need an answer regarding a specific legal issue, you will contact your

attorney, who will research the issue, inform you of the results of that research, and advise you of the

decisions you must make with respect to that issue.

The goals of this book are practical. Try to conceptualize your study of the legal environment of business

as a map by which you must navigate y our business dealings. We want to teach you how to read this map

so that you are able to understand the law and how it affects your business and your life. Besides limiting

legal liability proactively, an understanding of the law can also help you avoid se rious missteps. After all,

ignorance of the law is no defense for violating the law.

This chapter provides an overview of the legal system. We begin with a discussion of what the law is, and

then we turn our attention to the sources of law, the rule of law , the reasons why rule of law is important

to business, and how law affects business disciplines such as management, marketing, finance, and

accounting. The chapter concludes with a discussion of the link between rule of law and economic

prosperity.

Key Ta keaways

Law is a dynamic and ever -changing field that affects everyone, both in their individual capacities as

people and in their business interactions. Studying the legal environment of business helps us understand

how to reduce liability risks, identify legal problems that require an attorney’s assistance, and identify the

links between business and the law.

[1] Brian Knowlton and Michael M. Grynbaum, “Greenspan ‘Shocked’ That Free Markets Are Flawed,” New York

Times , October 23, 2008, http://www.nytimes.com/2008/10/23/business/worldbusiness/23iht -

gspan.4.17206624.html (accessed August 18, 2010).

Saylor URL: http://www.saylor.org/books Saylor.org

1.1 What Is Law?

L E A R N I N G O B J E C T I V E S

1. Understand the meaning of jurisprudence and how its study can lead to greater understanding of our laws

and legal system.

2. Distinguish among law as power, legal positivism, legal realism, and natural law.

3. Examine strengths and criticisms of sever al theories of jurisprudence.

4. Explore examples of several theories of jurisprudence.

If you were asked to define “the law,” what would you say? Is “you should eat five fruits and

vegetables a day” a law? What distinguishes law from mere suggestions or good advice? The key

difference is obviously enforcement and consequence. If you don’t eat five fruits and vegetables a

day, you are not going to be imprisoned or fined. If you steal or embezzle, however, you may be

prosecuted and face stiff financial penaltie s and imprisonment. Law , therefore, is a set of rules that

are enforced by a government authority.

Now consider the nature of law. Would you say that the law includes only the actual words that are

written, or does it also include reading between the lines to discern the spirit of the law? Would you

follow a law that you disagreed with, or would you ignore such a law? Do you believe that what the

law actually is matters as much as who enforces it? Do you think that morality is a part of legality, or

do you think that morality is wholly separate from the law?

Based on the particular system of jurisprudence to which one ascribes, these questions will generate

different answers. Not only will the answers to these questions differ, but the potential outcomes of

legal disputes can also vary widely, depending on one’s conception of what the law is. These

differences highlight fundamental disagreements over the nature of law.

Jurisprudence is the philosophy of law. The nature of law has been debated for centuries, giving rise

to a general coalescence of ideas to create particular schools of thought. Several different theories of

jurisprudence are explored in the paragraphs that follow.

At a most basic interpretation, some believe that law is simply power. That is, t he law is followed

because the sovereign issues orders that are backed by threats. Consider tyrannical rulers who create Saylor URL: http://www.saylor.org/books Saylor.org

arbitrary laws or bad laws. If the sovereign has the power to enforce those “laws,” then regardless of

the “badness” of the law, it is still law. The Nazis executed six million Jews pursuant to German law

during World War II. Saddam Hussein routinely tortured and executed political opponents and

minority Sunni Muslims in Iraq under Iraqi law. The military in Myanmar (known euphemistically

as the State Peace and Development Council) imprisoned the democratically elected and Nobel Peace

Prize –winning prime minister of the country, Aung San Suu Kyi ( Figure 1.2 "Aung San Suu Kyi" ),

under color of authority . (Actions taken under the law are sai d to be under the color of authority.)

Those who ascribe to the idea that law is power often argue that coercion is an essential and

necessary feature of law.

Figure 1.2 Aung San Suu Kyi

Source: Photo courtesy of the U.S. Department of State, http://en.wikipedia.org/wiki/File:Burma_3_150.jpg .

Let’s explore whether the law is nothing more than power. If an armed person robs your store, you

will very likely hand over what ever it is that he or she wants. The robber has exercised power over

you but has not exercised the law. This is because, as you might point out, an armed robber is not the

sovereign power. But compare this to a sovereign who exercises power over you. For i nstance,

imagine a government that institutes compulsory military service (the draft) under threat of

imprisonment for failing to comply. The sovereign would have the power to deprive us of our liberty

if we did not follow the rules; such a law certainly h as the force of power behind it.

Many have criticized the understanding of law as nothing more than power backed by threats. For

example, some point out that if law is nothing more than power, then the subjects of the law are Saylor URL: http://www.saylor.org/books Saylor.org

simply at the mercy of whoever is in power. If we look at the U.S. system of government, however,

citizens generally do not feel that they are “at the mercy” of the government. This is because people

also have power. People can elect their government officials, and they can vote “out” government

officials who aren’t doing a good job. In this way, those in power are accountable to the people. Other

criticisms include the more piercing observation that not all law requires the exercise or threat of

overt power. For instance, many of our l aws rely on economic incentives, rather than force of power,

to encourage compliance. Though penalty provisions may exist for violating those laws, those

penalties may not be driving compliance itself.

A competing view is that of legal positivism , whose pr oponents disagree that law is simply power.

Legal positivists believe that the law is what the law says. The laws are written, human -made rules.

The law is not drawn from any source higher than man. Legal positivists do not try to read between

the lines. T hey may disagree with the law as it is written, but they will acquiesce to the sovereign

power and follow the law as it is written. They reject any belief that they have an individual right to

disobey a law that they happen to oppose, providing that the la w is from a legitimate source.

Positivists believe that law is wholly separate from any consideration of ethics. Moreover, they do not

believe that people have intrinsic human rights other than those created by the law. This is very

different from a natura l rights perspective, which is discussed in the following paragraphs.

Positivists differ from the view that law is simply power, because they believe that valid law must be

created pursuant to the existing rules that allow the sovereign to create law. Unde r this way of

thinking, an arbitrary declaration of law by a sovereign who did not follow the rules for creating the

law would not be viewed as valid law. Additionally, positivists would not consider any rule or “law”

created by an illegitimate ruler as va lid law. Consequently, a legal positivist would feel no need to

obey an illegitimately created “law.”

Consider the example of the draft again. Some people have a strong moral objection to engaging in

armed conflict with other human beings. However, a legal positivist would most certainly comply

with a law that required compulsory conscription, though he or she might use other legal channels to

try to change the law. Saylor URL: http://www.saylor.org/books Saylor.org

A common criticism of legal positivism is that it prohibits individuals from remaining true to their

own consciences when their consciences conflict with the laws of the sovereign. However, for a

positivist, the desirability of enacting a law that might be viewed as “good” or “bad” is not relevant

for determining what the law is.

Some critics poi nt out that legal positivism is too limited in its conception of law. For instance, at

least some laws seem to reflect a moral stance. The prohibition against insider trading (using

nonpublic information to buy or sell a stock to make money) might be said to encompass the idea of

fairness, which is a moral consideration. Likewise, due process (fundamental fairness and decency in

government actions) might be said to encompass the ideas of both fairness and a moral position

against cruelty. Moreover, not all law is the result of a sovereign -issued, written rule. For

example, international customary law has developed through customary practices. It is valid law, but it

is not a set of rules handed down from a sovereign ruler.

A different viewpoint is legal reali sm , which is the belief that the law itself is far less important than

the consideration of who is in the position to enforce the law. Like positivists, legal realists believe

that law is the product of human making. However, unlike positivists, they belie ve that the outcome

of any issue that arises under law is dependent on the person, such as a judge, who is in the position

to exercise power under the mantle of the law. Additionally, realists believe that social and economic

considerations should be broug ht to bear in legal disputes, which may very well be “extra”

considerations that are not captured by the written law itself.

If a realist brought a dispute before a particular judge who was known to be unsympathetic to that

particular type of dispute, the realist would believe that the judge’s decision would reflect that

leaning. For example, if a dispute arose under the Clean Water Act, and the defendant was a legal

realist who believed that the judge was unduly harsh with environmental offenders, the lega l realist

would not look to the actual words of the Clean Water Act itself to determine a likely outcome.

Instead, the defendant would view the judge’s personal and professional beliefs about water

pollution as determinative factors. Moreover, if the plain tiff in the same case were a realist who did

not believe that the Clean Water Act was very strong, that plaintiff might hope that the judge would Saylor URL: http://www.saylor.org/books Saylor.org

consider the social importance of clean water to human health, natural environment, and nonhuman

animals.

Crit ics of legal realism point out that those who are in the position to exercise the power of the law

over others should not circumscribe the checks and balances of our system of government by

considering factors outside of legitimate sources of law when maki ng decisions. For instance, they

argue that judges should not use any factors other than the written law when rendering decisions.

Legal realists, however, point out that judicial interpretation not only is necessary but also was

contemplated by our Foundi ng Fathers as a built -in check and balance to our other branches of

government.

Natural law is the idea that humans possess certain inalienable rights that are not the products of

human -made law. Therefore, we can say that natural law differs from both positivism and realism in

this important respect. Humans are able to reason, and therefore the y are able to discover moral

truths on their own. They are not automatons who require a sovereign power to tell them right from

wrong. Natural law adherents do not reject human -made law. However, they recognize that human -

made law is subordinate to natural law if the two types of law conflict.

Civil rights activists often rely on natural law arguments to advance their platforms. This is true

today as well as historically. For example, a civil rights advocate might point out that regardless of

what the law “ says,” discrimination based on race is simply wrong. If the written law allowed racial

discrimination, natural law adherents would not recognize the law as valid.

Each theory of jurisprudence can inform our understanding of legal issues by allowing us to s ee the

same thing from many different perspectives. Moreover, depending on philosophical perspective,

there may be several possible outcomes to the same legal dispute that are equally supportable. This

understanding can help us identify common ground among disputants as well as points of departure

in their reasoning.

K E Y T A K E A W A Y S Saylor URL: http://www.saylor.org/books Saylor.org

Different theories of jurisprudence inform our understanding of what the law is. Examining legal issues

through the lenses of different theories of jurisprudence allows us to see how different outcomes can be

defended.

E X E R C I S E S

1. Read “The Case of the Speluncean Explorers” at http://www.nullapoena.de/stud/explorers.html . Identity

the justice’s opinion with which you most closely agree. Name the different theories of jurisprudence used

by each justice in reaching his or her opinion.

2. What are some examples of natural law in our legal system or system of governance?

3. Is it more important for you to follow the le tter of the law or to follow the spirit of the law? In what

circumstance would you believe the opposite to be true?

4. Can you think of any examples of law in which the threat of force or power is not needed?

5. Do you believe that morals are a part of our law, or do you believe that morality and law are separate

concepts?

Saylor URL: http://www.saylor.org/books Saylor.org

1.2 Sources of Law

L E A R N I N G O B J E C T I V E S

1. Differentiate between social customs and law.

2. Become familiar with primary sources of law in the United States.

3. Understand the difference between public law and private law.

4. Understand the relationship between state and federal systems of government.

Hyperlink: Supreme Court Friezes

http://www.supremecourt.gov/about/north&southwalls.pdf

Along the north and south walls of the Great Hall at the U.S. Supreme Court, friezes representing the

great lawgivers in history are carved in marble. Among them are Hammurabi, Moses, Solomon, Draco,

Confucius, Muhammad, Napoleon, and one American. Click the link to find out who he is.

Where does the law come from? How do you know right from wrong? Certainly your caretakers

taught you right from wrong when you were a child. Your teachers, community elde rs, and other

people who were in the position to help shape your ideas about appropriate manners of behavior also

influenced your understanding of which behaviors are acceptable and which are not. Additionally,

employers often have very firm ideas about ho w their employees should comport themselves. Those

ideas may be conveyed through employers’ codes of ethics, employee handbooks, or organizational

cultures.

Of course, actions that are considered “wrong” and inappropriate behavior are not violations of the

law. They simply may represent social norms. For example, it is generally not acceptable to ask

strangers about their income. It is not illegal to do such a thing, but it is considered impolite.

Imagine that you are interviewing for a position that you re ally want. Can you imagine yourself

asking your potential employer how much money he or she makes? It would not be illegal for the

employer to refuse to hire you based on your lack of social skills. However, it would be illegal for the

employer not to hire you based solely on your race. Saylor URL: http://www.saylor.org/books Saylor.org

So what is the difference? One type of “right from wrong” is based on societal norms and cultural

expectations. The other type of “right from wrong” is based on a source recognized as a holding

legitimate authority to make, and enforce, law within our society. These are two types of rules in our

society —social norms and laws.

A Question of Ethics

In January 2010, Haiti, the poorest country in the Western Hemisphere, was struck by a massive

earthquake that killed tens of thous ands —maybe even hundreds of thousands —of people. Rescue workers

rushed to remove survivors from the rubble, but in the days following the earthquake thousands of people

wandered the streets without food or shelter. Some instances of looting and violence oc curred as survivors

grew desperate for sustenance.

In the meantime, Royal Caribbean operated a cruise line that made a regular stop at Haiti, at a private

beach where it had previously spent millions of dollars in improvements to ensure that the vacationer s on

its cruise ships would enjoy themselves during their overnight stops. Within a week of the disaster, Royal

Caribbean was seeking to assure its customers that the stop in Haiti was not unethical. It pointed out that

bringing tourist dollars to Haiti wa s actually an ethical thing to do, despite the thousands of dying and

injured just a short distance away.

If you were scheduled to begin a vacation on a Royal Caribbean cruise ship that docked at its private beach

during the week following the earthquake, would you go? If you decided to go, how would your friends

and family react to your choice? If Royal Caribbean was not legally required to issue refunds for

nonrefundable tickets, should it be willing to issue refunds anyhow?

Check out a video of Royal Car ibbean’s CEO discussing his company’s involvement in bringing emergency

supplies to Haiti, as well as the potential for using ships as hotels or hospitals in the interim.

http://cnn.com/video/?/video/world/2010/01/18/ct.anderson.haiti.cruise.cnn

Social customs may be violated on pain of embarrassment or ostracism. Someone ma y choose to

ignore social customs, but there are usually negative social or professional consequences to doing so.

A person who violates social customs may be said be a boor, or people may try to avoid that person Saylor URL: http://www.saylor.org/books Saylor.org

because his or her actions and comments ma ke others uncomfortable. However, no legal

repercussions follow violating social customs.

Violations of law are different. Violating the law carries penalties, such as liability or loss of liberty,

depending on the type of violation. While we may generally decide whether or not to conform to

social customs, we are compelled to obey the law under threat of penalty.

Law can generally be classified as public law or private law. Public law applies to everyone. It is law

that has been created by some legitimate authority with the power to create law, and it has been

“handed down” to the people within its jurisdiction. In the United States, the lawmaking authority

itself is also subject to those laws, because no one is “above” the law. If the law is violated, pena lties

can be levied against the violator. These penalties are also “handed down” from some recognized

source of authority, like the judiciary. Of course, people in the United States may participate in many

law -creating activities. For instance, they may vo te in elections for legislators, who, in turn, create

legislation. Likewise, if people have a legal claim, their case may be heard by the judiciary.

It’s important to note, however, that not all law is public law. Private law is typically understood to be

law that is binding on specific parties. For instance, parties to a contract are involved in a private law

agreement. The terms of the contract apply to the parties of the contract but not to anyone else. If the

parties have a contract dispute, they will b e able to use dispute -resolution methods to resolve it. This

is because both parties of the contract recognize the judiciary as a legitimate authority that can

resolve the contract dispute. However, regardless of the resolution, the terms of the contract a nd the

remedy for breach will apply only to the parties of the contract and not to everyone else.

Additionally, some law is procedural and some law is substantive. Procedural law describes the legal

rules that must be followed. In other words, it details t he process or rules that are legally required.

For instance, the U.S. government must generally obtain a warrant before searching someone’s

private home. If the process of obtaining the warrant is ignored or performed illegally, then

procedural law has bee n violated. Substantive law refers to the actual substance of the law or the

merits of the claim, case, or action. Substantive law embodies the ideas of legal rights and duties and

is captured by our different sources of law, like statutes, the Constitutio n, or common law. Saylor URL: http://www.saylor.org/books Saylor.org

Sources of Law

In the United States, our laws come primarily from the U.S. Constitution and the state constitutions; from

statutory law from Congress, the state legislatures, and local legislative bodies; from common law; and

from administrative rules and regulations. Executive orders and treaties are also important sources of law.

These are all primary sources of law . As is true in any democracy, U.S. law reflects the will of the people

who vote for representatives to make the law. In this way, U.S. law is also a reflection of public policy.

Secondary sources of law include restatements of the law, law review and journal articles, uniform codes,

and treatises . These sources are created by legal scholars rather than by a recognized, legitimate law -

creating authority. However, these sources are read by and often influence those who are in the position

to create law. Members of the judiciary, for example, may consult a restatement of law or law -review

articles when making decisions. Lik ewise, state legislatures often adopt whole or parts of uniform acts,

such as the Uniform Commercial Code (UCC) . When a body of secondary law is formally adopted by a

legitimate lawmaking authority, then it becomes primary law. In this example, adoption of the UCC by a

state legislature transforms the UCC from a secondary source of law (a model code) to a primary source of

law in that state —namely, a statute.

Hyperlink: The U.S. Constitution

http://www.archives.gov/exhibits/charters/constitution_transcript.html

Read the U.S. Constitution at this link.

The U.S. Constitution created the structure of our federal government. Among other things, it sets forth

the thr ee branches —the legislative, executive, and judicial branches.

It provides organizational and procedural requirements, defines the boundaries of each branch’s

jurisdiction, and creates “checks” on each branch by the other branches. For example, look at Not e 1.26

"Hyperlink: The U.S. Constitution" . As you can see, in Article II, Section 2 the president is the commander

in chief of the several armed forces, but he does not have the power to declare war. That duty falls to

Congress. Saylor URL: http://www.saylor.org/books Saylor.org

The first ten amendments to the U.S. Constitution are known as the Bill of Rights. Some of the Founding

Fathers did not believe that a Bill of Rights was necessary because the power granted to the federal

government created by the U.S. Constitution was expressly limited. Any powers not expressly granted to

the federal government by the U.S. Constitution are reserved to the states. This means that if the U.S.

Constitution does not state that one of the federal branches of government has jurisdiction over a

particular area, then that a rea falls to the states to regulate.

Despite the limited power granted to the federal government by the U.S. Constitution, as a condition of

ratification, many states insisted on a written Bill of Rights that preserved certain individual civil rights

and l iberties. Today, business entities that are treated as legal persons under the law, such as

corporations, enjoy many of these rights and liberties, just as if they were natural human beings.

Each state also has its own constitution, and those constitutions serve essentially the same function for

each individual state government as the U.S. Constitution serves for the federal government. Specifically,

they establish the limits of government power, create protections for fundamental rights, and establish the

organization and duties of the different branches of government at the state level.

This dual system of government present in the United States is called federalism , which is a governance

structure whereby the federal government and the state governments coexist through a shared power

scheme. State laws may not conflict with federal laws, including the U.S. Constitution. This is because the

U.S. Constitution is the s upreme law of the land.

Statutory law is law created by a legislative body. Congress is the legislative body at the federal level. The

states also have legislative bodies, most of which are bicameral , like our federal system. The state

legislatures’ names vary by state. For instance, in Indiana, the legislature is known as the General

Assembly. In North Dakota, it is the Legislative Assembly. In New York, it is called the Legislature.

Nevertheless, their purposes are the same. They are the legislative branc hes of their respective state

governments.

Congress is composed of a Senate, with 100 members, and a House of Representatives, with 435

members. The forefathers who wrote the Constitution deliberated and argued over how to compose the

legislature, and the result is a deliberative body that doesn’t always respond quickly to the will of the Saylor URL: http://www.saylor.org/books Saylor.org

majority. Since population numbers from the census taken every ten years determine how many House

seats a state receives, smaller states are sometimes disproportionately r epresented in the Senate. Alaska

and Delaware, for example, have only one representative in the House, but each has two senators.

Senators serve six -year terms, and members of the House of Representatives serve two -year terms. There

are no term limits for either senators or members of the House. One benefit of having no term limits is

that institutional knowledge and wisdom can be carried forward in perpetuity. One drawback is that

elected officials may hedge their votes on important issues in a calculated way, to ensure reelection. If

term limits were imposed, then vote pandering would not be a problem, but the Congress would be

forever laboring with many inexperienced lawmakers.

As you can see from Note 1.32 "Hyperlink: How a Bill Becomes a Law" , a bill may be introduced in

Congress through the Senate or through the House of Representatives. Both the House of Representatives

and the Senate have many committees, and these are related to all areas under the purview of Congress to

legislate. After a bill is introduced, it is sent to an appropriate committee in the chamber of the Congress

where the bill originated. If the committee moves forward with the bill, it modifies the bill as it sees fit to

do, and then it sends the bill to the house of origin ation (either the Senate or the House of

Representatives) for a vote. If the bill passes, then it is sent to the other house (again, either the Senate or

the House of Representatives), where it undergoes the same process. If the other house votes to approv e

the bill, then the bill goes to the joint committee, which is composed of members of both the House of

Representatives and the Senate, where final work is completed. After that, the bill is sent to Congress for a

full vote. If the bill passes, it is sent to the president. If the president signs the bill, then it becomes a

statute.

The president may veto a bill. A presidential veto is an executive “check” on the legislative body. However,

if the president vetoes a bill, the legislature can override the vet o by a supermajority vote. A congressional

override is a legislative “check” on the executive branch. These checks are built into our U.S. Constitution.

Hyperlink: How a Bill Becomes a Law

http://www.lexisnexis.com/help/CU/The_Legislative_Process/How_a_Bill_Becomes_Law.htm Saylor URL: http://www.saylor.org/books Saylor.org

Check out the interactive flowchart for how a bill becomes law. Be sure to click on the different boxes for

additional inform ation about each step.

Importantly, Congress may not act outside of its enumerated powers. Many people wrongfully believe that

Congress can do anything. That is simply not true. Look at Article I, Section 8, accessible through Note

1.26 "Hyperlink: The U.S . Constitution" , for the enumerated powers of Congress. Remember that any

power not granted to the federal government by the U.S. Constitution is reserved to the states. This means

that if Congress passed a law in an area that was actually reserved to the states to regulate, Congress

would have acted outside the scope of its powers. If challenged, the law would be struck down as

unconstitutional.

As a practical matter, this means that many U.S. states have state laws that are very different from each

other. For instance, in Oregon, certain terminally ill patients may legally commit suicide under the state’s

Death with Dignity Act. However, in many other states, such an act would be illegal.

Common law is judge -made law. Common law is a feature of most countr ies previously colonized by Great

Britain, where it originated. In continental Europe, an alternative system called civil law developed, where

judges do not have the power to create law through interpretation. In civil -law jurisdictions, only the

legislatu re may create law. A jurisdiction is an area where power may be exercised.

In a common -law system, when an appellate court hears cases and writes opinions, rules of law are

created, formed, and shaped. After a particular legal issue has been decided in a j urisdiction, there is a

high probability that subsequent cases that present the same legal issue will use the same rule of law

generated from already -decided cases regarding the same legal issue. This policy is known as stare decisis ,

or “let the decision stand.” This is how a precedent is formed, though precedents may shift or change over

time. Precedents also may be entirely overturned, though that is rare. Precedents and stare decisis allow

us to anticipate the behavior of others and to gauge the legalit y of our own actions.

Legal reasoning is used by attorneys to argue for a particular outcome in a case and by judges when

rendering decisions. At its most basic form, legal reasoning involves first identifying the legal question,

which is the issue in disp ute. Then, the rule of law that applies to that issue is identified. The rule of law

may be drawn from precedent, for example. The facts of the case are analyzed against the rule of law to Saylor URL: http://www.saylor.org/books Saylor.org

reach a supportable conclusion. This method of legal reasoning is r eferred to as the IRAC method, which

is an acronym for issue, rule, analysis, and conclusion.

Common law is an important source of law in those many areas that are reserved to the states to regulate.

