CH-2-4 Business Ethics and the Social Responsibility of Business – Smith and Robersons Business Law : Book Guide

This Document Contains Chapters 2 to 4 Chapter 2 BUSINESS ETHICS AND THE SOCIAL RESPONSIBILITY OF BUSINESS ANSWERS TO PROBLEMS 1. You have an employee who has a chemical imbalance in the brain that causes him to be severely emotionally unstable. The medication that is available to deal with this schizophrenic condition is extremely powerful and decreases the taker's life span by one to two years for every year that the user takes it. You know that his doctors and family believe that it is in his best interest to take the medication. What course of action should you follow? Answer: Arguments Against Social Responsibility. This question illustrates one scenario where arguments against corporate social responsibility could come into play. If you take the “anti-social responsibility” position that a corporation has -- as its primary objective -- a fundamental responsibility to maximize profits, the employer could make the medication a requirement for the employee to remain in the workforce. It could be argued that this decision may also decrease the possibility of injury or deterioration in working conditions for other employees. The other side of the argument, however, is that this type of decision is too personal for a corporation to make. The ultimate determination should reside with the employee and it should be his free decision to take or not take the medication. This puts the responsibility back where it belongs, on the employee and his family. 2. You have a very shy employee from another country. After a time, you notice that the quality of her performance is deteriorating rapidly. You find an appropriate time to speak with her and determine that she is extremely distraught. She tells you that her family has arranged a marriage for her and that she refuses to obey their contract. She further states to you that she is thinking about committing suicide. Two weeks later, after her poor performance continues, you determine that she is on the verge of a nervous breakdown; and once again she informs you that she is going to commit suicide. What should you do? Consider further that you can petition a court to have her involuntarily committed to a mental hospital. You know, however, that her family would consider such a commitment an extreme insult and that they might seek retribution. Does this prospect alter your decision? Answer: Arguments For Social Responsibility. A good, responsible manager would be hard-pressed to demand that the employee either improve her on-the-job performance or face dismissal. However, initiating an involuntary committal to a mental hospital could constitute an improper invasion of rights with many legal repercussions. An interim step of providing appropriate psychological social counseling (perhaps at company expense) would seem to best fit into the concept of good corporate management. This would benefit not only the individual, but the corporation may be able to keep a valued employee. The cost of counseling is likely to be less expensive than hiring and training a new employee. 3. You receive a telephone call from a company that you never do business with requesting a reference on one of your employees, Mary Sunshine. You believe that Mary is generally incompetent and would be delighted to see her take another job. You give her a glowing reference. Is this right? Explain. Answer: Utilitarianism. Pawning off an incompetent employee would certainly help the profitability of an employer. However, relatively accurate referrals are expected, and good corporate citizenship would impose a moral responsibility to act properly. The employer would be better advised to give a more accurate, but not overly negative, description of Mary’s job performance (while staying within the conditional privilege of avoiding a defamation action), rather than generate animosity and gain a reputation as a liar among other businesses in the area. 4. You have just received a report suggesting that a chemical your company uses in its manufacturing process is very dangerous. You have not read the report, but you are generally aware of its contents. You believe that the chemical can be replaced fairly easily, but that if word gets out, panic may set in among employees and community members. A reporter asks if you have seen the report, and you say no. Is your behavior right or wrong? Explain. Answer: Utilitarianism. Weighing the arguments for profitability to shareholders and fairness to shareholders and employees against the arguments for good corporate citizenship and long-run profits, an appropriate response might be that you are aware of the report but haven’t thoroughly read or studied it. Proceeding with a course that acknowledges (at least internally) past dangerous practices, while immediately correcting the current problems, and correcting future problems in a timely manner, may be an appropriate legal as well as moral response to this problem. This is one of the reasons many corporations have a corporate spokesperson to give appropriate and consistent responses. 5. You and Joe Jones, your neighbor and friend, bought lottery tickets at the corner drugstore. While watching the lottery drawing on television with you that night, Joe leaped from the couch, waved his lottery ticket, and shouted, “I've got the winning number!” Suddenly, he clutched his chest, keeled over, and died on the spot. You are the only living person who knows that Joe, not you, bought the winning ticket. If you substitute his ticket for yours, no one will know of the switch, and you will be $10 million richer. Joe's only living relative is a rich aunt whom he despised. Will you switch his ticket for yours? Explain. Answer: Fundamentalism. Perhaps an advocate of utilitarianism or social egalitarianism might feel that switching the ticket would be morally appropriate on the premise that it maximized pleasure and was an appropriate distribution of wealth. However, such a moral rationalization would demonstrate the flaws in both theories. There is no escaping the fact that switching the tickets would be improper under the law and most moral theories. 6. Omega, Inc., a publicly held corporation, has assets of $100 million and annual earnings in the range of $13–$15 million. Omega owns three aluminum plants, which are profitable, and one plastics plant, which is losing $4 million a year. The plastics plant shows no sign of ever becoming profitable, because of its very high operating costs; and there is no evidence that the plant and the underlying real estate will increase in value. Omega decides to sell the plastics plant. The only bidder for the plant is Gold, who intends to use the plant for a new purpose, to introduce automation, and to replace all present employees. Would it be ethical for Omega to turn down Gold's bid and keep the plastics plant operating indefinitely, for the purpose of preserving the employees' jobs? Explain. Answer: Egalitarianism. Indefinite maintenance of the plastics plant may strike one as being the morally correct thing to do. The moral basis for such a decision would be essentially egalitarianism where the wealth generated by many is redistributed to benefit others. However, as the basis for an economic system, such an approach may be doomed to ultimate failure in that it does not rectify anything and only prolongs a perhaps snowballing problem that could taint and impair the job security of everyone employed by Omega. If managerial and operational changes truly cannot rectify the net loss situation suffered by the plastics plant, sale of the plant to Gold may, in a broader context, be the morally correct thing to do. 7. You are the sales manager of a two-year-old electronics firm. At times, the firm has seemed to be on the brink of failure, but recently has begun to be profitable. In large part, the profitability is due to the aggressive and talented sales force you have recruited. Two months ago, you hired Alice North, an honors graduate from State University who decided that she was tired of the research department and wanted to try sales. Almost immediately after you sent Alice out for training with Brad West, your best salesman, he began reporting to you an unexpected turn of events. According to Brad, “Alice is terrific: she's confident, smooth, and persistent. Unfortunately, a lot of our buyers are good old boys who just aren't comfortable around young, bright women. Just last week, Hiram Jones, one of our biggest customers, told me that he simply won't continue to do business with ‘young chicks’ who think they invented the world. It's not that Alice is a know-it-all. She's not. It's just that these guys like to booze it up a bit, tell some off-color jokes, and then get down to business. Alice doesn't drink, and although she never objects to the jokes, it's clear she thinks they're offensive.” Brad felt that several potential deals had fallen through “because the mood just wasn't right with Alice there.” Brad added, “I don't like a lot of these guys' styles myself, but I go along to make the sales. I just don't think Alice is going to make it.” When you call Alice in to discuss the situation, she concedes the accuracy of Brad's report, but indicates that she's not to blame and insists that she be kept on the job. You feel committed to equal opportunity, but do not want to jeopardize your company's ability to survive. What should you do? Answer: Utilitarianism. This is a common problem with a myriad of legal and moral implications. From a profitability standpoint, especially in the case of a company on the brink of economic failure, ignoring the requirements and whims of customers can amount to economic death. From a legal standpoint, the Equal Opportunity laws operate harshly against an employer that discriminates on the basis of sex or race in hiring and promotional activities. Employees are frequently aware of their rights, yet wishing to help the business of an employer and otherwise acting as a good “team player.” A possible response might be (with the consent of Alice) attempting to divide sales accounts to give to Alice those accounts where her sex would be a neutral or perhaps positive factor, while retaining for Brad oversight of the “good old boy” accounts. Such an approach would acknowledge both her legal rights and her justifiable expectations while not undermining the profitability of a company whose very existence is at issue. Best utilization of employees is critical to any corporation, and this includes sensitivity to both the employees’ needs and the customers’ needs. 8. Major Company subcontracted the development of part of a large technology system to Start-up Company, a small corporation specializing in custom computer systems. The contract, which was a major breakthrough for Start-up Company and crucial to its future, provided for an initial development fee and subsequent progress payments, as well as a final date for completion. Start-up Company provided Major Company with periodic reports indicating that everything was on schedule. After several months, however, the status reports stopped coming, and the company missed delivery of the schematics, the second major milestone. As an in-house technical consultant for Major Company, you visited Start-up Company and found not only that they were far behind schedule but that they had lied about their previous progress. Moreover, you determined that this slippage put the schedule for the entire project in severe jeopardy. The cause of Start-up's slippage was the removal of personnel from your project to work on short-term contracts in order to obtain money to meet the weekly payroll. Your company decided that you should stay at Start-up Company to monitor their work and to assist in the design of the project. After six weeks and some progress, Start-up is still way behind their delivery dates. Nonetheless, you are now familiar enough with the project to complete it in-house with Major's personnel. Start-up is still experiencing severe cash flow problems and repeatedly requests payment from Major. But your CEO, furious with Start-up's lies and deceptions, wishes to “bury” Start-up and finish the project using Major Company's internal resources. She knows that withholding payment to Start-up will put them out of business. What do you do? Explain. Answer: Situational Ethics. We don't know if the development fee was ever paid to Start-up Company. Major had an obligation to pay the initial development fee. If it was paid, and Start-up did not produce the required progress reports then Major is correct to withhold payment. Situational ethics will come into play when you decide whether or not to give Start-up more time to complete the work. If the start-up fee was not paid, and it was Major’s failure to pay on schedule that caused Start-up to divert their personnel, then Major needs to take some share of the blame. . 