This Document Contains Chapters 22 to 23 Chapter 22: Consumer Protection Law OVERVIEW This chapter covers laws that are primarily designed to protect consumers. Coverage begins with federal and state statutory protections of consumers which regulate advertising, financial institutions, and telemarketing. The chapter also devotes significant attention to product warranties that are derived from Article 2 of the UCC. The final section discusses the regulation of credit transactions and debt collection. KEY LEARNING OUTCOMES Outcome Accreditation category Articulate the standards used to define false advertising and other deceptive practices and identify specific consumer protection laws applied to bulk e-mail. Knowledge Explain the role of the Federal Trade Commission in terms of various statutory consumer protections. Knowledge Identify the parties in a credit transaction and understand the role of federal statutory laws in consumer credit transactions including the Truth-In-Lending Act, and give specific examples of regulatory requirements Knowledge, Analysis Explain the protections afforded to consumers by federal statutes regulating the collection of consumer debt and give examples of illegal practices. Knowledge, Analysis Define and give an example of the differences between express warranties and implied warranties, and apply the standards for disclaiming a warranty. Knowledge, Analysis, Critical thinking TEACHING OUTLINE A. Unfair or Deceptive Sales Practices [P.601] Points to emphasize: • The Federal Trade Commission (FTC) is charged with preventing unfair and deceptive acts or practices in commercial transactions; the FTC has wide-ranging authority over advertising, price disclosures, and representations made during the sales of consumer goods. • Advertising: FTC regulations provide several specific examples of prohibited deceptive advertising such as making expressly false statements in advertising about a product’s quality, ingredients, or effectiveness. o Bait and Switch: Bait and switch schemes involve a seller advertising an item for sale, but in reality the seller has no intention to actually sell that product at the price or on those terms; rather, when the consumer comes to their business after seeing the advertisement, the seller discourages the purchase of the advertised item and instead tries to convince the buyer to purchase a different item for a higher price or on less favorable terms. o Pricing: Pricing is also subject to consumer protection regulations, including a ban on misrepresentation of the prices of a competitor, artificially inflating the original retail price of a product when featuring it as a sale item, and using terms such as “clearance period” or “marked down for sale” when the items are not being sold at reduced prices. • Financial Institutions: In addition to the FTC, the Office of the Comptroller of the Currency (OCC) also pursues violations of the Federal Trade Commission Act (FTCA) if the deceptive advertising involves a financial institution. • Telemarketing: The Telephone Consumer Protection Act and the Telemarketing and Consumer Fraud and Abuse Prevention Act prescribe how and when a telemarketer may obtain permission to obtain payment from the consumer and prohibit any harassment, threats, or deceit by the telemarketer. o Do Not Call List: The FTC established a “do not call” registry in which consumers sign up to be on a list that protects them from certain unsolicited calls by telemarketers. • Odometers: The Federal Odometer Act makes it a crime to change vehicle odometers and requires that any faulty odometer be plainly disclosed in writing to potential buyers. • State Statutes: In addition to federal statutes, each state has adopted consumer protections by enacting state laws aimed at preventing unfair or deceptive trade practices within state borders and many states have created specific task forces to police merchants’ and other sellers’ compliance with consumer protection statutes where the transaction takes place primarily within its state borders. o Federal agencies and state authorities are thought of as having concurrent jurisdiction and state statutory protections often fill gaps in federal protections. Legal Implications in Cyberspace: Regulation of Online Advertising [P.605] • The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (CAN-SPAM Act) regulates the sending of unsolicited e-mail (spam) by prohibiting certain online marketing practices, including falsifying the “from” name and information in the subject line and mandating that senders provide a physical address of the producer of the e-mail. • The CAN-SPAM Act allows e-mail recipients the right to bring a lawsuit directly against the spammer as a compliance mechanism in egregious cases and when the plaintiff can prove that the spam produced actual damages. Concept Summary: Unfair and Deceptive Trade Practices [P.606] Case 22.1 Vagias v. Woodmont Properties, 894 A.2d 68 (N.J. Super. Ct. 2006) [P.604] Facts: Vagias hired Dingle as his realtor and told her he was in the market to buy a house in Montville Township, N.J. because of the favorable reputation of the township’s schools. Dingle showed Vagias a house in a development called “Woodmont Court at Montville,” and when Vagias inquired as to whether this house was located within the jurisdictional limits of Montville Township, both Dingle and the representative of the builder (neither of whom were familiar with the township boundaries) assured Vagias that the house was. Vagias purchased the house and later sued to have the sale rescinded on the basis of misrepresentation concerning location when he attempted to enroll his son in the school system and learned his house was actually located outside of Montville Township limits. Issue: Can Vagias have the sale rescinded even though the misrepresentation by the realtor and the builder was not intentional? Ruling: Yes. Under the New Jersey Consumer Fraud Act, Dingle’s misrepresentation need not be an intentional misrepresentation. Dingle and the builder knew of Vagias’s concerns and made an affirmative misrepresentation, which is sufficient to prevail in a New Jersey Consumer Fraud Act case. Answers to case questions: 1. Had Dingle not known that Vagias was specifically looking for a home in Montville Township, yet had still made her statements, would the outcome of the case have been different? Why or why not? Explain your answer. Answer: Had Dingle not know that Vagias was specifically looking for a home in Montville Township, yet still made her statements, the outcome of the case very well may have been different. Vagias’s specification that the location in Montville Township was a prerequisite to purchasing a house made that location a part of the basis of the bargain. If she made no such specification, Dingle’s statements would be more along the lines of idle comments or mere puffery because they were not contingent on the sale of the house. 2. If Vagias paid market value for his home, had still been able to send his son to a highly rated elementary school, and the only detriment imposed upon him was a lower status due to the location of the home, how would that affect your analysis? Answer: If Vagias paid market value for his home, had still been able to send his son to a highly rated elementary school, and the only detriment imposed upon him was a lower status due to the location of the home, the outcome would likely remain the same under the New Jersey Consumer Fraud Act. All that is necessary under this Act is that Dingle knew of Vagias’s concerns, for whatever reason they may be, and made an affirmative misrepresentation. However, in this hypothetical, Dingle would be able to assert a partial performance defense in that Vagias essentially received substantially what he bargained for. Whether or not the detriment imposed upon Vagias would be substantial enough to rescind the contract would be a question of fact for the jury to determine. B. Warranties [P.607] Points to emphasize: • Consumers have certain statutory protections related to the quality and functionality of products sold by merchants, derived primarily from product liability statutes and commercial law statutes, which provide for warranty protection. • A warranty is a seller’s legally enforceable promise to a consumer concerning the quality and/or functionality of a product, as recognized under state statutory laws that are based on Article 2 of the UCC. • Express Warranty: Created (generally through advertising) when the seller promises that the goods have certain qualities or a certain level of efficiency, and if the goods turn out not to have these qualities, the buyer may sue for a breach of the express warranty. o Puffery is a nonfactual-based statement used in advertising that does not create an express warranty. Self-Check: Express Warranty: Has an express warranty been created? [P.608] • Implied Warranties: Even in cases where the seller makes no express promise about the good, the UCC imposes several implied warranties. o Merchantability: The implied warranty of merchantability applies to every sale of a product from a merchant (one who is regularly engaged in the sale of that product) to a buyer and