A state may exercise its police powers to regulate the s afety, health, and welfare of its citizens, for

example. The laws implemented in these areas may give rise to laws in divergent areas, such as property

law (e.g., zoning regulations), so -called vice laws (e.g., restrictions on vice business activities in c ertain

areas or during certain days), and domestic relations (e.g., laws relating to marriage and adoption). It’s

also important to note that precedents vary among different jurisdictions because precedents created by

one jurisdiction are not binding in ot her jurisdictions.

Most administrative agencies are created by the legislature. At the federal level they are created by

Congress, and at the state level they are created through the state legislative bodies. Administrative

agencies may be thought of as a delegation of congressional authority to area experts in particular fields,

so that those experts can engage in limited lawmaking, adjudicative procedures, and investigations within

their particular purviews. Laws made by administrative agencies are called rules or regulations .

Administrative agencies are created by enabling legislation , which sets forth the agencies’ jurisdictional

boundaries, rule -making procedures, and other information relating to agencies’ scopes of power.

K E Y T A K E A W A Y S

The legal system in the United States is composed of multiple jurisdictions at the local and state levels and

one federal jurisdiction. Local and state laws may not conflict with federal laws. Primary sources of law in

the United States include constitutional law, s tatutory law, common law, and administrative law.

E X E R C I S E S

1. Identify an action that would violate social norms but would not violate any laws. Can you identify any

violations of law that would not violate any social norms?

2. What are three specific powers of Congress? What are three specific powers of the executive branch? Do

you think that the powers of the judicial branch are well defined? Why or why not?

3. What areas of law have been reserved to the states to regulate? How do you know?

4. Identify a bill in eit her the House of Representatives or the U.S. Senate. What stage(s) of the bill process

has it passed through? To be passed into law, what stages must it still pass through? Saylor URL: http://www.saylor.org/books Saylor.org

5. Which three federal administrative agencies affect you or your family the most? Why ?

Saylor URL: http://www.saylor.org/books Saylor.org

1.3 The Rule of Law

L E A R N I N G O B J E C T I V E S

1. Understand what a rule of law system is.

2. Explore the U.S. rule of law system.

When you hear the term “rule of law,” what comes to mind? It may seem like an ambiguous term, but

it is used frequently in legal and governance circles. Rule of law is a system of laws under which the

people and the government are bound, which allows predictability and restraint of government

action.

A rule of law legitimizes the law. It establishes clear rules of behavior, establishes (or captures)

precedent, and seriously undermines any defense of ignorance of the law. Moreover, it holds people

to the same standards, though in many ancient rules of law, the standards differed depending on the

person’s classification. For instance, men often had different rights than women. Slaves were a

different legal class than those who were free, and indentured servants were often a different

classification altogether. When people are held to the same standards, we can see systems of fairness

(that is, equal justice under the law) emerging, at least for those within the same class.

The Founding Fathers of the United States did not create our rule of law system out of thin air. Many

rule of law systems existed prior to the founding of the United State s. The U.S. rule of law system has

many similarities with prior rule of law systems from which our Founding Fathers drew their ideas.

We can trace elements of our legal genealogy back to ancient Babylon. For example, who has the

right to govern, the legiti mate sources of law, the organization of government, substantive and

procedural legal responsibilities, processes for dispute resolution, and consequences for legal

transgressions are all common foci for rule of law systems.

Can you imagine if we had no wa y to determine these things? Imagine that we did not know who had

the legitimate right to govern or that we did not know which sources of law were legitimate. If we did

not have a rule of law system that specified and legitimized these and other foundation al issues,

chaos would rule. There would likely be competing claims of authority between different factions of

power if our U.S. Constitution and our state constitutions did not create our systems of government. Saylor URL: http://www.saylor.org/books Saylor.org

Likewise, there would be competing sources o f law —such as those based on religious texts, or others

created by modern human beings —if our constitutions did not legitimize the manner in which laws

were to be created. Also, there would be different methods of dispute resolution. Perhaps some

people wo uld favor a vigilante system, while others would prefer a procedural system. This type of

unpredictability would result in a very unstable society. We should not take the American rule of law

system for granted. It provides predictability and stability to our lives.

Rule of law systems establish authority, create expectations for behavior, and establish redress for

grievances and penalties for deviance. Governance of conflict and the attainment of peace among the

governed are primary goals of rule of law sy stems. For example, securing peace is a goal within the

U.S. rule of law system. The U.S. Constitution’s preamble states, “We the People…in Order to…insure

domestic Tranquility.” We see this same notion in the English Bill of Rights of 1689 , though th e wor ds

used are somewhat different.

According to many rule of law systems, the attainment of peace relies on the establishment of a

hierarchical authority structure. This recognition of the right to govern provides legitimacy. For

instance, in the Code of Hamm urabi and the Magna Carta , these rights are derived from religious

authority. In the U.S. Constitution and the English Bill of Rights of 1689, the power is derived from

the people.

Note the difference between power and authority. Power is the ability to ma ke someone behave in a

predictable manner. Authority draws its strength from legitimacy. Imagine that your friend told you

that his mother granted him the right to govern others. Would you believe him? Probably not. Why?

Because it is unlikely that you wou ld recognize your friend’s mother as having a legitimate authority

to bestow the right to govern on anyone, including your friend. Imagine, instead, the governor of

your state. You probably recognize the authority of the governor to govern, because you rec ognize

that the people, through representative government, have the authority to elect the governor to do

so.

The rule of law of the federal government in the United States is composed of many different sources

of law, including constitutional law, statuto ry law, rules and regulations promulgated by Saylor URL: http://www.saylor.org/books Saylor.org

administrative agencies, federal common law, and treaties. Additionally, within the United States,

several state and local jurisdictions exist, each having its own rule of law systems. Moreover, the U.S.

system of governance is one of federalism, which allows different rule of law systems to operate side

by side. In the United States, these systems are the federal government and the state governments.

Organizational structures for government —including who has the right to govern —are also set out in

rule of law systems. For instance, the Code of Hammurabi identified a ruler: Hammurabi himself.

The English Bill of Rights of 1689 required representative bodies. The U.S. Constitution organized

the U.S. government by c reating the legislative, executive, and judicial branches. These models

minimally provide order and, in some cases, provide opportunities for the governed to participate in

government, both of which create role expectations of the governed.

Notably, even t hough our Founding Fathers relied on prior rule of law systems when creating our

Constitution, they were unable to resolve all challenges that exist when people live together. Today,

for instance, one unresolved challenge is reflected in the tension betwee n personal liberty and

responsibility to state. We have many individual rights and personal liberties, but as some argue, we

do not have many responsibilities to the state. We could have a system that requires greater duties —

such as the legal duty to vote, to serve in public office or in the military, or to maintain public lands.

Unresolved challenges highlight the fact that rule of law systems are not perfect systems of

governance. Nevertheless, these systems create expectations for conduct, without which governance

of conflict could not reasonably exist and peace could not be attained.

The U.S. Constitution is the foundation on which the U.S. federal rule of law system rests. It asserts

the supremacy of law. “We the people” is a very important part of the preamble, because it confers

power on the people as well as on the states. Notably, unlike the Magna Car ta and the English Bill of

Rights of 1689, it does not focus on individual rights. Of course, the Bill of Rights does focus on

individual rights, but those amendments were passed after the Constitution was written. (That is why

they are called amendments to the constitution.) The U.S. Constitution implemented the supremacy

of law using structure and processes. The Founding Fathers were particularly concerned about giving

the government the power to do its job without encouraging tyranny. They built in proce sses to

ensure the supremacy of law. Indeed, ours is “a government of laws and not of men,” John Adams Saylor URL: http://www.saylor.org/books Saylor.org

wrote in the Massachusetts Constitution. Thomas Paine noted the same sentiment in Common Sense ,

when he wrote, “the law is king.”

K E Y T A K E A W A Y S

Rule of law is a system of published laws under which the people and the government are bound, which

allows predictability and restraint of government action. A rule of law system allows people to understand

what is expected of them. It provides a system that allo ws many people with different beliefs and cultures

to live together in peace, by providing methods by which conflicts can be resolved. The U.S. rule of law

system contains many elements of prior rule of law systems.

E X E R C I S E S

1. View the Code of Hammurabi at http://avalon.law.yale.edu/ancient/hamframe.asp . Scroll down slightly

until you see the subheading “Code of Laws.” Find three laws that you believe are similar to laws that we

have in the United States.

2. Given the long history of rule of law systems, why hasn’t any rule of law system been developed that

resolves all problems? Name three social problems that our rule of law system does not address, or does

not address adequately.

3. Are t he Ten Commandments a rule of law system? How many of the Ten Commandments are illegal in

your state today?

4. What problems would exist without a rule of law?

5. How does the rule of law affect business?

Saylor URL: http://www.saylor.org/books Saylor.org

1.4 Importance of Rule of Law to Business

L E A R N I N G O B J E C T I V E S

1. Determine why the rule of law is important to business.

2. Identify several areas of law that are especially relevant to business and the importance of the rule of law

to those areas.

3. Identify how the rule of law limits government.

4. Identify how the rule of law protects people from harmful business practices.

As you may have guessed by now, the rule of law is important to business. Can you imagine trying to

do business without being able to have any reasonable expectations of other people’s behavior?

Would you be willing to conduct business if you had no legal means by which to protect your

property interests? And in the case of a dispute, without a rule of law system, there would be no

established way of resolving it. Without the rule of law, busines s would be chaotic. This section

provides some overarching examples of why the rule of law is important to business.

Before getting to those examples, imagine this: What if you did not know how to play chess, but you

tried to play anyhow? You would probabl y become frustrated very quickly, because you would see no

logic in the movement of your opponent’s pieces, and you would not be permitted to move some

pieces like you might wish to. Sometimes you would see your opponent move his or her knight two

spaces i n one direction and then one space in another. Other times, you would see your opponent

move his or her bishop diagonally. Moreover, you would not understand what you were and were not

permitted to do. You would also not know how to penalize an opponent wh o moved his or her pieces

incorrectly to gain advantage or to take something of yours. This is analogous to what it’s like to do

business without understanding the rules of the game.

The rule of law establishes rules that people —and businesses —must follow to avoid being penalized.

The rule of law not only allows people to understand what is expected of them in their personal

capacities but also sets forth rules for businesses so that they, too, know what is expected of them in

their dealings and transaction s. In addition, it restrains government and others from infringing on Saylor URL: http://www.saylor.org/books Saylor.org

property rights. Should disputes arise, the rule of law provides a peaceful and predictable means by

which those disputes can be resolved.

The rule of law provides guidance and direction in every area of business. For example, it provides a

means to bring a complaint against another party to a neutral decision maker so that a decision can

be made regarding the dispute. Because of our rule of law system, we know that we are permitted to

file a complaint in the proper court to commence litigation. Or we can try an alternative method of

dispute resolution if we do not wish to engage in litigation. We know that we are permitted to do

these things because our rule of law system allows us to do them. Moreover, we can expect some sort

of resolution when we institute such a proceeding. This expectation is reasonable only because we

have a rule of law.

Additionally, in the United States, the rule of law provides a sophisticated system of federalism,

where state and federal laws coexist. This allows people and businesses to determine which system of

government pertains to them and which jurisdiction they belong to. Imagine that you sell firearms in

a retail capacity. You would be subject to both state and federal laws. You would be required to carry

a federal permit from the federal administrative agency known as the Bureau of Alcohol, Tobacco,

Firearms, and Explosives. You would be forbidden from engaging in illegal arms trading. According

to state la ws, you would likely have to ensure that each purchaser of a firearm held a valid permit for

a firearm. You would be required to check identification, enforce waiting periods, and refuse to sell

guns to people who were not permitted to carry them according to your state’s laws. If we did not

have a rule of law system, you might be uncertain how to conduct your business, and you would be

subject to arbitrary enforcement of unstated or ex post facto (retroactive) laws that affected your

business.

The rule of law also governs contracts between people and between merchants. Under the common

law system, certain elements of a contract must exist for the contract to be enforceable. Under the

Uniform Commercial Code (UCC), merchants are governed by a separate set of rules that anticipate

and allow for flexibility in contractual terms, to facilitate business needs. In the event that terms

conflict in an offer and acceptance between merchants, the UCC allows “gap fillers” to complete the

terms of the contract without n eed for the contract to be rewritten or for formal dispute resolution. Saylor URL: http://www.saylor.org/books Saylor.org

Moreover, businesses rely on the rule of law to help them enforce contracts against contractors who

fail to perform.

Additionally, because we have a rule of law system, employers know t he rules of the game regarding

their relationship to employees, and employees know the rules with respect to their obligations to

employers. Likewise, business partners, members of boards of corporations, and members of limited

liability companies all know what is expected of them in their roles vis -à-vis the business and other

people within their organizations. When someone does something that is not permitted, there is legal

recourse.

The rule of law also provides protection for property. Imagine if we di d not have protection for

nontangible property, such as intellectual property like trade secrets, trademarks, or copyrights. It

would be very difficult to protect this type of property if we did not know the rules of the game.

People would not have the inc entive to create or share new intellectual property if they had no

reasonable expectation of being able to protect it or of being rewarded for their creations. Likewise,

the rule of law allows us to protect tangible property without having to go to extraor dinary measures.

For instance, if we had no rule of law system to convey and maintain legal ownership to us for our

real or personal property, we might be forced to hire expensive private security forces to guard our

property when we could not be there to physically protect it ourselves.

Businesses also rely on the rule of law to govern their debtor and creditor relationships. And, if

financial matters do not go as anticipated, our legal system allows businesses to ask the court for

protection from creditor s under our bankruptcy law. This allows businesses to protect their property

from creditor repossessions or foreclosures while they get back on track financially.

The rule of law also protects people from businesses. For example, Congress has enacted antit rust

legislation that prevents certain anticompetitive practices, such as colluding and price fixing.

Additionally, businesses are prohibited from using deceptive advertising and are held responsible

when they manufacture or sell defective products that ca use injury.

The rule of law also protects businesses from government. Since everyone is subject to the rule of

law, this means that government itself may not overextend its reach when regulating or investigating Saylor URL: http://www.saylor.org/books Saylor.org

businesses. Government must play by the rule s, too. For example, imagine that our government

could do anything, without any limits or jurisdictional restraints. A business operating in such a

climate might find itself subject to government closure on a whim, or excessive taxes, or

requirements to pa y bribes to gain permits to do business. Our rule of law system prevents such

abuses.

Without a rule of law system, people would have to exact satisfaction for the wrongs committed

against them on their own. They would have to physically protect their own property. This would

lead to a breakdown in social structure, and it would result in vigilante justice and physical strength

playing primary roles in dispute resolution.

K E Y T A K E A W A Y S

The rule of law system in the United States sets the rules of the game f or doing business. It creates a

stable environment where plans can be made, property can be protected, expectations can exist,

complaints can be made, and rights can be protected. Violation of the law can result in penalties. The rule

of law protects busin ess, protects consumers from harmful business practices, and limits government from

engaging in abusive practices against businesses.

E X E R C I S E S

1. Have you ever played a game in which you did not know all the rules? Have you ever tried to speak a

language in which you weren’t fluent? What was the outcome?

2. What incentive or motivation would exist to work for your employer if you were not certain that you

would be paid for your efforts and your time? What incentive would you have to invent something new,

create a work of art, or write a book if you had no legal expectation that you would be able to protect your

creation?

3. Imagine that you are an entrepreneur. What type of business would you open? Would you know what

types of permits were required to conduct your b usiness and which government entities had jurisdiction

over your business? If not, how could you find out?

4. What would business be like in a land without any rule of law system? Be specific.

Saylor URL: http://www.saylor.org/books Saylor.org

1.5 How Law Affects Business Disciplines

L E A R N I N G O B J E C T I V E S

1. Identify the relevance of law to business disciplines.

2. Understand the relevance of law to the study of business.

3. Identify how the rule of law protects people from harmful business practices.

Foundational courses taken by undergraduate business students usu ally include accounting, finance,

management, and marketing. An understanding of the legal environment of business is relevant —

indeed, essential —to functioning well within each of those disciplines. Additionally, a solid

understanding of the legal environm ent can help avoid liability or at least minimize risk. In business,

it is not enough to comport yourself and your business ethically. You must also ensure that you

understand the legal environment in which you are working. Therefore, it is important to yo u, to

your employer, and to all the other people who may be relying on your business expertise —such as

your employees and your family —to understand the legal environment. Such an understanding will

help you avoid or lessen the likelihood of liability expos ure, enabling you to manage your business

affairs successfully, unhampered by unmanaged legal liability risks. This section provides some

examples of how law affects specific business disciplines.

During the last several years, accountants have been in the limelight due to culpable behavior of

some members of the profession during well -known business scandals, such as Enron. Largely as a

result of the fallout from the Enron case, Congress passed the Sarbanes -Oxley Act (SOX) of 2002,

which imposed stringent oversight requirements on accounting and auditing firms. The

requirements seek to ensure competence, compliance with security laws, and conduct consistent

with generally accepted accounting principles.

Of course, the Enron scandal and SOX were both fairly dramatic examples of how law can affect

accounting. Other ways in which law affects this discipline are through regulation. For example, the

U.S. Securities and Exchange Commission’s (SEC) mission is to protect investors and to maintain a

fair market, amon g other things. Accordingly, the SEC enforces accounting and auditing policies to Saylor URL: http://www.saylor.org/books Saylor.org

allow investors to make decisions based on accurate information. The SEC pursues charges of

accounting fraud and oversees private regulation of the accounting profession.

The law also affects finance. Like accounting professionals, many who work in finance are also

regulated by the SEC. The SEC is concerned that investors receive accurate information to make

investment decisions. Moreover, the SEC enforces prohibitions against insider trading and pursues

claims of other types of securities fraud, such as Ponzi schemes .

Similarly, several statutes protect consumers in financial transactions. For example,

the Truth in Lending Act (TILA) requires lenders to accurately provide info rmation concerning the

costs involved in offers of credit. TILA and its corresponding Regulation Z are administered by

federal banking agencies.

Law also affects those in management. For instance, knowledge of employment law is essential to

those in human resources. Title VII of the Civil Rights Act prohibits discrimination related to protected

characteristics in hiring and employment practices. Those in management also must be aware of the

potential liability that demands on employees might create. For exam ple, in Oregon, McDonald’s was

found to be liable for injuries resulting when an off -duty, off -premises worker fell asleep while

driving. [1] The employee had worked three shifts during a twenty -four -hour period. The court held

that employers have a duty to avoid conduct that creates a foreseeable risk of harm to others.

If your field is marketing, the law also relates to your work. Marketers must be particularly attuned

to tort law, consumer protection law, and intellectual property law. For example, to a void charges of

libel, those in advertising need to take care not to defame another person, business, or product. It

might be tempting to do so, especially if you were engaged in serious competition with another

company that sold a similar product. Likewis e, marketers must take great care not to engage in

deceptive advertising practices, lest their employer run afoul of

the Federal Trade Commission’s (FTC) policies or the FTC Act. Additionally, marketers must be aware

of other people’s intellectual property to avoid copyright or trademark infringement in their own

work product. Saylor URL: http://www.saylor.org/books Saylor.org

These are a few examples of how the law relates to specific business disciplines. Of course, this is just

an overview. It is incumbent on each business professional to become familiar with the legal

environment in his or her profession. Employers may provide training regarding legal environment

issues, such as anti –sexual harassment training or anti –insider trading training, but ultimately,

becoming familiar with the legal environment is each person’s individual responsibility. Remember

that a defense of “I didn’t know the law!” is no defense at all.

K E Y T A K E A W A Y S

The law is relevant to every business discipline. Minimizing liability exposure is a primary concern of

business, and an understanding of the legal environment relevant to each disciplinary perspective helps

business practitioners minimize their risk of incurring liability to themselves or to their employers.

E X E R C I S E S

1. Which business discipline is your favorite? Find a newsp aper article that illustrates a legal problem

pertaining to that discipline that could have been avoided with a better understanding of the legal

environment of business.

2. How can employers use knowledge of the legal environment of business to minimize liab ility exposure?

Identify three concrete ideas.

3. How can employers stay current with the legal environment of business? For example, how would other

employers in Oregon find out about the case of the off -duty, off -premises worker mentioned in this

section? I f you were an employer in Oregon, how might this case change your business practices?

4. Do you think that if employers train their employees how to behave on the job, those employers should be

absolved from legal liability resulting from employees’ actions? For example, imagine that an employer

provides training to its employees regarding how to avoid sexual harassment in the workplace, but an

employee ignores the training and sexually harasses a colleague. Should the employer bear liability in that

situation ? Why or why not?

[1] Faverty v. McDonald’s , 892 P.2d 703 (Or. Ct. App. 1995).

Saylor URL: http://www.saylor.org/books Saylor.org

1.6 Concluding Thoughts

This chapter provides an introduction to the legal environment of business. Knowledge of the legal

environment of business is essential to successful business practices. This involves understanding

what the law is, where it comes from, and specifically how it relates to business. Moreover, different

philosophies of law exist. Approaching a problem from different perspectives allows for multip le

outcomes to be explored. Additionally, when people approach the same problem from different legal

philosophies, reasonable minds can disagree on the outcome. Familiarity with government structure

and an understanding of rule of law are essential to succ essful business operations. Ultimately,

businesspeople should be able to recognize legal situations, minimize liability exposure, and know

when to consult an attorney.

As you embark on your study of the legal environment, try to remain oriented. Ask yourse lf questions

like “Where does this piece of law fit in the business world?” and “Why is it important for me to know

this?” Studying the law can, at times, seem like studying pieces of a very large jigsaw puzzle. You may

not immediately see how individual p ieces fit together, but with protracted study of law, it will

become clear. Often, with that understanding, the depth of law becomes apparent.

Additionally, it is very helpful if you try to find contemporary examples of the concepts that are

discussed in t his book. When surfing the Internet, watching movies, or reviewing current events, try

to “issue spot.” In other words, try to identify the legal issue raised by the particular problem

presented. Try to figure out which jurisdiction would have authority ov er the issue. State

government? Federal government? Both? Try to determine which type of law would control or be

determinative of the outcome. Is it a statutory issue? A constitutional issue? A regulatory issue?

Also, try to ask yourself why the dispute wa s raised. Will the parties involved be able to work it out on

their own? If not, why not? Has the issue entered into litigation? How could the issue have been

avoided with better planning and greater familiarity with the legal environment?

This little game can give you practice in orienting yourself as you gain footing in the study of law and

the legal environment of business. We wish you every success in your course! Saylor URL: http://www.saylor.org/books Saylor.org

Saylor URL: http://www.saylor.org/books Saylor.org

Chapter 2

The Court System

L E A R N I N G O B J E C T I V E S

After reading this chapter, you should have a thorough understanding of the U.S. court system and how it

affects the conduct of businesses and individuals. Specifically, you should be able to answer the following

questions:

1. What role does each of the three branches of government play?

2. How do th e other two branches of government balance the judiciary?

3. How are the state and federal courts structured?

4. What are the primary differences between trial and appellate courts?

5. How does the Supreme Court do its work?

As you now know, laws are meaningless if they are not enforced. Companies have to make a barrage

of decisions daily, from product development to marketing to strategies to maintain growth, but

most of these are based on sound business acumen rather than legal requirements. If a company

does viol ate a law, however, it must be held accountable. Typically, that accountability comes in the

form of a lawsuit heard in court. Whether a suit is brought by a supplier, customer, employee,

shareholder, or other stakeholder, litigation is a fact of life for companies. As future business

professionals, being familiar with our court system will lay the foundation for your understanding of

the litigation process.

Saylor URL: http://www.saylor.org/books Saylor.org

2.1 The Third Branch

L E A R N I N G O B J E C T I V E S

1. Understand the constitutional basis for the judicial branch.

2. Explore the differences among the three branches of government.

3. Learn about the chief justice’s role in judicial administration.

4. Explore the concept of judicial review.

5. Become familiar with how the other two branches check and control the judiciary .

Under the federal Constitution, power is separated among three branches of government. Article I of

the Constitution allocates the legislative power to Congress, which is composed of the House of

Representatives and the Senate. Congress makes laws and re presents the will of the people in doing

so. Article II of the Constitution creates the executive power in the president and makes the president

responsible for enforcing the laws passed by Congress. Article III of the Constitution establishes a

separate a nd independent judiciary , which is in charge of applying and interpreting the meaning of

the law. The U.S. Supreme Court sits at the top of the federal judiciary as the supreme court of the

land. There are nine judges on the Supreme Court. (See Figure 2.1 "The U.S. Supreme Court in

2009" .)