9. A customer requested certain sophisticated tests on equipment he purchased from your factory. Such tests are very expensive and must be performed by a third party. The equipment was tested and met all of the industry standards, but showed anomalies which could not be explained. Though the problem appeared to be very minor, you decided to inspect the unit to try to understand the test data—a very expensive and time-consuming process. You informed the customer of this decision. A problem was found, but it was minor and was highly unlikely ever to cause the unit to fail. Rebuilding the equipment would be very expensive and time-consuming; moreover, notifying the customer that you were planning to rebuild the unit would also put your overall manufacturing procedures in question. What should you do: fix it, ship it, or inform the customer? Answer: Fundamentalism. You must inform the customer. The customer apparently has the right to request such testing and as such you have ethical responsibility to inform the customer of all factors. The ultimate decision should be made by the customer. However, you have the obligation to comply with the legal and governmental responsibilities within your industry. 10. You are a project manager for a company making a major proposal to a Middle Eastern country. Your major competition is from Japan. (a) Your local agent, who is closely tied to a very influential sheik, would receive a 5 percent commission if the proposal were accepted. Near the date for decision the agent asks you for $150,000 to grease the skids so that your proposal is accepted. What do you do? (b) What if, after you say no, the agent goes to your vice president, who provides the money? What do you do? (c) Your overseas operation learns that most other foreign companies in this Middle Eastern location bolster their business by exchanging currency on the gray market. You discover that your division is twice as profitable as budgeted due to the amount of domestic currency you have received on the gray market. What do you do? Answer: Ethical Theories. (a) This may cross the line from ethical to legal requirements. If this is not illegal, then applying the doctrine of ethical relativism, you must decide what is subjectively right for you. You also need to check the company code of conduct and any other applicable policy. (b) Again applying the doctrine of ethical relativism, if you feel strongly enough you may have to quit your job or request a transfer to another division. If this activity is not legal you have the obligation to report it to your company's superiors. (c) The Utilitarianism cost–benefit analysis will allow you to first quantify this in monetary terms and then compare the direct and indirect costs and benefits. This process may achieve the most profit but may ignore justice in the process. 11. Explain what relevance ethics has to business. Answer: Business Ethics. Business ethics seeks to understand the moral issues that arise from business practices, institutions, and decision-making and their relationship to generalized human values. Unlike the law, analyses of ethics have no central authority, such as courts or legislatures, upon which to rely; nor do they have clear-cut, universal standards. Despite these inherent limitations, making meaningful ethical judgments is still possible and necessary in the areas of employment relationships, relationships between business and its customers, corporate governance, shareholder voting, and management’s duties to the shareholders, pollution of the physical environment, commitment to the community’s economic and social infrastructure, the depletion of natural resources, fair competition, bribery of foreign officials, exploitation of developing countries, and conflicts among differing cultures and value systems. 12. How should the financial interests of stockholders be balanced with the varied interests of stakeholders? If you were writing a code of conduct for your company, how would you address this issue? Answer: Business Ethics. Answers will vary, but should include the idea that a corporation is responsible to society at large, and more directly, to all those constituencies on which it depends for its survival. Thus, it is argued that a corporation should be managed for the benefit of all of its stakeholders—stockholders, employees, customers, suppliers, and managers, as well as the local communities in which it operates. 13. A company adopts a policy that (a) prohibits romantic relationships between employees of different rank and (b) permits romantic relationships between employees of the same rank only if both employees waive in writing their rights to sue the company should the relationship end. Violation of this rule is grounds for dismissal. Is this rule ethical? If not, how should it be revised? Explain. Answer: Business Ethics. Answers will vary, but may include some of the following ideas: • A corporation’s main responsibility is to make a profit, and anything that might interfere with that goal should be avoided. • Ethical relativism is a doctrine asserting that individuals must judge actions by what they feel is right or wrong for themselves. This would prohibit a corporation from making such restrictions. • Situational ethics holds that the person judging must actually put herself in the other person’s shoes to understand what motivated the other to choose a particular course of action. This would prohibit a corporation from making such restrictions. • Utilitarianism is a doctrine that assesses good and evil in terms of the consequences of actions. This would require a corporation to prove that there is more benefit from making the restrictions than from allowing the behavior. • Deontological theories hold that certain underlying principles are right or wrong regardless of calculations regarding pleasure or pain. This would require a corporation to prove that there is a moral value to restricting or allowing the behavior. 14. A company prohibits any employee from making disparaging comments about the company through any social media, including online blogs, email, and other electronic media. Violation of this rule is grounds for dismissal. Explain whether this rule is ethical. If not, how should it be revised? Explain. Answer: Business Ethics. Answers will vary, but may include some of the following ideas: • A corporation’s main responsibility is to make a profit, and anything that might interfere with that goal should be avoided. • Ethical relativism is a doctrine asserting that individuals must judge actions by what they feel is right or wrong for themselves. This would prohibit a corporation from making such restrictions. • Situational ethics holds that the person judging must actually put herself in the other person’s shoes to understand what motivated the other to choose a particular course of action. This would prohibit a corporation from making such restrictions. • Utilitarianism is a doctrine that assesses good and evil in terms of the consequences of actions. This would require a corporation to prove that there is more benefit from making the restrictions than from allowing the behavior. • Deontological theories hold that certain underlying principles are right or wrong regardless of calculations regarding pleasure or pain. This would require a corporation to prove that there is a moral value to restricting or allowing the behavior. Chapter 3 CIVIL DISPUTE RESOLUTION ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. On June 15, a newspaper columnist predicted that the coast of State X would be flooded on the following September 1. Relying on this pronouncement, Gullible quit his job and sold his property at a loss so as not to be financially ruined. When the flooding did not occur, Gullible sued the columnist in a State X court for damages. The court dismissed the case for failure to state a cause of action under applicable State law. On appeal, the State X Supreme Court upheld the lower court. Three months after this ruling, the State Y Supreme Court heard an appeal in which a lower court had ruled that a reader could sue a columnist for falsely predicting flooding. (a) Must the State Y Supreme Court follow the ruling of the State X Supreme Court as a matter of stare decisis? (b) Should the State Y lower court have followed the ruling of the State X Supreme Court until the State Y Supreme Court issued a ruling on the issue? (c) Once the State X Supreme Court issued its ruling, could the United States Supreme Court overrule the State X Supreme Court? (d) If the State Y Supreme Court and the State X Supreme Courts rule in exactly opposite ways, must the United States Supreme Court resolve the conflict between the two courts? Answer: Stare Decisis in the Dual Court System. a. No. A decision of one state’s supreme court is not binding on another state’s supreme court. It may be persuasive, but it’s not binding. b. Not necessarily. The decision of one state’s supreme court is not binding on the lower courts of another state. Again, it may be persuasive, but it’s not binding. c. If the issue is one strictly of state–as opposed to federal–law, which this seems to be, then the United States Supreme Court could not overrule the State X Supreme Court. However, a decision of the U.S. Supreme Court on federal questions is binding on all other courts, federal and state. d. No. If the conflict in rulings relates exclusively to state law, the U.S. Supreme Court cannot exercise jurisdiction. Even if the conflict between states related to federal law, there is no mandatory requirement that the Supreme Court intervene. The Supreme Court may intervene when two Circuit Courts of Appeals adopt inconsistent positions, but there is no mandatory requirement that it do so. 2. State Senator Bowdler convinced the legislature of State Z to pass a law requiring all professors to submit their class notes and transparencies to a board of censors to be sure that no “lewd” materials were presented to students at State universities. Professor Rabelais would like to challenge this law as being violative of his First Amendment rights under the U.S. Constitution. (a) May Professor Rabelais challenge this law in the State Z courts? (b) May Professor Rabelais challenge this law in a Federal district court? Answer: Subject Matter Jurisdiction. a. Yes. Adjudicating First Amendment disputes can occur either in the state courts or the federal courts because they have concurrent jurisdiction over federal questions. b. Yes, even if he cannot show a monetary loss, because a federal question exists and there is no minimum dollar requirement for federal question cases. 