requires the seller to warrant that the product is fit for its ordinary use. o Fitness for a Particular Purpose: An implied warranty is also created when a seller promises that the product is fit for a particular purpose; however, in order for the warranty to arise, the buyer must prove the seller knew of the buyer’s desire to use the product in a specified way and the buyer relies on the seller’s advice and recommendation. • Warranty Disclaimers and Limitations: In order to disclaim a warranty, the seller must do so in a conspicuous writing such as capital letters, bold print, or a larger font that stands out from the rest of the writing. o Sellers may also, under certain circumstances, limit the remedies of a buyer who has suffered damages because of a seller’s breach of warranty—primarily used where the only harm suffered by the buyer was the loss of the use of the product. Case 22.2 Birdsong v. Apple, 590 F.3d 955 (9th Cir. 2009) Facts: Apple supplies earbud headphones with its iPod and includes a warning about permanent hearing damage and keeping the volume low. Birdsong brought suit against Apple for breach of implied warranty of merchantability. Issue: Does the fact that the iPod is capable of playing at 115 decibels subject Apple to liability under a warranty theory? Ruling: No. The ordinary purpose of an iPod is to listen to music. While consumers have the option of using the iPod in a risky manner, there is no lack of product quality. Case questions: 1. If the iPod is capable of playing at a certain level of sound, isn’t it foreseeable that users would assume that a high level of sound was ordinary use? Answer: It may be, but the term ordinary use applies to the product quality. Here the claim must be centered on whether or not the IPod was fit for its ordinary use (playing music). 2. If Apple did not provide the warning, how would that impact your analysis? Answer: The warning bolsters the case that the iPod’s ordinary use is to listen to the volume at a safe level. Without the warning, it would be more difficult to defend based on product quality. • Magnuson-Moss Warranty-Federal Trade Commission Improvement Act: A federal statute that regulates warranties given by a seller or lessor to a consumer. o The Magnuson-Moss Act does not mandate that sellers offer a warranty to a consumer/buyer, nor does it create any additional implied warranty, however, if the seller does offer a written express warranty, the transaction is subject to the provisions of the statute. o Labeling Requirements: Under the Magnuson-Moss Act, if the product being warranted costs $10 or more, the act requires that warranties be written conspicuously and in plain and clear language and be specific to the parts, products, characteristics, or functionality covered by the warranty. o Restrictions on Disclaimers and Limitations: Under the Magnuson-Moss Act, if an express warranty is given, the seller may not disclaim implied warranties; however, they are permitted to set a time limit on the implied warranties (same as express warranties). o Figure 22.1: Sample Disclaimer and Limitation of Remedies [P.611] • Consumer Product Safety Act (CPSA): Statute that created the Consumer Product Safety Commission to research, institute, and enforce safety standards for consumer products that pose a potential risk of injury. o Other CPSA Protections: Subsequent amendments to the CPSA expanded the Commission’s jurisdiction to include more specific categories of consumer products such as materials used in clothing, components used to make toys, and the disclosure of poisons used in consumer products. C. Food and Drug Safety [P.612] Points to emphasize: • The Food, Drug and Cosmetic Act (FDCA) created the Food and Drug Administration (FDA) to regulate testing, manufacture, and distribution of foods, medications, and medical devices, and cosmetics. • A major component of the FDCA is the requirement that makers of certain food ingredients, additives, drugs, or medical devices obtain formal FDA approval before selling the product to the general public. • FDA Regulations and Enforcement: Food Safety: The FDA enforces both specific and general standards for food safety; while certain regulations set out specific purity or safety standards, a catchall provision sets out a general standard banning all adulterated food. o The FDA investigates any public outbreaks of illness related to food contamination using its broad enforcement powers to detect and prevent any further contamination. Concept Summary: Warranties and Product Safety [P.613] D. Credit Transactions [P. 613] Points to emphasize: • It is important for business owners and managers to be aware that establishing a credit relationship with a consumer borrower triggers protections for the borrower via federal and state statutes, as well as a large body of administrative law that regulates credit transactions. • Consumer Credit Regulation: The centerpiece of federal statutory regulation of credit transactions is the Consumer Credit Protection Act (CCPA), which regulates credit transactions between creditor and borrower including consumer protections in the areas of disclosure of credit terms, credit reporting, antidiscrimination laws for credit applicants, and collection of debts from consumers. o Truth in Lending Act (TILA): Part of the CCPA that requires lenders to disclose to borrower applicants certain information about the loan or terms of credit, and mandates uniform methods of computation and explanation of the terms of the loan or credit arrangements. • The TILA covers only creditors who are regularly engaged in extending (or arranging for) an extension of credit for goods and services that is for personal, family, or household goods. • The most important regulation for business owners and managers is Regulation Z, which requires that certain written disclosures be made prior to the time that a credit transaction is consummated. • Figure 22.2: Sample Home Equity Loan TILA Disclosure (P.617) • Figure 22.3: Sample Home Equity Loan Notice of Right to Cancel (P.618) Case 22.3 Palmer v. Champion Mortgage, 465 F.3d 24 (1st Cir. 2006) [P.616] Facts: In March 2003, Palmer obtained a home equity loan from Champion and received copies of her signed TILA disclosures and the “notice of her right to cancel” disclosure. This notice provided that Palmer could “cancel the transaction for any reason within three business days of (1) the date of the transaction, (2) the date she received her TILA disclosures, or (3) the date she received the notice of the right to cancel,” and that if she was to cancel the transaction by mail or telegraph, the cancellation had to be post marked no later than April 1, 2003. In August 2004 Palmer filed for cancellation of the transaction under the extended three-year statute of limitations under the TILA, claiming that Champion failed to make TILA disclosures because the time frames in the cancellation were too confusing. Issue: Was Palmer’s right to rescind extended by a failure to follow TILA procedures? Ruling: No. The notice of the right to cancel provided by Champion complied with the TILA disclosure requirements, and an objectively reasonable consumer would not find the notice confusing. Answers to case questions: 1. Given the language of the time frame notice, do you agree with the court’s statements that it was clear and objectively reasonable consumers would not be confused by it? Why or why not? Answer: Given the language of the time frame notice, one could reasonable agree with the court’s statements that it was clear and objectively reasonable consumers would not be confused by it. No reasonably alert person reading the notice would have been drawn to the April 1 deadline without also grasping the alternative deadlines. Not only was Palmer given the opportunity to cancel the contract within three business days of the transaction, but also the notice specified that she could cancel three business days from either the date she received her TILA disclosures or from the date she received the notice of the right to cancel, whichever occurred latest. Moreover, the notice was identical in all material respects with the format authored by the Federal Reserve Board. Therefore, the notice was clear and did not trigger an extended rescission right under the TILA. 2. Examine Figure 22.3. This is a notice that is similar to the notice Palmer received. Does that affect your analysis? Answer: The notice presented in Figure 22.3 strengthens the previous arguments made in the court’s analysis. The sample home equity loan notice of right to cancel, similar to the notice Palmer received, clearly indicates both when and how Palmer could exercise her cancellation rights. The “when” aspect is listed clearly and in plain language at the very beginning of the document and then is crossed referenced again in the boxed in portion bolded and capitalized “HOW TO CANCEL.” In fact, it would be more difficult for a objectively reasonable consumer to find the “April 1 deadline” than it would for them to find the three clearly listed events. Therefore, it would be highly unlikely that this notice would confuse an objectively reasonable consumer. • Other Federal Statutory Protections: The CCPA and the TILA have been amended several times to include additional protections for consumers related to credit discrimination, credit card issuers, and consumer leases. o Consumer Financial Protection Bureau (CFPB): Congress created the CFPB in 2010 as an independent agency housed within the Federal Reserve, charged with setting rules to curb unfair practices in consumer loans and credit cards. o Antidiscrimination: Denying an applicant credit based on discriminatory factors relating to the applicant’s race, religion, national origin, color, gender, age, or marital status is unlawful under the Equal Credit Opportunity Act of 1974. o Credit Cards: The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) increases the power and oversight authority of the Federal Trade Commission over credit card issuers. • The CARD Act protects consumers from surprises when interest rates increases or credit card fees are imposed, and to restrict marketing and card-issuing practices targeted to younger (18-21 years of age) consumers. Teaching Tip: The CARD ACT The CARD Act is a favorite topic for students. Some discussion questions are: 1) Should the government be in the position of regulating contracts between two private parties simply because one party is not yet 21? 