Figure 2.1 The U.S. Supreme Court in 2009 Saylor URL: http://www.saylor.org/books Saylor.org

Justice Stevens has since retired and was replaced by Justice Kagan in 2010.

Source: Photo courtesy of Steve Petteway, Collection of the Supreme Court of the United

States, http://en.wikipedia.org/wiki/File:Supreme_Court_US_2009.jpg .

The Constitution is remarkably short in describing the judicial branch. The president, under Article

II, has the power to nominate judges with the advice and consent of the Senate. Article III also

provides the following: “The judicial power of the United States, shall be vested in one Supreme

Court, and in such inferior courts as the Congress may from time to time ordain and establish. The

judges, both of the supreme and inferior courts, shall hold their offices during good behaviour, and

shall, at stated times, receive for their services, a compensation, which shall not be diminished

during their continuance in office.” Under the Constitution, therefore, there are only two

requirements to becoming a federal judge: nomination by the president and confirmati on by the

Senate. There are no age, citizenship, or qualification requirements. If the president wanted to, he Saylor URL: http://www.saylor.org/books Saylor.org

could nominate any reader of this book as a federal judge. Additionally, the Constitution guarantees

that judges are relatively free from politic al interference by providing them with lifetime tenure and a

salary that cannot be reduced.

It is commonly accepted that the three branches of government are coequal, but in reality they are

very different. The judiciary is the only unelected branch of gov ernment and is therefore the most

mysterious. Although many Americans know who the president is, and many are familiar with their

representatives in Congress, very few know the names of the judges who sit on the Supreme Court or

any lower court. When polit icians run for Congress or president, they spend months campaigning,

begging voters to look into their eyes and trust them enough to cast their votes. Since judges are not

elected, the vast majority of Americans cannot associate them with a face. Indeed, m any visitors to

the Supreme Court building in Washington, DC, routinely come face -to-face with a justice and don’t

realize it.

The three branches also consume vastly different resources in serving the public, with the entire

federal court system consuming less than two -tenths of 1 percent of the federal budget. The political

branches capture the public imagination with monuments and landmarks (Air Force One, the White

House, the Capitol), while the federal judiciary works in relative anonymity. (All federal judges, for

example, travel commercially and do not have access to government -owned planes.) Finally, the

judiciary is designed to be the most remote branch from the people. In addition to being unelected,

federal judges have life tenure and can be remove d from office only through impeachment. They also

tend to be in public office far longer than politicians. While the United States has had forty -four

presidents and more than two thousand members of Congress, Chief Justice John Roberts is only the

seventee nth chief justice. Roberts was only fifty years old when he became chief justice and will likely

be chief justice for many decades to come, certainly long after his nominating president, George W.

Bush, has faded from public life.

When we speak of the “federal judiciary,” we are referring to a very small entity compared to other

federal bureaucracies. The Supreme Court (the building, justices, and staff) is one part of the federal

judiciary. The district and appellate courts (described later in this cha pter) are another part, and they

also comprise judges and staff (although these courts do not own their own buildings; rather, all Saylor URL: http://www.saylor.org/books Saylor.org

courts other than the Supreme Court are rented from other branches of the government).

The Administrative Office of the Unite d States Courts runs the day -to-day issues for all the courts,

such as payroll and rent. A second component of the judiciary is the Federal Judicial Center , an

agency dedicated to conducting research on judicial administration and providing judicial educat ion.

A third component is the United States Sentencing Commission (USSC) , established by Congress to

make recommendations on how to establish uniformity in federal criminal sentencing. In addition to

his responsibilities in hearing cases and writing opinio ns, the chief justice oversees the overall

operation of the federal courts and represents the courts to the other branches of government. When

it comes to hearing and deciding cases, however, the chief justice is “first among equals”: he has no

more power than any of the other justices, known as associate justices .

In that capacity, the chief justice traditionally releases an annual report on the judiciary. Since

becoming chief justice in 2005, Chief Justice Roberts ( Figure 2.2 "Chief Justice John G. Robert s")

has focused his annual reports on judicial pay. Although judicial salaries cannot be reduced, years

have passed since Congress approved a cost -of-living increase for judges. District court judges are

currently paid $169,300 (the same salary as members of Congress), while circuit court judges are

paid $179,500. Supreme Court justices earn $208,100, and the chief justice earns $217,400. While

this may seem like a lot of money, it’s important to keep in mind that the integrity of the judicial

system depend s on attracting the very best lawyers to join the bench. Lawyers of that caliber are also

in high demand in private law firms, where they can earn many times more than what judges earn.

As a result, high -quality lawyers who otherwise may serve the country by becoming judges never

even consider joining the bench. As you can see from Note 2.11 "Hyperlink: Excerpt from 2008 Year -

End Report to Congress" , there is a risk, the chief justice believes, that the pool of judicial talent may

be limited to less -than -the-best lawyers or those who are independently wealthy.

Figure 2.2 Chief Justice John G. Roberts Saylor URL: http://www.saylor.org/books Saylor.org

Source: Photo courtesy of the Supreme Court of the United

States, http://en.wikipedia.org/wiki/File:File -Official_roberts_CJ_cropped.jpg .

Hyperlink: Excerpt from 2008 Year -End Report to Congress

http://www.supremecourt.gov/publicinfo/year -end/2008year -endreport.pdf

I suspect many are tired of hearing it, and I know I am tired of saying it, but I must m ake this plea again —

Congress must provide judicial compensation that keeps pace with inflation. Judges knew what the pay

was when they answered the call of public service. But they did not know that Congress would steadily

erode that pay in real terms by r epeatedly failing over the years to provide even cost -of-living increases.

Last year, Congress fell just short of enacting legislation, reported out of both House and Senate

Committees on the Judiciary, that would have restored cost -of-living salary adjust ments that judges have

been denied in past years. One year later, Congress has still failed to complete action on that crucial

remedial legislation, despite strong bipartisan support and an aggregate cost that is miniscule in relation

to the national budge t and the importance of the Judiciary’s role. To make a bad situation worse,

Congress failed, once again, to provide federal judges an annual cost -of-living increase this year, even

though it provided one to every other federal employee, including every Me mber of Congress. Congress’s

inaction this year vividly illustrates why judges’ salaries have declined in real terms over the past twenty

years. Saylor URL: http://www.saylor.org/books Saylor.org

Our Judiciary remains strong, even in the face of Congress’s inaction, because of the willingness of those

in p ublic service to make sacrifices for the greater good. The Judiciary is resilient and can weather the

occasional neglect that is often the fate of those who quietly do their work. But the Judiciary’s needs

cannot be postponed indefinitely without damaging its fabric. Given the Judiciary’s small cost, and its

absolutely critical role in protecting the Constitution and rights we enjoy, I must renew the Judiciary’s

modest petition: Simply provide cost -of-living increases that have been unfairly denied! We have done our

part —it is long past time for Congress to do its.

The Supreme Court is a well -known institution today, but it wasn’t always that way. When the Court

first met, many of the justices (then appointed by George Washington) couldn’t travel in time for the

Court’s opening day, so the session was dismissed. For the first three years of its existence, the Court

heard no cases of any importance. John Jay, the first chief justice, traveled to Europe while he was

chief justice to negotiate the Jay Treaty wit h Great Britain. While there, he won election as governor

of New York. He was reappointed as chief justice by President Washington and confirmed by the

Senate but declined to return to the Court, citing the Court’s lack of energy, weight, and dignity as

pa rt of his reasoning. It wasn’t until John Marshall became the fourth chief justice (a position he

held for a record thirty -four years) that the Supreme Court firmly established itself as a separate and

coequal branch of government. The Supreme Court did no t even get its own building until 1932,

years after the nation’s capital was established in Washington, DC. Before then, it met in the

basement of the old Senate building to hear cases. When William Taft (the only president who also

served as a Supreme Cou rt justice) became chief justice, he persuaded Congress to appropriate

funds, and the Court finally got its own building in Washington, DC (see Figure 2.3 "U.S. Supreme

Court" ).

Hyperlink: Supreme Court Virtual Tour

http://supremecourt.c -span.org/VirtualTour.aspx

The Supreme Court building, located at 1 First Street, is an impressive marble building that sits at the

northern border of Washington, DC’s, famous plaza. It is open year -round and is free to visit. If you have Saylor URL: http://www.saylor.org/books Saylor.org

not been there, you can use the link to take a virtual tour of the entire building, inside and out, courtesy of

C-Span.

The Supreme Court’s early malaise can partially be attributed to the problem that no one really had a

good idea of what the Supreme Court was supposed to do. There were few cases of tremendous

national importance in the new republic, and a quirky tradition known as “riding circuit” meant that

the Supreme Court justices also acted as lower appellate c ourt judges, thus making their work at the

Supreme Court somewhat duplicitous. The Constitution simply states that the judicial power of the

United States is vested in the Supreme Court, without expounding what that means. It wasn’t until

1803 that the mod ern role of the Supreme Court began to emerge.

In 1800, the presidential election between John Adams and Thomas Jefferson nearly tore the

country apart. The election was bitter, partisan, and divisive. Jefferson won but wasn’t declared the

winner until ear ly in 1801. In the meantime, Adams and other Federalists in Congress attempted to

leave their mark on government by creating a slate of new life -tenured judgeships and appointing

Federalists to those positions. For the judgeships to become effective, certa in paperwork (known as

commissions) had to be delivered in person to the new judges. At the time power transitioned from

Adams to Jefferson, several commissions had not been delivered, and Jefferson ordered his acting

secretary of state to stop delivering them. When Jefferson came to power, there was not a single

judge from his Democratic -Republican Party sitting on the bench, and he wasn’t keen on expanding

the Federalist influence on the bench any further. One Federalist judge, William Marbury, sued the

secretary of state, James Madison, to deliver his commission. The case was filed in the Supreme

Court, led by Chief Justice John Marshall ( Figure 2.4 "Chief Justice John Marshall" ). Marshall

himself was a Federalist and had served as Adams’s secretary of st ate, so he understood how political

the case was and how he stood to be accused of bias if he ruled the wrong way. In a shrewd and

calculated move, he ultimately ruled against Marbury but at the same time declared that it was the

Supreme Court’s role to de cide the meaning of the Constitution. This is called judicial review , and it

makes the U.S. Supreme Court the most powerful judicial body in the world. The following is from

Marbury v. Madison : “It is emphatically the province and duty of the Judicial Department to say

what the law is. Those who apply the rule to particular cases must, of necessity, expound and Saylor URL: http://www.saylor.org/books Saylor.org

interpret that rule. If two laws conflict with each other, the Courts must decide on the operation of

each.” [1]

Figure 2.4 Chief Justice John M arshall

Source: Photo courtesy of the U.S. Department of State, http://www.flickr.com/photos/statephotos/2267272626 .

Chief Justice Marshall did not invent judicial review; it is a feature of most common -law countries

and as a concept goes back centuries. He did, however, institutionalize judicial review at the U.S.

Supreme Court at a time when there was great uncertainty about the Court’s future role in

government. While all t hree branches are bound to uphold the Constitution, on all matters relating

to the meaning of the Constitution, the Supreme Court has the final say.

After Marbury v. Madison , it took the Supreme Court nearly sixty years to again use the power of

judicial r eview to strike down legislation. The case was Dred Scott v. Sanford , [2] and it involved a

slave who traveled with his owner, a doctor in the army, to many states including free states ( Figure

2.5 "Dred Scott" ). Dred Scott filed suit for his freedom, and the case ended up before the Supreme

Court. In what many commentators call the Supreme Court’s “self -inflicted injury,” the Court, in an Saylor URL: http://www.saylor.org/books Saylor.org

opinion written by Chief Justice Roger Taney, used judicial review to overturn the Missouri

Compromise and held that Dr ed Scott was not a person under the Constitution and therefore could

not file suit. The decision hastened the country into Civil War, and it took years for the Supreme

Court to recover its standing with the public.

Figure 2.5 Dred Scott

Source: Photo courtesy of the Missouri Historical Society, http://en.wikipedia.org/wiki/File:DredScott.jpg .

Judicial review means that any federal court can hold any act of the president or the Congress to be

unconstitutional. It is a power that rests with each of the more than eight hundred federal judges,

from the trial courts through the appellate courts. It is an extraordinary power in a democracy, as an

unelected life -tenured person or group of persons overturns the acts of a popularly elected branch of

government. Rather than give rise to judicial tyranny, however, our system of checks and balances

ensures that the other two branches also play a critical role in “checking” the judiciary.

Tak e, for example, the executive branch. The president can control the judiciary by making careful

judicial selections. The power of the president to name federal judges is absolute —he is not required

to consult with any other individual in making his choice. As a matter of custom, presidents have

traditionally looked to senators to provide names of judicial candidates for consideration, and some Saylor URL: http://www.saylor.org/books Saylor.org

presidents are more willing than others to defer to the advice of aides and advisors. For much of the

nation’s hist ory, the Senate routinely confirmed the president’s choices. President Reagan’s

nomination of Robert Bork in 1987 changed that tradition forever. Alarmed Democrats grilled Bork

in confirmation hearings and ultimately declined to confirm him, setting the st age for a new breed of

confirmation hearings where senators try to ascertain not just the nominee’s character but also how

he or she will judge certain issues. Judicial nominees, especially to the Supreme Court, are under so

much scrutiny now that sometime s even the president’s own party will turn against a nominee. This

happened to President George W. Bush when he named his close friend Harriet Miers to fill a

vacancy left by Justice Sandra Day O’Connor’s retirement. Alarmed at her lack of judicial experie nce

and record on conservative judicial issues, Republicans urged the president to reconsider his choice,

and Ms. Miers eventually withdrew as a nominee.

Presidents hope, and believe, that their selections reflect their own ideologies and beliefs. Federal

judges are notoriously independent, however, and many demonstrate little hesitance to overrule

their nominating president if they believe it necessary to do so. Several presidents have been

disappointed in their nominee as they watched the judge move away from his or her earlier political

roots. For example, President Eisenhower, a Republican, nominated Earl Warren as chief justice.

Warren would later transform the civil rights landscape with a series of decisions, leading

Eisenhower to describe nominating Warren as “the biggest damned fool mistake I ever

made.” [3] President Nixon, a Republican, placed Harry Blackmun on the Supreme Court, only to see

Blackmun later move to the left and author Roe v. Wade , [4] the principal decision legalizing access to

abortion services. More recently, President George H. W. Bush nominated David Souter to the Court

on the belief that Souter would be a reliable conservative. Souter quickly aligned himself with the

liberal wing of the Court.

In addition to nominating judge s, the president serves as a check on the judiciary by being the

primary means of enforcing judicial decisions. Federal judges do not control any police force and as

such are unable to ensure their decisions are carried out. That responsibility falls on th e executive

branch. No matter how much a president may disagree with a judicial decision, it is a testament to Saylor URL: http://www.saylor.org/books Saylor.org

our republican form of government, and the rule of law, that the president nonetheless faithfully

executes a federal court’s decision.

Hyperlink: The Little Rock Nine

http://www.npr.org/templates/story/story.php?storyId=14091050

Figure 2.6 Elizabeth Eckford

Source: Photo courtesy of Will Counts, http://en.wikipedia.org/wiki/File:Little_Rock_Desegregation_1957.jpg .

After the Supreme Court handed down its seminal decision in Brown v. Board of Education , [5] many

Southern states continued to resist desegregation. In Little Rock, Arkansas, the local NAACP chapter

enrolled nine students in Little Rock High School to begin with the fall term in September 1957. Several

segregationist groups protested, and Arkans as governor Orval Faubus deployed Arkansas National Guard

troops to stop the students from entering the school. President Eisenhower reluctantly ordered the 101st

Airborne Division of the U.S. Army to Little Rock to ensure the students could enroll and att end class.

Click the link to listen to a story about one of the students, Elizabeth Eckford ( Figure 2.6 "Elizabeth

Eckford" ), who tried to enroll in Little Rock High School that day. Saylor URL: http://www.saylor.org/books Saylor.org

The Congress can also play an important role in “checking” the judiciary. The most obvious role is in

confirming judicial selections. In the last few years, judicial confirmations have become a political

battlefield, as activists on both the left and right seek to block judicial nominees they view as being

too radical. It’s not unusual for some judicial candidates to wait years for their confirmation

hearings. President George W. Bush, for example, initially appointed Chief Justice Roberts to a court

of appeals judgeship in 2001, but he wasn’t confirmed until 2003, after Republi cans regained control

of Congress in midterm elections. Similarly, the newest member of the Supreme Court, Elena Kagan,

was nominated for a federal appellate judgeship in 1999 by President Bill Clinton but was never

confirmed due to Republican objections t o her nomination.

In addition to confirmation, Congress also controls the judiciary through its annual budgetary

process. Although the Constitution protects judicial salaries from any reductions, Congress is not

obligated to grant any raises. For several y ears, judges have worked without cost -of-living raises.

Although no one has seriously suggested that Congress is withholding money from the courts in

retaliation for judicial decisions, some have observed that Congress would like to see the judicial

branch yield on some high -profile issues such as televising Supreme Court proceedings in turn for

pay raise consideration.

Finally, Congress can control the judiciary by determining how the courts are organized and what

kind of cases the courts can hear. After t he 1800 presidential election, for example, the newly elected

Congress canceled the Supreme Court’s term for the entire year while they reorganized the judiciary.

More recently, several conservative members of Congress have suggested splitting up the liber al-

leaning Ninth Circuit Court of Appeals on the West Coast, to reduce its influence. The Constitution

also gives Congress the authority to determine the courts’ jurisdiction. Congress has used this

authority in the past to take away controversial cases fr om judicial consideration. During Civil War

Reconstruction, for example, Congress passed a law taking away the Supreme Court’s jurisdiction to

hear an appeal from a newspaper publisher jailed for publishing articles opposing

Reconstruction. [6] Recently, Congress did the same thing, removing federal court jurisdiction from

hearing appeals involving detainees held at the military prison in Guantanamo Bay. In the recent

past, members of Congress have also introduced legislation prohibiting federal courts fro m hearing Saylor URL: http://www.saylor.org/books Saylor.org

cases about the public display of religion and flag burning or from using any foreign law as support

for their decisions.

K E Y T A K E A W A Y S

The third branch (judicial branch) is the only unelected branch of government. As such, it can sometimes

appear remote or detached from the American public. The judiciary is composed of federal courts, the

Administrative Office, the Federal Judicial Center, and the U.S. Sentencing Commission. The chief justice

has administrative responsibilities over these ag encies in addition to his adjudicatory duties. The judiciary

comprises less than two -tenths of 1 percent of the federal budget. In spite of this, judicial pay is very low

compared to pay in the private sector and is a source of tension between the judiciar y and the other

branches of government. Marbury v. Madison established the doctrine of judicial review, which allows

courts to determine the final validity of laws as well as the meaning of the Constitution. Judicial review is

an awesome power, and it is u sed sparingly. The president can check the judiciary through appointments

and the enforcement of judicial decisions. The Congress can check the judiciary through funding,

administrative control of court calendars and funds, and jurisdiction -stripping legis lation.

E X E R C I S E S

1. Do you believe that judicial review is a good thing for American democracy? Why or why not?

2. How does the Constitution guarantee judicial independence? Do you think judges have enough

independence? Too much?

3. How much money do you think fed eral judges should be paid?

4. Do you believe that Congress should have the ability to remove cases from federal courts? If so, what

types of cases are appropriate for removal?

5. What options does a president have if he disagrees with a federal court’s opinion?

6. Should a federal court force desegregation on a community that is overwhelmingly against it?

[1] Marbury v. Madison , 5 U.S. 137 (1803).

[2] Dred Scott v. Sanford , 60 U.S. 393 (1857).

[3] John Fox, “Biographies of the Robes: Earl Warren,” PBS , December

2006, http://www.pbs.org/wnet/supremecourt/democracy/robes_warren.html (accessed August 22, 2010).

[4] Roe v. Wade , 410 U.S. 113 (1973). Saylor URL: http://www.saylor.org/books Saylor.org

[5] Brown v. Board of Educa tion , 347 U.S. 483 (1954).

[6] Ex parte McCardle , 74 U.S. 506 (1869).

Saylor URL: http://www.saylor.org/books Saylor.org

2.2 Activists and Strict Constructionists

L E A R N I N G O B J E C T I V E S

1. Explore the strict constructionist, or originalist, judicial philosophy.

2. Explore the judicial activist philosophy.

3. Learn about the modern origin of the divide between these two philosophies.

4. Examine the evolution of the right to privacy and how it affects judicial philosophy.

5. Explore the biographies of the current Supreme Court justices.

In the early years of the republic, judges tended to be much more political than they are today. Many

were former statesmen or diplomats and considered being a judge to be a mere extension of their

political activities. Consider, for example, the presidential election of 1800 between John Ad ams and

Thomas Jefferson. Even by today’s heated standards of presidential politics, the 1800 election was

bitter and partisan. When Jefferson won, he was in a position of being president at a time when not a

single federal judge in the country came from h is political party. Jefferson was extremely wary of

judges, and when the Supreme Court handed down the Marbury v. Madison decision in 1803

declaring the Supreme Court the ultimate interpreter of the Constitution’s meaning, Jefferson wrote

that “to consider the judges as the ultimate arbiters of all constitutional questions is a very dangerous

doctrine indeed, and one which would place us under the despotism of an oligarchy.” [1] A few years

later, the first justice to be impeached, Samuel Chase, was accused of being overly political. His

impeachment (and subsequent acquittal) started a trend toward nonpartisanship and political

impartiality among judges. Today, judges continue this tradition by exercising impartiality in cases

before them. Nonetheless, charg es of political bias continue to be levied against judges at all levels.

In truth, the majority of a judge’s work has nothing to do with politics. Even at the Supreme Court

level, most of the cases heard involve conflicts among circuit courts of appeals or statutory

interpretation. In a small minority of cases, however, federal judges are called on to interpret a case

involving religion, race, or civil rights. In these cases, judges are guided sometimes by nothing more

than their own interpretation of case law and their own conscience. This has led some activists to

claim that judges are using their positions to advance their own political agendas. Saylor URL: http://www.saylor.org/books Saylor.org

In general terms, judges are thought to fall into one of two ideological camps. On the politically

conservative right, judges are described as either strict constructionists or originalists . Judges who

adhere to this philosophy believe that social change is best left to the politically elected branches of

government. The role of judges is therefore to strictly inte rpret the Constitution, and nothing more.

Strict constructionists also believe that the Constitution contains the complete list of rights that

Americans enjoy and that any right not listed in the Constitution does not exist and must be earned

legislatively or through constitutional amendment. Judges do not have the power to “invent” a new

right that does not exist in the Constitution. These judges believe in original meaning , which means

interpreting the Constitution as it was meant when it was written, as opposed to how society would

interpret the Constitution today. Strict constructionists believe that interpreting new rights into the

Constitution is a dangerous exercise because there is nothing to guide the development of new rights

other than a judge’s i ndividual conscience. Justice Antonin Scalia, appointed by Ronald Reagan to

the Supreme Court in 1984, embodies the modern strict constructionist.

Hyperlink: Justice Antonin Scalia

Figure 2.7 Justice Antonin Scalia

Saylor URL: http://www.saylor.org/books Saylor.org

Source: Photo courtesy of Steve Petteway, Collection of the Supreme Court of the United

States, http://en.wikipedia.org/wiki/File:Antonin_Scalia,_SCOTUS_photo_portrait.jpg .

http://www.cbsnews.com/stories/2008/04/24/60minutes/main4040290.shtml

In 2008, Justice Antonin Scalia ( Figure 2.7 "Justice Antonin Scalia" ) sat down with 60 Min utes to discuss

a new book he wrote and his originalist judicial philosophy. Click the link to watch a portion of this

fascinating interview with one of the most powerful judges in the country.