3. While driving his car in Virginia, Carpe Diem, a resident of North Carolina, struck Butt, a resident of Alaska. As a result of the accident, Butt suffered over $80,000 in medical expenses. Butt would like to know if he personally serves the proper papers to Diem whether he can obtain jurisdiction against Diem for damages in the following courts: (a) Alaska State trial court (b) Federal Circuit Court of Appeals for the Ninth Circuit (includes Alaska) (c) Virginia State trial court (d) Virginia Federal district court (e) Federal Circuit Court of Appeals for the Fourth Circuit (includes Virginia and North Carolina) (f) Virginia equity court (g) North Carolina State trial court. Answer: Jurisdiction. a. The only way that Butt could get proper service on Diem for purposes of suing Diem in an Alaska state court would be if Diem somehow came into the state borders and Butt served him while he was inside the state. Butt could not use a long-arm statute to get service since there would have been no real connection between the events leading up to the lawsuit and the State of Alaska. If the case could be tried in Alaska, the court would apply Virginia law. b. No. A Circuit Court of Appeals is an appellate court. It never tries cases. c. Yes. The accident occurred in Virginia. This is the most logical place to try the case. d. Yes. There is diversity of citizenship, and the amount in controversy does exceed $75,000, therefore both requirements of diversity jurisdiction have been satisfied. e. No. A Circuit Court of Appeals is an appellate court. It never tries cases. f. No. A court of equity–assuming one exists in Virginia–does not hear cases in which monetary damages would provide adequate relief. In this case, monetary damages would suffice. g. Yes, assuming proper services were obtained in North Carolina. Why Butt would want to sue in North Carolina is a mystery since the North Carolina court would apply Virginia law. 4. Sam Simpleton, a resident of Kansas, and Nellie Naive, a resident of Missouri, each bought $85,000 in stock at local offices in their home States from Evil Stockbrokers, Inc. (“Evil”), a business incorporated in Delaware with its principal place of business in Kansas. Both Simpleton and Naive believe that they were cheated by Evil Stockbrokers and would like to sue Evil for fraud. Assuming that no Federal question is at issue, assess the accuracy of the following statements: (a) Simpleton can sue Evil in a Kansas State trial court. (b) Simpleton can sue Evil in a Federal district court in Kansas. (c) Naive can sue Evil in a Missouri State trial court. (d) Naive can sue Evil in a Federal district court in Missouri. Answer: Subject Matter Jurisdiction a. Yes. You can always sue for fraud in state court. There are sufficient minimum contacts with that state, since Evil’s principal place of business is located there. b. Simpleton cannot successfully sue Evil for fraud in federal district court because the only possible basis would be diversity of citizenship since no federal question is involved. There is no diversity in this case because Simpleton and Evil are both citizens of Kansas. A corporation is a citizen both of the state of incorporation and of its principal place of business. c. Yes. You can always sue for fraud in state court. By using a long-arm statute Evil can be reached because it is transacting business within Missouri. d. In this case, Naïve can claim diversity of citizenship because Evil is not a citizen of Missouri. The mere fact that a corporation does business in a state does not make it a citizen of that state. So, if Naïve has suffered more than $75,000 in damages, this loss--coupled with diversity of citizenship--would make her eligible to sue Evil in a federal district court. The case does not tell us how much her loss is, however, so the facts are insufficient to make a proper determination. 5. The Supreme Court of State A ruled that, under the law of State A, pit bull owners must either keep their dogs fenced or pay damages to anyone bitten by the dogs. Assess the accuracy of the following statements: (a) It is likely that the United States Supreme Court would issue a writ of certiorari in the “pit bull” case. (b) If a case similar to the “pit bull” case were to come before the Supreme Court of State B in the future, the doctrine of stare decisis would leave the court no choice but to rule the same way as the Supreme Court of State A ruled in the “pit bull” case.. Answer: Stare Decisis in the Dual Court System. a. This statement is false. The United States Supreme Court would not issue a writ of certiorari in a case involving only state tort law and not presenting a federal question. b. False. Again this is an issue of state law, specifically the law of State A. The decision of one state’s supreme court is not binding on the courts of another state. Such a decision in State A may be persuasive on the courts in State B, but it is not binding. 6. The Supreme Court of State G decided that the United States Constitution requires professors to warn students of their right to remain silent before questioning the students about cheating. This ruling directly conflicts with a decision of the Federal Court of Appeals for the circuit that includes State G. (a) Must the Federal Circuit Court of Appeals withdraw its ruling? (b) Must the Supreme Court of State G withdraw its ruling? Answer: Stare Decisis in the Dual Court System. a. No. Decisions of a state supreme court are only binding on the federal courts as to questions of that state’s law. Here a federal question is at issue. b. Although a decision of a federal court, other than the U.S. Supreme Court, may be persuasive in a state court on a federal question, it is still not binding on that state court. 7. Thomas Clements brought an action to recover damages for breach of warranty against defendant, Signa Corporation. (A warranty is an obligation that the seller of goods assumes with respect to the quality of the goods sold.) Clements had purchased a motorboat from Barney's Sporting Goods, an Illinois corporation. The boat was manufactured by Signa Corporation, an Indiana corporation with its principal place of business in Decatur, Indiana. Signa has no office in Illinois and no agent authorized to do business on its behalf within Illinois. Clements saw Signa's boats on display at the Chicago Boat Show. In addition, literature on Signa's boats was distributed at the Chicago Boat Show. Several boating magazines, delivered to Clements in Illinois, contained advertisements for Signa's boats. Clements also had seen Signa's boats on display at Barney's Sporting Goods Store in Palatine, Illinois, where he eventually purchased the boat. A written warranty issued by Signa was delivered to Clements in Illinois. Although Signa was served with a summons, it failed to enter an appearance in this case. The court entered a default order and, subsequently, a judgment of $6,220 against Signa. Signa appealed. Decision? Answer: Personal Jurisdiction. Judgment for Clements. Under Section 17 of the Illinois Long-Arm Statute, a nonresident corporation which transacts business within the State of Illinois is subject to personal jurisdiction in the Illinois state courts in any lawsuit arising out of business. The assertion of personal jurisdiction, however, must satisfy the due process clause of the 14th Amendment to the U.S. Constitution. Due process requires sufficient “minimum contacts” between Illinois and the non-resident corporation so that the exercise of personal jurisdiction is consistent with traditional notions of fair play and substantial justice. By displaying its boats and distributing literature at the Chicago Boat Show, advertising in magazines with Illinois subscribers and selling its boats to Illinois retailers, Signa Corporation satisfies the due process “minimum contacts” test and the Illinois Long-Arm Statute. Since it has intentionally and consistently engaged in practices designed to promote sales of its boats in Illinois, it would not violate traditional notions of fair play and justice for the Illinois State court to assert personal jurisdiction over Signa on a claim which arose out of the sale of one of its boats to an Illinois resident, in Illinois. Clements v. Barney’s Sporting Goods Store, 84 Ill.App.3d 600, 40 Ill.Dec. 342, 406 N.E.2d 43 (1980). 8. Mariana Deutsch worked as a knitwear mender and attended a school for beauticians. The sink in her apartment collapsed on her foot, fracturing her big toe and making it painful for her to stand. She claims that as a consequence of the injury she was compelled to abandon her plans to become a beautician because that job requires long periods of standing. She also asserts that she was unable to work at her current job for a month. She filed a tort claim against Hewes Street Realty for negligence in failing properly to maintain the sink. She brought the suit in Federal district court, claiming damages of $25,000. Her medical expenses and actual loss of salary were less than $1,500; the rest of her alleged damages were for loss of future earnings as a beautician. Hewes Street moved to dismiss the suit on the basis that Deutsch's claim fell short of the jurisdictional requirement, which then was $10,000, and that the Federal court therefore lacked subject matter jurisdiction over her claim. Decision? Answer: Federal Jurisdiction. Judgment for Deutsch. The general rule for determining the $10,000 jurisdictional amount in controversy requirement (as it was at the time of this case; the requirement now is $75,000) is that an amount alleged in good faith to exceed $10,000 will satisfy the requirement, unless it appears to be a legal certainty that the claim is really for less than $10,000. The court may look beyond the face of the complaint, however, to determine the validity of the alleged amount. For example, the court may dismiss a suit for lack of jurisdiction: (1) if the damages claimed are not recoverable at all under applicable law, or (2) if the damages that are recoverable cannot as a matter of law exceed $10,000, or (3) if the amount of damages was inflated solely to gain access to the federal courts. In this case, Deutsch’s claim for unliquidated damages of $25,000 for her loss of future earnings as a beautician satisfies the jurisdictional requirement. Although it may seem unlikely that she could actually prove $25,000 in damages, it cannot be said with legal certainty that the damages do not exceed $10,000. Therefore, she should have an opportunity to have her claim decided on its merits in a federal court. Deutsch v. Hewes St. Realty Corp., 359 F2d 96 (1966). 9. Vette sued Aetna under a fire insurance policy. Aetna moved for summary judgment on the basis that the pleadings and discovered evidence showed a lack of an insurable interest in Vette. (An “insurable interest” exists where the insured derives a monetary benefit or advantage from the preservation or continued existence of the property or would sustain an economic loss from its destruction.) Aetna provided ample evidence to infer that Vette had no insurable interest in the contents of the burned building. Vette also provided sufficient evidence to put in dispute this factual issue. The trial court granted the motion for summary judgment. Vette appealed. Decision? Answer: Summary Judgment. Judgment for Vette. Summary judgment should not be entered unless the pleadings, stipulations, affidavits, and admissions in the case show that there exists no genuine issue as to any material fact. In passing upon a motion for summary judgment, the court is required to view the facts in the light most favorable to the party opposing the motion [Vette] and to give that party the benefit of all reasonable inferences to be drawn from the underlying facts. Although Aetna provided ample evidence to infer that Vette had no insurable interest in the contents of the burned building, Vette also provided sufficient evidence to put in dispute this material and factual issue. As the party opposing the motion for summary judgment, Vette was entitled to the benefit of all reasonable inferences and to a review of the facts in the light most favorable to him. Therefore, the motion for summary judgment should be denied. Vette Co. v. Aetna Cas. & Sur. Co., 612 F.2d 1076 (8th Cir., 1980). 10. Mark Womer and Brian Perry were members of the US Navy and were stationed in Newport, Rhode Island. On April 10, Womer allowed Perry to borrow his automobile so that Perry could visit his family in New Hampshire. Later that day, while operating Womer's vehicle, Perry was involved in an accident in Manchester, New Hampshire. As a result of the accident, Tzannetos Tavoularis was injured. Tavoularis brought this action against Womer in a New Hampshire superior court, contending that Womer was negligent in lending the automobile to Perry when he knew or should have known that Perry did not have a valid driver's license. Womer sought to dismiss the action on the ground that the New Hampshire courts lacked jurisdiction over him, citing the following facts: (a) he lived and worked in Georgia; (b) he had no relatives in New Hampshire; (c) he neither owned property nor possessed investments in New Hampshire; and (d) he had never conducted business in New Hampshire. Did the New Hampshire courts have jurisdiction? Explain. Answer: Personal Jurisdiction. Yes, judgment affirmed. The long-arm statute in New Hampshire provides that any person who “in person or through an agent . . . commits a tortious act within this state . . . submits himself . . . to the jurisdiction of the courts of this state as to any cause of action arising from or growing out of the [tortious] act . . .” Although Womer’s allegedly “tortious act”–lending the car to Perry–occurred in Rhode Island, and only the injury occurred in New Hampshire, this does not preclude the exercise of jurisdiction over Womer under the long-arm statute. The jurisdiction over Womer in this case accords with constitutional due process, which requires that a defendant have “minimum contacts” with a State such that the jurisdiction does not offend “traditional notions of fair play and substantial justice.” Womer should have anticipated being brought into court in NH. He authorized Perry to drive there, and it was reasonably foreseeable that Womer would be sued in NH for negligently entrusting his vehicle to Perry. Womer had sufficient contacts with New Hampshire for the constitutional exercise of jurisdiction by its courts. Tavoularis v. Womer, 462 A.2d 110 (N.H., 1983). 