2) What other areas of government regulation affect 18-21 year olds? 3) Does the CARD Act’s ban on gifts giving by credit card companies to college students make sense? 4) Shouldn’t credit be extended to someone based on creditworthiness rather than age? • Existing Regulations under the TILA: The CARD Act added to already existing disclosure and transaction regulations under the TILA that were left intact. Case 22.4 Discover Bank v. Owens, 822 N.E.2d 869 (Cleveland Municipal Court 2004) [P.620] Facts: Discover brought a collection lawsuit against Owens after she defaulted on her credit card agreement that allowed Discover to add fees and increase her interest rate in certain circumstances. When Owens became disabled and experiences severe financial difficulty, she stopped using the credit card and made payments regularly on her original charge of $1,460. Despite never using the credit card and paying $3,492 toward an original debt of $1,900 (her credit limit), with all the fees and accrued charges, Owens nevertheless faced a $5,564.28 outstanding balance at the time of the collection suit. Issue: Were the terms of Discover’s credit card agreement provisions unreasonable and the accumulation of fees unconscionable? Ruling: Yes. Discover had a duty to mitigate its damages once it became clear that Owens would never be in a position to make required payments; instead, the fees, charges, and substantial increases in the finance rate were the bulk of the balance owed. (Note: This is an example of the types of creditor abuses that spurred the enactment of the CARD Act) Answers to case questions: 1. The court conceded that Discover had complied with existing federal regulations regarding disclosures of fees and so forth. Given this fact, is the court sacrificing legal principles in favor of a paternalistic approach? Is this good public policy? Answer: Because Discover had complied with existing federal regulations regarding disclosures of fees etc., this can be viewed as a paternalistic approach. The court has broad legal and equitable powers and exercised them here because it was good public policy to do so. In this particular case, a paternalistic approach was necessary to prevent unjust enrichment of the creditor and to serve the interests in equity and public policy. If the court remained steadfast to legal principles then Owens would end up worse off and the creditor would be rewarded for exploitation. 2. Suppose that Owens had chosen to close the account and notified Discover that she was defaulting on the account and could not pay. Would she have been in a better position than if (as she actually did) she kept paying as much as she could afford (the minimum amount due or less) over a period of six years? Answer: Had Owens simply stopped paying on her account in 1997, as perhaps some unscrupulous person might have considered, her account would have been closed and charged off at approximately $2,000. But because Owens was not unscrupulous and evidently did her best by paying as much as she could afford, she was paying a debt out from which she would never climb because Discover would continue to assess charges, fees, and substantial increases in the finance rate. In doing so she was in a worse position then if she would have exercised the former option because instead of owing approximately $2,000, six years later she owes $5,564.28 even though she stopped using the credit card. 3. How could Discover have known that Owens, as the court said, would “never be in a position” to pay the full amount owed? Answer: Discover should have known that Owens would “never be in a position” to pay the full amount owed because for a period of six years she was making the minimum payments and no longer used the card. In fact, sixty months after she stopped using the card, Discover continued to assess her a monthly fee despite the fact that she had made payments nearly twice the $1,900 she owed in the first place. o Identity Theft: The Fair and Accurate Credit Transactions Act (FACT Act) requires that credit bureaus stop reporting any fraudulent account information once a consumer alleges identity theft and during an investigation period. o Consumer Leases: Consumer leasing is regulated by the Consumer Leasing Act (CLA), which covers lessors engaged in leasing or those arranging leases for consumers in the ordinary course of business. o Credit Reports: The Fair Credit Reporting Act (FCRA) sets privacy rights for consumer credit reports and requires that the credit bureaus give individual consumers complete and timely access to their own credit reports. E. Consumer Debt Collection [P.621] Points to emphasize: • The Fair Debt Collection Practice Act (FDCPA) is a federal statute that directly regulates agents involved in debt collection for consumer debts. • FDCPA Requirements: The FDCPA requires that the collection agency make known certain rights of the debtor in a validation disclosure when making the initial contact to inquire about the debt. o The FDCPA prohibits collector contact (1) at inconvenient times or inconvenient places; (2) once the collector is informed that the debtor is represented by an attorney; or (3) if the debtor gives written notice that she refuses to pay the debt and requests the agent to cease contact. o Enforcement: Federal statutes that govern consumer debt collection are enforced primarily by the Federal Trade Commission, which uses a system of penalties, cease-and-desist orders, and civil lawsuits to enforce the FDCPA. END OF CHAPTER PROBLEMS, QUESTIONS AND CASES Theory to Practice [P. 623] 1. This is a classic bait and switch and is a form of deceptive advertising made illegal under the Federal Trade Commission’s regulations. A bait and switch ploy involves a seller advertising an item for a particularly good price or favorable terms (bait) with the intent of selling the consumer a more expensive product (switch). Willen was lured into Outdoor World due to the advertisement of 50% off, but was then diverted by the manager who tried to get Willen to purchase a more expensive tent. [Ties to Unfair or Deceptive sales Practices]. 2. The manager has created an implied warranty of fitness for a particular purpose. Under the UCC, the seller creates an implied warranty of fitness for a particular purpose when he knows of the buyer’s desire to use the product in a specified way. Once the manager gave assurances about a certain feature of the boot (warmth), and the buyer relied on that representation, the warranty protects Willen. There is also the possibility of an express warranty, except that it is doubtful that a general statement to Willen would be sufficient to create an express promise. [Ties to Implied Warranties]. 3. Although the UCC allows sellers to disclaim implied warranties, the warranty of merchantability can only be disclaimed if the term “merchantability” is specifically used in the disclaimer. However, the Magnuson-Moss Act may also be a factor. Assuming that this agreement was part of an express, written warranty between merchant and consumer, the Magnuson-Moss Act preempts state law (UCC) and prohibits sellers from disclaiming any implied warranties. [Ties to Warranty Disclaimers and Limitation]. 4. The CAN-SPAM Act does apply to the advertising because Outdoor World must still comply with the requirements that prohibit certain practices even when they send e-mail to their own customers. [Ties to Regulation of Online Advertising]. 5. Once Outdoor World begins offering customers credit, they are subject to regulation under the Consumer Credit Protection Act regarding proper disclosure of credit terms, credit reporting, antidiscrimination laws for credit applicants, and collection of debts from consumers. The Truth in Lending Act (TILA) imposes requirements on Outdoor World if they are regularly engaged in extending credit for goods or services for personal or household use. The TILA contains statutory protections for consumers including standard procedures for APR disclosure and the right to cancel the transaction within a certain period of time. [Ties to Consumer Credit Regulation]. 