On the politically liberal left are judges who are described a s activist. Judicial activists believe that

judges have a role in shaping a “more perfect union” as described in the Constitution and that

therefore judges have the obligation to seek justice whenever possible. They believe that the

Constitution is a “livi ng document” and should be interpreted in light of society’s needs, rather than

its historical meaning. Judicial activists believe that sometimes the political process is flawed and

that majority rule can lead to the baser instincts of humanity becoming th e rule of law. They believe

their role is to safeguard the voice of the minority and the oppressed and to deliver the promise of

liberty in the Constitution to all Americans. Judicial activists believe in a broad reading of the

Constitution, preferring to look at the motivation, intent, and implications of the Constitution’s

safeguards rather than merely its words. Judicial activism at the Supreme Court was at its peak in

the 1960s, when Chief Justice Earl Warren led the Court in breaking new ground on civi l rights

protections. Although a Republican, and nominated by Republican President Eisenhower, Earl

Warren became a far more activist judge than anyone anticipated once on the Supreme Court. Chief

Justice Warren led the Court in the desegregation cases in the 1950s, including the one affecting the

Little Rock Nine. The “Miranda” [2] warnings —familiar to nearly every American who has ever seen a

police show or movie —come from Chief Justice Warren, as does the fact that anyone who cannot

afford an attorney has the right to publicly funded counsel in most criminal cases.

Figure 2.8 President Franklin Roosevelt Saylor URL: http://www.saylor.org/books Saylor.org

Source: Photo courtesy of the U.S. Library of Congress, http://loc.gov/pictures/resource/cph.3c17121 .

The modern characterization of judges as politically motivated can be traced to the Great Depression.

Against cataclysmic economic upheaval, Americans voted for Franklin D. Roosevelt ( Figure 2.8

"President Fran klin Roosevelt" ) in record numbers, and they delivered commanding majorities in

both the Senate and House of Representatives to his Democratic Party. President Roosevelt vowed to

alter the relationship between the people and their government to prevent the sort of destruction and

despair wreaked by the Depression. The centerpiece of his action plan was the New Deal, a legislative

package that rewrote the role of government, vastly increasing its size and its role in private

commercial activity. The New Deal brought maximum working hours, the minimum wage, mortgage

assistance, economic stimulus, and social safety nets such as Social Security and insured bank

deposits. Although the White House and the Congress were in near -complete agreement on the New

Deal, t he Supreme Court was controlled by a slim majority known as the “Four Horsemen of the

Apocalypse” because of their dire warnings of the consequences of economic regulation. Three

justices known as the “Three Musketeers” —Justice Brandeis, Justice Cardozo, a nd Justice Stone —

opposed the Four Horsemen. In the middle sat two swing votes. The Four Horsemen initially

prevailed, and one by one, pieces of President Roosevelt’s New Deal were struck down as

unconstitutional reaches of power by the federal government. Frustrated, President Roosevelt Saylor URL: http://www.saylor.org/books Saylor.org

devised a plan to alter the makeup of the Supreme Court by increasing the number of judges and

appointing new justices. The “court -packing plan” was never implemented due to the public’s

reaction, but nonetheless, the swing votes on the Supreme Court switched their votes and began

upholding New Deal legislation, leading some historians to label their move the “switch in time that

saved Nine.” During the public debate over the Supreme Court’s decisions on the New Deal, the

jus tices came under constant attack for being politically motivated. The loudest criticism came from

the White House.

Hyperlink: Fireside Chats

http://millercenter.org/scripps/archive/speeches/detail/3309

One of the hallmarks of FDR’s presidency was his use of the radio to reach millions of Americans across

the country. He regularly broadcast his “fireside chats” to inform and lobby the public. In this link,

President Roosevelt complains bitterly about the Supreme Court, claiming that “the Court has been acting

not as a judicial body, but as a policy -making body.” Do modern politicians make the same accusation?

The abortion debate is a good example of the politically charged atmosphere surrounding modern

judicial politics. Strict constructionists decry Roe v. Wade as an extremely activist decision and

bemoan the fact that in a democracy, no one has ever had the chance to vote on one of the most

socia lly controversial and divisive issues of our time. Roe held that a woman has a right to privacy

and that her right to privacy must be balanced against the government’s interest in preserving

human life. Within the first trimester of her pregnancy, her righ t to privacy outweighs governmental

intrusion. Since there is no right to privacy mentioned in the Constitution, strict constructionists

believe that Roe has no constitutional foundations to stand on.

Roe did not, however, declare that a right to privacy e xists in the Constitution. A string of cases

before Roe established that right. In 1965 the Supreme Court overturned a Connecticut law

prohibiting unmarried couples from purchasing any form of birth control or contraceptive. [3] The

Court reasoned that the First Amendment has a “penumbra of privacy” that must include the right

for couples to choose if and when they want to have children. Two years later, the Supreme Court

found a right to privacy in the due process clause when it declared laws prohibiting m ixed -race Saylor URL: http://www.saylor.org/books Saylor.org

marriages to be unconstitutional. [4] As a result of these decisions and others like them, the phrase

“right to privacy” today is widely accepted as a form of litmus test for whether a judge (or judicial

candidate) is a strict constructionist or activist.

Video Clip: A Question of Ethics: The Right to Privacy and Confirmation

Hearings

Since federal judges are appointed for lifetime, the turnover rate for federal judgeships is low.

Recently, the Supreme Court went through an eleven -year period without any changes in

membership. In the last five years, however, four new justices have joined the Court. First, John

Roberts was nominated by George W. Bush in 2005 to replace retiring Justice Sandra Day O’Connor.

President Bush did not have the opport unity to nominate anyone to the Supreme Court during his

first term as president, and John Roberts’s nomination was viewed widely as a smart move to place

on the Court a young, smart, and popular judge with solid Republican credentials. (Roberts began

his legal career as an attorney with the Reagan administration.) Before the Senate could confirm

Roberts, however, Chief Justice Rehnquist died of thyroid cancer while still in office. President Bush

withdrew his nomination and renominated John Roberts as chie f justice, which the Senate

confirmed. President Bush then began looking for a nominee to replace Justice O’Connor. His first

nominee was a close personal friend, Harriet Miers. Selecting Miers allowed him to replace a woman

with a woman, something importa nt to First Lady Laura Bush. More importantly, the president felt

that Miers, a born -again Christian, would comfortably establish herself as a solid judicial

conservative. Others in the Republican Party, however, were nervous about her nomination given her

lack of judicial experience. (Miers had never been a judge.) Keen to avoid another situation in which

a conservative president nominated a judge who turned out liberal, as was the case with President

George H. W. Bush’s nomination of David Souter, key law makers put enough pressure on Miers that

she withdrew her nomination. For his second nominee, President George W. Bush selected Samuel

Alito, a safe decision given Alito’s prior judicial record. Although he has been on the Court for only a

few years, most legal observers believe Alito’s nomination is critical in moving the Court to the

political right, as Alito has demonstrated himself to be more ideological in his opinions than the

pragmatic O’Connor. In his first term as president, President Barack Obama has had the opportunity Saylor URL: http://www.saylor.org/books Saylor.org

to name two justices to the Supreme Court: Sonia Sotomayor in 2009 to replace David Souter and

Elena Kagan in 2010 to replace John Stevens. Both nominations are widely regarded as not moving

the Court too much in either direction in terms of activism or originalism. There are now three

women on the Supreme Court, a historical record.

Hyperlink: Biographies of the Current Supreme Court Justices

http:/ /www.supremecourt.gov/about/biographiescurrent.pdf

The Supreme Court today is more diverse than it ever has been throughout its history. The hardworking

men and women of the Court command respect from the legal community both in the United States and

abroa d. Click the link to explore their biographies.

K E Y T A K E A W A Y S

Judicial conservatives, also known as originalists or strict constructionists, believe that the Constitution

should be interpreted strictly, in light of its original meaning when it was written. They believe that

societal change, especially the creation of new civil rights, should come from the political process rather

than the judicial process. Judicial liberals, also known as judicial activists, believe that judges have a role to

play in shapin g a more perfect union. They believe that the outcome of a case is paramount over other

considerations, including past precedent. Judicial activists are more likely to find new civil rights in the

Constitution, which they believe should be broadly interpre ted in light of modern society’s needs. The

modern fight over judicial conservatives and judicial liberals began with FDR’s New Deal and his court -

packing plan and continues to this day. The right to privacy is a good example of the difference between

judi cial conservatives and judicial liberals, and it is seen as a test to determine what philosophy a judge

subscribes to. After a long period of stability, membership in the Supreme Court has changed substantially

in the last three years with three new member s. The Court remains closely divided between judicial

conservatives and judicial liberals, with conservatives poised to control the Court’s direction. Justice

Anthony Kennedy, a moderate conservative, remains the key swing vote on the Supreme Court.

E X E R C I S E S

1. Read Justice Stewart’s dissent in the Griswold case

here: http://www4.law.cornell.edu/supct/html/historics/USSC_CR_0381_0479_ZD1.html . Although he Saylor URL: http://www.saylor.org/books Saylor.org

believes Connecticut’s law is “uncommonly silly,” he nonetheless believes that it’s not unconstitutional. Do

you think that judges have an obligation to overturn “uncommonly silly” laws?

2. Modern judicial confirmation hearings have been describ ed as an intricate dance between nominees and

Senators, with the nominees giving broad scripted answers that reveal little about their actual judicial

philosophy. Do you agree with this characterization? Do you think any changes should be made to the

confi rmation process?

3. If you were president, what characteristics would you look for in nominating federal judges?

4. If an elected legislature refuses to grant citizens a right to privacy, do you believe it is appropriate for the

courts to do so? Why or why not?

5. If a president believes that the Court has reached the wrong result, should the president be able to change

the Court by increasing its numbers or forcing early retirement?

[1] Thomas Jefferson to William C. Jarvis, 1820, in The Writings of Thomas Jeffer son , ed. Andrew A. Lipscomb and

Albert Ellery Bergh, Memorial Edition (Washington, DC: Thomas Jefferson Memorial Association of the United

States, 1903 –4), 15:277, quoted in Eyler Robert Coates Sr., “18. Judicial Review,” Thomas Jefferson on Politics &

Gov ernment: Quotations from the Writings of Thomas Jefferson ,

1999, http://etext.virginia.edu/jefferson/quotations/jeff1030.htm (accessed September 24, 2010).

[2] Miranda v. Arizona , 384 U.S. 436 (1969).

[3] Griswold v. Connecticut , 381 U.S. 479 (1965).

[4] Loving v. Virginia , 388 U.S. 1 (1967).

Saylor URL: http://www.saylor.org/books Saylor.org

2.3 Trial and Appellate Courts

L E A R N I N G O B J E C T I V E S

1. Learn the differences between the state and federal constitutions.

2. Understand subject matter jurisdiction.

3. Explore the state and federal court systems.

4. Distinguish the work of trial and appellate courts.

In many American cities, you can find both a state and a federal courthouse. These courts hear

different types of cases, involvin g different laws, different law enforcement agencies, and different

judicial systems. The rules governing the procedures used in these courts are known

as civil procedure or criminal procedure and are sometimes so hard to understand they confound

experienc ed attorneys and judges. Nonetheless, as future business professionals, it’s important for

you to understand the general boundaries between state and federal courts.

Most people forget that there are actually fifty -one separate legal systems in the United States: one

federal and fifty in the states. Within each legal system is a complex interplay among executive,

legislative, and judicial branches of government. The foundation of each of these systems of

government is a constitution. Some state constitution s are actually older than the federal

Constitution, while others are relatively new. The Massachusetts Constitution, for example, was

ratified in 1780, seven years before the federal Constitution. The Montana Constitution, on the other

hand, was adopted in 1972. In some states, state constitutions remain vibrant and provide civil

protections beyond the federal Constitution. Several state Supreme Courts, for example, have

interpreted their various state constitutions as prohibiting treating gays and lesbians differently

when it comes to marriage under their “equal protection” provisions. Other state supreme courts

have interpreted their state constitutions to grant citizens the right to choose the time and manner of

their own death. Since these decisions are by state supreme courts interpreting their own state

constitutions, they are beyond the reach or review of the federal Congress or federal courts. This

dynamic power sharing between state and federal governments is known as federalism and is a key

feature of our republican form of government. Saylor URL: http://www.saylor.org/books Saylor.org

To determine which court a case belongs in, lawyers look first to what the case is about. The rules

of subject matter jurisdiction dictate whether a case is heard in federal or state court. Lawsuits

involving state law s are generally heard in state courts. Most criminal laws, for example, are state

laws. There may be wide differences among the states about what behavior constitutes criminal

behavior. Speed limits, for example, are different from state to state. Even ser ious crimes such as

murder or manslaughter, and possible defenses to those crimes, are defined differently by the states.

Domestic issues such as divorce and family law are also handled at the state level. Some states make

it very easy to marry (Nevada pro vides an obvious example), while others define marriage

differently. Some states permit same -sex marriage, but most do not. Child custody and adoption laws

are state based. Property and probate laws are also based on state law. Laws related to the transfer of

property (including real estate), vehicle or watercraft ownership registration, and the disposition of

property after death are different depending on what state you live in. The laws surrounding

contracts are also passed at the state level (although m ost are based on a common law called

the Uniform Commercial Code [UCC] ). Finally, the law of torts is state based. Torts are any civil wrong

other than a breach of contract and can cover a vast array of situations in which people and

businesses suffer lega l injury. Some states are far friendlier toward torts than others, and the

resulting patchwork of tort laws means that companies that do business across the country need to

bear in mind the different standards they are held to, based on what state their cu stomers live in.

Given the wide array of subject areas regulated by state law, it’s not surprising that for most

individuals and businesses, their experience with courts is with state courts. Nonetheless, cases do

sometimes end up in federal court as well. Federal court subject matter jurisdiction is generally

limited to cases involving a federal question —either the federal Constitution or a federal law. Cases

involving the interpretation of treaties to which the United States is a party are also subject to federal

court jurisdiction. In fact, any case involving the United States as a party is properly litigated in

federal court. Finally, in original jurisdiction cases (so called because the Constitution specifically

grants this jurisdiction), lawsuits betwee n states can be filed directly with the U.S. Supreme Court.

Ongoing disputes between Wyoming and Montana over the use of the Tongue and Powder rivers, for

example, were litigated in the Supreme Court in 2005. Saylor URL: http://www.saylor.org/books Saylor.org

Sometimes it’s possible for a federal court to hear a case involving a state law. These cases are

called diversity jurisdiction cases, and they arise when all plaintiffs in a civil case are from different

states than all defendants and the amount claimed by the plaintiffs exceeds seventy -five thousand

dollars. Diversity jurisdiction cases allow one party who feels it may not receive a fair trial where its

opponent has a “home court” advantage to seek a more neutral forum to hear its case, a process

called removal .

Within both the federal court and the s tate court system, there is a hierarchy of higher and lower

courts. The diagram in Figure 2.9 "State and Federal Court Systems" demonstrates this hierarchy.

The U.S. Supreme Court is the highest court in the country, and all courts are bound to follow

prec edent established by the U.S. Supreme Court through the doctrine of stare decisis . Keep in mind,

though, that if an issue is exclusively a state matter (such as a state court interpreting its own state’s

Constitution), then the U.S. Supreme Court has no ju risdiction on that matter, leaving the state

supreme court as the highest court on that particular issue.

Figure 2.9 State and Federal Court Systems

On the left -hand side of the diagram is the federal court system. Cases are filed in a U.S. District

Court, the trial court in the federal system. Under the court administration system, there are ninety - Saylor URL: http://www.saylor.org/books Saylor.org

four judicial districts in the country. Some states with low population have only one judicial district,

while more populous states have multiple judicial districts. The districts are named for their

geographical location —the federal court in Manhattan, for example, is the U.S. District Court for the

Southern District of New York. The U.S. Department of Justice, which acts as the prosecutor

representing the federal government in both civil and criminal cases, divides its attorneys among the

ninety -four judicial districts, with each district led by a U.S. attorney appointed by the president

without any Senate confirmation.

As a trial court, the U.S. district courts hear civil and criminal trials. The trials may

be bench trials (heard only by the judge), or they may be jury trials. At the trial, witnesses are called

and their testimonies are recorded, word for word, into a trial record (transcript of what was s aid in

the courtroom along with supporting documentation). At the conclusion of the trial, if the losing side

is unhappy with the outcome, it is entitled as a matter of right to appeal its case to the U.S. Circuit

Court of Appeals. There are thirteen circu it courts of appeals in the United States, also spread

geographically through the states. A party losing an appeal at the circuit court level can appeal one

more time to the U.S. Supreme Court for review, but given the extremely small odds of that appeal

being granted, most federal litigation ends at the U.S. circuit court level.

On the right side of the diagram is the state court system. In all fifty states, a trial court

of general jurisdiction accepts most types of civil and criminal cases. These courts are called various

names such as superior court, circuit court, or district court. Confusingly, trial courts in New York

State are called supreme courts. There may be other courts of limited jurisdiction at the state level,

such as traffic court, juvenile court, family court, or small claims court. Increasingly, states are also

experimenting with specialized drug courts to treat drug abuse (not distribution or trafficking) as a

health problem rather than a criminal problem. State judges may be either appoin ted by the

governor or elected by the public. Like their federal counterparts, state trial courts hold trials, and

most preserve a trial record for review by an appellate court. In thirty -nine states, a party that loses

at trial can file an appeal with an intermediate court of appeals. The remaining states are smaller and

therefore don’t maintain this level of appeal, in which case appeals are filed directly with the state

supreme court. In states with an intermediate court of appeals, the party losing the appeal can Saylor URL: http://www.saylor.org/books Saylor.org

typically file one more time with the state supreme court, although state supreme court rules vary on

whether appeals are a matter of right or discretion. Finally, in certain cases that involve a federal

constitutional right, a party that loses at the state supreme court level can appeal to the U.S. Supreme

Court for review. These cases are typically criminal and involve the application of the Constitution to

criminal procedure, evidence collection, or punishment.

Whenever an appeal is filed, the trial record is forwarded to the appellate court for review. Appellate

courts do not conduct new trials and are unable to recall witnesses or call new witnesses. The trial

court’s duty is to figure out the facts of the case —who did what, when, why, or how . This process of

fact -finding is an important part of the judicial process, and a great deal of deference is placed on the

judgment of the fact finder ( trier of fact ). The trier of fact is typically the jury, or the judge in the case

of a bench trial. On appeal, the appellate judge cannot substitute his or her interpretation of the facts

for that of the trier of fact, even if the appellate judge believes the trier of fact was wrong. The issues

on appeal are therefore limited to questions of law or legal er rors. For example, the appellate court

may disagree with the trial judge’s interpretation of the meaning of a law, or it may disagree with a

ruling the trial judge made about what evidence should be admitted or excluded to the trier of fact.

The deference to the trier of fact (trial court) means that, as a practical matter, appeals are rarely

won. Even if a litigant is successful in persuading a court of appeals that legal error has taken place, it

doesn’t automatically win the case. In most cases, the best remedy a litigant can hope for is for the

court of appeals to send the case back to a trial court (a process called remand ) for reconsideration or

perhaps a new trial.

K E Y T A K E A W A Y S

There are fifty -one separate legal systems in the United States, each with its own executive, legislative,

and judicial functions. State constitutions remain a vibrant source of civil rights protections for many

citizens because state constitutions are permitted to grant more civil rights (but not less) than the federal

Cons titution. Subject matter jurisdiction is the authority of a court to hear a case based on its subject

matter. State law claims are generally heard in state courts, while federal question cases are generally

heard in federal court. Federal courts sometimes hear state law claims under diversity jurisdiction. Federal

cases are filed in a U.S. district court and appealed to a U.S. circuit court of appeals. State cases are Saylor URL: http://www.saylor.org/books Saylor.org

typically filed in a trial court and appealed to an intermediate court of appeals. The U.S . Supreme Court is

the highest court in the country, and all other courts must follow the precedent in Supreme Court

opinions. Trial courts are the triers of fact, and their judgment is not questioned by appellate courts.

Appellate court review is limited to legal errors.

E X E R C I S E S

1. Do you think that the “home court advantage” that justifies diversity jurisdiction still exists? Why or why

not?

2. Should states retain the ability to grant more civil rights than the federal Constitution? Can you think of

historic al examples of this happening? What implications does this have for the future?

3. Stare decisis requires courts to respect and follow established precedent. Why do you think stare decisis is

important in our common -law system? What do you think would happen if courts were not bound to stare

decisis?

4. Under what circumstances do you think the Supreme Court should feel comfortable abandoning a prior

precedent? Do you think the answer differs depending on whether you believe in judicial originalism or

activism?

Saylor URL: http://www.saylor.org/books Saylor.org

2.4 The Certiorari Process

L E A R N I N G O B J E C T I V E S

1. Understand the Supreme Court’s jurisdiction, including what kinds of cases are selected for review.

2. Explore what happens when lower courts of appeal disagree with each other.

3. Learn about the Supreme Court’s process in hearing and deciding a case.

Video Clip: The U.S. Supreme Court

The Supreme Court’s jurisdiction is discretionary, not mandatory. This means the justices

themselves decide which cases they want to hear. For the justices to hear a case, the losing party

from the appeal below must file a petition for a writ of certiorari . During the 2008 term (a term begins

in October and ends the following June), the Supreme Court received approximately 7,700 petitions.

Of these, about 6,100 were in forma pau peris , leaving only approximately 1,600 paid petitions. In

forma pauperis petitions are filed by indigent litigants who cannot afford to hire a lawyer to write

and file a petition for them. Supreme Court rules permit these petitions to be filed, sometimes

handwritten, without any filing fees. These petitions are typically filed by prisoners protesting a

condition of their detention or a defect in their conviction and are quickly dismissed by the Supreme

Court. Not all in forma pauperis petitions are meritle ss, however. In the case of Gideon v.

Wainwright ,[1] a poor defendant convicted of burglary without being represented by a lawyer filed a

handwritten in forma pauperis writ of certiorari with the Supreme Court. The Court granted the writ,

heard the case, and ruled that Gideon was entitled to have a lawyer represent him and that if he

could not afford one, then the government had to pay for one. Gideon was retried with a lawyer’s

assistance, and he was acquitted and released.

Of the 7,700 petitions filed in the 2008 term, 87 cases were eventually argued. With such a large

number of petitions filed, and a less than 1 percent acceptance rate, what kind of cases do the justices

typically grant? Remember, the Supreme Court is a court of discretionary jurisdictio n. It does not

exist as a court to right every legal wrong, or to correct every social injustice. Typically, the cases fall

into one of three categories. The first category is a case of tremendous national importance, such as

the Bush v. Gore [2] case to d ecide the outcome of the 2000 presidential election. These cases are rare, Saylor URL: http://www.saylor.org/books Saylor.org

but they dominate headlines on the Supreme Court. Second, the justices typically take on a case

when they believe that a lower court has misapplied or misinterpreted a prior Supreme Court

precedent. This category is also fairly infrequent. By far, the majority of cases granted by the

Supreme Court fall into the third category, the circuit split .

Recall that there are thirteen circuit courts of appeals in the United States (see Figure 2.10

"Geography of U.S. Federal Courts" ). Eleven are divided geographically among the several states and

hear cases coming from district courts within their jurisdiction. Thus, for example, someone who

loses a case in federal district court in Pennsylvani a will appeal his or her case to the Third Circuit

Court of Appeals, while a litigant who loses in Florida will appeal his or her case to the Eleventh

Circuit Court of Appeals. In addition to the eleven numbered circuit courts, there are two additional

spe cialized courts of appeals. They are both seated in the District of Columbia. The U.S. Court of

Appeals for the Federal Circuit is a specialized court that mainly hears appeals involving intellectual

property cases, such as those involving patent law. Deci sions by this court on patent law are binding

on all district courts throughout the country, unless overruled by the Supreme Court. The second

specialized court is the U.S. Court of Appeals for the District of Columbia Circuit. Although this

appellate cour t has the smallest geographical area of any court of appeal, it is a very important court

as it hears cases against the federal government and the myriad federal agencies in Washington, DC.

Chief Justice Roberts, as well as Justices Scalia, Ginsburg, and T homas, served on this important

court before being appointed to the Supreme Court.