11. Kenneth Thomas brought suit against his former employer, Kidder, Peabody & Company, and two of its employees, Barclay Perry and James Johnston, in a dispute over commissions on sales of securities. When he applied to work at Kidder, Peabody & Company, Thomas had filled out a form, which contained an arbitration agreement clause. Thomas had also registered with the New York Stock Exchange (NYSE). Rule 347 of the NYSE provides that any controversy between a registered representative and a member company shall be settled by arbitration. Kidder, Peabody is a member of the NYSE. Thomas refused to arbitrate, relying on Section 229 of the California Labor Code which provides that actions for the collection of wages may be maintained “without regard to the existence of any private agreement to arbitrate.” Perry and Johnston filed a petition in a California State court to compel arbitration under Section 2 of the Federal Arbitration Act. Should the petition of Perry and Johnson be granted? Answer: Arbitration. Yes, the petition should be granted. Judgment for Perry and Johnston. When it passed the Federal Arbitration Act, Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims the contracting parties had agreed to resolve by arbitration. Enacted pursuant to the Commerce Clause of the U.S. Constitution, the Federal Arbitration Act is enforceable in both state and federal courts. This Act embodies a clear federal policy of requiring arbitration unless the agreement to arbitrate is not part of a contract evidencing interstate commerce, or is revocable upon such grounds as exist at law or in equity for the revocation of any contract. This clear federal policy places the Federal Arbitration Act in unmistakable conflict with California statute’s requirement that litigants be provided a judicial forum for resolving wage disputes. Therefore, under the supremacy clause of the U.S. Constitution, the state statute must give way to the federal law. 12. Steven Gwin bought a lifetime Termite Protection Plan for his home from the local office of Allied-Bruce, a franchise of Terminix International Company. The plan provided that Allied-Bruce would “protect” Gwin’s house against termite infestation, reinspect periodically, provide additional treatment if necessary, and repair damage caused by new termite infestations. Terminix International guaranteed the fulfillment of these contractual provisions. The plan also provided that all disputes arising out of the contract would be settled exclusively by arbitration. Four years later, Gwin had Allied-Bruce reinspect the house in anticipation of selling it. Allied-Bruce gave the house a “clean bill of health.” Gwin then sold the house and transferred the Termite Protection Plan to Dobson. Shortly thereafter, Dobson found the house to be infested with termites. Allied-Bruce attempted to treat and repair the house, using materials from out of state, but these efforts failed to satisfy Dobson. Dobson then sued Gwin, Allied-Bruce, and Terminix International in an Alabama state court. Allied-Bruce and Terminix International asked for a stay of these proceedings until arbitration could be carried out as stipulated in the contract. The trial court refused to grant the stay. The Alabama Supreme Court upheld that ruling, citing a state statute that makes predispute arbitration agreements unenforceable. The court found that the Federal Arbitration Act, which preempts conflicting state law, did not apply to this contract because its connection to interstate commerce was too slight. Was the Alabama Supreme Court correct? Explain. Answer: Arbitration. No, the Alabama Supreme Court was wrong in upholding the trial court’s refusal to grant a stay. The trial court should have granted the stay to allow arbitration to be carried out. The Federal Arbitration Act provides that written arbitration provisions in contracts for transactions involving commerce are generally enforceable. These transactions do not always have to directly involve interstate commerce, but merely affect interstate commerce. In addition, the statute applies where a transaction has in fact involved interstate commerce even though the parties did not contemplate interstate commerce when creating the contract. In this case, the parties do not contest that the transaction, in fact, involved interstate commerce. In addition to the multistate operations of Terminix and Allied-Bruce, the materials used by Allied-Bruce in its efforts to carry out the terms of the Plan came from outside Alabama. Therefore, the Federal Arbitration Act preempts Alabama’s anti-arbitration statute and requires enforcement of the contract’s arbitration provision. 13. Eddie Lee Howard and Shane D. Schneider worked for Nitro-Lift Technologies LLC. As a condition of employment, they entered into confidentiality and noncompetition agreements that contained a clause requiring any dispute between Nitro-Lift and its employees to be settled in arbitration. After working for Nitro-Lift on wells in Oklahoma, Texas, and Arkansas, the plaintiffs quit and began working for one of Nitro-Lift’s competitors. Claiming that the plaintiffs had breached their noncompetition agreements, Nitro-Lift served them with a demand for arbitration. The plaintiffs then filed suit in the District Court of Johnston County, Oklahoma, asking the court to declare the noncompetition agreements null and void and to enjoin their enforcement. The court dismissed the complaint, finding that the contracts contained valid arbitration clauses under which an arbitrator, and not the court, must settle the parties’ disagreement. On appeal the Oklahoma Supreme Court reversed, holding that despite the “[U.S.] Supreme Court cases on which the employers rely,” the “existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.” Finding that the arbitration clauses were no obstacle to its review, the Oklahoma Supreme Court held that the noncompetition agreements were “void and unenforceable as against Oklahoma’s public policy,” expressed in an Oklahoma statute. Did the Oklahoma Supreme Court err in preventing the arbitration of the noncompetition agreement? Answer: Arbitration. Yes. The judgment of the Supreme Court of Oklahoma is vacated, and the case is remanded. State courts rather than federal courts are most frequently called upon to apply the Federal Arbitration Act (FAA), [citation], including the Act's national policy favoring arbitration. It is a matter of great importance, therefore, that state supreme courts adhere to a correct interpretation of the legislation. *** The Oklahoma Supreme Court’s decision disregards this Court’s precedents on the FAA. That Act, which “declare[s] a national policy favoring arbitration,” [citation], provides that a “written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” [Citation.] It is well settled that “the substantive law the Act created [is] applicable in state and federal courts.” [Citations.] And when parties commit to arbitrate contractual disputes, it is a mainstay of the Act’s substantive law that attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved “by the arbitrator in the first instance, not by a federal or state court.” [Citations.] *** When parties commit to arbitrate contractual disputes, the FAA requires that attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved by the arbitrator in the first instance, not by a federal or state court. 14. Llexcyiss Omega and D. Dale York, both residents of Indiana, jointly listed a Porsche automobile for sale on eBay, a popular auction website. The listing stated that the vehicle was located in Indiana and that the winning bidder would be responsible for arranging and paying for delivery of the vehicle. The Attaways, residents of Idaho, entered a bid of $5,000 plus delivery costs. After being notified that they had won the auction, the Attaways submitted payment to Omega and York through PayPal (an online payment service owned by eBay), which charged the amount to the Attaways’ MasterCard account. The Attaways arranged for CarHop USA, a Washington-based auto transporter, to pick up the Porsche in Indiana and deliver it to their Idaho residence. After taking delivery of the Porsche, the Attaways filed a claim with PayPal, asking for a refund of its payment to Omega and York because the Porsche was “significantly not-as-described” in its eBay listing. PayPal informed the Attaways via email that their claim was denied. The Attaways convinced MasterCard to rescind the payment that had been made to Omega and York. Omega and York filed suit against the Attaways in small claims court in Indiana, demanding $5,900 in damages. Explain whether the Indiana courts have jurisdiction over the Attaways. Answer: Jurisdiction. Yes, the Indiana courts do have jurisdiction. The U.S. Supreme Court has established that a nonresident defendant must have “certain minimum contacts with [the forum state] such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.” The Court later clarified this test to mean that the nonresident defendant must engage in “some act by which [he] purposefully avails [himself] of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.” If the defendant's contacts with the forum state are sufficient, due process requires that the assertion of personal jurisdiction would comport with “fair play and substantial justice.” To make this determination, the court may consider five factors: (1) the burden on the defendant; (2) the forum state's interest in adjudicating the dispute; (3) the plaintiff's interest in obtaining convenient and effective relief; (4) the interstate judicial system's interest in obtaining the most efficient resolution of controversies; and (5) the shared interest of the several states in furthering fundamental substantive shared policies. 105 S.Ct. 2174. Here, the Indiana sellers, filed suit against the Idaho buyers, the Attaways, after the Attaways took delivery of the vehicle and then rescinded payment. The Attaways were able to see the sellers' location prior to making their bid on the Porsche. Presumably, a person considering placing a bid in an online auto auction would note the vehicle's location, particularly when, as here, the seller states that the buyer will be responsible for arranging and paying for delivery. Obviously, delivery fees could vary significantly, depending upon how far away the vehicle is from the buyer's home. By submitting a bid, the Attaways agreed to appear, in person or by representative, in Indiana to pick up the vehicle. After they won the Porsche, they hired an auto shipping company, based in Washington, to enter the state of Indiana as their representative, pick up the Porsche, and deliver it to them in Idaho. In sum, during the course of this transaction, there was more than just a single online purchase to satisfy the personal jurisdiction requirements of the federal due process clause. Therefore, the Attaways purposefully availed themselves of the privilege of conducting activities within the state of Indiana such that they could reasonably anticipate defending a lawsuit in Indiana related to this eBay purchase. As for whether the assertion of personal jurisdiction comports with fair play and substantial justice, it appears that the burden on the Attaways is no greater than the burden would be on Omega and York if they were forced to bring this case in Idaho. As for efficient resolution of the controversies, it is not evident that there would be greater travel expenses or inconvenience for more people if the case is tried in Indiana. In weighing the interests of the states, it is certainly within the bounds of fair play and substantial justice to allow Indiana to exercise personal jurisdiction over individuals who have entered into a contract with an Indiana resident for the purchase of property located in Indiana, have removed that property from the state of Indiana, and then rescinded payment. Attaway v. Omega, Indiana Court of Appeals, 903 N.E.2d 73 (2009). ANSWERS TO “TAKING SIDES” PROBLEMS John Connelly suffered personal injuries when a tire manufactured by Uniroyal failed while his 1969 Opel Kadett was being operated on a highway in Colorado. Connelly’s father had purchased the automobile from a Buick dealer in Evanston, Illinois. The tire bore