6. The Fair Debt Collection Practices Act only applies to agents of the debtor. A creditor attempting to collect their own debt are not subject to the act. However, most states also have laws that regulate collection of debts by agents and creditor which prohibits aggressive tactics such as threats, etc. when collecting the debt. [Ties to Consumer Debt Collection]. Manager’s Challenge [P. 623] Sample answers to all Manager’s Challenge exercises are provided in the student and instructor’s versions of this textbook’s Web site.. Case Summary 22.1: Truth in Lending Act: Barrer v. Chase Bank USA [P.624] 1. Do Chase’s actions comply with TILA? Why or why not? Answer: Chase’s actions to not comply with TILA because under TILA, the creditor must disclose an explanation of the specific event or events that may result in the increased rate, clearly and conspicuously in writing. 2. Shouldn’t Barrer be liable for failing to reject the new terms? Answer: Barrer did not reject to the new terms because the condition on which his APR increased were not listed in the notice as an event qualifying for a rate increase, thus he should not be liable. Case Summary 22.2: Fair Debt Collection Practices Act: Myers v. LHR, Inc. [P.624] 1. Were LHR’s actions lawful under the FDCPA? Why or why not? Answer: LHR’s actions were not lawful under the FDCPA because the FDCPA prohibits any harassing, intimidating, or misleading tactics by collection agents. 2. If LHR’s actions were not lawful, what could they have done to comply with the act? Answer: To comply with the act, LHR should have provided a validation disclosure (if they had not already) when making the initial contact to inquire about the debt. Furthermore, LHR should have ceased collection efforts after the negotiated debt was paid in full and reported such payment to the credit agencies in good faith. Additionally, LHR agents should have abstained from any harassing, intimidating or misleading tactics in the collection of the debt. Case Summary 22.3: Consumer Fraud Act: Phoenix of Broward, Inc. v. McDonald’s Corp. [P.624] 1. Does Phoenix have a claim under the Consumer Fraud Act? Why or why not? Answer: Phoenix may have a claim under Consumer Fraud Act under the theory that McDonald’s advertising campaign breached an express warranty in representing that all customers had a fair and equal chance to win. This theory is premised on the fact that in their representations, McDonalds specified the odds of winning. Without such specification, a statement indicating “all customers had a fair and equal chance to win” alone would be more along the lines of puffery because it lacks a factual basis. 2. Would there be any other factors affecting whether or not Phoenix had a claim? Answer: Even if Phoenix argues a sufficient claim under the Consumer Fraud Act, it would most likely not be actionable because they lack standing. A court would be hesitant to grant Phoenix standing because of the attenuated link between the alleged injury by Phoenix and McDonalds’ alleged misrepresentations, the speculative nature of the claimed damages, the potential complexity in apportioning damages, and the significant risk of duplicative damages. Case Summary 22.4: Implied Warranties: American Suzuki Motor Corp. v. Carney [P.625] 1. Which implied warranty is Carney claiming here, and what is the legal standard for such warranties? Answer: Carney is claiming the implied warranty of merchantability, which attaches automatically to every sale of a product from a merchant to a buyer and requires the seller to warrant that the product is fit for its ordinary use. 2. Can Suzuki disclaim this warranty? Why or why not? Answer: Suzuki can disclaim implied warranties under certain circumstances; however, in order to disclaim a warranty, the seller must do so in a conspicuous writing such as capital letters, bold print, or a larger font that stands out from the rest of the writing. Additionally, if the contract is covered by the Magnuson-Moss Act (because it involves a written, express agreement), Suzuki may not disclaim any implied warranties. Case Summary 22.5: Warranties: Hauter v. Zogarts [P.625] 1. What words on the box created the express warranty? Answer: The words on the box indicating “ball will not hit player” created the express warranty that proved to be false when Hauter was struck by the ball. 2. Is the phrase “completely safe” a verifiable fact or is it puffing? Is any product actually completely safe? Answer: The phrase “completely safe” is puffery because it is a nonfactual-based statement commonly used in advertising. No product can actually be completely safe because there is no method to verify that a particular product used in every possible way and in every possible circumstance will prove to be completely safe. Quick Assessment Questions (QAQs) 1. The claim “this sweater is 100% Irish wool” is an example of _____________. a. An implied warranty of fitness for a particular purpose b. An implied warranty of merchantability c. An express warranty d. Puffery e. Bait and switch Answer: c 2. Which provision of the Truth in Lending Act requires that certain written disclosures be made prior to the time that a credit transaction is consummated? a. Regulation X b. Regulation Z c. Article 2 of the Uniform Commercial Code d. Article 2 of the Consumer Credit Protection Act e. None of the above Answer: b 3. Which statute regulates the sending of unsolicited e-mail by prohibiting certain online marketing practices? a. Consumer Electronic Protection Act b. Telemarketing and Consumer Fraud and Abuse Prevention Act c. Federal Trade Commission on Electronic Mail Act d. Controlling the Assault of Non-Solicited Pornography and Marketing Act e. None of the above Answer: d 4. The Magnuson-Moss Act does not mandate that sellers offer a warranty to a consumer. Answer: True 5. The implied warranty of merchantability only arises when a seller promises that the product is fit for a particular purpose. Answer: False 6. The Truth in Lending Act covers only creditors who are regularly engaged in extending an extension of credit for goods and services that is for personal, family, or household goods. Answer: True Chapter 23: Criminal Law and Procedure in Business OVERVIEW This chapter focuses on government regulation via criminal law. Its coverage includes an examination of how criminal law, criminal procedure, and the criminal justice system impact business entities, owners, and managers. After exploring the origins and sources of criminal law, coverage is devoted to elements and examples of criminal acts. The final section covers legal protections of the accused and an explanation of the steps in the criminal justice system. KEY LEARNING OUTCOMES Outcome Accreditation Category Distinguish between criminal law and criminal procedure, and explain the differences between criminal law and civil law. Knowledge Articulate the underlying tenants of criminal law and requirements for criminal liability. Knowledge Give specific examples of white collar crime laws that may impact business entities and explain when business managers and owners may be liable for criminal violations by a corporation. Knowledge, Analysis Explain the steps in the criminal justice system, the various constitutional procedural protections afforded to those accused of a crime, and give examples of when to apply the exclusionary rule. Knowledge, Analysis TEACHING OUTLINE A. Origins and Sources of Criminal Law and Procedure [P.627] Points to emphasize: • American criminal law is based on state and federal statutory laws, much of which is derived primarily English common law. B. Modern Criminal Law: The Model Penal Code [P.627] Points to emphasize: • Nearly two-thirds of states have enacted criminal codes based on the Model Penal Code (MPC) adopted by the American Law Institute (ALI) in 1962. • Although a state criminal statute and a federal criminal statute may outlaw identical or substantially identical conduct, state law and federal law may coexist unless the federal statute contains specific language that preempts state law. C. Criminal Law versus Criminal Procedure [P.628] Points to emphasize: • While criminal law defines the boundaries of behavior and sanctions for violating those boundaries, criminal procedure refers to the legal process and safeguards afforded to individuals (and in some cases business entities) during criminal investigations, arrest, trials, and sentencing. • Criminal Law versus Civil Law: While some actions implicate both criminal and civil liability, civil laws protect individuals by redressing injuries, but criminal laws protect society as a whole by punishing wrongdoers. o Burden of Proof: In a civil case, plaintiffs need only to prove that the defendant had committed a civil wrong by a preponderance of the evidence (more likely than not); in criminal cases the government must prove their case beyond a reasonable doubt (not in doubt to a reasonable person). • General Principles of Criminal Law: The principle of legality protects individuals from being