A circuit split arises when the circuit courts of appeals disagree with each other on the meaning of

federal law. Let’s assume that two similar cases are being decided in fe deral district court at the same

time, one in California and the other in South Carolina. The cases present similar facts and involve

the same federal law passed by Congress. Both cases are appealed —the California case to the Ninth

Circuit and the South Ca rolina case to the Fourth Circuit. On appeal, it’s possible that the two

appellate courts may come to opposite conclusions on what the law means, especially if Congress has

recently passed the law. Since the circuit court of appeal decision is binding for that circuit, the state

and meaning of federal law is different based on where a citizen lives. The Supreme Court is Saylor URL: http://www.saylor.org/books Saylor.org

therefore very likely to grant certiorari in this case to resolve the split and decide the meaning of the

law for the entire country.

Figur e 2.10 Geography of U.S. Federal Courts

Source: Photo courtesy of the U.S. Department of

Justice, http://en.wikipedia.org/wiki/File:US_Court_of_Appeals_and_District_Court_map.svg .

When a petition for writ of certiorari is filed with the Supreme Court, the party that won the case in

the appeal below (called the respondent) files an opposition. Together, these two documents are

considered by the justices during one of their weekly conferences to decide whether or not the case

should be granted. As previously discussed, cases that fall into one of three categories are generally

granted, while others are di smissed. The conference works on the rule of four —only four justices (a Saylor URL: http://www.saylor.org/books Saylor.org

minority) need to agree to hear a case for the petition to be granted. The vast majority of cases are

dismissed, which means the decision of the lower court stands.

Each Supreme Court justice is permitted to hire up to four law clerks every term to assist with his or

her work. These law clerks are typically new attorneys from the nation’s best law schools. Being

selected as a clerk is obviously very prestigious, and the job is reserved for the brightest young legal

minds. Many justices rely on their clerks to read the thousands of filed petitions and to make

recommendations on whether or not to grant the case. This arrangement, called a cert pool (the clerk

assigned to the case writes a memo that is circulated to all the justices), has been criticized as giving

too much power to inexperienced lawyers. Participation in the cert pool is voluntary and not all the

justices participate. Justice Alito, for example, does not participate, and his clerks read all the

incoming petitions independently. Until his retirement, Justice Stevens also did not participate in

the cert pool process.

If a petition is granted, the parties are then instructed to file written briefs with the Court, laying out

argu ments of why their side should win. At this point, the Court also allows nonparties to file briefs

to inform and persuade the justices. This type of brief, known as an amicus brief , is an important tool

for the justices. Many cases before the Supreme Court are of tremendous importance to a broad array

of citizens and organizations beyond the petitioner and respondent, and the amicus brief procedure

allows all who are interested to have their voice heard. For example, in the 2003 affirmative action

cases fro m the University of Michigan, more than sixty -five amicus briefs were filed in support of the

university’s policies, from diverse parties such as MTV, General Motors, and retired military leaders.

Hyperlink: Amicus Briefs

http://www.vpcomm.umich.edu/admissions/legal/gru_amicus -ussc/um.html

The University of Michigan affirmative action cases drew national attention to the practice of colleges and

universities usi ng race as a factor in deciding whether or not to admit a college applicant. The Supreme

Court ultimately held that race may be used as a factor but not as a strict numerical quota. The Court was

aided in its decision by numerous amicus briefs urging it to find in favor of the university, including briefs Saylor URL: http://www.saylor.org/books Saylor.org

filed by many corporations. Click the link to read some of these briefs and to understand why these

companies are strong supporters of affirmative action.

After the justices have read the briefs in the cas e, they hear oral arguments from both sides. Oral

arguments are scheduled for one hour, in the main courtroom of the Supreme Court building. They

are open to the public but not televised. Members of the press are given special access on one side of

the cou rtroom, where they are permitted to take handwritten notes; no other electronic aids are

permitted. During the oral arguments, the justices are interested not in the attorneys repeating the

facts in the briefs but rather in probing the weaknesses of their arguments and the implications

should their side win. The justices typically hear two or three cases a day while the Court is in

session. Before each day’s session, the marshall of the court begins with the invocation in Note 2.58

"Hyperlink: Oyez.org" .

Hy perlink: Oyez.org

http://www.oyez.org/media/oyezoyezoyez

After the oral arguments, the justices once again meet in conference to decide the outcome of the

case. Unlike the other branches of government, the justices work alone. No aides or clerks are

permitted into their conferences. Once they decide which side should win, they begin the task of

drafting their legal opinions. The opinions are the only way that justices communicate with the

pu blic and the legal community, so a great deal of thought and care is given to opinion drafting. If

the chief justice is with the winning side, he or she decides which justice writes the majority opinion ,

which becomes the opinion of the Court. The chief ju stice can use this assignment power wisely by

assigning the opinion to a swing or wavering member of the Court to ensure that justice’s vote

doesn’t change. If the chief justice is in the minority, then the most senior of the justices in the

majority decid es who writes the majority opinion. Dissenting justices are entitled to write their

own dissenting opinions , which they do in hopes that one day their view will become the law.

Occasionally, a justice may agree with the outcome of the case but disagree with the majority’s

reasoning, in which case he or she may write a concurring opinion . After all the opinions are drafted, Saylor URL: http://www.saylor.org/books Saylor.org

the Court hands down the decision to the public. Except in very rare instances, all cases heard in a

term are decided in the same ter m, as the Court maintains no backlog.

K E Y T A K E A W A Y S

The Supreme Court has discretionary jurisdiction to hear any case it wishes to hear. Every year, the chance

of having the Supreme Court hear a particular case is less than 1 percent. The Supreme Court is more likely

to hear a case if it involves an issue of national importance, if the Court believes a lower court has

misinterpreted precedent, or if the case involves a split in the appellate circuits. A circuit split occurs when

two or more federal circuit courts of appeals disagree on the meaning of a federal law, resulting in the law

being different depending on where citizens live. Although it takes a majority of justices to vote together

to win a case, only a minority decides the Court’s docket under the rule of four. The Supreme Court

decides cases every term by reading briefs and amicus briefs and by hearing oral arguments. In any case,

the Court may issue a majority opinion, dissenting opinions, and concurring opinions.

E X E R C I S E S

1. Do you believe that Su preme Court oral arguments should be televised, as government proceedings are on

C-Span? Why or why not?

2. Do you think the Supreme Court should act more as a court of last resort, especially in serious cases such

as capital crimes, or should the Supreme Cou rt continue to accept only a very small number of cases?

[1] Gideon v. Wainwright , 372 U.S. 335 (1963).

[2] Bush v. Gore , 531 U.S. 98 (2000).

Saylor URL: http://www.saylor.org/books Saylor.org

2.5 Concluding Thoughts

As the smallest branch of government, and with the shortest founding text in the Constitution among

the three branches, the U.S. judiciary faced uncertainty and political interference in its early days. In

recent decades, however, the judiciary has matured into an independent and transparent institution,

remarkably resilient to politic al turbulence and attack. It’s also a relative bargain for taxpayers,

considering its role as the primary interpreter and defender of the Constitution.

None of this has prevented political attacks on the judiciary, which continue to this day. You may

recal l the Florida case involving Terri Schiavo, a patient in a permanent vegetative state, and what

happened when her husband won judicial relief to stop medical measures to keep her alive.

Prominent pro -life politicians launched vitriolic attacks on the judge s involved. Attacks on the

judiciary for politically unpopular decisions have become so toxic that former Supreme Court Justice

Sandra Day O’Connor has made it part of her post -Court retirement to stop these attacks and inject

more civility into political treatment of judges. While citizen frustration with government is not new,

dangerous threats against the judiciary are on the rise and represent a worrying trend.

You may spend your entire life without ever meeting a single judge. If you do have experience s with a

judge, you will likely find him or her to be surprisingly human, honest, and above all, fair. The

judiciary lacks a natural constituency, so the burden of ensuring the continued success of this

American institution falls on all of us, citizens and corporations alike.

Saylor URL: http://www.saylor.org/books Saylor.org

Chapter 3

Litigation

L E A R N I N G O B J E C T I V E S

In this chapter, you will explore our litigation system in detail. Litigation provides an opportunity for each

side in a dispute, whether criminal or civil, to lay their side of the story to an impartial jury or judge and

ask that jury or judge to decide who wins and loses, and how much the loser should pay or how much time

the defendant should spend in jail. After reading this chapter, you should have a deeper understanding of

how litigati on is conducted in the United States. Specifically, you should be able to answer the following

questions:

1. Who are the parties involved in litigation?

2. What is standing and how does it impact litigation?

3. How does a court obtain personal jurisdiction over a defendant?

4. How does a trial progress from beginning to end?

5. How does a losing side appeal a case?

Even if you’ve never stepped foot in a courtroom before, you can probably describe what a courtroom

looks like. It’s a large, imposing room with tall ceilings , flags on stands, and wood paneling on the

walls. The majority of the floor space is taken up with seating for the public. The front of the

courtroom is dominated by the bench, behind which the judge sits, above everyone else in the room.

Next to the benc h is a solitary chair with a microphone in front of it, where a witness sits. Along one

side of the wall is a separated area with two rows of seats, where the jury sits. Facing the bench, and

always closest to the jury, is one table for the party that is c arrying the burden of proof in the case:

the prosecution in a criminal trial and the plaintiff in a civil trial. Across the aisle, there is another

impressive table for the opposite side, the defense . When court is in session, a hush settles into the

room so that everyone can hear the judge, commanding in presence, or the witness, captivating in

detail. Saylor URL: http://www.saylor.org/books Saylor.org

Many of us have such clear imagery of a courtroom because our experiences are drawn from popular

culture. Whether in movies ( A Civil Action , To Kill a Mockingbird , Erin Brockovich ), on television

shows ( Law & Order , L.A. Law , Boston Legal ), or in fictional books ( The Firm , Twelve Angry Men ),

courtroom scenes capture our imagination and fire our sense of righteousness and justice as good

always prevails o ver evil. In our collective courtrooms the truth always comes out, our ideals are

always upheld, and the bad guys always lose. Who could forget, for example, the psychological

breakdown on the witness stand in the movie A Few Good Men , as Jack Nicholson pl ays it out?

Video Clip: You Can’t Handle the Truth

Scenes like these, while providing wonderful imagery, are pure fiction. In a real courtroom, there is

no back -and -forth argument between counsel and witness as examinations proceed through

questioning alon e. In a real courtroom, the truth doesn’t always emerge. In a real courtroom, there

are many shades of gray between good and evil. And finally, in a real courtroom, the bad guys don’t

always lose, and the good guys don’t always win.

As future business prof essionals, your responsibility to your company, to your company’s

stakeholders, and to yourself is to avoid ever seeing the inside of a courtroom. Acting ethically and

legally, and identifying the legal pitfalls that you may encounter by mastering the elem ents of this

course, will help you achieve this goal. Agreeing to arbitration for parties that you have a preexisting

relationship with, such as your customers, suppliers, or employees, will also help you stay away from

a courtroom. In spite of this planni ng, however, many companies still find that litigation is

sometimes unavoidable. Whether litigation is initiated against parties you don’t have a contract with

(such as another company that steals your intellectual property rights) or by parties you don’t have a

contract with (such as a customer who is injured by your product or an employee harassed by

another employee), litigation may be the only dispute -resolution mechanism available.

In this chapter we’ll explore the process of litigation from the beginn ing to the end. You’ll learn about

the parties involved and about preliminary matters such as standing and personal jurisdiction and

then explore the trial and appeal. We’ll also discuss the role of lawyers and juries in our litigation

system. By the end o f the chapter, you’ll have an appreciation that while our litigation system is Saylor URL: http://www.saylor.org/books Saylor.org

cherished for its ability to resolve disputes peacefully and establishes a hallmark for public

accessibility, for businesses it is often a far from satisfactory forum for disput e resolution.

Key Takeaways

Litigation is an inevitable part of a business’s activities. Lawsuits, trials, and appeals can be ruinously

expensive for some companies, especially small - and medium -sized enterprises. Learning about our

litigation system will give you the skills and comfort you need should your company find itself in

litigation.

Saylor URL: http://www.saylor.org/books Saylor.org

3.1 The Parties Involved

L E A R N I N G O B J E C T I V E S

1. Identify the parties involved in litigation.

2. Explore the role of lawyers in our adversarial system.

3. Understand the roles and obligations of jurors.

The litigation system relies on parties bringing forth and defending their respective claims. As in the

game of chess, each move can take place only if a player makes a decision to move in a particular

direction; the game does n ot play itself. Courts, jurors, and witnesses are similarly moribund: it is up

to the players, in this case called litigants , to act decisively. Occasionally, a court may act sua sponte ,

without a direct request from a party. A judge may decide, for exampl e, to fine a party for bad or

unethical behavior. These actions are fairly rare. More commonly, judges act on a motion filed by

either party asking the judge to make a particular decision.

The party that begins the lawsuit is called the plaintiff in a civi l case. The plaintiff is a victim that has

presumably suffered some sort of legal wrong that the law recognizes. The plaintiff brings suit

against the defendant —the alleged wrongdoer or perpetrator. Note that in a criminal trial, the party

that initiates l itigation is the prosecution, representing the people of a state or, in federal cases,

representing the people of the United States. In a criminal trial the alleged wrongdoer is also called

the defendant.

Many cases involve multiple plaintiffs and multiple defendants. Civil procedure encourages, and

makes it easy for, parties to air all their grievances against each other at once. All parties, and every

possible claim (each claim is a separate violation of law) arising out of a single incident or series of

related incidents, should be identified and named in a lawsuit. For example, if you go to an off -

campus party one night and witness a friend being harassed, you might feel the need to step in to

defend your friend. The harasser may then turn his attention toward you, perhaps taking a swing at

you. Let’s assume that the harasser is drunk and misses, but in return you take a swing and hit him,

knocking him to the ground. The harasser may file a lawsuit against you, alleging assault and battery.

The harasser i s the plaintiff, and you are the defendant. The lawsuit filed in court would be Saylor URL: http://www.saylor.org/books Saylor.org

captioned Harasser v. You . You might decide in return to file a claim against the harasser, alleging

that the harasser started the fight and that you acted in self -defense. This is called a counterclaim ,

and you are now the counterplaintiff , making the harasser the counterdefendant . In return, the

harasser may allege that he wasn’t really harassing your friend but trying to defend himself from

your friend’s unwanted advances. The harasser may sue your friend as a third -party defendant

through a process called joinder .

Except in some small -claims courts, parties hire attorneys to litigate most cases. Sometimes

individuals feel like they have a sufficient grasp on the law to pro ceed in litigation without a lawyer

or that they have sufficient legal training (or even a law degree) that hiring a lawyer would be a waste

of money. Individuals who represent themselves are called pro se litigants and can only proceed pro

se if the judge overseeing the case allows it. Abraham Lincoln once famously said, “He who

represents himself has a fool for a client.” The complexities of litigation require a cool and detached

mind to thread a route to success, and if you are representing yourself it i s all too easy to allow

passion to cloud your judgment.

Attorneys are sometimes called members of the bar . The U.S. legal profession is unique in several

respects. In most countries, legal education is an undergraduate program followed by a period of

appre nticeship before an individual is allowed to practice law. Many countries also make a

distinction between attorneys who litigate in court and those who do not. In the United Kingdom, for

example, solicitors are lawyers who deal with ordinary legal matters outside of court, while Queen’s

Counsel (QC) are specially trained lawyers who are permitted to argue in court. In the United States,

lawyers undertake three years of graduate study resulting in the award of the Juris Doctorate degree,

or JD. Every year, m ore than thirty thousand students graduate from U.S. law schools with their JD.

They then sit for the bar exam in the state where they wish to practice. Since the practice of law in the

United States varies widely by different jurisdictions, lawyers are on ly permitted to practice in

jurisdictions where they are licensed. Some states permit lawyers from out of state, after a few years

of being in practice, to apply for bar admission without taking the exam through a process called

reciprocity. Other states, notably California and Florida, require attorneys to take the bar exam no

matter how long they have been in practice. If a lawyer is dealing with an issue or matter that takes Saylor URL: http://www.saylor.org/books Saylor.org

him or her out of state to litigate a case, he or she can ask to be admitted tem porarily by a court in

that foreign state through a motion called pro hac vice . Once the lawyer passes the state’s bar exam or

is otherwise admitted, he or she is permitted to practice all aspects of law in that state, from drafting

wills and contracts to arguing a case before the U.S. Supreme Court.

Attorneys in the United States are broadly divided into civil and criminal attorneys; few lawyers excel

in both areas. Civil attorneys generally work in two different categories: in law firms, where they may

represent multiple clients, and as in-house counsel , where they represent only one client, their

employer. Most large corporations have an in -house legal department to control legal costs but may

still hire outside counsel for representation and advice in co mplex matters.

With the possible exception of politicians, no other profession is subject to more morbid jokes than

lawyering. William Shakespeare famously wrote in Henry VI , through a character speaking of a

utopian world, “The first thing we do, let’s ki ll all the lawyers.” In spite of this public animosity

toward lawyers, however, if there comes a time when someone needs a lawyer, it’s not uncommon to

hear them wish they had the most aggressive lawyer money can buy.

Perhaps part of the reason the public has a low opinion of lawyers can be traced to the ethical and

legal obligations of attorneys. Lawyers may be the most regulated of all the professional industries,

and they are required to comply with complex and sometimes rigid rules of professional condu ct.

Unlike rules for other professions, the rules of professional conduct for lawyers are largely drafted

and enforced by the bar itself (other lawyers and judges) and almost never involve external

enforcement mechanisms. These rules govern virtually every aspect of the practice of law, and a

violation of these rules can result in disciplinary action from the state bar or supreme court of the

state in which the lawyer practices, up to lifetime disbarment. When President Bill Clinton, for

example, lied under oath about certain aspects of his extramarital affairs, he was suspended from

practicing law for five years in Arkansas and ordered to pay a $25,000 fine. These rules of

professional responsibility require attorneys to represent their clients with zealous advocacy.

Ordinarily, we associate the word “zealot” with extremists, but that is the standard by which lawyers

must represent their clients. This might clarify why some lawyers act the way they do. Saylor URL: http://www.saylor.org/books Saylor.org

One of the most sacrosanct rules of professional respons ibility is the obligation to keep a client’s

secrets. The communications between a client and his or her attorney are absolutely confidential

under the attorney -client privilege doctrine. There are many privileges under the law, such as the

spousal privile ge, doctor -patient privilege , and priest -penitent privilege . The attorney -client privilege,

however, is arguably the strongest of these privileges. The privilege belongs to the client, and the

attorney is not permitted to reveal any of these communications without the client’s consent. A

narrow exception exists for clients who tell their lawyers they intend to harm others or themselves,

but attorneys must tread very carefully to avoid violating the privilege. Many members of the public

feel that the privile ge may be open to abuse and can’t understand, for example, why an attorney can’t

reveal a client’s confession to a heinous crime. Ultimately, the privilege exists for the client’s benefit.

Someone who cannot communicate with his or her attorney freely is u nable to help the attorney

prepare the best possible case for litigation. You should note that in -house attorneys represent the

corporations they work for and not individual employees. If you communicate with an in -house

attorney for the company where you work, for example, that communication may not be

automatically protected by the attorney -client privilege.

Hyperlink: The Lynne Stewart Case

http://www.lynnestewart.org

Lynne Stewart, a human rights attorney, was assigned to represent Sheik Omar Abdel -Rahman, the blind

Egyptian cleric convicted of conspiracy in the 1993 World Trade Center bombing in New York City. As

part of her representation, she agreed to abide by certain conditions when communicat ing with her client,

including not speaking to the media. Ms. Stewart broke those promises and inadvertently passed on a

communication from her client to his followers around the world. She was indicted and convicted of

conspiracy and providing material su pport to terrorists. She was sentenced to a twenty -eight -month

prison term. Click the link to read more about her case, including the legal documents involved. A very

controversial aspect of the case involved the use of secret cameras and recorders to list en in on her

conversations with her client while he was in prison.

Figure 3.2 Lynne Stewart Saylor URL: http://www.saylor.org/books Saylor.org

Source: Photo courtesy of Robert B. Livingston, http://en.wikipedia.org/wiki/File:Lynne_Stewart.JPG .

In spite of an attorney’s professional obligations to his or her client, it’s important to remember that

ultimately a lawyer’s first duty is to the administration of justice . The rules of professional co nduct are

written with this goal in mind. The requirements for lawyers on civility, honesty, and fairness are all

written to ensure that lawyers represent the very best aspects of our judicial system. Let’s say, for

example, a client admits to his lawyer t hat he is guilty or liable in a case. The client then wants to

testify under oath that he is innocent. Although a lawyer cannot tell anyone what her client has told

her, the lawyer is also prohibited from knowingly suborning perjury . The attorney must eith er

convince the client to not testify, or withdraw from the case.

In the case in Note 3.31 "Hyperlink: A Question of Ethics" , an attorney goes a little too far in her

representation and draws a heavy fine from a judge as a result.

Hyperlink: A Question of Ethics

The Case of the Birther Attorney

Order Hon. Clay D. Land, U.S. District Judge, District Court for the Middle District of Georgia, Case No.

4:09 -CV -106, Rhodes v. MacDonald , at http://www.scribd.com/doc/20996403/Gov -uscourts -gamd -

77605 -28 -0. Saylor URL: http://www.saylor.org/books Saylor.org

Throughout the presidential election campaign in 2008, persistent rumors swirled around whether

Barac k Obama was born in the United States, a requirement under the Constitution to serve as president.

After the election, California attorney Orly Taitz launched a campaign to prove that the president was not,

in fact, born in Hawaii. Her bizarre tirades agai nst the media and the courts earned her this unusual

reprimand from a federal judge. Click the link to read the entire order. Do you believe that in their

“zealous” representation of their clients, attorneys have the ethical duty to pursue claims such as t hese?

Order

Introduction

Commenting on the special privilege granted to lawyers and the corresponding duty imposed on them,

Justice Cardozo once observed, “Membership in the bar is a privilege burdened with conditions. [A lawyer

is] received into that anci ent fellowship for something more than private gain. He [becomes] an officer of

the court, and, like the court itself, an instrument or agency to advance the ends of justice.” Competent

and ethical lawyers “are essential to the primary governmental functio n of administering justice.” For

justice to be administered efficiently and justly, lawyers must understand the conditions that govern their

privilege to practice law. Lawyers who do not understand those conditions are at best woefully

unprepared to practi ce the profession and at worst a menace to it.

When a lawyer files complaints and motions without a reasonable basis for believing that they are

supported by existing law or a modification or extension of existing law, that lawyer abuses her privilege

to p ractice law. When a lawyer uses the courts as a platform for a political agenda disconnected from any

legitimate legal cause of action, that lawyer abuses her privilege to practice law. When a lawyer personally

attacks opposing parties and disrespects the integrity of the judiciary, that lawyer abuses her privilege to

practice law. When a lawyer recklessly accuses a judge of violating the Judicial Code of Conduct with no

supporting evidence beyond her dissatisfaction with the judge’s rulings, that lawyer ab uses her privilege

to practice law. When a lawyer abuses her privilege to practice law, that lawyer ceases to advance her

cause or the ends of justice. Saylor URL: http://www.saylor.org/books Saylor.org

It is irrefutable that a lawyer owes her client zealous advocacy, but her zeal must be constrained withi n the

bounds placed on her as an officer of the Court and under the Court’s rules. Specifically, Rule 11 of the

Federal Rules of Civil Procedure expressly sets forth the outer boundaries of acceptable attorney conduct.

That rule prohibits a lawyer from ass erting claims or legal positions that are not well -founded under

existing law or through the modification, extension, or expansion of existing law. Rule 11 also prohibits an

attorney from using the courts for a purpose unrelated to the resolution of a legi timate legal cause of

action.

Regrettably, the conduct of counsel Orly Taitz has crossed these lines, and Ms. Taitz must be sanctioned

for her misconduct. After a full review of the sanctionable conduct, counsel’s conduct leading up to that

conduct, and co unsel’s response to the Court’s show cause order, the Court finds that a monetary penalty

of $20,000.00 shall be imposed upon counsel Orly Taitz as punishment for her misconduct, as a deterrent

to prevent future misconduct, and to protect the integrity of the Court. Payment shall be made to the

United States, through the Middle District of Georgia Clerk’s Office, within thirty days of today’s Order. If

counsel fails to pay the sanction due, the U.S. Attorney will be authorized to commence collection

proceed ings. The Court does not take this action lightly, and in fact, cannot recall having previously

imposed monetary sanctions upon an attorney sua sponte.