the name “Uniroyal” and the legend “made in Belgium” and was manufactured by Uniroyal, sold in Belgium to General Motors, and subsequently installed on the Opel when it was assembled at a General Motors plant in Belgium. The automobile was shipped to the United States for distribution by General Motors. It appears that between the years 1968 and 1971 more than 4,000 Opels imported into the United States from Antwerp, Belgium, were delivered to dealers in Illinois each year; that in each of those years between 600 and 1,320 of the Opels delivered to Illinois dealers were equipped with tires manufactured by Uniroyal, and that the estimated number of Uniroyal tires mounted on Opels delivered in Illinois within each of those years ranged from 3,235 to 6,630. Connelly brought suit in Illinois against Uniroyal to recover damages for personal injuries. Uniroyal asserted that it was not subject to the jurisdiction of the Illinois courts because it is not registered to do business and has never had an agent, employee, representative, or salesperson in Illinois; that it has never possessed or controlled any land or maintained any office or telephone listing in Illinois; that it has never sold or shipped any products into Illinois, either directly or indirectly; and that it has never advertised in Illinois. a. What arguments could Connelly make in support of its claim that Illinois courts have jurisdiction over Uniroyal? b. What arguments could Uniroyal make in support of its claim that Illinois courts do not have jurisdiction over it? c. Who should prevail? Explain. Answer: a. Connelly could argue that Uniroyal was subject to the jurisdiction of the Illinois courts under that state’s long-arm statute because Uniroyal had transacted business in Illinois and that business is the subject matter of Connelly’s lawsuit. Connelly could also argue that this exercise of jurisdiction over Uniroyal does not offend traditional notions of fair play and substantial justice. b. Uniroyal could argue that Uniroyal was not subject to the jurisdiction of the Illinois courts under that state’s long-arm statute because Uniroyal had never transacted business in Illinois. Uniroyal could also argue that this exercise of jurisdiction over Uniroyal offends traditional notions of fair play and substantial justice because there is a total lack of contact between Uniroyal and the state of Illinois so that an assertion of jurisdiction by an Illinois court over Uniroyal would be contrary to substantial justice and would violate the rights of Uniroyal under the U.S. Constitution. c. The court in this case found for Connelly. Connelly v. Uniroyal, Inc., Illinois Supreme Court, 1979, 75 Ill.2d 393, 389 N.E. 2d 155, http://scholar.google.com/scholar_case? case=5833115262180270768&hl=en&as_sdt=2,34 Uniroyal argues that the requirements of due process are not satisfied unless a corporation has exercised the privilege of conducting activities within the state and thereby enjoyed the benefits and protections of the laws of that state and that there has been no action on its part by which it purposely availed itself of the privilege of conducting activities within Illinois and thereby invoked the benefits and protections of its laws. “The ‘quality and nature of the activity’ in which a foreign corporation must engage within a state in order to be subject to the jurisdiction of its courts has been the subject of much litigation. (See Annots., 19 A.L.R.3d 13 (1968), 24 A.L.R.3d 532 (1969).) The diametrically opposed and irreconcilable views on the question whether a manufacturer whose product has been distributed in a State by a third party is insulated from in personam jurisdiction under the due process clause of the fourteenth amendment in a product liability case because the sale and distribution of the product into the forum State was through an intermediary, rather than by the manufacturer, are well demonstrated by the majority and dissenting opinions [in numerous cases.]” “A manufacturer whose products pass through the hands of one or more middlemen before reaching their ultimate users cannot disclaim responsibility for the total distribution pattern of the products. If the manufacturer sells its products in circumstances such that it knows or should reasonably anticipate that they will ultimately be resold in a particular state, it should be held to have purposefully availed itself of the market for its products in that state. 71 Cal.2d 893, 902, 458 P.2d 57, 64, 80 Cal. Rptr. 113, 120.” “[Uniroyal’s] tires, introduced into the stream of commerce in obvious contemplation of their ultimate sale or use in other nations or States, came into Illinois on a regular basis and in substantial numbers, and we hold that its activities rendered it amenable to process under sections 13.3 and 16 of the Civil Practice Act. Given the nature and quality of its activities, we hold further that [Uniroyal] has purposefully invoked the benefits and protections of the law of Illinois, that as required by International Shoe and Shaffer there were present ‘such contacts of the corporation with the state of the forum as make it reasonable, in the context of our federal system of government, to require the corporation to defend the particular suit which is brought there’ (326 U.S. 310, 317, 90 L.Ed. 95, 102, 66 S.Ct. 154, 158; 433 U.S. 186, 203, 53 L.Ed.2d 683, 697, 97 S.Ct. 2569, 2580), and that requiring it to defend this action does not offend ‘traditional notions of fair play and substantial justice’ (326 U.S. 310, 316, 90 L.Ed. 95, 102, 66 S.Ct. 154, 158).” Chapter 4 CONSTITUTIONAL LAW ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. In May, Patricia Allen left her car on the shoulder of a road in the city of Erehwon after the car stopped running. A member of the Erehwon police dept. came upon the car later that day and placed on it a sticker which stated that unless the car was moved, it would be towed. After a week the car had not been removed, and the police department authorized Baldwin Auto Wrecking Co. to tow it away and store it on its property. Allen was told by a friend that her car was at Baldwin's. Allen asked Baldwin to allow her to take possession of her car, but Baldwin refused to relinquish the car until the $70 towing fee was paid. Allen could not afford to pay the fee and the car remained at Baldwin's for six weeks. At that time, Baldwin requested the police department for a permit to dispose of the automobile. After the police department tried unsuccessfully to telephone Allen, the department issued the permit. In late July, Baldwin destroyed the automobile. Allen brings an action against the city and Baldwin for damages for loss of the vehicle, arguing that she was denied due process. Decision? Answer: Due Process. Judgment for Allen. These facts raise the question of due process under the Fourteenth Amendment. As the Appellate Court of Illinois stated in Valdez v. City of Ottawa, 434 N.E. 2d 1192 (1982) upon which this problem is based: Due process is not an inflexible standard and does not require a trial-type hearing in every conceivable case of government impairment of private interest. Nonetheless, due process requires that, at a minimum, . . . deprivation of life, liberty or property by adjudication be preceded by notice and an opportunity for hearing appropriate to the nature of the case. The notice must be reasonably calculated to convey the necessary information and to afford the interested parties a reasonable time for a hearing. Those parties must be given notice and an opportunity before the deprivation takes place, unless there exists extraordinary circumstances requiring immediate action to protect a valid governmental interest. Furthermore, there is no question that ownership of an automobile and continued access to it is a property interest within the protection of the Fourteenth Amendment, and whether the deprivation will be permanent or temporary is immaterial. Towing a car without prior notice [subject to exceptions noted later] is a violation of due process rights. On these facts it seems clear that the auto posed no substantial danger to traffic when it was parked on the shoulder. This conclusion is supported by the fact that the police saw no need to disturb the car for at least one week. In the absence of an emergency the city violated Allen's constitutional rights when it seized, towed and refused to relinquish the auto before payment of a towing fee. Moreover, the city failed to provide Allen with proper notice before towing; under these facts, notice by certified or registered mail would have been appropriate. Even if pre-towing notice had not been required, due process demands prompt notice and an opportunity to a hearing before the government makes any disposition of the vehicle. Additionally, the owner must have an opportunity to contest the seizure and tow before she can be required to pay any charges or fees. See Stypmann v. City & County of San Francisco, 557 F. 2d 1338 (1977). Accordingly, the city and Baldwin violated Allen's right to due process when they destroyed her automobile without any notice. 2. In 1967, large oil reserves were discovered in the Prudhoe Bay area of Alaska. As a result, State revenues increased from $124 million in 1969 to $3.7 billion in 1981. In 1980, the State legislature enacted a dividend program that would distribute annually a portion of these earnings to the State's adult residents. Under the plan, each citizen eighteen years of age or older receives one unit for each year of residency subsequent to 1959, the year Alaska became a State. Crawford, a resident since 1978, brings suit challenging the dividend distribution plan as violative of the equal protection guarantee. Did the dividend program violate the Equal Protection Clause of the Fourteenth Amendment? Explain. Answer: Equal Protection. Decision for Crawford. When a state distributes benefits unequally, the distinctions it makes are subject to scrutiny under the Equal Protection Clause of the Fourteenth Amendment. Generally, a law will survive the scrutiny if the distinction it makes rationally furthers a legitimate state purpose. The state advanced three purposes justifying the distinctions made by the dividend program; (a) creation of a financial incentive for individuals to establish and maintain residence in Alaska; (b) encouragement of prudent management of the earnings; and (c) apportionment of benefits in recognition of undefined "contributions of various kinds, both tangible and intangible, which residents have made during their years of residency." The U.S. Supreme Court held that none of these purposes rationally furthered a legitimate state purpose. Zobel v. Williams, 457 U.S. 55 (1982). The court determined that the first two purposes were not rationally related to the distinctions the statute makes between newer residents and those who have been in the state since 1959. As the Court stated with repect to the first objective: “Newcomers seem more likely to become dissatisfied and to leave the State than well-established residents; it would thus seem that the State would give a larger, rather than a smaller, dividend to new residents if it wanted to discourage emigration. The separation of residents into classes hardly seems a likely way to persuade new Alaskans that the State welcomes them and wants them to stay.” The Court explained its rejection of the second objective: “Assuming, arguendo, that granting increased dividend benefits for each year of continued Alaska residence might give some residents an incentive to stay in the State in order to reap increased dividend benefits in the future, the State’s interest is not in any way served by granting greater dividends to persons for their residency during the 21 years prior to the enactment.” The last objective–to reward citizens for past contributions–was held not to be a legitimate state purpose. As the court stated: If the states can make the amount of a cash dividend depend on length of residence, what would preclude varying university tuition on a sliding scale based on years of residence–or even limiting access to finite public facilities, eligibility for student loans, for civil service jobs, or for government contracts by length of domicile? Could States impose different taxes based on length of residence? Alaska's reasoning could open the door to state apportionment of other rights, benefits and services according to length of residency. It would permit the states to divide citizens into expanding numbers of permanent classes. Such a result would be clearly impossible. 