charged with some unspecified general offense by requiring that crimes be specifically proscribed by law in advance of the conduct sought to be punished; the principle of punishment is based on the concepts that criminal law (1) acts as a deterrent, (2) removes dangerous criminals from the population, and (3) that rehabilitation is an important part of the criminal justice system. • Criminal Liability: A crime has two parts: a physical part whereby the defendant committed and act or omission, and a mental part focusing on the defendant’s subjective state of mind. o Act Requirement (actus reus): Requires the government to prove that defendant’s actions objectively satisfied the elements of a particular offense, based on the fundamental criminal law tenet that evil thoughts alone do not constitute a criminal act. o Mental Requirement (mens rea): Requires that the defendant have a requisite degree of culpability with regard to each element of a given crime, based on the fundamental underpinning that an act does not make a person guilty unless his mind is guilty. • Courts and legislatures have established certain rules for applying the mental element requirement in cases of mistake, and certain statutes also impose strict liability, whereby the mental element is assumed by certain conduct so that the defendant’s culpable state of mind need not be proved. o Figure 23.1: Excerpt from a Florida Criminal Statute: F.S.A. § 831.02 [P.630] o Defenses: Even when a requisite mental state and bad act are proven, the accused can offer a defense such self-defense, whereby the law recognizes that certain cases require the use of deadly force to repel an attack in which the defendant reasonably feared that death or substantial harm was about to occur either to the defendant or to a third party. • Mental incapacity is another defense to avoid criminal liability whereby the defendant’s actions are related to some type of mental disease or defect. • Less frequently asserted defenses include duress, in which a defendant committed a crime in response to another person’s threat to inflict personal injury; and intoxication, which generally depends on whether the intoxication was voluntary or involuntary. • Types of Crimes: Crimes can be classified in several different ways (that frequently have degrees of crimes within each category): Felonies are crimes that generally carry one year or more of incarceration as the penalty; misdemeanors are crimes that carry up to one year of incarceration as the penalty; and summary offenses or infraction offenses for minor crimes that carry no threat of jail. Teaching Tip: Keeping them focused on business. Students become very inquisitive when it comes to criminal law. It is the area of law that they think they most about whether learned in high school civics, on television, or through a personal skirmish they have had with the law. Some of this excitement is a great way to connect—but it can go awry quickly. The challenge for the instructor is to keep students focused on the business aspect without extinguishing their enthusiasm for the subject. Taking any recent “executive in handcuffs” type of story from the headlines helps to bridge the gap. The chapter gives a brief overview of criminal law first, but then frames the remainder of the material in a business context. This is the best point to make the transition. The LaGrou case is at once alarming and thought-provoking in terms of risk management. The text then features a section on white collar crime and a business ethics perspective feature on the Madoff ponzi scheme. I have found this helps to keep them focused on how criminal law regulates business without dampening their enthusiasm for the material. D. Criminal Law and Business Entities [P.631] Points to emphasize: • Business owners and managers should have a fundamental knowledge of how criminal law may be applied to business entities to help reduce the risk and add value to the business by taking affirmative steps to limit criminal culpability for the business and its principles. • The MPC provides criminal liability for business entities if (1) the criminal act by the business’s agent is within the scope of her employment, and the statute imposes liability on the business for such an act; or (2) the criminal omission is the failure to perform a specific duty imposed by law; or (3) the crime was authorized by one of the corporation’s top-level managers. • Individual Liability for Business Crimes: Congress and state legislatures have expanded criminal culpability and strict liability statutes for individual officers and directors for corporate crimes committed within the scope of their employment. o In 2002, the Sarbanes-Oxley Act imposed significant criminal liability for officers, directors, and majority shareholders of corporations that falsify financial disclosures and provides up to 20 years of incarceration for any employee that destroys documents relevant to a government agency investigation. Case 23.1 U.S. v. LaGrou Distribution Systems, 466 F.3d 585 (7th Cir. 2006) [P.633] Facts: LaGrou’s warehouse in Chicago stored frozen meat for various food companies in the region and its cold storage facility had a severe rodent problem. Evidence indicated that Stewart, president of LaGrou, knew of the rat infestation for a period of three years and instructed employees to keep catching rats but refused to perform a full extermination because he determined that it would be too expensive. Testing by federal and state health agencies confirmed adulteration of food products, including rodent gnawing, rodent hair, and rodent feces on several products in LaGrou’s warehouse. Stewart was charged with violating federal criminal laws prohibiting the sale of adulterated meat and he defended he did not have the requisite knowledge for criminal liability because he had no actual knowledge of any specific meat contamination. Issue: Can Stewart, as an individual officer, be liable for LaGrou’s crimes even though he had no actual knowledge of any specific meat contamination? Ruling: Yes. Knowledge of any rat problem was sufficient and Stewart is liable for all the violations that he was in charge of preventing at LaGrou. Answers to case questions: 1. What if Stewart was never told about the rat problem. Did he have a responsibility to find out? Answer: Even in the case that Stewart was never told about the rat problem he could still be held liable. As the president of LaGrou, Stewart has the duty to be sure that LaGrou is in compliance with statutes and to act diligent about adhering to standards set out in statutes and regulations. He could have prevented or controlled the infestation if he was acting prudently in carrying out his obligations as a chief officer of LaGrou. This notion of responsibility is even more critical given the fact that Stewart’s business operated within a closely regulated industry and the charged offense concerns public welfare. 2. What about the workers who shipped the contaminated meat each day? Should they be guilty of some crime? What about the government inspectors who let the warehouse operate for three years? Who is most culpable? Answer: Though the workers that shipped the contaminated meat each day may have a moral obligation to report such conduct, as long as they were acting within the scope of their employment, they are not criminally liable for LaGrou’s crimes. They were simply doing what their employer instructed them to do and may have very well been unaware of the specific regulatory requirements of the industry. The government inspectors who let the warehouse operate for three years are the most culpable because they have the duty to regulate such businesses for this very purpose. These individual inspectors can be held criminally liable if they knew of the infestation and fraudulent failed to enforce the regulations and statutes of the USDA. Concept Summary: Criminal Law [P.632] E. White-Collar Crime [P.632] Points to emphasize: • White-collar crimes usually signify criminal violations by corporations or individuals including fraud, bribery, theft, and conspiracy committed in the course of the offender’s occupational duties. • Fraud: The basic elements of fraud are (1) a false representation (or concealment) concerning a fact and (2) another party relied on the false misrepresentation of the fact and suffered damages as a result. o In 1990, Congress passed the Mail Fraud Act to give federal prosecutors significant leverage in prosecuting white-collar criminals by criminalized any fraud where the defrauding party uses the mail or any wire, radio, or television. o Embezzlement is another form of fraud, occurring when someone in a position of trust creates fraudulent records to disguise the theft. • Ponzi Schemes: A fraudulent investment operation that pays returns to investors from their own money or money paid by subsequent investors rather than from any actual profit earned. o Ponzi Schemes are destined to collapse because the earnings, if any, are less than the payments. • Conspiracy: An agreement by two or more persons with the specific intent to commit a criminal act (it does not require that the act actually be carried out). • Racketeer Influenced