As the Orly Taitz case demonstrates, attorneys must take care to respect a court’s authority at all

time s and conduct themselves in a civil manner. Most attorneys have no problem discharging this

obligation to the judge, but it is to the jury that they focus their attention the most. In our legal

system, the jury has a very special role to play in ensuring c itizen participation in the administration

of justice. As the trier of fact, the jury has the duty of determining the truth in any given situation:

who said and did what, why, and when?

Do you know when someone is lying to you? Have you ever been lied to s o well that you didn’t find

out about the lie until much later? Have your roommates or friends who were involved in a dispute

ever asked you to decide who should win? In essence, being a juror relies on those same human

skills. In every legal proceeding, e ach of two adversarial sides, absolutely opposed to each other,

claims that it is right and the other side is wrong. Our litigation system is a process by which each Saylor URL: http://www.saylor.org/books Saylor.org

side gets to present its case to a group of stranger citizens, and then ask them to decide who is lying

and who is telling the truth.

There are two types of juries. A grand jury is a group of citizens convened by the prosecution in

serious criminal cases to simply determine whether there is probable cause to believe that a crime

has occurred an d whether it’s more likely than not that the defendant in question committed the

crime. The grand jury serves as a procedural step to prevent prosecutors from abusing their powers

of arrest and indictment, a sort of “sanity check” on the awesome power of g overnment to accuse

citizens of crime. The grand jury requirement exists at the federal level and in some, but not all,

states. A grand jury typically meets for an extended period of time and can hear several different

cases in one day.

The grand jury does not determine guilt or innocence. A petit jury does that. This jury is impaneled

for a specific trial. During the trial, members of the jury listen to the evidence presented and then

deliberate as a group on what they believe the facts of the case are. Th ey then apply the law, as

instructed by the judge, to the facts. There are typically twelve members in a petit jury in criminal

trials and from six to twelve members in civil trials, and generally speaking they must arrive at a

unanimous verdict.

The jury system is a jewel in our litigation system for it involves ordinary citizens in adjudicating all

sorts of disputes, from domestic family issues to complex business and insurance litigation to heart -

wrenching criminal cases. There are problems with administ ering this system, however.

Both grand and petit juries are drawn from citizen voter and driver license rolls. In high -profile

cases, it may be difficult to find citizens who have not heard about the case or who can be impartial

about the case, in spite of their promises to be open minded. When Enron collapsed in 2001, for

example, defense attorneys for former CEO Jeff Skilling argued strenuously that the trial should not

be held in Houston, where almost every citizen was affected in some way by the energy giant’s

collapse or knew someone affected. The question of juror bias was so serious that the U.S. Supreme

Court agreed to hear Skilling’s appeal based partially on this argument. Although the Court

eventually found that Skilling’s jury was adequately impa rtial, Justice Sotomayor noted in a Saylor URL: http://www.saylor.org/books Saylor.org

dissenting opinion that the “deep seated animosity that pervaded the community at large” caused her

great concern. [1]

Another problem arises from the burdens placed on jurors’ personal lives through their service.

While most states have laws that prevent an employer from firing a worker or taking any negative

work action, such as demotion, against the worker for being on jury duty, there is no legal

requirement that an employer continue to pay a worker on jury duty. The court system does not pay

juries for their services either (although some court systems pay a small amount, typically less than

twenty dollars per day, to cover food and transportation costs). Some citizens, such as those who are

self -employed, are therefo re at great risk for losing personal income by serving on juries. Imagine

being on the O. J. Simpson criminal trial jury, for example —that trial lasted ten months. The effects

of jury service on a juror’s personal life can be staggering.

Another potential problem arises in the makeup of the jury itself. To provide a fair jury, courts

attempt to draw from a cross -section of society to reflect the diversity of the surrounding community.

Local court rules typically allow judges to excuse potential jurors for h ardship or extreme

inconvenience. If these rules are too generous, then the only citizens left may be those without full -

time employment, such as students or retirees. Such a narrow cross -section of society would tend to

skew the reliability and trust of t he jury system, and judges across the country are becoming

increasingly intolerant of attempts to evade jury service. The only professions that automatically

exempt citizens from jury duty are active -duty soldiers, police officers and firefighters, and pub lic

officers.

In spite of these administrative problems, our jury system remains a cornerstone of litigation and is

often openly admired. In South Korea, for example, attempts to create a more open and responsive

democracy resulted in a novel and wholesale revision to the country’s court system: the adoption of

citizen juries.

Hyperlink: Korea Adopts Jury System

http://www.nytimes.com/2008/07/07/world/asia/07iht -jury.2.14299454.html Saylor URL: http://www.saylor.org/books Saylor.org

In 2007, with little public debate or preparation, South Korea adopted a jury system in certain criminal

and civil trials. For now, the jury’s decision is only advisory, and the court is free to reject it. The result has

been some confusion about the role of citizens in the legal system, some concern about the methodology

employed to implement the jury system, and an increase in transparency and greater citizen participation

in governme nt affairs.

K E Y T A K E A W A Y S

The federal rules of civil procedure make it easy for parties in a lawsuit to identify and join other relevant

parties and to make legal claims against each other. The goal of civil litigation is to find the truth. Litigants

typic ally rely on lawyers to assist them in litigation. An attorney’s highest duty is to the administration of

justice. Lawyers are ethically bound to represent their clients with zealous advocacy. A grand jury acts as a

body of citizens to prevent abuse of dis cretion by prosecutors. A petit jury sits in trials as the trier of fact

to ascertain the truth through their observations of the presented evidence.

E X E R C I S E S

1. Can you think of a situation where an in -house attorney may advise you to retain your own counsel?

2. Most rules of legal professional conduct are drafted and enforced by the bar itself, but the Sarbanes -Oxley

Act (passed in reaction to the Enron accounting scandal) imposed a legal duty on lawyers to report acts of

misconduct in publicly traded co rporations. Do you believe that the bar does an effective job of policing

itself, or do you think external government agencies should be more involved?

3. Read the legal documents available for the Lynne Stewart case at Note 3.28 "Hyperlink: The Lynne Stewart

Case" . Do you think that the U.S. government should be able to curb the attorney -client privilege when the

client is a convicted terrorist? Or a suspected terrorist?

4. How aggressive should a lawyer be in representing his or her client “zealously”? Read the rest of Judge

Land’s order in Note 3.31 "Hyperlink: A Question of Ethics" . Do you think Orly Taitz’s conduct warranted a

twenty -thousand -dollar fine?

5. Do you think that juries can be trusted to always arrive at the truth? Why or why not?

6. Do you think the U .S. jury system should be adopted by other countries? What factors do you think should

affect a country’s decision to adopt a jury system?

Saylor URL: http://www.saylor.org/books Saylor.org

[1] Skilling v. United States , 561 U.S. ___ (2010), http://www.supremecourt.gov/opinions/09pdf/08 -

1394.pdf (accessed October 2, 2010).

Saylor URL: http://www.saylor.org/books Saylor.org

3.2 Standing and Personal Jurisdiction

L E A R N I N G O B J E C T I V E S

1. Explore the standing requirement.

2. Understand how a court obtains personal jurisdiction over the parties.

Before a case can be litigated, parties have to demonstrate that they meet two pretrial requirements:

standing and personal jurisdiction.

Standing is a constitutional requi rement. Article III of the Constitution grants the judiciary the power

to hear “cases” and “controversies.” This means actual cases and controversies, not merely

hypothetical ones. Unlike some other jurisdictions, the standing requirement means that courts are

unable to give advisory opinions. Let’s say, for example, Congress is considering whether or not to

pass a law and would like to know whether the law is constitutional. Standing prevents this question

from being litigated, because it’s not yet an actu al case or controversy. Standing, therefore, is a

doctrine that limits judicial overreach by circumscribing the types of cases that are litigated in our

courts.

To demonstrate standing, a party has to prove first that it has an actual case to proceed. This is a

procedural matter, and it requires the case to be brought at the right time. If a case is brought too

early, it’s not yet ripe . If it’s brought too late, then the case is moot . For example, assume that a state

is debating whether or not to pass a law that would require thirty hours of financial management

classes before anyone is allowed to form his or her own company. If an entrepreneur who wishes to

form her own company but doesn’t want to take the thirty hours of classes sues the state for an

uncon stitutional law, that lawsuit would be dismissed for being brought too early —it is not ripe since

the law hasn’t been passed yet. Now let’s assume that the law has been passed, and the entrepreneur,

who has abandoned her plans and is now working for someon e else, sues the state anyway. That

lawsuit would also be dismissed since it is now moot. Even if the entrepreneur won the case and the

law was overturned, the remedy would be meaningless to her since she does not plan to take the class

anyway. Saylor URL: http://www.saylor.org/books Saylor.org

In addition to being brought at the right time, the case has to be brought by the right person. To

show standing, a plaintiff has to demonstrate that he has an actual stake in the litigation, or

something of value that would be lost if he loses the case. Of course, i f a plaintiff has lost money in a

contract dispute or has been injured in a tort case, that is sufficient legal injury. Let’s say, for

example, that your roommate is the victim of Internet fraud when she does not receive the goods that

she paid for online. She would rather move on and forget the whole episode, but you are outraged

and decide to sue the perpetrator in court. Even if the perpetrator admitted that it committed fraud,

you would still lose the case because you’re not the right plaintiff here; yo ur roommate is.

Cases that don’t involve monetary damages are sometimes more difficult to call. For example, what if

a constitutional right is at stake? What standing does a citizen have to prove to file a lawsuit? Courts

have generally held that merely be ing a taxpayer does not give standing to challenge government

expenditures. So, for example, a citizen cannot sue the government to stop the war in Afghanistan

just because he pays his taxes. If taxpayers don’t have standing to challenge government action, then

who does?

In 2007 Massachusetts, along with eleven other states, sued the Environmental Protection Agency

(EPA) to force the agency to regulate carbon dioxide as a pollutant. For years, the EPA had argued

that carbon dioxide is not a pollutant and th erefore could not be regulated. In response to the suit,

the EPA argued that the states lacked standing since they couldn’t prove they had been harmed by

excess carbon dioxide in the air. In a major decision, [1] the Supreme Court ruled that the states had

standing because they had suffered environmental degradation as a result of global warming brought

about by excess carbon dioxide and that therefore the EPA has jurisdiction over carbon dioxide as a

pollutant. Th is decision, along with the election of President Obama, led to a major policy reversal at

the EPA, which is now aggressively pursuing the regulation of carbon pollution to combat global

warming.

Another high -profile case on standing involves the Pledge of Allegiance. In 2000 a California

attorney and physician sued the government because his daughter attended a school where the

Pledge of Allegiance was recited every morning. The plaintiff, Michael Newdow, claimed that the Saylor URL: http://www.saylor.org/books Saylor.org

pledge is unconstitutional under t he First Amendment because it contains the words “under God.” In

2002 the Ninth Circuit Court of Appeals agreed with Newdow, ruling that the pledge is indeed

unconstitutional. On appeal to the Supreme Court, the Court ducked the question of whether the

ple dge is unconstitutional. [2] Instead, the Court held that Newdow lacked standing to bring the

lawsuit in the first place since he is a noncustodial parent. Only his wife, who had custody of the

daughter, could bring the lawsuit.

It’s important to note that standing doesn’t have anything to do with the merits of the case. Being

able to prove standing doesn’t mean that you can win the case at hand. It only means that you’ve

been able to clear a procedural bar toward proceeding with litigation.

Another procedur al bar before a plaintiff can proceed is personal jurisdiction . Personal jurisdiction is

different from subject matter jurisdiction, which is the power of a court to hear a case. Personal

jurisdiction is the power of a court over specific litigants, and it requires litigants to have some form

of minimum contacts with the state where the case is filed. Personal jurisdiction seeks to avoid

inconvenient litigation, even if the case has actual merit. If you’ve never been to Nebraska, for

example, and don’t have any connections to Nebraska, then you might be very surprised to find that

you’re being sued in a Nebraska state court. In addition to that, you’d have to go to Nebraska to

answer the lawsuit, hire local lawyers to assist you, and spend a lot of time and money in a state you

have nothing to do with.

A court obtains personal jurisdiction over the plaintiff when the plaintiff files its lawsuit. Obtaining

personal jurisdiction over the defendant can be a little trickier. Typically, there has to be some sort o f

connection between the defendant and the state where the court is located. For example, living in the

state would create personal jurisdiction. Residency for purposes of personal jurisdiction is different

from residency for other legal requirements such as voting and driving. Even temporary residency,

such as a college student studying out of state, creates residency for personal jurisdiction purposes.

Moreover, merely being in the state temporarily creates personal jurisdiction. If you’re driving

through Nebraska, for example, and you’re speeding on a local highway, Nebraska courts have

jurisdiction to hear a speeding ticket issued against you. Owning property in a state also creates Saylor URL: http://www.saylor.org/books Saylor.org

jurisdiction. For corporations, courts generally hold that personal juri sdiction is proper in the state

of incorporation as well as in any state the corporation does business.

Personal jurisdiction, like standing, is a constitutional requirement. The due process clause of the

Fourteenth Amendment requires government processes to be carried out fairly. In 1980, the

Supreme Court heard an important case on personal jurisdiction involving a car crash in

Oklahoma. [3] The plaintiff purchased the car in New York and filed a lawsuit against the

manufacturer (Volkswagen) and the distr ibutor and retailer (car dealer). The distributor and the

retailer moved to dismiss the case for lack of personal jurisdiction, arguing that they had no business

in Oklahoma, had no employees or property there, and did not target citizens of Oklahoma to

pu rchase vehicles from them in New York. The Supreme Court held in favor of the distributor and

car dealer, finding that neither had “purposefully availed” themselves of the privileges that come

from doing business in Oklahoma. The Court noted that for perso nal jurisdiction to attach,

“substantial notions of fair play and justice” cannot be offended.

Today, most states have written these concepts into laws known as long -arm statutes . These statutes

set forth the procedure by which out -of-state defendants can be required to appear before a local

court. The statutes provide for how service of process can occur. Service of process is the process by

which any defendant (both local and out -of-state) is notified that it is being sued. Service of process

typically re quires a copy of the summons (notice to appear before a court) to be personally delivered

to the defendant or the defendant’s agent. In the case of companies and other nonhuman entities,

service of process is usually easy since they are required to have a registered agent as part of the

process of forming an organization. Service can be more challenging with an individual, since some

defendants know that litigation can be held up while service is attempted and therefore choose to

avoid being served at all c osts. While the best service is personal delivery of the summons, some

states prescribe alternative methods such as leaving a copy with a family member while also mailing

a copy.

The Internet era has raised some interesting personal jurisdiction issues. Do es creating a Web site,

for example, subject you to personal jurisdiction in all states where the Web site is accessible? Courts Saylor URL: http://www.saylor.org/books Saylor.org

have ruled that the answer depends on what kind of Web site you have created. If it is a general

informational Web site that de scribes a product, then there are insufficient minimum contacts to

create personal jurisdiction. If, on the other hand, the Web site reaches out to specific customers and

urges them to make a purchase, either through a shopping cart function or by calling the seller, then

there are minimum contacts to justify jurisdiction.

K E Y T A K E A W A Y S

Standing is a constitutional requirement that requires a plaintiff prove that he or she is the right person to

bring a lawsuit and that he or she is bringing the lawsuit at the right time. Taxpayers lack standing to sue

the government just by being taxpayers. Legal injury does not have to be monetary based; environmental

harm, for example, may be sufficient to demonstrate standing. Standing has nothing to do with the merits

of the underlying case. Courts must have personal jurisdiction over a defendant before litigation can

proceed. Personal jurisdiction, a constitutional requirement, requires minimum contacts with the state

such that substantial notions of fair play and justi ce are not offended. Once personal jurisdiction is

established, service of process can occur, where a copy of the summons is delivered to the defendant. If

the defendant lives out of state, a long -arm statute prescribes the method for service to occur. A W eb site

creates personal jurisdiction in any state where it reaches out for customers through a shopping cart

function.

E X E R C I S E S

1. When President Obama nominated Hillary Clinton as secretary of state in 2008, several constitutional

scholars observed that it may be unconstitutional for her to assume the post due to an often -ignored

section of the Constitution. What procedural bar stopped citizens from challenging the nomination?

2. Do you believe the Supreme Court acted properly by finding that states with env ironmental damage from

global warming had standing to challenge the federal government?

3. In the Volkswagen car crash case, the manufacturer (Volkswagen, a German company) and the importer

did not contest personal jurisdiction of Oklahoma state courts. Why d o you think they submitted to

jurisdiction so readily?

4. If a car dealer in a neighboring state runs advertisements in your state claiming that its deals are better

than those of in -state dealers, does that out -of-state car dealer create personal jurisdictio n in your state? Saylor URL: http://www.saylor.org/books Saylor.org

5. If you sell something on eBay, do you create personal jurisdiction in the buyer’s state? Why or why not?

6. If you commit a tort on the Internet, do you create personal jurisdiction in the victim’s state? For example,

if you defamed someone w ho lives out of state on Facebook, have you created jurisdiction in that foreign

state?

[1] Massachusetts v. EPA , 549 U.S. 497 (2007).

[2] Elk Grove Unified School District v. Newdow , 542 U.S. 1 (2004).

[3] World -Wide Volkswagen v. Woodson , 444 U.S. 286 (1980).

Saylor URL: http://www.saylor.org/books Saylor.org

3.3 Pretrial Procedures

L E A R N I N G O B J E C T I V E S

1. Explore pretrial procedures such as pleadings, discovery, and motions.

2. Find out how class -action lawsuits are organized and prosecuted.

3. Learn about issues and challenges facing parties during discovery.

After issues related to subject matter jurisdiction, standing, and personal jurisdiction are sorted out

and parties have hired counsel to represent them, then a dispute can proceed to the pretrial stage. In

civil cases, litigation begins with th e filing of a complaint by the plaintiff. The complaint is a simple

document setting forth who the parties are, the facts of the case, and what specific laws the

defendant has violated. (Each of these is a claim.) The complaint ends with a prayer for relie f. The

plaintiff may be seeking damages (money), specific performance in certain kinds of contract cases, or a

temporary or permanent injunction . It is much easier to get a temporary injunction in the early

stages of litigation, because courts don’t want to see the defendant take some action that may result

in irreparable harm . For example, if a real estate development company wants to tear down an old

shopping mall to build a new skyscraper, and one of the tenants in the old mall claims it still has a

rig ht to be there, the tenant may be able to obtain a temporary injunction stopping the demolition

until the lease issues are sorted out. If the demolition is allowed to continue and the tenant later

turns out to be the winner, it will be too late to grant th e tenant any meaningful remedy.

Citizen advocacy groups with an antilitigation public policy agenda often complain

about frivolous lawsuits being filed in court. Most court systems have rules to prevent the filing of

frivolous suits. In the federal system, the rules state that all claims must be signed by a lawyer

certifying that to the “best of the person’s knowledge,” formed after “an inquiry reasonable under the

circumstances,” the claim is not being presented for an unlawful purpose such as harassment a nd

that the claims are either “warranted by existing law” or a nonfrivolous argument for modifying

existing law. In practice, this standard is quite easy to meet, and it’s hard to think of a factual

scenario —other than the most absurd —that would rise to th e level of being legally frivolous. Saylor URL: http://www.saylor.org/books Saylor.org

The complaint is filed with the clerk of the court where the suit is to be heard. Every court has a

clerk’s office to handle administrative matters relating to litigation. Even though the court system is

a public service , there is usually a fee associated with filing a complaint to cover some of the court’s

costs.

The clerk will next issue a summons to the defendant, along with a copy of the complaint. The

summons is sent to a process server to effect service on the defen dant. When the defendant is served,

it is very important for the defendant to respond to the complaint in a timely manner. Ignoring the

complaint, even if the defendant believes the complaint is devoid of any merit, is a fatal error. If the

defendant does not reply to the complaint, the plaintiff can ask the court to issue

a default judgment against the defendant, including granting all the relief the plaintiff is asking for.

In certain types of cases, there may be a large number of plaintiffs injured by a defendant’s actions.

This may happen in a product liability lawsuit where a product is purchased by many thousands of

consumers, all of whom experience the same product failure. The batteries for Apple’s popular iPod,

for example, had a high failure rate, leading to a large number of consumer claims. There also may be

a large number of plaintiffs in financial services cases, where a financial institution or investment

firm defrauds a large number of investors. In these cases, several lead plaintiffs may att empt to form

a class in a class -action lawsuit against the defendants. Under federal civil procedure rules, class

actions may be granted when there are so many plaintiffs that it is impractical for them to file

separate lawsuits, there are questions of law or fact that are common to members of the class, and

the lead plaintiffs will fairly and adequately protect the interests of the class.

The defendant must file an answer to the complaint within a specified period of time, typically thirty

days. The answer is a paragraph -by -paragraph response to the complaint, admitting certain

paragraphs and denying others. The answer may also contain an affirmative defense (self -defense in

an assault charge, for example) the defendant wishes to pursue. Taken together, the complaint and

answer are known as the pleadings . The answer may admit, for example, noncontroversial claims by

the plaintiff such as the defendant’s name, address, and the nature of the defendant’s relationship

with the plaintiff. Each time the defendant d enies a plaintiff’s claim in the complaint, that sets up a Saylor URL: http://www.saylor.org/books Saylor.org

controversy or argument that must be litigated. Reducing the number of claims to be resolved before

an actual trial begins makes the trial shorter. For example, in many civil cases, the plaintiff w ill make

claims about liability and damages. A defendant may be willing to admit that it is liable but may

argue about the plaintiff’s claims for damages. This can sometimes lead to bifurcated trials, where

the issues of liability and damages are litigated separately.

At any point in litigation, either party may file motions with the court. The motions are designed to

short -circuit the litigation and lead to an early end to the lawsuit. Litigation is so time consuming

and expensive that either party would b e gratified if the judge would simply cut the lawsuit short and

declare a winner. One such motion is the motion to dismiss for failure to state a cause of action. In

this motion, the defendant argues that even if it admits everything in the complaint is fa ctually true,

that doesn’t lead to any legal liability. In other words, the defendant’s conduct has not broken any

laws. A similar motion is the motion for judgment on the pleadings. In this motion, one party asks

the judge to decide the case based simply on the answer and complaint.

If a long period of time has passed since the incident in question and the filing of the lawsuit, a

defendant may file a motion to dismiss based on the statute of limitations. Every civil and criminal

action has a statute of limitations , which states that any claim or prosecution under the statute must

be brought within a specified period of time or it will be dismissed. Only a few crimes are exempt

from the statute of limitations and can be prosecuted at any time: murder (in mo st states) and rape

(in many states). The statute of limitations exists to encourage aggrieved parties to file their lawsuits

quickly, while evidence is still fresh and relevant people have memories of what occurred. As time

passes, evidence may become sta le, witnesses may die or move away, and those that can be located

can’t remember what they saw or heard. In other words, the quicker a suit is filed, the more likely

that the real truth will be discovered by litigation. For businesses, a statute of limitat ions also allows

it to “close the books” on past liabilities, such as accounts payable or tax payments, knowing that too

much time has passed for anyone to come collecting on those monies. It is possible, though, in many

cases to toll the statute of limita tions. If an accountant commits fraud, for example, and a criminal

complaint is filed but the accountant flees overseas for many years, the statute of limitations does not

run while the suspect is hiding. Saylor URL: http://www.saylor.org/books Saylor.org

In support of any motion, a party may submit an aff idavit . Affidavits play an important role in

pretrial procedure because they are an effective way for parties to tell their side of the story to the

judge. They are limited, however, because even though they are given under oath, they may raise

more questi ons and are not subject to examination by the other side.

After pleadings are filed, the litigation moves into the discovery phase. Discovery is a process in

which each side finds out information about the other’s case. Let’s assume, for example, that you buy

a new car and within a few weeks, a tire falls off suddenly while you’re driving. You would rightly

conclude that there’s something wrong with the car, so you sue the manufacturer. At this point, you

have no idea what’s wrong with the vehicle. Was the design flawed? Was there something wrong with

the manufacturing of your specific vehicle? All you know is that new cars should not experience this

sort of failure. After you file a lawsuit against the manufacturer, discovery allows you to find out

more inf ormation about the vehicle so that you can effectively proceed with the lawsuit. You could

find out what engineers did when they designed the vehicle and review records of similar accidents

or factory records from the day your vehicle was produced.