3. Maryland enacted a statute prohibiting any producer or refiner of petroleum products from operating retail service stations within the State. The statute also required that any producer or refiner discontinue operating its company-owned retail service stations. Approximately 3,800 retail service stations in Maryland sell more than twenty different brands of gasoline. All of this gasoline is brought in from other states, as no petroleum products are produced or refined in Maryland. Only 5 percent of the total number of retailers are operated by a producer or refiner. Maryland enacted the statute because a survey conducted by the State comptroller indicated that gasoline stations operated by producers or refiners had received preferential treatment during periods of gasoline shortage. Seven major producers and refiners bring an action challenging the statute on the ground that it discriminated against interstate commerce in violation of the Commerce Clause of the United States Constitution. Are they correct? Explain. Answer: State Regulation of Commerce. No they are not correct. The Maryland statute is constitutional. In Exxon Corp. v. Governor of Maryland, 437 U.S. 117 (1978) the U.S. Supreme Court stated: Plainly, the Maryland statute does not discriminate against interstate goods, nor does it favor local producers and refiners. Since Maryland's entire gasoline supply flows in interstate commerce and since there are no local producers or refiners, such claims of disparate treatment between interstate and local commerce would be without merit. Appellants, however, focus on the retail market, arguing that the effect of the statute is to protect in-state independent dealers from out-of-state competition. They contend that the divestiture provisions "create a protected enclave for Maryland independent dealers. . ." As support for this proposition, they rely on the fact that the burden of the divestiture requirements falls solely on interstate companies. But this fact does not lead, either logically or practically, to a conclusion that the state is discriminating against retail interstate commerce. As the record shows, there are several major interstate marketers of petroleum that own and operate their own retail gasoline stations. These interstate dealers, who compete directly with the Maryland independent dealers, are not affected by the Act because they do not refine or produce gasoline. In fact, the Act creates no barriers whatsoever against interstate independent dealers; it does not prohibit the flow of interstate goods, place added costs upon them, or distinguish between in-state and out-of-state companies in the retail market. The absence of any of these factors fully distinguishes this case from those in which the state is found to have discriminated against interstate commerce. The fact that the burden of a state regulation falls on some interstate companies does not, by itself, establish a claim of discrimination against interstate commerce. 4. The Federal Aviation Act of 1958 provides that “The United States of America is declared to possess and exercise complete and exclusive national sovereignty in the airspace of the United States.” The city of Orion adopted an ordinance that makes it unlawful for jet aircraft to take off from its airport between 11:00 P.M. of one day and 7:00 A.M. of the next day. Jordan Airlines, Inc., is adversely affected by this ordinance and brings suit challenging it under the Supremacy Clause of the United States Constitution as conflicting with the Federal Aviation Act or preempted by it. Is the ordinance valid? Explain. Answer: Federal Supremacy and Preemption. No. Decision for Jordan Airlines. The Federal Aviation Act (FAA) of 1958, as amended by the Noise Control Act of 1972, preempts the field. Any control of noise pollution must be consistent with the "highest degree of safety." The FAA requires a delicate balance between safety and efficiency, and the protection of the persons on the ground. The interdependence of these factors requires a uniform and exclusive system of federal regulation if the congressional objectives underlying the Federal Aviation Act are to be fulfilled. As the U.S. Supreme Court stated in City of Burbank v. Lockheed Air Terminal, Inc., 411 U.S. 624 (1973) upon which this problem is based: If we were to uphold the Burbank ordinance and a significant number of municipalities followed suit, it is obvious that fractionalized control of the timing of takeoffs and landings would severely limit the flexibility of the FAA in controlling air traffic flow. The difficulties of scheduling flights to avoid congestion and the concomitant decrease in safety would be compounded. Moreover, as the court had stated in the earlier decision of Northwest Airlines, Inc. v. Minnesota: Federal control is intensive and exclusive. Planes do not wander about in the sky like vagrant clouds. They move only by federal permission, subject to federal inspection, in the hands of federally certified personnel and under an intricate system of federal commands. The moment a ship taxis onto a runway it is caught up in an elaborate and detailed system of controls. Thus, the pervasive nature of the scheme of federal regulations of aircraft noise demonstrates that federal law has preempted the field. 5. The Public Service Commission of State X issued a regulation completely banning all advertising that “promotes the use of electricity” by any electric utility company in State X. The commission issued the regulation to conserve energy. Central Electric Corporation of State X challenges the order in the State courts, arguing that the commission has restrained commercial speech in violation of the First Amendment. Was their freedom of speech unconstitutionally infringed? Explain. Answer: Commercial Speech. Yes, Central Electric’s freedom of speech was infringed. Decision for Central Electric Corporation. This problem is based upon Central Hudson Gas and Electric Corporation v. Public Service Commission, 447 U.S. 557 (1980) in which the Court concisely stated the test for commercial speech cases: In commercial speech cases, then, a four-part analysis has developed. At the outset, we must determine whether the expression is protected by the First Amendment. For commercial speech to come within that provision, it at least must concern lawful activity and not be misleading. Next, we ask whether the asserted governmental interest is substantial. If both inquiries yield positive answers, we must determine whether the regulation directly advances the governmental interest asserted, and whether it is not more extensive than is necessary to serve that interest. On these facts the court found the promotional advertising to be commercial speech even though the electric utility had a monopoly in electricity since it nonetheless competed with fuel oil and natural gas. It was conceded by the Commission that the advertising was neither inaccurate nor relating to unlawful activities. The Court agreed that the governmental interest of conservation was substantial and found that this interest was directly advanced by the prohibition upon advertising. However, the court concluded that the regulation was more extensive than was necessary in that it reached all promotional advertising, regardless of its impact upon overall energy use: The commission also has not demonstrated that its interest in conservation cannot be protected adequately by more limited regulation of appellant's commercial expression. To further its policy of conservation, the Commission could attempt to restrict the format and content of Central Hudson's advertising. It might, for example, require that the advertisements include information about the relative efficiency and expense of the offered service, both under current conditions and for the foreseeable future. In the absence of a showing that more limited speech regulation would be ineffective, we cannot approve the complete suppression of Central Hudson's advertising. 6. E—Z—Rest Motel is a motel with 216 rooms located in the center of a large city in State Y. It is readily accessible from two interstate highways and three major State highways. The motel solicits patronage from outside of State Y through various national advertising media, including magazines of national circulation. It accepts convention trade from outside State Y, and approximately 75 percent of its registered guests are from out of State Y. An action under the Federal Civil Rights Act has been brought against E—Z—Rest Motel alleging that the motel discriminates on the basis of race and color. The motel contends that the statute cannot be applied to it because it is not engaged in interstate commerce. Can the Federal government regulate this activity under the Interstate Commerce Clause? Why? Answer: Federal Commerce Power. Yes, the Federal government can regulate this activity. Decision against the E-Z Rest Motel. This problem is based upon Heart of Atlanta Motel v. United States, 379 U.S. 241 (1964) in which the court discussed the legislative history of the Civil Rights Act of 1964: While the Act as adopted carried no congressional findings the record of its passage through each house is replete with evidence of the burdens that discrimination by race or color places upon interstate commerce . . . This testimony included the fact that our people have become increasingly mobile with millions of people of all races traveling from state to state; that Negroes in particular have been the subject of discrimination in transient accommodations, having to travel great distances to secure the same; that often they have been unable to obtain accommodations and have had to call upon friends to put them up overnight, . . . and that these conditions had become so acute as to require the listing of available lodging for Negroes in a special guidebook which was itself "dramatic testimony to the difficulties" Negroes encounter in travel, . . . This testimony indicated a qualitative as well as quantitative effect on interstate travel by Negroes. The former was the obvious impairment of the Negro traveler's pleasure and convenience that resulted when he continually was uncertain of finding lodging. As for the latter, there was evidence that this uncertainty stemming from racial discrimination had the effect of discouraging travel on the part of a substantial portion of the Negro community . . . The court relied upon these facts and the motel's operation to hold that the motel is subject to Congress because 'if it is interstate commerce that feels the pinch, it does not matter how local the operation which applies the squeeze' . . . Thus the power of Congress to promote interstate commerce also includes the power to regulate the local incidents thereof, including local activities in both the states of origin and destination, which might have a substantial and harmful effect upon that commerce. One need only examine the evidence which we have discussed above to see that Congress may–as it has–prohibit racial discrimination by motels serving travelers, however 'local' their operations may appear . . ." Congress may act under the Commerce Clause when the activity sought to be regulated is "commerce which concerns more states than one" and has a real and substantial relation to the national interest. 7. State Z enacted a Private Pension Benefits Protection Act requiring private employers with 100 or more employees to pay a pension funding charge upon terminating a pension plan or closing an office in State Z. Acme Steel Company closed its offices in State Z, whereupon the State assessed the company $185,000 under the vesting provisions of the act. Acme challenged the constitutionality of the Act under the Contract Clause (Article I, Section 10) of the U.S. Constitution. Was the act constitutional? Explain. Answer: Contract Clause. Decision for Acme. The statute is unconstitutional under the Contract Clause. As the U.S. Supreme Court stated in Allied Structural Steel Company v. Spannus, 438 U.S. 234 (1978) upon which this problem is based: Entering a field it had never before sought to regulate, the State Z Legislature grossly distorted the company's existing contractual relationships with its employees by superimposing retroactive obligations upon the company substantially beyond the terms of its employment contracts. And that burden was imposed upon the company only because it closed its office in the state. This State Z law simply does not possess the attributes of those state laws that in the past have survived challenge under the Contract Clause of the Constitution. The law was not even purportedly enacted to deal with a broad, generalized economic or social problem. It did not operate in an area already subject to state regulation at the time the company's contractual obligations were originally undertaken, but invaded an area never before subject to regulation by the state. It did not effect simply a temporary alteration of the contractual relationships of those within its coverage, but worked a severe, permanent, and immediate change in those relationships–irrevocably and retroactively. And its narrow aim was leveled not at every State Z employer, not even at every State Z employer who left the state, but only at those who had in the past been sufficiently enlightened as voluntarily to agree to establish pension plans for their employees. 