and Corrupt Organizations Act (RICO): Federal statute that makes it a criminal offense for anyone associated with an enterprise to conduct or participate in its affairs through a pattern of racketeering activity. o The modern trend is for authorities to use the RICO statute in an expansive manner, including criminal conduct that is not traditionally related to organized crime, and the penalties under RICO are stiff, including an authoritative forfeiture provision. Business Ethics Perspective: Epic Fraud: Bernie Madoff’s Multibillion-Dollar Ponzi Scheme P.635 • Insider Trading: Insider trading laws are federal securities statutes that prohibit corporate insiders who have access to certain information that is not available to the general investment public from trading their company’s stock based on the insider knowledge. o In 1988, Congress passed the Insider Trading and Securities Fraud Enforcement Act that raised the criminal and civil penalties for insider trading, increased the liability of brokerage houses for wrongful acts of their employees, and gave the government more authority to pursue insider-trading violations. • Bribery: Is covered in both federal and state statutes and generally involves a scheme to pay a government official money in order to obtain favorable treatment for a personal or business transaction (requires only the offer of a bribe). • Obstruction of Justice: Prosecutors have been increasingly willing to prosecute white-collar criminals under federal laws prohibiting the obstruction of justice for any conduct that is related to attempting to cover up evidence of wrongdoing (an obstruction of justice charge may stand independently from the underlying crime). • Foreign Corrupt Practices Act (FCPA): A criminal statute enacted in 1977 principally to prevent corporate bribery of foreign officials in business transactions. o A foreign official means any officer or employee of a foreign government, regardless of rank; employees of government-owned or government-controlled business; foreign political parties; party officials; candidates for political office; and employees of public international organizations. Self-Check: White-Collar Crime: What white-collar crimes are at issue in the following circumstances? [P.639] Case 23.2: U.S. v. Kozeny, et al, 667 F.3d 122 (2nd Cir. 2011) Facts: Bourke was approached by Kozeny about participating in an investment opportunity that would lead to the purchase of a state owned oil company in Azerbaijan (SOCAR). Kozeny, dubbed the Pirate of Prague by Fortune magazine, was an entrepreneur known for his crooked transactions during a similar privatization effort in the Czech Republic’s reforms in the mid-1990s. Bourke and Kozeny became partners and developed an elaborate investment scheme designed to ensure that they would have exclusive rights to purchase SOCAR. Without the knowledge of some of the partners, Kozeny bribed the Azeri government. Kozeny, Bourke, and others were indicted under the Foreign Corrupt Practices Act (FCPA) and other violations of federal law. Bourke was convicted of conspiracy to violate the FCPA. Issue: Can Bourke be convicted of conspiracy if he had no actual knowledge of the bribery? Ruling: Yes. The Court of Appeals for the Second Circuit upheld Bourke’s convictions. They pointed to evidence of conversations which indicated that Bourke was fully cognizant of their plan to offer bribes to Azeri officials. Case questions 1. What steps could Bourke have taken to be sure that he was not involved in FCPA violations? Answer: First, he should have investigated his business partners. Kozney was well-known as a corrupting influence and Bourke assumed the risk that his transaction would also involve bribery and corruption. 2. If bribery is a normal way of economic life in some parts of the world, how might the FCPA impact the competitiveness of American companies? Answer: This question is intended to spur debate on the ethics and legality of bribes. If the U.S. company is locked out from doing business because other country’s governments are looking the other way, that unfairly impacts American businesses. Still, if U.S. business executive are permitted to engage in bribery for the good of the firm, where do we draw the line? F. The Criminal Justice System [P.641] Points to emphasize: • The criminal justice system is best though of as one process that operates in two phases: investigation and adjudication. • Investigation: Authorities become aware of an alleged criminal act and begin an investigation by gathering physical evidence, interviewing witnesses and potential suspects, and obtain search warrants if necessary. o Once the authorities believe that sufficient evidence creates enough probable cause to indicate the culpability of a suspect, they will, depending on the circumstances, obtain an arrest warrant, arrest the suspect by taking them into custody, or issue a citation for minor infractions. o Once the defendant is arrested they are formally charged by a magistrate who then sets bail and appoints defense counsel if necessary. • Adjudication: If the prosecutor elects to proceed with the charges, the defendant is entitled to a preliminary adjudication (via grand jury or magistrate depending on the jurisdiction). o If probable cause exists, an indictment is filed (known as “information” depending on jurisdiction); or the charges are dropped due to insufficient evidence. o The defendant then enters plea and following the arraignment, the prosecutor and defense counsel will typical enter into plea negotiations if necessary. o If no pleas agreement is reached, the defendant goes to trial whereby the fact finder either finds the defendant guilty, resulting in a conviction or finds the defendant not guilty, resulting in an acquittal. o If the defendant is convicted, the judge sets a future date for sentencing. Concept Summary: The Criminal Justice Process [P.642] G. Criminal Procedure [P.643] Points to emphasize: • For purposes of understanding criminal procedure in a business environment, our focus is on the protections found in the Fourth, Fifth, and Sixth Amendments. • Searches and Arrests: The Fourth Amendment of the Constitution protects individuals (and sometimes businesses) from government agents performing an unreasonable search and seizure and permits warrants to be issued only if probable cause exists. o Expectation of Privacy: Fourth Amendment protections apply only where an individual’s reasonable expectation of privacy (such as the warrantless search of a house) has been violated by government authorities. o Plain View Doctrine: A doctrine stating that authorities generally do not commit a Fourth Amendment violation where they obtain evidence by virtue of seeing an object that is plain view of a government agent. • In regards to aerial observations made by authorities, so long as the plane/helicopter is in public navigable airspace, anything the police can see with the naked eye or basic equipment available to the public will be considered in plain view. o Searches of Business Premises: Courts have been reluctant to extend reasonable expectation of privacy rights to the workplace, especially when the business is highly regulated. • Self-Incrimination: The Fifth Amendment provides that no person “shall be compelled in any criminal case to be a witness against himself.” o The Fifth Amendment right against self-incrimination also applies while authorities are investigating crimes as well, although this protection is limited to custodial interrogations, where the interviewee has been taken into custody or deprived of his freedom in some significant way. o Anything said during custodial interrogation is presumed to be involuntary unless and until one has been read Miranda warnings. Landmark Case 23.3 Miranda v. Arizona, 394 U.S. 436 (1966) [P.646] Facts: Miranda, a suspect in a knifepoint rape, was taken into custody and detained, and confessed during a subsequent interview. Before the interview the officers never told Miranda that he had the constitutional right to an attorney, the right to remain silent, or that whatever he said could be used against him later at his trial After being convicted on the strength of the confession Miranda appealed, arguing that being interviewed in police custody is inherently coercive if the suspect is unaware of his rights, thus his confession was not voluntary. Issue: Is the government required to notify the defendant of their Fifth Amendment rights against self-incrimination before a custodial interrogation? Ruling: Yes. Because police always have inherent power in any custodial interrogation of a suspect, unless the suspect is informed of his rights beforehand, any confession would be presumed involuntary and in violation of the Fifth Amendment and not admissible in court. Answers to case questions: 1. Do the Miranda warnings really matter? If you ask for a lawyer or will not talk, doesn’t that mean you have something to hide? What would you do if you were a suspect? Answer: The Miranda warnings do matter because they protect an individual from involuntary self-incrimination before, during, and after an investigation and trial. If you ask for a lawyer or will not talk, that