Discove ry is designed to prevent trial by surprise, where either side may suddenly produce a

damning piece of evidence that allows it to win the trial. Since trials are based on the discovery of

truth, they should be tried on the merits of the case rather than a party’s deceit. In that spirit, the

rules of discovery are written broadly to cover scope and obligation. In scope, any piece of evidence

that may be relevant to the trial is discoverable. Even if evidence may be ruled later to be

inadmissible for a legal reason, it is discoverable during discovery. In obligation, both parties are

obligated to turn over material that supports their own case, without demand from the other side. If

the material harms their own case, they have to turn it over if the other side asks for it.

There are four types of discovery. The simplest (and least expensive) is an interrogatory . These are

written questions addressed to the other party. The questions tend to be simple and straightforward,

dealing with uncontroversial matters such as a company’s structure or the names and addresses of

relevant witnesses. Saylor URL: http://www.saylor.org/books Saylor.org

A second type is a request for production. Using this form of deposition, a party can request the other

party to produce written communications such as internal company reports, e -mails, product

manuals, and engineering specifications. In some cases physical evidence may also be produced. If

you sued a vehicle manufacturer because your tire fell off while driving, for example, the

manufacturer may ask you to produce your vehicle so that its engineers can inspect it. Failure to

preserve and produce key evidence in litigation can lead to charges of spoliation , which may result in

severe sanctions against the offending party.

A third form of discovery is a request for admission . Remembe r that a complaint contains a series of

claims the plaintiff is making against the defendant, and the answer is mainly a series of denials of

those claims. As each party finds more information about the other’s case in discovery, one party

may ask the othe r to admit that one of the contested claims is true. Doing so narrows the issues for

trial because it is one less thing that the jury has to decide. Asking a party to give up a contested

claim can be done at any time during litigation. If not done as a for mal method of discovery, it may

be done as a stipulation instead. For example, in your trial against the vehicle manufacturer, you may

ask the manufacturer to admit that your specific vehicle was manufactured on a specific date at a

specific factory.

Final ly, discovery can take the form of a deposition . A deposition is a sworn oral statement, in

response to questions, given by a potential witness in a trial to the attorneys in the case. A deposition

hearing is attended by the witness being deposed and lawye rs from both side, as well as a court

reporter who keeps a written transcript of the entire deposition. In your product liability suit against

your vehicle’s manufacturer, for example, you might want to depose the safety engineer who

designed the car’s tir e and braking systems. There is no judge present, so there is great latitude for

parties to ask questions, even if those questions may result in testimony that is later inadmissible in

court. Depositions serve to allow attorneys to prepare for trial by kno wing everything a witness may

say in court. They also serve to pin down a witness’s testimony, since a witness who changes

testimony between a deposition and trial can be easily impeached . Depositions are easily the most

expensive form of discovery, someti mes requiring weeks or months of advance planning, travel, extra Saylor URL: http://www.saylor.org/books Saylor.org

costs, and lost work time from witnesses being deposed. In some cases they can degenerate without

the presence of a judge, as Note 3.72 "Video Clip: A Deposition Goes Awry" shows.

Video Clip: A Deposition Goes Awry

Although the policy behind liberal rules of discovery is to permit both sides to prepare adequately for

trial, in effect discovery is an expensive phase of litigation. With most lawyers charging by the hour,

responding to discovery requests can quickly rack up daunting legal bills. Discovery can also drag out

litigation to many months or years. Most large corporations find they must dedicate entire in -house

staffs of attorneys, paralegals, and support staff to respond exclusively to discovery requests. The

judge assigned to the case is supposed to supervise discovery and ensure that the parties respond in a

timely manner, as well as make rulings on specific discovery requests and objections. Theoretically, a

judge has the power to san ction parties for abusive discovery, up to and including ordering a default

judgment against the offending party. There are, however, few meaningful sanctions that can be

levied against parties that abuse discovery, and plaintiffs in particular have a vest ed interest in

making discovery last longer than the price of a sought -after settlement. These issues are magnified

in e-discovery , when mountains of electronic data have to be sifted through to find relevant

discoverable material. Objections to turning ov er material that may be proprietary, privileged, or the

result of the work product doctrine also become more time consuming when parties are engaged in e -

discovery.

During or after discovery, parties typically make a motion for summary judgment . This motion is

designed to cut the trial short by asking the judge to decide based on the information discovered so

far in the case. In essence, the party making the motion is saying, “Why have a trial?” since the

evidence would lead any reasonable jury to the same an d inevitable conclusion.

K E Y T A K E A W A Y S

Litigation commences with the filing of a complaint by the plaintiff. If the plaintiff wishes to represent

many others with the same claim against the same defendants, the plaintiff may try to certify the lawsuit

as a class -action suit. Frivolous cases are prohibited in litigation, but it is relatively easy to argue that a

case is not frivolous. The defendant files an answer to the complaint or risks a default judgment. Most civil Saylor URL: http://www.saylor.org/books Saylor.org

and criminal cases must be brought wit hin the prescribed statute of limitations. During the discovery

phase of litigation, parties share and exchange information about each other’s cases so that neither side is

surprised during the trial. There are four methods for conducting discovery: interr ogatories, requests for

production, requests for admissions, and depositions.

E X E R C I S E S

1. During the Catholic priest sex scandal, many potential plaintiffs who were abused as children found that

their lawsuits against the church and individual priests were barred by the statute of limitations because

the abuse happened so many years ago. Do you believe that these lawsuits were rightfully barred? Why or

why not? Should the statute be changed in sexual misconduct cases?

2. Do you think there are too many frivolou s cases filed? If you answered yes, how would you revise the

federal rules of civil procedure to raise the standard on what constitutes a frivolous case?

3. Look at a sample interrogatory at http://www.justice.gov/atr/foia/frito -lay/8 -16 -96.htm . This

interrogatory was issued by the U.S. Department of Justice in an antitrust investigation against Frito -Lay

for possible violations of the Sherman Antitrust Act. What do you notice ab out the questions? How long

do you think it would take to compile a response to these questions? If you were the defendant, would

you object to any of them? If so, on what grounds?

Saylor URL: http://www.saylor.org/books Saylor.org

3.4 The Trial and Appeal

L E A R N I N G O B J E C T I V E S

1. Learn about jury selection.

2. Follow a trial from opening statement to closing arguments.

3. Explore the public policy rationale for the trial system.

After discovery is finally completed, and assuming that neither side has been successful in short -

circuiting litigation through motions, the case is finally scheduled for a trial. In civil litigation, this is

a most unusual development, for well over 90 percent of cases filed are resolved or settled before a

trial. If a case actually goes to trial, it means there are genuine issues of fact that the parties cannot

resolve, and both sides are determined to see their side win. Remember that a trial is a fact -finding

process, through which the trier of fact (the jury in most cases or the judge in a bench trial) attempts

to determine what happene d. The trier of fact applies the facts to applicable law as instructed by the

judge and determines guilt or innocence in a criminal case, or liability or no liability in a civil case.

The first step in this process is to seat a jury.

At any given day in a courthouse, several citizens may be called by a judge as potential jurors in a

case. If a jury needs twelve members, it’s not unusual for a judge to begin with a pool of more than

fifty or sixty potential jurors to narrow down to a dozen. The process of se lecting a petit jury is

called voir dire .

Voir dire typically begins with the jurors filling out a written questionnaire. The questionnaire asks

the jurors to identify their occupation, any work or occupational conflicts, and any potential conflicts

of int erest with the case. The process then continues with attorneys quizzing each potential juror in

turn. During this questioning, attorneys ask each juror if he or she has any biases against upholding

the law and whether he or she can keep an open mind during the trial.

If an attorney does not like a juror’s response, that juror may be excused. There are two types of

challenges to a potential juror: peremptory or for cause. A party can make a for cause challenge if it

can demonstrate to the judge that there is a good reason to excuse the juror, such as the juror’s Saylor URL: http://www.saylor.org/books Saylor.org

100

personal relationship with one of the parties, or the juror’s stated unwillingness to be unbiased. Since

these excuses are for a good reason, each side is allowed an unlimited number of for cause

chal lenges. A party can also make a peremptory challenge against a juror, without giving any reason

for the challenge. Since these challenges are unsupported by rationale or reason, each side is given a

limited number of peremptory challenges. A party may make a peremptory challenge based on a

juror’s perceived bias because of that juror’s occupation or life background but may not make a

peremptory challenge because of the juror’s race [1] or gender.

After a jury has been selected and sworn in, the trial begins. The plaintiff or prosecution begins by

delivering an opening statement . The opening statement is a preview of the trial. In it, the attorneys

explain the facts of the case to the jury and indicate what witnesses they will be calling and what the

witnesses will say. Attorneys do not make any arguments during the opening statement; they simply

lay out what jurors can expect from the trial ahead. In a trial against your vehicle’s manufacturer,

your attorney may begin by telling the jury to expect testimony fr om you about your car accident,

from your doctor about the injuries you suffered, and perhaps from an expert witness who has

examined your vehicle and believes it was manufactured defectively. Once the plaintiff has delivered

an opening statement, the defe ndant will deliver the defense opening statement. In a criminal case,

the defense has the right to reserve delivering the opening statement until after the prosecution has

rested its case (concluded presenting all the witnesses).

After opening statements, the trial moves into the examination phase. Jurors are presented with

witnesses, called by each side, to give evidence. The plaintiff begins by calling its witnesses. The

attorney will guide the witness in delivering testimony by a series of short open -end ed questions

during the direct examination . Leading questions (questions that call for a yes or no answer) are not

permitted during direct examination. As the questioning proceeds, a court reporter maintains a

record of all the words spoken in case there is an appeal. The opposing side may raise objections

during the examination, which the judge will rule on. These rulings can also form the basis for a later

appeal. Saylor URL: http://www.saylor.org/books Saylor.org

101

All the evidence in a trial must be introduced in this manner (questioning a live witness). I f one side

wants to introduce videotape into evidence, for example, it has to call the person who took the

footage or was in charge of running the camera to testify about his or her personal knowledge of

where the camera footage came from before the jury c an watch the video. In a criminal case, if the

prosecution wants to introduce the murder weapon into evidence, it must first call the detective or

police officer who found the weapon to testify about where he or she found it and where it has been

since the n.

Hyperlink: O. J. Simpson Tries on Gloves

http://video.google.com/videoplay?docid= -7472594685651342793#

O. J. Simpson’s criminal murder trial was probably the most -watched courtroom proceeding in history.

During the trial, the prosecution sought to introduce a pair of gloves into evidence. The prosecution

claimed the gloves contained blood from the victims. In this scene, the defendant, O. J. Simpson, is asked

to try on the gloves so that the jury can see for themselves whether or not the gloves might belong to him.

The fact that the gloves appear too small for his hands later becomes fertile ground for the defense

attorneys to argue that reasonable doubt exists as to his guilt.

After direct examination, the other side has the right to conduct a cross -examination . During the

cross -examination, the attorney will try to discredit the witness to convince the jury that the witness

is not credible. The attorney may pro be into any potential biases the witness may have or try to prove

that the witness’s recollection of events may not be as clear or certain as the witness believes. During

cross -examination, attorneys frequently engage in asking leading questions, which is permitted.

Once the prosecution or plaintiff has called all its witnesses, and the witnesses have undergone direct

and cross -examination, then the prosecution or plaintiff will rest its case. The defendant may make a

motion for a directed verdict , arguing that no reasonable juror could possibly find in favor of the

prosecution or plaintiff after hearing the evidence presented so far. This motion can be made

anytime during the trial before the jury returns a verdict. The motion is typically denied, and the t rial Saylor URL: http://www.saylor.org/books Saylor.org

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moves on to the defense phase. The defense will then present its witnesses, who are led through

direct and cross -examination.

After the defense has rested its case, the attorneys once again address the jury in closing arguments .

Here, the attorneys su mmarize the case for the jury. They address what witnesses were called and

what the witnesses said. During closing arguments, the attorneys are permitted to be much more

persuasive and argumentative than during the opening statement. They appeal to the jur y’s emotions

and argue how the jury should interpret the evidence before them.

Video Clip: Johnnie Cochran Delivers Closing Arguments

After closing arguments are made, the judge in the case charges the jury by giving the jury its

instructions. The instruct ions acquaint the jury with the relevant law. The jury then retires to

deliberate. During deliberations, the jury will decide first what facts it believes to be true. Then it will

apply those facts to the law as outlined in the jury instructions. In a tria l against your vehicle’s

manufacturer, for example, the judge may explain to the jury what is legally required for a product to

be considered defective so that the jury can make a determination, based on the evidence presented,

whether or not there is any liability.

Central to the jury’s deliberations is the burden of proof applicable to the case. In criminal trials, the

prosecution always carries the burden of proof. That burden is to prove the defendant committed all

the elements required in the crime bey ond a reasonable doubt . If any member of the jury has any

reasonable doubts about the defendant’s guilt or innocence, then the only appropriate verdict is not

guilty. Many people confuse the burden with “without a doubt.” Jurors may have doubts, but the only

question for the jurors is whether they have any reasonable doubts. This standard is deliberately set

high because of the severe sanctions and penalties that follow a criminal conviction. In a criminal

trial, the defense only has to prove reasonable d oubt exists and has no burden of proof at all. That is

why in criminal trials, the defense may strategically decide to not call any witnesses and to rest its

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In civil cases the burden of proof is preponderance of the evidence . This standard requires the scales

of justice to tilt ever so slightly toward one party to declare that party the winner. If the jury believes

one side is 51 percent correct and the other is 49 percent corr ect, that is enough to declare a winner.

It is a much easier standard to win, because it only requires a party to prove that its side is more

likely than not telling the truth. In a civil liability suit against your vehicle’s manufacturer, your

burden is t o convince the jury that more likely than not, your vehicle was somehow defective.

Sometimes it’s possible for a jury in a criminal trial to find the defendant not guilty, while a separate

jury in a civil case applying a lower burden of proof finds the def endant liable for the same act. This

is what happened to O. J. Simpson when he was tried for the murder of his wife.

During jury deliberations, the jurors are permitted to ask the judge for clarification about the law and

to request to see the evidence aga in. If the jury is unable to come to a verdict, the jury is said to be

deadlocked, and a mistrial results. Since trials are expensive and time consuming, the judge will

usually instruct the jury to try its best before giving up. If the jury does arrive at a decision, it is called

a verdict .

Once the jury delivers its verdict, the losing side typically makes a motion

for judgment notwithstanding the verdict . In this motion, the party is arguing that the jury arrived at

the wrong verdict and that no reasonable jury could have arrived at that verdict. The judge typically

will not grant this verdict. Even if the judge believes that the jury arrived at the wrong factual

conclusion, the judge is not permitted to substitute his or her judgment for that of the jury. If,

however, the jury clearly ignored the law in arriving at its verdict in a criminal case, the judge may

overrule the jury. This phenomenon is known as jury nullification .

If the judge denies the motion for judgment notwithstanding the verdict, then the judge enters the

jury’s verdict as a judgment . After that, the losing party has the right to file an appeal. Remember that

on appeal, the appellate court is only reviewing the record for legal error and cannot call new

witnesses or substitute its judgment on the facts for the jury’s. In the following excerpt, Supreme

Court Justice Ruth Bader Ginsburg uses the trial record to make a point in her dissenting opinion in

an important employment discrimination case involving gender discrimination. Although hers w as a Saylor URL: http://www.saylor.org/books Saylor.org

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dissenting opinion and the plaintiff lost her case, Congress reacted to the decision by passing the Lily

Ledbetter Fair Pay Act, the first law signed by President Obama after he assumed office.

Hyperlink: Justice Ginsburg Reviews an Employment Discrim ination Case

http://www.law.cornell.edu/supct/html/05 -1074.ZD.html

From 1979 to 1998, Lilly Ledbetter worked as a supervisor at Goodyear’s plant in Gadsden, Alabama. Over

the course of her career, her pay slipped when compared to the pay of men of equal experience and

seniority. She sued the company, alleging pay discrimination on the basis of her gender under Title VII of

the 1964 Civil Rights Act. The law states that any law suit must be initiated within 180 days of the unlawful

discriminatory act occurring. Ledbetter argued that each paycheck she received was an unlawful

discriminatory act, so the fact that she filed her lawsuit within 180 days of her last paycheck means her

lawsuit is within the time limit. Goodyear argued that the discriminatory act was the decision to pay her

less, which took place many years ago and that therefore her lawsuit is too late. In a 5 –4 decision, the

Supreme Court ruled in Goodyear’s favor. In h er dissent, Justice Ginsburg returns to the trial record to

make her point that Ledbetter is the victim of unlawful discrimination. The following is from the

dissenting opinion:

Specifically, Ledbetter’s evidence demonstrated that her current pay was discriminatorily low

due to a long series of decisions reflecting Goodyear’s pervasive discrimination against women

managers in general and Ledbetter in particular. Ledbetter’s former supervisor, for example,

admitted to the jury that Ledbetter’s pay, duri ng a particular one -year period, fell below

Goodyear’s minimum threshold for her position. Although Goodyear claimed the pay disparity

was due to poor performance, the supervisor acknowledged that Ledbetter received a “Top

Performance Award” in 1996. The jury also heard testimony that another supervisor —who

evaluated Ledbetter in 1997 and whose evaluation led to her most recent raise denial —was

openly biased against women. And two women who had previously worked as managers at the

plant told the jury they had been subject to pervasive discrimination and were paid less than their

male counterparts. One was paid less than the men she supervised. Ledbetter herself testified

about the discriminatory animus conveyed to her by plant officials. Toward the end of he r career, Saylor URL: http://www.saylor.org/books Saylor.org

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for instance, the plant manager told Ledbetter that the “plant did not need women, that [women]

didn’t help it, [and] caused problems.” After weighing all the evidence, the jury found for

Ledbetter, concluding that the pay disparity was due to intentional discrimination.

Once all appeals are exhausted, the winner in litigation can finally collect whatever damages it is

entitled to. This process is called execution . If the loser is unable or unwilling to pay the judgment,

the winner can petition th e court to use its full legal resources, including asking the sheriff to seize

the loser’s assets for sale, to satisfy the judgment. The winner can also ask that the loser’s wages

be garnished until the judgment is satisfied. The loser in litigation cannot refile a civil lawsuit once it

has been decided under the doctrine of res judicata . Just like criminal cases cannot be retried after

acquittal under the double jeopardy clause of the Constitution, res judicata operates as a bar to

relitigation.

K E Y T A K E A W A Y S

The process of selecting a jury is called voir dire. Each side is permitted to question a potential juror and

excuse that juror for any reason through a peremptory challenge or for a good reason through a for cause

challenge. A trial begins with opening statements where the parties lay out the essential facts of their

case. Next, witnesses are called to provide testimonial evidence. The side calling the witness conducts a

direct examination, while the opposing side conducts a cross -examination. Af ter all witnesses are called,

the parties make closing arguments to the jury, which then deliberates and applies the law as outlined in

the jury instructions. The burden of proof in a criminal case is “beyond a reasonable doubt,” while the

burden of proof in a civil case is “preponderance of evidence.” A jury’s verdict must be converted into a

legal judgment by the trial judge. Once all appeals are settled, res judicata prevents the case from being

tried again.

E X E R C I S E S

1. Why would a jury engage in jury nullification? If a jury cannot engage in nullification, what are its

alternatives to express a similar view?

2. One of President Obama’s first acts as president was to sign into law a statute aimed at overturning the

Ledbetter decision. How can Congress over turn the Supreme Court in this instance? Saylor URL: http://www.saylor.org/books Saylor.org

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3. Although litigation is rightfully criticized as slow and expensive, res judicata means the parties have only

one chance to “get it right.” Do you think relaxing the rules of res judicata would help with the expense

and time involved in litigating cases?

[1] Batson v. Kentucky , 476 U.S. 79 (1986).

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3.5 Concluding Thoughts

The litigation system, publicly financed, is an important dispute -resolution mechanism that

processes millions of cases in both state and federal courts every year. The system permits parties to

air their grievances against each other in an open and transparent manner and is typically very

effective at finding the truth. The jury system, in particular, is largely admired for its ability to

involve ordinary citizens in an important form of civil service. For many businesses, however,

litigation can be a vexing and distracting problem. The extraordinarily high costs associated with

complex litigation, along with pressure from stakeholders to settle ca ses rather than litigate them

fully, means that most businesses would prefer to avoid litigation whenever possible. These problems

have led many courts to experiment with various levels of reform, from mandatory pretrial

settlement attempts to mandatory me diation to jury selection and management reforms. These

reforms are aimed at maintaining the vitality and usefulness of the litigation system, which can be a

trusted and valuable resource for all citizens and corporations.

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Chapter 4

Alternative Dispute Resolution

L E A R N I N G O B J E C T I V E S

After reading this chapter, you should understand alternative dispute resolution (ADR) options, including

the benefits and drawbacks to different methods of dispute resolution. You will know the legal basis for

mandatory arb itration, as well as why parties enter into voluntary ADR methods. You will understand

current debates regarding the fairness of ADR. Additionally, you should be able to answer the following

questions:

1. What are the benefits and drawbacks of ADR as compared to litigation?

2. What legal basis supports the use of ADR rather than litigation?

3. What unique challenges exist in ADR efforts among B2B (business to business), B2C (business to

consumer), and B2E (business to employees)?

4. What are the ethical implications of ADR between parties that are unequal in power?

Imagine that you’ve been wronged by a supplier, by your employer, or by a business where you are a

customer. You’ve correctly determined that you have an actionable legal claim. What are you going to

do? You probably won’t run to the courthouse to file a formal complaint to initiate litigation. This is

because litigation is very expensive and time consuming. Besides, you may wish to continue doing

business with the supplier, employer, or business. Perhaps the matter is of a private nature, and you

do not want to engage in a public process to determine the outcome. You would like the dispute to be

resolved, but you do not want to engage in public, time -consuming, expensive litigation to do it.

A common method of dispute resolution that avoids many of the challenges associated with litigation

is alternative dispute resolution. Alternative dispute resolution (ADR) is a term that encompasses

many different methods of dispute resolution other than litigation. ADR inv olves resolving disputes

outside of the judicial process, though the judiciary can require parties to participate in specific types

of ADR, such as arbitration, for some types of conflicts. Moreover, some ADR methods vest power to

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themselves. See Figure 4.1 "A Continuum of Different ADR Methods" for a continuum of different

ADR methods based on where power to solve the dispute is vested.

Figure 4.1 A Continuum of Different ADR Methods

Source: Adapted from New York State Unified Court System

,http://www.nycourts.gov/ip/adr/images/continuum2.jpg .

Common methods of ADR include negotiati on, mediation, and arbitration. Lesser used methods of

ADR include minitrials, hybrid forms of mediation -arbitration (with elements of both), and

collaborative goal -oriented processes. ADR is often used to resolve disputes among businesses,

employers and e mployees, and businesses and consumers. ADR can also be used in many other types

of conflicts. For instance, ADR strategies can be used in domestic law cases, such as divorce, or in

international legal issues, such as issues relating to transboundary pollu tion. This chapter limits its Saylor URL: http://www.saylor.org/books Saylor.org

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focus to the use of ADR methods in business. Particularly, we will examine the common methods of

ADR, including the benefits and drawbacks to each. We will also examine potential consequences to

parties that have unequal barga ining power. Additionally, we will examine the use of ADR methods

in situations where ADR may not be the most appropriate method of dispute resolution, such as civil

rights violations.

ADR methods are used outside of the courtroom, but that does not mean t hat they are outside of the

interests of our legal system. Participation in ADR has important legal consequences. For instance,

parties that have agreed by contract to be subject to binding arbitration give up their constitutional

right to bring their comp laint to court. The Federal Arbitration Act (FAA) is a federal statute under

which parties are required to participate in arbitration when they have agreed by contract to do so,

even in state court matters. Indeed, the FAA is a national policy favoring

arbitration. [1] The Southland Corp. Court said that “in enacting…[the FAA], Congress declared a

national policy favoring arbitration and withdrew the power of the states to require a judicial forum

for the resolution of claims which the contracting partie s agreed to resolve by arbitration.” This is an

example of federal preemption exercised through the Supremacy Clause in the U.S. Constitution.