8. A State statute empowered public school principals to suspend students for up to ten days without any notice or hearing. A student who was suspended for ten days challenges the constitutionality of his suspension on the grounds that he was denied due process. Was due process denied? Explain Answer: Due Process. Yes, due process was denied. Decision for the student. The plaintiff student's denial of an evidentiary hearing violated the Due Process Clause of the Fourteenth Amendment according the U.S. Supreme Court decision in Goss. v. Lopez, 419 U.S. 565 (1975). At the very minimum students facing suspension and the consequent interference with a protected property interest must be given some kind of notice and afforded some kind of hearing. The Due Process Clause does not require that students be afforded the opportunity to secure counsel, to confront and cross-examine witnesses supporting the charge, or to call his own witnesses to verify his version of the incident. It does, however, require that the student be given notice and an informal hearing permitting him to give his version of the events. Longer suspensions and expulsions may require more formality, and procedural due process laws within each state cover this process. 9. Iowa enacted a statute prohibiting the use of sixty-five-foot double trailer truck combinations. All of the other midwestern and western states permit such trucks to be used on their roads. Despite these restrictions, Iowa’s statute permits cities abutting the state line to enact local ordinances adopting the length limitations of the adjoining state. In cases in which a city has exercised this option, otherwise oversized trucks are permitted within the city limits and in nearby commercial zones. Consolidated Freightways is adversely affected by this statute and brings suit against Iowa, alleging that the statute violates the Commerce Clause. The District Court found that the evidence established that sixty-five -foot doubles were as safe as the shorter truck units. Does the statute violate the Commerce Clause? Explain. Answer: Commerce Clause. Yes. Decision for Consolidated Freightways. The U.S. Supreme Court said in Kassel v. Consolidated Freightways Corporation, 450 U.S. 662 (1981) that because Iowa imposed this burden without any significant countervailing safety interest, its statute violated the Commerce Clause. The court said that the statute seemed to have been designed not to ban dangerous trucks, because it included a "border cities exemption," but rather to discourage interstate truck traffic. A state cannot constitutionally promote its own parochial interest by requiring vehicles which have no known safety hazards to detour around it. Note, however, that this was a plurality decision by Justice Powell and three other justices. There were two other justices who had a concurring opinion and there were three justices who dissented. This provides subsequent litigants with arguments upon which to present their case. 10. Metropolitan Edison Company is a privately owned and operated Pennsylvania corporation subject to extensive regulation by the Pennsylvania Public Utility Commission. Under a provision of its general tariff filed with the commission, Edison had the right to discontinue electric service to any customer on reasonable notice of nonpayment of bills. Catherine Jackson had been receiving electricity from Metropolitan Edison when her account was terminated because of her delinquency in payments. Edison later opened a new account for her residence in the name of James Dodson, another occupant of Jackson's residence. In August of the following year, Dodson moved away and no further payments were made to the account. Finally, in October, Edison disconnected Jackson's service without any prior notice. Jackson brought suit claiming that her electric service could not be terminated without notice and a hearing. She further argued that such action, allowed by a provision of Edison's tariff filed with the commission, constituted “state action” depriving her of property in violation of the Fourteenth Amendment's guarantee of due process of law. Should Edison’s actions be considered state action? Explain. Answer: Due Process. No, it is not state action. Decision for Metropolitan Edison Company. In Jackson v. Metropolitan Edison Co., 419 U.S. 345 (1974) the U.S. Supreme Court stated that deprivations of property without due process by the state are prohibited by the Fourteenth Amendment, but private actions depriving individuals of property are immune from the due process requirement. The termination of Jackson's service by Edison was a private action, immune from the Fourteenth Amendment's due process requirement. Even though Edison is closely regulated by the commission and enjoys at least a partial monopoly, it is still a privately owned utility. Jackson's service was terminated in a manner the commission found permissible under state law. 11. Miss Horowitz was admitted as an advanced medical student at the University of Missouri-Kansas City. During her first year, several faculty members expressed dissatisfaction with Miss Horowitz's clinical performance, noting that it was below that of her peers, that she was erratic in attendance at her clinical sessions, and that she lacked a critical concern for personal hygiene. Upon the recommendation of the school's Council on Evaluation, she was advanced to her second and final year on a probationary basis. After subsequent unfavorable reviews during her second year and a negative evaluation of her performance by seven practicing physicians, the council recommended that Miss Horowitz be dismissed from the school for her failure to meet academic standards. The decision was approved by the dean and later affirmed by the provost after an appeal by Miss Horowitz. She brought suit against the school's Board of Curators, claiming that her dismissal violated her right to procedural due process under the Fourteenth Amendment and deprived her of “liberty” by substantially impairing her opportunities to continue her medical education or to return to employment in a medically related field. The trial court found for the defendant, but the appellate court reversed. The Board of Curators appealed. Is her claim correct? Explain? Answer: Procedural Due Process. No. Judgment for the Board of Curators. Oral or written notice and an opportunity for the student to present her side of the story at a "hearing" is only required for dismissals or suspensions based on disciplinary grounds. In contrast, a dismissal on academic ground demands a less stringent procedure–merely an "informal give and take" between the student and administrative body which provides the student "the opportunity to characterize his conduct and put it in what he deems the proper context.” (Quotes from the Supreme Court opinion.) Since the Council dismissed Miss Horowitz for failure to meet the school's academic standards, and not for disciplinary reasons, a hearing was not required. In this case the faculty fully informed Miss Horowitz of her unsatisfactory performance ratings and the dangers they posed to her timely graduation and continued enrollment. Furthermore, the Council went beyond the constitutionally required procedural due process by affording her the opportunity to be examined by independent physicians before reaching a final decision. Because the Council more than satisfied the constitutional requirement of procedural due process, its decision is upheld. Board of Curators of the University of Missouri v. Horowitz. 12. The McClungs own Ollie’s Barbecue, a restaurant located a few blocks from the interstate highway in Birmingham, Alabama, with dining accommodations for whites only and a take-out service for blacks. In the year preceding the passage of the Civil Rights Act of 1964, the restaurant had purchased a substantial portion of the food it served from outside the state. The restaurant has refused to serve blacks since its original opening in 1927 and asserts that if it were required to serve blacks it would lose much of its business. The McClungs sought a declaratory judgment to render unconstitutional the application of the Civil Rights Act to their restaurant because their admitted racial discrimination did not restrict or significantly impede interstate commerce. Decision? Answer: Commerce Clause. The Commerce Clause of the Constitution empowers Congress to regulate interstate commerce and to make all laws necessary and proper for that purpose. Even if a business’s activity is local it may be reached by Congress if the activity directly or indirectly burdens or obstructs interstate commerce. Title II of the Civil Rights Act passed by Congress in 1964 prohibits racial discrimination in a restaurant if it serves or offers to serve interstate travelers or if a substantial portion of the food it serves has moved in interstate commerce. Testimony introduced during the Congressional hearings on the act revealed that racial discrimination by restaurants, especially in the South, has resulted in the sale of fewer interstate goods, obstructed interstate travel by blacks, deterred new businesses from being established there, and caused business in general to suffer. Consequently, there is a connection between discrimination by restaurants and the movement of interstate commerce. Ollie’s Barbecue purchases through interstate commerce a substantial portion of the food it serves, thereby at least indirectly burdening interstate commerce. Not only would the application of the Civil Rights Act to the McClungs’ restaurant not violate any express constitutional limitations, it would also remain within the limits of the Commerce Clause. Therefore, as applied to restaurants like the McClungs’, the act is constitutionally valid. Katzenbach v. McClung, 379 U.S.294 (1964). 13. Drug compounding is a process by which a pharmacist or doctor combines, mixes, or alters ingredients to create a medication tailored to the needs of an individual patient. Compounding is typically used to prepare medications that are not commercially available, such as medication for a patient who is allergic to an ingredient in a mass-produced product. The Federal Food, Drug, and Cosmetic Act of 1938 (FDCA) regulates drug manufacturing, marketing, and distribution, providing that no person may sell any new drug unless approved by the Food and Drug Administration (FDA). The Food and Drug Administration Modernization Act of 1997 (FDAMA), which amends the FDCA, exempts compounded drugs from the FDCA’s requirements provided the drugs satisfy a number of restrictions, including that the prescription must be “unsolicited,” and the provider compounding the drug may “not advertise or promote the compounding of any particular drug, class of drug, or type of drug.” The provider, however, may “advertise and promote the compounding service.” A group of licensed pharmacies that specialize in drug compounding challenged the FDAMA’s requirement that they refrain from advertising and promoting their products if they wish to continue compounding on the basis that it violates the Free Speech Clause of the First Amendment. What test should the court apply in determining the validity of the FDAMA. Answer: First Amendment. The restricted speech is commercial speech. Central Hudson articulated a test for determining whether a particular commercial speech regulation is constitutionally permissible. Under that test a threshold matter is whether the commercial speech concerns unlawful activity or is misleading. If so, then the speech is not protected by the First Amendment. If the speech concerns lawful activity and is not misleading, however, the next question is “whether the asserted governmental interest is substantial.” If it is, then the courts “determine whether the regulation directly advances the governmental interest asserted,” and, finally, “whether it is not more extensive than is necessary to serve that interest.” Each of these latter three inquiries must be answered in the affirmative for the regulation to be found constitutional. In this case the U.S. Supreme Court found that the government restriction on nonmisleading commercial speech concerning lawful activity was invalid under the First Amendment because the regulation was more extensive than necessary to directly advance a substantial government interest. Thompson v. Western States Medical Center, Supreme Court of the United States, 2002, 535. 