doesn’t necessarily mean that you have something to hide, in fact it is a prudent decision given that the layperson does not know the law. Importantly, asking for a lawyer or remaining silent may be preferential to denying the crime because by denying that you committed the crime you are choosing and disclosing the nature of your defense before you even know the evidence against you, before you have the opportunity to calm down and think rationally, and before you’ve consulted with an attorney and know the law. 2. What if the suspect is not in the police station, but is he still in “custody” in a police car? Pulled over for speeding? Sitting in your office with the police in front of you? When do the police stop talking to you and start “interrogating” such that they need to give the Miranda warnings? Answer: It doesn’t matter whether an interrogation occurs in a police car, at the scene of a traffic stop, or sitting in your office with the police in front of you: If a person is in custody (deprived of his or her freedom of action in any significant way), the police must give a Miranda warning if they want to question the suspect and use the suspect’s answers as evidence at trial. Anything said during custodial interrogation is presumed to be involuntary unless and until one has been read Miranda warnings. However, if you are not in custody, such as after being pulled over for speeding or if the police come into your office for a voluntary statement, Miranda warnings are not required. If the statements were made voluntarily, in a noncoercive setting and if the suspect could have stopped the interview at any time, the interview may not be considered custodial and Fifth Amendment protections are not triggered. • Production of Business Records: Business records may be classified as private papers protected by the Fifth Amendment, but this protection has been severely narrowed over the last several decades. o Records of a corporation are not subject to Fifth Amendment safeguards because that business entity is separate and distinct from its owners and does not qualify for self-incrimination protections. Case 23.4 Braswell v. United States, 487 U.S. 99 (1988) [P.647] Facts: Braswell was the sole shareholder and officer in two companies engaged in brokering timer, land, oil interests, and machinery. Federal authorities that were investigating Braswell’s business subpoenaed his business records and Braswell refused to hand over the documents. Braswell argued that when a business is so mall that is nothing more than a person’s “alter ego,” the Fifth Amendment safeguards should apply. Issue: Can Braswell assert his Fifth Amendment protections in refusing to hand over business records? Ruling: No. The Fifth Amendment only protects private individuals. A corporation can act only through its officers/employees and when an officer/employee acts as records custodian for that company, then he is not entitled to Fifth Amendment protection because he is not longer acting as a private individual but as part of a corporation. Answers to case questions: 1. If a corporation has been recognized as a legal “person” for First Amendment purposes, shouldn’t the Fifth Amendment protect it too? Answer: Corporations and other collective entities are treated differently from individuals for purposes of the Fifth Amendment because such privilege applies only to natural individuals and protects only private papers. Though the corporation is a legal “person” for First Amendment purposes, it is an artificially created creature of the state, with powers limited by the state. As such, the state may, in the exercise of its rights to oversee the corporation, demand the production of corporate records. 2. What if Braswell’s company was a sole proprietorship rather than a corporation? What if he ran it alone out of his apartment? When should the Fifth Amendment start or stop protecting him? Answer: If Braswell’s company was a sole proprietorship rather than a corporation he could be protected by the Fifth Amendment. Similarly, if he ran the business alone out of his apartment, he could be afforded Fifth Amendment protections as long as the business was structured as a sole proprietorship. The underlying theory for his possible protections in these circumstances is that a sole proprietor is a form of business entity that is essentially the alter ego of the individual. Because there is no legal separation between the business and the sole owner (unlike a corporation, which exists as a separate legal “person”), his records could be considered personal and subject to Fifth Amendment protections. If Braswell had conducted his business as a sole proprietorship, he would have the opportunity to show that his act of production would entail testimonial self-incrimination. If he could meet this burden, then the Fifth Amendment could start protecting him. • Trial: The Sixth Amendment provides that in all criminal prosecutions the accused shall enjoy the right to a speedy trial. The infrastructure was established by the Speedy Trial Act. o The Sixth Amendment also contains other important procedural rights such as a right to a jury trial for serious crimes, the right to a public trial, and the right to confront witnesses through cross-examination. o Double Jeopardy: The Fifth Amendment guarantee providing that a defendant cannot be subject to prosecution twice for the same offense. • Exclusionary Rule: Bans evidence obtained in violation of the Constitution from being used at trial. o Even evidence that is only indirectly obtained in violation of a defendant’s rights is subject to the exclusionary rule because it is considered the fruit of the poisonous tree. o The Supreme Court has fashioned several exceptions to the exclusionary rule intended to differentiate between abuse by the authorities of an individual’s constitutional rights and those cases where the government made an innocent mistake in obtaining evidence. o One exception is when the government can show that authorities were acting in good faith in obtaining evidence based on a search warrant issued by an authorized judge that was later found to be unsupported by an appropriate level of probable cause. Case 23.5: HERRING V. UNITED STATES, 555 U.S. 135 (2009) [P. 649] Facts: Herring was in a Sherriff’s department impound lot to retrieve personal items from his impounded truck. Police were familiar with Herring through past interactions, so they checked for any outstanding warrants for his arrest. Due to a clerical error, officers were incorrectly informed that an active warrant existed for Herron’s arrest and, pursuant to the warrant, they took him into custody shortly after his visit to the impound lot. During a search incident to the arrest, officers discovered illegal narcotics and an illegal firearm in Herring’s possession. Subsequently, the police records clerk discovered the oversight and officers became aware that the warrant for Herring’s arrest had, in fact, been recalled several months before. Issue: Does the exclusionary rule apply to cases where the arresting officers took a suspect into custody because of an innocent mistake? Ruling: No. The Court applied the good faith exception to the exclusionary rule as set out in U.S. v. Leon. The majority emphasized that the Court has never held that the exclusionary rule is an individual right and that it only applied when application of the rule resulted in appreciable deterrence to law enforcement overreaching. Case Questions 1. How does this decision square with the exclusionary rule’s objective of deterring police conduct? Answer: On one hand, application of the exclusionary rule would not make sense since it would not serve to deter any misconduct since none took place. However, if the exclusionary rule applied, it may make the police more vigilant in checking the actual status of a warrant. 