There is a very good chance that you will —or already have —signed a contract that contains a

mandatory arbitration clause. This means that if a dispute arises under that contract, then you will

be required to arbitrate your claim rather than going straight to court. Under a binding arbitration

clause, you will have waived your constitutional rights to go to court. Eve n if you have never signed

such a contract and never will, there is still a good likelihood that you will be involved in a

commercial dispute at some point in your life. Because of this, it’s important to understand the ADR

process, situations in which lit igation is a better choice than ADR, and special issues that arise when

parties have unequal bargaining power.

Key Takeaways

Alternative dispute resolution (ADR) is a body of dispute -resolution methods outside of the litigation

process. ADR is often faster , less expensive, and more private than litigation. For this reason, ADR can be

the preferred dispute -resolution method, particularly when an ongoing relationship between disputants is Saylor URL: http://www.saylor.org/books Saylor.org

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desired. However, some types of disputes might be best resolved through litigation, such as in cases where

parties have unequal power or resources or in civil rights violations. Common methods of dispute

resolution are negotiation, mediation, and arbitration. Mandatory arbitration clauses are common in

contracts, and such cla uses are enforceable against the parties even if they wish to litigate their claims.

[1] Southland Corp. v. Keating , 465 U.S. 1 (1984).

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4.1 Negotiation

L E A R N I N G O B J E C T I V E S

1. Understand the role of negotiation in avoiding and settling disputes.

2. Explore negotiation as it is commonly employed in business.

3. Understand the implications of bargaining power during negotiation.

4. Become familiar with the benefits and drawbacks of negotiation as a form of alternative dispute

resolution (ADR).

Imagine that you are a tent manufacturer. Your supplier of tent fabric routinely supplies you with

appropriate water -resistant fabric to construct your tents, so that you can produce your products and

bring them to market. After many years of a good working relationship, your f abric supplier

delivered nonconforming goods . Specifically, the fabric delivered was not water -resistant, despite

your need for water -resistant fabric to produce your tents. However, on your notifying the supplier of

the problem, the supplier denied that t he fabric was nonconforming to your order. You refused to

pay for the goods. The fabric supplier insisted on payment before future delivery of any additional

fabric. Without water -resistant fabric, you cannot continue to produce your tents.

This is an exam ple of a business to business ( B2B ) dispute. Despite the problem, you will likely wish

to continue working with this supplier, since you have a good, long -standing relationship with it.

This problem seems to be a “hiccup” in your regular business relations hip. Accordingly, you will

probably want to resolve this dispute quickly and without hard feelings. It is very unlikely that you

will immediately hire an attorney to file a formal complaint against your supplier. However, that

does not change the fact that there is a dispute that needs to be resolved.

One of the first strategies that you and your supplier are likely to employ is negotiation. Negotiation is

a method of alternative dispute resolution (ADR) that retains power to resolve the dispute to the

part ies involved. No outside party is vested with authoritative decision -making power concerning the

resolution of the dispute. Negotiation requires the parties to define the conflicts and agree to an

outcome to resolve those conflicts. Often, this can take th e form of a compromise. Note that a

compromise does not mean that anyone “loses.” Indeed, if both parties are satisfied with the result of Saylor URL: http://www.saylor.org/books Saylor.org

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the negotiation and the business relationship can continue moving forward, then both parties will be

very likely to c onsider this as a “winning” situation.

Benefits to negotiation as a method of ADR include its potential for a speedy resolution, the

inexpensive nature of participation, and the fact that parties participate voluntarily. Drawbacks

include the fact that the re are no set rules, and either party may bargain badly or even unethically, if

they choose to do so. In a negotiation, there is no neutral party charged with ensuring that rules are

followed, that the negotiation strategy is fair, or that the overall outc ome is sound. Moreover, any

party can walk away whenever it wishes. There is no guarantee of resolution through this method.

The result may not be “win -win” or “win -lose,” but no resolution at all. Also, generally speaking,

attorneys are not involved in ma ny negotiations. This last point may be seen as a drawback or a

benefit, depending on the circumstances of the negotiation.

Though our example involves B2B, the parties may or may not have equal bargaining power . If your

business and your supplier are both dependent on each other for roughly equal portions of the

respective businesses, then they are most likely relatively equal with respect to bargaining power.

However, in our example, if your business is a very small business but your supplier is a very lar ge

business —perhaps with a patent protecting the rights to the specialty fabric that you need —then we

might say that the B2B negotiation is potentially unbalanced, since one party has a much more

powerful bargaining position than the other. Specifically, y our business needs that particular type of

fabric, which is only available from one supplier. But your supplier does not need your business

because it has a legal monopoly in the form of a patent for its product, and it probably sells to many

manufacturers . This would be an example of unequal bargaining power .

When the negotiation occurs as a result of a dispute, but not a legal dispute per se, then the party

with the weakest bargaining position may be in a very vulnerable spot. This is illustrated in Note 4.13

"Hyperlink: Rubbermaid’s Unequal Bargaining Power" . When Rubbermaid’s raw materials price for

resin increased, it needed to raise its prices. However, Wal -Mart refused to accept the necessary

price increase for Rubbermaid products. This refusal had a s ubstantial negative impact on Saylor URL: http://www.saylor.org/books Saylor.org

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Rubbermaid’s business, since Wal -Mart was its main customer. In short, Rubbermaid needed Wal -

Mart, but Wal -Mart did not need Rubbermaid.

Hyperlink: Rubbermaid’s Unequal Bargaining Power

A Question of Ethics

http://www.pbs.org/wgbh/pages/frontline/video/flv/generic.html?s=frol02s48aq71&continuous=1

Watch “Muscling Manufacturers,” a clip from Is Wal -Mart Good for America? to see how unequal

bargaining power can affect the least powerful party in a negotiation.

As economist Brink Lindsey from the Cato Institute commented, “We’ve definitely seen a shift in the

balance of bargaining power between ma nufacturers and retailers…Back in the old days, manufacturing

was a high -productivity endeavor; retailing and distribution was fairly low -productivity…And so

manufacturers called the shots.” [1]

That doesn’t appear to be the case anymore.

Negotiation is a skill often developed by people who are charged with settling existing disputes or

with creating new agreements. Since we are focusing on dispute resolution in this chapter, we will

limit our discussion to the resolution of disputes rather than the negotia tion of new contract terms,

but keep in mind that these activities essentially draw on the same skills.

In Getting to Yes , written by members of the Harvard Program on Negotiation, the goal of negotiation

is viewed as “win -win.” [2] Note that this is a sub stantially different goal from litigation. Our

adversarial legal system requires one party to “win” and the other party to “lose.” Getting to

Yes focuses on principled negotiation, and it sets forth specific steps and discusses strategies to allow

particip ants to achieve the “win -win” goal. This book’s popularity perhaps suggests that people have

a real interest in learning about ADR, avoiding litigation, and ensuring that all parties leave the

resolution process as “winners.” Some concepts common in negoti ation include the BATNA,

WATNA, and the bargaining zone. For example, the authors of Getting to Yes encourage negotiators

to know their best alternative to a negotiated agreement ( BATNA ). This ensures that unfavorable Saylor URL: http://www.saylor.org/books Saylor.org

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terms will not be accepted and terms consistent with a negotiator’s interests won’t be

rejected. [3] Likewise, the worst alternative to a negotiated agreement ( WATNA ) is a concept used by

some negotiators prior to entering negotiations. The bargaining zone is the area in which parties to a

ne gotiation are willing to trade, barter, or negotiate their positions, within which parties can find an

acceptable agreement. If you think of a Venn diagram, the bargaining zone would be where the two

ovals overlap. The reservation point is essentially a par ty’s “bottom line,” beyond which it will not

agree to terms.

Let’s go back to our example. Imagine that after negotiating with your fabric supplier, the following

facts emerged: The fabric supplier believed that it sent the correct fabric to you, because o ne of your

new employees inadvertently ordered the wrong fabric. You reviewed your business records and

determined that this allegation was true. This sounds like a misunderstanding that would be easy to

clear up in negotiation, doesn’t it? Imagine the emb arrassment and hard feelings that would have

been caused by immediately filing a formal complaint in court, not to mention the great expense that

both parties would have incurred. Through negotiation, chances are very good that this

misunderstanding will b e resolved in a win -win outcome and that you will be able to continue your

working relationship with your supplier.

K E Y T A K E A W A Y S

Negotiation is a method of alternative dispute resolution (ADR) in which the parties retain power to decide

on a resolution of the issue themselves, without relying on a neutral decision maker. Negotiation is also

used between parties entering into agreements, when there is no legal dispute. Negotiation is often the

first method of dispute resolution attempted, because it is inex pensive and relatively fast. Additionally,

parties that wish to continue working together in the future often employ negotiation as a friendly

method to resolve disputes. Negotiation between parties with unequal bargaining power can result in the

stronger party being heavy -handed at the negotiation table, which can result in unfair outcomes for the

weaker party. Since negotiation does not follow an externally imposed set of rules, parties may negotiate

as their conscience dictates. However, negotiation is o ften considered a dispute -resolution option that can

result in a win -win situation for all parties, as illustrated by the popular book Getting to Yes , in which

negotiation strategies are set forth in detail. Saylor URL: http://www.saylor.org/books Saylor.org

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E X E R C I S E S

1. Visit http://www.sfhgroup.com/ca/training/online -training/test -your -skills.php and click “Negotiate with

Bill” under “Online Negotiation Course.” This is a free in teractive negotiation exercise. After completing

the negotiation, answer the following questions: How far did you get? (If you did not get to level three, go

back and try it again. See if you can get all the way through to level three.) What negotiation st rategies did

you learn? In other words, what works? What doesn’t work?

2. What are the benefits of negotiation as a dispute -resolution method? What are the drawbacks?

3. How can parties that have unequal bargaining power negotiate meaningfully, without one party taking

advantage of the other? Have you ever negotiated with someone who had more bargaining power than

you? What were your strategies during the negotiation? Did you obtain your goal by the conclusion of the

negotiation?

4. Watch the video in Note 4.13 "Hyp erlink: Rubbermaid’s Unequal Bargaining Power" . If you were a

manufacturer and you had to raise prices due to an increase in price for your raw materials, and if Wal -

Mart was your most important customer, what strategies would you employ so that both parti es would

have a chance to have a “win -win” outcome?

[1] Hedrick Smith, “Who Calls the Shots in the Global Economy?” PBS , November 16,

2004, http://www.pbs.org/wgbh/pages/frontline/shows/walmart/secrets/shots.html (accessed on August 23,

2010).

[2] Roger Fisher, William Ury, and Bruce Patton, Getting to Yes (New York: Penguin Books, 1991).

[3] Roger Fisher, William Ury, and Bruce Patton, Gettin g to Yes (New York: Penguin Books, 1991), 100.

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4.2 Mediation

L E A R N I N G O B J E C T I V E S

1. Learn what mediation is.

2. Explore the process of mediation as an alternative dispute resolution (ADR) strategy.

3. Identify disputes suitable to mediation as a form of ADR.

4. Become familiar with the benefits and drawbacks of mediation as a form of ADR.

Mediation is a method of ADR in which parties work to form a mutually acceptable agreement. Like

negotiation, parties in mediation do not vest authority to decide the dispute in a neutral third party.

Instead, this authority remains with the parties themselves, who are free to terminate mediation if

they believe it is not working. Often, when parties terminate mediation, they pursue another form of

ADR, such as arbitration, or th ey choose to litigate their claims in court. Mediation is appropriate

only for parties who are willing to participate in the process. Like negotiation, mediation seeks a

“win -win” outcome for the parties involved. Additionally, mediation is confidential, w hich can be an

attractive attribute for people who wish to avoid the public nature of litigation. The mediation

process is usually much faster than litigation, and the associated costs can be substantially less

expensive than litigation.

Unlike in many neg otiations, a third party is involved in mediation. Indeed, a neutral mediator is

crucial to the mediation process. Mediators act as a go -between for the parties, seeking to facilitate

the agreement. Requirements to be a mediator vary by state. See Note 4.2 3 "Hyperlink:

Mediators" to compare the requirements between states. There are no uniform licensing

requirements, but some states require specific training or qualifications for a person to be certified as

a mediator. Mediators do not provide advice on the subject matter of the dispute. In fact, the

mediators may not possess any subject -matter expertise concerning the nature of the dispute.

However, many mediators are trained in conflict resolution, and this allows them to employ methods

to discover common goals or objectives, set aside issues that are not relevant, and facilitate an

agreement into which the parties will voluntarily enter. Mediators try to find common ground by Saylor URL: http://www.saylor.org/books Saylor.org

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identifying common goals or objectives and by asking parties to set aside the som etimes emotionally

laden obstacles that are not relevant to the sought -after agreement itself.

Hyperlink: Mediators

http://www.mediationworks.com/medcert3/staterequirements.htm

Visit this site to see the various requirements and qualifications to become a mediator in the different

states.

Disputants choose their mediator. This choice is often made based on the mediator’ s reputation as a

skilled conflict resolution expert, professional background, training, experience, cost, and

availability. After a mediator is chosen, the parties prepare for mediation. For instance, prior to the

mediation process, the mediator typically asks the parties to sign a mediation agreement. This

agreement may embody the parties’ commitments to proceed in good faith, understanding of the

voluntary nature of the process, commitments to confidentiality, and recognition of the mediator’s

role of ne utrality rather than one of legal counsel. At the outset, the mediator typically explains the

process that the mediation will observe. The parties then proceed according to that plan, which may

include opening statements, face -to-face communication, or ind irect communication through the

mediator. The mediator may suggest options for resolution and, depending on his or her skill, may

be able to suggest alternatives not previously considered by the disputants.

Mediation is often an option for parties who cann ot negotiate with each other but who could reach a

mutually beneficial or mutually acceptable resolution with the assistance of a neutral party to help

sort out the issues to find a resolution that achieves the parties’ objectives. Sometimes parties in

med iation retain attorneys, but this is not required. If parties do retain counsel, their costs for

participating in the mediation will obviously increase.

In business, mediation is often the method of ADR used in disputes between employers and

employees abou t topics such as workplace conditions, wrongful discharge, or advancement

grievances. Mediation is used in disputes between businesses, such as in contract disputes. Saylor URL: http://www.saylor.org/books Saylor.org

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Mediation is also used for disputes arising between businesses and consumers, such as in m edical

malpractice cases or health care disputes.

Like other forms of dispute resolution, mediation has benefits and drawbacks. Benefits are many.

They include the relative expediency of reaching a resolution, the reduced costs as compared to

litigation, t he ability for parties that are unable to communicate with each other to resolve their

dispute using a nonadversarial process, the imposition of rules on the process by the mediator to

keep parties “within bounds” of the process, confidentiality, and the v oluntary nature of

participation. Of course, the potential for a “win -win” outcome is a benefit. Attorneys may or may not

be involved, and this can be viewed as either a benefit or a drawback, depending on the

circumstances.

Drawbacks to mediation also exi st. For example, if disputants are not willing to participate in the

mediation process, the mediation will not work. This is because mediation requires voluntary

participation between willing parties to reach a mutually agreeable resolution. Additionally, even

after considerable effort by the parties in dispute, the mediation may fail. This means that the

resolution of the problem may have to be postponed until another form of ADR is used, or until the

parties litigate their case in court. Since mediators a re individuals, they have different levels of

expertise in conflict resolution, and they possess different backgrounds and worldviews that might

influence the manner in which they conduct mediation. Parties may be satisfied with one mediator

but not satisf ied in subsequent mediations with a different mediator. Even if an agreement is

reached, the mediation itself is usually not binding. Parties can later become dissatisfied with the

agreement reached during mediation and choose to pursue the dispute through other ADR methods

or through litigation. For this reason, parties often enter into a legally binding contract that

embodies the terms of the resolution of the mediation immediately on conclusion of the successful

mediation. Therefore, the terms of the med iation can become binding if they are reduced to such a

contract, and some parties may find this to be disadvantageous to their interests. Of course, any

party that signs such an agreement would do so voluntarily. However, in some cases, if legal counsel

is not involved, parties may not fully understand the implications of the agreement that they are

signing. Saylor URL: http://www.saylor.org/books Saylor.org

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K E Y T A K E A W A Y S

Mediation is a method of ADR in which the parties retain power to decide the issue themselves without

vesting that power in an outside d ecision maker. However, mediation relies on neutral mediators who

facilitate the mediation process to assist the parties in achieving an acceptable, voluntary agreement.

Mediation is more formal than negotiation but less formal than arbitration or litigati on. Mediation is

relatively inexpensive, fast, and confidential, unlike litigation. Though nonbinding mediation resolutions

are not binding on the parties, these resolution agreements may be incorporated into a legally binding

contract, which is binding on the parties who execute the contract. Mediation does not follow a uniform

set of rules, though mediators typically set forth rules that the mediation will observe at the outset of the

process. Successful mediation often reflects not only the parties’ will ingness to participate but also the

mediator’s skill. There is no uniform set of rules for mediators to become licensed, and rules vary by state

regarding requirements for mediator certification.

E X E R C I S E S

1. Visit the link in Note 4.23 "Hyperlink: Mediators" and find your state’s requirements and qualifications for

mediators. What would it take for you to become a mediator in your state? Do you think that your state

requirements ensure that only qualified mediators practice? Why or why not?

2. Identify a situation in which you would choose mediation as your preferred method of dispute resolution.

Why is mediation the best method in this situation? What are the potential benefits and drawbacks of

mediation in this situation?

3. Should mediators be required to be licensed, like attorneys or physicians, before practicing? Why or why

not?

4. Visit http://www.sfhgroup.com/ca/training/online -training/test -your -skills .php and scroll down to

Mediation game. Click on “play game” under “The Angry Neighbours.” This is a free interactive mediation

exercise. After completing the mediation, answer the following questions: Were you able to successfully

mediate this dispute? If you did not reach a successful resolution, go back and try it again. See if you can

reach a successful resolution. What mediation strategies did you learn? What works? What doesn’t work?

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4.3 Arbitration

L E A R N I N G O B J E C T I V E S

1. Explore the option of arbitration as an alternative dispute resolution (ADR) strategy.

2. Explore contemporary issues of fairness in arbitration.

3. Determine when arbitration is a viable option for dispute resolution.

4. Examine the benefits and drawbacks of arbitration as a form of AD R.

Arbitration is a method of ADR in which parties vest authority in a third -party neutral decision

maker who will hear their case and issue a decision, which is called an arbitration award .

An arbitrator presides over arbitration proceedings. Arbitrators are neutral decision makers who are

often experts in the law and subject matter at issue in the dispute. Their decisions do not form

binding precedent. Arbitrators may be members of the judiciary, but in arbitrations they are not

judges. Arbitrators act in an analogous capacity to judges in trials. For instance, they determine

which evidence can be introduced, hear the parties’ cases, and issue decisions. They may be certified

by the state in which they arbitrate, and they may arbitrate only certain types o f claims. For instance,

the Better Business Bureau trains its own arbitrators to hear common complaints between

businesses and consumers (B2C).

Participation in the arbitration proceeding is sometimes mandatory. Mandatory arbitration results

when disputes arise out of a legally binding contract involving commerce in which the parties agreed

to submit to mandatory arbitration. Arbitration is also mandatory when state law requires parties to

enter into mandatory arbitration.

Although perhaps not obvious, fede ral law lies at the heart of mandatory arbitration clauses in

contracts. Specifically, Congress enacted the Federal Arbitration Act (FAA) [1] through

its Commerce Clause powers. This act requires parties to engage in arbitration when those parties

have ent ered into legally binding contracts with a mandatory arbitration clause , providing the subject

of those contracts involves commerce. [2] In Southland Park v. Keating , the U.S. Supreme Court

interpreted this federal statute to apply to matters of both feder al and state court jurisdiction. Saylor URL: http://www.saylor.org/books Saylor.org

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Indeed, the Court held that the FAA created a national policy in favor of arbitration. It also held that

the FAA preempts state power to create a judicial forum for disputes arising under contracts with

mandatory arbitratio n clauses. [3] In a later decision, the Court held that the FAA encompasses

transactions within the broadest permissible exercise of congressional power under the Commerce

Clause. [4]This means that the FAA requires mandatory arbitration clauses to be enfo rceable for

virtually any transaction involving interstate commerce, very broadly construed.

Some states require mandatory arbitration for certain types of disputes. For instance, in Oregon, the

state courts require mandatory arbitration for civil suits wh ere the prayer for damages is less than

$50,000, excluding attorney fees and costs. [5] Many parties accept the arbitration award without

appeal. However, when state law requires mandatory arbitration of certain types of disputes, parties

are permitted to appeal because the arbitration is nonbinding. In nonbinding arbitration, the parties

may choose to resolve their dispute through litigation if the arbitration award is rejected by a party.

However, some states have statutory requirements that, in practice, create a chilling effect on

appealing an arbitration award. For example, in the state of Washington, if the appealing party from

a nonbinding mandatory arbitration does not do better at trial than the original award issued by the

arbitrator, then that par ty will incur liability not only for its own expenses but also for those of the

opposing side. [6]In nonbinding arbitration, this is a powerful incentive for parties to accept the

arbitration award without appealing to the judicial system.

Voluntary arbitration also exists, and it is frequently used in business disputes. Sometimes parties

simply agree that they do not want to litigate a dispute because they believe that the benefits of

arbitration outweigh the costs of litigation, so they choose volun tary arbitration in hopes of a speedy

and relatively inexpensive outcome. Other times, parties are not certain how strong their case is. In

such cases, arbitration can seem much more attractive than litigation.

Arbitration awards can be binding or nonbindi ng . Some states, like Washington State, have codified

the rule that arbitration decisions are binding when parties voluntary submit to the arbitration

procedure. [7] In binding arbitration, the arbitration award is final; therefore, appealing an arbitratio n

award to the judicial system is not available. In many states, an arbitration awards is converted to Saylor URL: http://www.saylor.org/books Saylor.org

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a judgment by the court, thereby creating the legal mechanism through which the judgment holder

can pursue collection activities. This process, called confirmation , is contemplated by the FAA and

often included in arbitration agreements. But even if the FAA does not apply, most states have

enacted versions of either the Uniform Arbitration Act or the Revised Uniform Arbitration Act . These

state laws allow confirmation of arbitration awards into judgments as well.

Like any other form of dispute resolution, arbitration has certain benefits and drawbacks. Arbitration

is an adversarial process like a trial, and it will produce a “winner” and a “loser.” Arbitrat ion is more

formal than negotiation and mediation and, in many ways, it resembles a trial. Parties present their

cases to the arbitrator by introducing evidence. After both sides have presented their cases, the

arbitrator issues an arbitration award.

Rules related to arbitration differ by state. The rules of procedure that apply to litigation in a trial do

not typically apply to arbitration. Specifically, the rules are often less formal or less restrictive on the

presentation of evidence and the arbitration procedure. Arbitrators decide which evidence to allow,

and they are not required to follow precedents or to provide their reasoning in the final award. In

short, arbitrations adhere to rules, but those rules are not the same as rules of procedure for

liti gation. Regardless of which rules are followed, arbitrations proceed under a set of external rules

known to all parties involved in any given arbitration.

Arbitration can be more expensive than negotiation or mediation, but it is often less expensive than

litigation. In Circuit City Stores Inc. v. Adams , the U.S. Supreme Court noted that avoiding the cost of

litigation was a real benefit of arbitration. [8] The costly discovery phase of a trial is nonexistent or

sharply reduced in arbitration. However, arbitration is not necessarily inexpensive. Parties must bear

the costs of the arbitrator, and they typically retain counsel to represent them. Additionally, i n

mandatory arbitration clause cases, the arbitration may be required to take place in a distant city

from one of the disputants. This means that the party will have to pay travel costs and associated

expenses during the arbitration proceeding. The Circuit City Court also noted that mandatory

arbitration clauses avoid difficult choice -of-law problems that litigants often face, particularly in

employment law cases. Saylor URL: http://www.saylor.org/books Saylor.org

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Arbitration is faster than litigation, but it is not as private as negotiation or mediation. U nlike

mediators, arbitrators are often subject -matter experts in the legal area of dispute. However, as is

true for