14. A Massachusetts statute established differential methods by which wineries may distribute wines in Massachusetts. The statute allows only “small” wineries, defined as those producing 30,000 gallons or less of grape wine a year, to obtain a “small winery shipping license.” This license allows them to sell their wines in Massachusetts in three ways: through shipments made directly to consumers, through wholesaler distribution, and through retail distribution. All of Massachusetts's wineries are “small” wineries. Some out-of-state wineries also meet this definition. Wines from “small” Massachusetts wineries compete with wines from “large” wineries, which Massachusetts has defined as those producing more than 30,000 gallons of grape wine annually. These “large” wineries must choose between relying upon wholesalers to distribute their wines in-state or applying for a “large winery shipping license” to sell directly to Massachusetts consumers. They cannot, by law, use both methods to sell their wines in Massachusetts, and they cannot sell wines directly to retailers under either option. Plaintiffs, a group of California winemakers and Massachusetts residents, assert that the statute was designed with the purpose, and has the effect, of advantaging Massachusetts wineries to the detriment of those wineries that produce 98 percent of the country’s wine, in violation of the Commerce Clause. Decision? Answer: State Regulation of Commerce. The statute violates the Commerce Clause. Family Winemakers of California v. Jenkins, 592 F.3d 1 (1st Cir. 2010). The Commerce Clause vests Congress with the authority to “regulate Commerce ... among the several States.” U.S. Const. art. I, § 8, cl. 3. This grant of exclusive federal power carries an implicit consequence for states' powers. When states regulate commerce within their own borders, they cannot enact laws that discriminate against out-of-state economic interests in favor of in-state competitors absent congressional authorization or some other source of constitutional authority. Or. Waste Sys., Inc. v. Dep't of Envtl. Quality, 511 U.S. 93, 98, 114 S.Ct. 1345, 128 L.Ed.2d 13 (1994). This aspect of the Commerce Clause is commonly referred to as the “dormant commerce clause” because its limitations upon states are not stated in the text. But § 19F [of the statute] is neutral on its face; it does not, by its terms, allow only Massachusetts wineries to distribute their wines through a combination of direct shipping, wholesaler distribution, and retail sales. Section 19F instead uses a very particular gallonage cap to confer this benefit upon “small” as opposed to “large” wineries. We hold that § 19F violates the Commerce Clause because the effect of its particular gallonage cap is to change the competitive balance between in-state and out-of-state wineries in a way that benefits Massachusetts's wineries and significantly burdens out-of-state competitors. Massachusetts has used its 30,000 gallon grape wine cap to expand the distribution options available to “small” wineries, including all Massachusetts wineries, but not to similarly situated “large” wineries, all of which are outside Massachusetts. The advantages afforded to “small” wineries by these expanded distribution options bear little relation to the market challenges caused by the relative sizes of the wineries. Section 19F's statutory context, legislative history, and other factors also yield the unavoidable conclusion that this discrimination was purposeful. Nor does § 19F serve any legitimate local purpose that cannot be furthered by a non-discriminatory alternative. 15. American Express Travel Related Services (“Amex”) sells Amex Travelers Cheques (“TCs”), which are preprinted checks for specified amounts with a unique serial number and no expiration date. Amex is able to sell TCs for their face value because Amex’s contract with TC owners gives Amex the right to retain, use, and invest funds from the sale of TCs until the date the TCs are cashed. All States have unclaimed property laws requiring abandoned property to be turned over to the State while the original property owner still maintains the right to the property. The purpose of unclaimed property laws is to provide for the safekeeping of abandoned property and then to allow the rightful owner to claim the abandoned property. As these laws are applied to TCs, Amex sends the funds held as TCs to the State as unclaimed property with the serial number, amount, and date of sale since the name of TC owner is not known. When one of these TCs is cashed, Amex seeks to reclaim those funds from that State. In New Jersey, the Treasurer returns the funds with interest. Until recently, all States had a fifteen-year abandonment period for travelers checks. In 2010, New Jersey passed Chapter 25, shortening the abandonment period for travelers checks to three years. Amex challenges the constitutionality of the amendment. Explain whether the amendment violates any of the following provisions of the U.S Constitution: (a) Due Process Clause, (b) Contract Clause, (c) Takings Clause, and (d) Commerce Clause. Answer: Due Process Clause/Contract Clause/Takings Clause/Commerce Clause. Amex failed to show a likelihood of success on the merits of its Due Process Clause, Contract Clause, Takings Clause, and Commerce Clause claims. American Exp. Travel Related Services, Inc. v. Sidamon-Eristoff, 669 F.3d 359 (3rd Cir. 2012); certiorari denied, ___ U.S. ____, 133 S.Ct. 345, 184 L.Ed.2d 157. (a) Amex failed to show a likelihood of success on the merits of its Due Process Clause claim. The amendment served legitimate state interest, as required to withstand challenge on substantive due process grounds. Amex argues that the sole purpose behind enacting Chapter 25 was to raise revenue for the State, which is not a legitimate state interest. But the State has offered several legitimate interests that justify shortening the abandonment period for travelers checks from fifteen years to three years.. (b) Amex failed to establish likelihood of success on the merits of its Contract Clause claim. To ascertain whether there has been a Contract Clause violation, a court must first inquire whether the change in State law has “operated as a substantial impairment of a contractual relationship.” If this threshold inquiry is met, the court must then determine “whether the law at issue has a legitimate and important public purpose.” If so, the court must ascertain “whether the adjustment of the rights of the parties to the contractual relationship was reasonable and appropriate in light of that purpose.” Amex fails to show that Chapter 25 imposes a substantial impairment on Amex's contractual relationships with TC owners. (c) Amex failed to establish reasonable probability of success on the merits of its takings claim. The Takings Clause of the Fifth Amendment prohibits the federal government from taking private property for public use without providing just compensation. When a state directly appropriates private property, it is considered a per se taking, and the state has a duty to compensate the owner. Where, as here, a party asserts a regulatory taking, there is no set formula. Rather, courts must engage in a factual inquiry to determine whether a taking has been effected. (d) Amex did not show reasonable probability of success on the merits of its dormant Commerce Clause claim. Under the Commerce Clause, Congress has the power to “regulate Commerce ... among the several States.” U.S. Const. Art. I, § 8, cl. 3. “This clause also has an implied requirement (often called the ‘negative’ or ‘dormant’ aspect of the clause) that the states not ‘mandate differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.’ ” Our inquiry as to whether a state law violates the dormant Commerce Clause is twofold: first, we determine whether heightened scrutiny applies, and, if not, then we determine whether the law is invalid. We apply heightened scrutiny when a law “discriminates against interstate commerce” in purpose or effect. Amex contends that Chapter 25, if implemented, will violate the dormant Commerce Clause because its effects will be projected into other states. Specifically, Amex claims that it will be forced to choose between: (a) selling TCs in New Jersey at a marginal profit or at a loss; (b) not selling TCs in New Jersey; (c) charging a fee for selling TCs in New Jersey; or (d) charging a fee to sell TCs throughout the country so that it can maintain uniform conditions. If it chooses to charge a fee to sell TCs throughout the country, Amex argues, then Chapter 25 will have dictated commercial activity in other states. Unlike these statutes, Chapter 25 does not directly regulate travelers checks sold in other states or force Amex to conform its out-of-state practices to less favorable in-state conditions. Nothing prevents other states from regulating travelers checks differently from the way New Jersey has chosen to do in Chapter 25. And by Amex's own admission, the costs of compliance could be passed on to New Jersey travelers check customers or be absorbed by issuers like Amex. Therefore, Amex failed to show a reasonable probability of success on the merits of its Commerce Clause claim. ANSWERS TO “TAKING SIDES” PROBLEMS Alabama was one of only sixteen states that permitted commercial hazardous waste landfills. From 1985 through 1989, the tonnage of hazardous waste received per year more than doubled. Of this, up to 90 percent of the hazardous waste was shipped in from other states. In response, Alabama imposed a hazardous waste disposal fee of $72 per ton on hazardous waste generated outside the state and disposed of at a commercial facility in Alabama. The fee does not apply to such waste having a source in Alabama. (This law imposes a fee of $97.60 per ton for hazardous waste generated outside Alabama compared with a fee of $25.60 per ton for hazardous wastes generated within Alabama.) Chemical Waste Management, Inc., which operates a commercial hazardous waste land disposal facility in Emelle, Alabama, filed suit asserting that the Alabama law violated the Commerce Clause of the U.S. Constitution. a. What arguments could Chemical Waste Management, Inc. make in support of its claim that the statute is unconstitutional? b. What arguments could Alabama make to defend the constitutionality of the statute? c. Who should prevail? Explain. Answer: a. Chemical Waste Management, Inc. could argue that the Alabama statute imposes an unfair burden on interstate commerce that is excessive compared to the local benefit and that there are non-discriminatory alternatives available. It also could contend that Alabama’s tax interfered with interstate commerce. b. Alabama could argue that the additional fee of $72.00 served a legitimate local purpose related to its citizens’ health and safety that could not be adequately served by reasonable non-discriminatory alternatives, given recent large increases in the hazardous waste received into the state and the possible adverse effects of such waste. Alabama also could contend that it is bearing the health risk that other states refused to accept. c. The additional fee is in violation of the U.S. Constitution. Chemical Waste Management, Inc. v. Hunt, U. S. Supreme Court 1992, 504 U.S. 334. No state may attempt to isolate itself from a problem common to the several states by raising barriers to the free flow of interstate trade. Ultimately, the state’s concern focuses on the volume of the waste entering the Emelle facility. Less discriminatory alternatives, however, are available to alleviate this concern, not the least of which are a generally applicable per-ton additional fee on all hazardous waste disposed of within Alabama, or a per-mile tax on all vehicles transporting hazardous waste across Alabama roads, or an evenhanded cap on the total tonnage landfilled at Emelle, which would curtail volume from all sources. Solution Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637