2. Can you think of examples where police mistakes would rise to the level where the exclusionary rule would apply? Answer: Some type of blatant oversight that amounted to purposefully overlooking some method to check their information. Here, if the police had some other way to check the status of the warrant but failed to do so, the exclusionary rule may apply. Legal Implications in Cyberspace: Computer Crimes and Internet Regulation [P.650] • There are three major classes of criminal activity through use of a computer: (1) unauthorized use of a computer; (2) creating or releasing a malicious computer program; and (3) harassment and stalking in cyberspace. • The Computer Fraud and Abuse Act (amended in 2001 by the Patriot Act) prohibits unauthorized use of computers to commit espionage, accessing unauthorized information, accessing a nonpublic government computer, fraud by computer, damage to a computer, trafficking in passwords, and extortionate threats to damage a computer. • Obscenity in Cyberspace: The Communications Decency Act (1996): Intended to ban material that was “patently offensive” of “indecent” from being online if the content providers knew that children would have access to the material. • Challenges to the CDA: In the 1997 case, ACLU v. Reno (Reno I), the Supreme Court held that the government was not entitled to as much deference in regulation of the Internet as the government was entitled to with other media and went on to strike down much of the act’s substance, reasoning that the CDA’s prohibition against “patently offensive” material being distributed on the Web is too vague to pass constitutional muster. • Congressional Response to Reno I: Child Online Protection Act of 1998: Using Reno I as a roadmap on constitutionality, Congress passed a similar piece of legislation the next year with the Child Online Protection Act of 1998 (COPA) • The American Civil Liberties Union again filed a lawsuit challenging the COPA as unconstitutional and in ACLU v. Reno (Reno II), the Supreme Court struck the statute down as still too overly broad. Concept Summary: Criminal Procedure [P.651] END OF CHAPTER PROBLEMS, QUESTIONS AND CASES Theory to Practice [p. 653] 1. Similar to the LaGrou case, Grendel could be held personally responsible for crimes committed by employees. If Grendel was aware of the problems for an extended period of time, many state statutes (and the MPC) would impose liability on the officers of DBAS. Grendel’s actions in fixing the air conditioner are not a criminal act in and of itself. However, coupled with his order to destroy records just after notification of the OSHA investigation constitutes obstruction of justice, conspiracy, and possibly fraud. The on-site manager may also be guilty of obstruction and conspiracy (agreement by two or more persons to commit a criminal act, also figures into this question). [Ties to Criminal Law and Business Entities and White Collar Crime]. 2. Even if Grendel’s defense was that subordinates failed to carry out their duty, under the MPC Grendel still has criminal culpability for failing to install systems to assure compliance with standards. In terms of Grendel’s liability, if he had cancelled his orders to the manager, he could still be convicted of conspiracy because the MPC does not require that the criminal act actually be carried out—only that two people manifested intent to commit a crime. [Ties to Individual Liability for Crimes and Conspiracy]. 3. OSHA’s search was lawful. Once Grendel set the trash bin on the public curb, he gave up his expectation of privacy under the Fourth Amendment. Because the evidence was obtained legally, it is not subject to the exclusionary rule. [Ties to Expectation of Privacy]. 4. Although Grendel’s diary is of a personal nature and could be protected by his Fifth Amendment rights, if the government can show that it qualifies as a business record, the Fifth Amendment would not apply. The SCOTUS has narrowed what business related documents may qualify for protection under the Fifth Amendment. [Ties to Production of Business Records]. 5. Because the government agents were using equipment that was available to the general public, OSHA does not need a warrant to take the photos. Under the plain view doctrine, the government generally does not commit a Fourth Amendment violation where they obtain evidence by virtue of seeing an object that is in plain view of a government agent who has the right to be in the position to have that view. So long as the viewing takes place with the naked eye or equipment available to the general public, no warrant is required. [Ties to Plain View Doctrine]. Manager’s Challenge [p.653] Sample answers to all Manager’s Challenge exercises are provided in the student and instructor’s versions of this textbook’s Web site.. Case Summary 23.1: Production of Business Records: Bear Sterns & Co. v. Wyler [P.654] 1. Will the court force Wyler to disclose the documents? Are they business records? Answer: Letters, memoranda, e-mail exchanges, inventory, financial documents, and the like are all business records if they are in the context of the defendant’s business dealings. The court will force Wyler to disclose the documents unless he can tender some credible reason why a response would pose a real danger of self-incrimination. 2. Does the Fifth Amendment apply in civil suits? Answer: The Fifth Amendment privilege can be asserted in any proceeding, civil or criminal, administrative or judicial, investigatory or adjudicatory. The protection extends equally to civil proceedings because the nature of the protection goes to the question asked, not the proceeding itself. Case Summary 23.2: Criminal Law and Business Entities: Dollar S.S. Co. v. United States [P.654] 1. Will the steamship company be criminally liable? Should they be even though they did everything to prevent the crime? Answer: The steamship company can be criminally liable even though the violation of the statute appeared to be unintentional because the steamship company failed to prevent the commission of the prohibited act. Even though they likely will be criminally liable, one could argue that they should not be because they took reasonable measures to insure that the violation did not occur. 2. If they should not be liable, what is the best way to prevent this crime? Answer: Although there may be no way to unconditionally prevent this crime, the steamship company could assess strict fines and penalties for those who violate the prohibition and pass the costs onto the individual employees. Case Summary 23.3: Insider Trading: United States v. Stewart [P.654] 1. Is the woman guilty of insider trading? Why? Answer: Yes the woman is guilty of insider trading because she is considered a tipee, had access to certain information that is not available to the general investment public, and traded her stock based on the insider knowledge. 2. Would you do what she did or just wait around to lose all your money? Answer: Given the two options, I would rather lose the fixed investment than face the stiff criminal and civil penalties imposed for insider trading. 3. Should the CEO get to sell his shares? Answer: The CEO should not get to sell his shares and in doing so, he too would be liable for insider trading. Case Summary 23.4: Foreign Corrupt Practices Act: Lamb v. Phillip Morris, Inc. [P. 655] 1. What criminal law did Phillip Morris possibly violate? Why? Answer: Phillip Morris possibly violated the Foreign Corrupt Practices Act because their donations to various foreign countries may have amounted to unlawful inducements designed and intended to restrain trade. 2. Should the criminal law have a problem with money going to poor Venezuelan children and work for poor Venezuelan farmers? Answer: The criminal law has no problem with money going to poor Venezuelan children by itself, however, it is a crime when this donation is coupled with the intent to obtain or retain business or any other competitive advantage. This prohibition is interpreted broadly in that companies may be held liable for violating the antibribery provisions of the FCPA whether or not they took any action within U.S. borders. Case Summary 23.5: Exclusionary Rule: State v. Yenzer [P.655] 1. Why isn’t the time of the dentist’s appointment protected by the Fourth Amendment in this case? Answer: The Fourth Amendment does not protect the time of the dentist’s appointment in this case because as a fugitive, Yenzer already had an outstanding warrant for her arrest. The fact that Yenzer was a fugitive and the police received information that she would be at a local dentist presented sufficient probable cause to satisfy the Fourth Amendment in regards to the time of the dentist’s appointment. 2. Did the police go too far in this case by requesting confidential information from the dentist’s receptionist? Isn’t the exclusionary rule intended to deter unlawful conduct by authorities? Answer: While one may reasonably infer that such disclosure should not be condoned for privacy concerns, the police were within their right to ask for the confidential information from the dentist’s receptionist. Simply requesting the confidential information by itself is not unlawful. Had the police went to each of Yenzer’s medical providers and blindly requested appointment dates and times, then the police may have gone too far. However, in this case they were following legitimate information they received that eventually leads to the arrest of a fugitive. Quick Assessment Questions (QAQs) 1. Which landmark case established that unless a suspect in a custodial interrogation is informed of his Fifth Amendment rights beforehand, any confession would be presumed involuntary and coerced and not admissible in court? a. U.S. v. LaGrou Distribution Systems b. Miranda v. Arizona c. Braswell v. United States d. State v. Yenzer e. None of the above Answer: b 2. Which Amendment to the U.S. Constitution requires the authorities to obtain a warrant before searching areas where a citizen has a reasonable expectation of privacy? a. First Amendment b. Fourth Amendment c. Fifth Amendment d. Sixth Amendment e. None of the above Answer: b 3. What is the Fifth Amendment guarantee providing that a defendant cannot be subject to prosecution twice for the same offense? a. Reno I b. Fruit of the poisonous tree c. The Exclusionary rule d. Double jeopardy e. None of the above Answer: d 4. Criminal procedure defines the boundaries of behavior and sanctions for violating those boundaries. Answer: False 5. The burden of proof in criminal cases is by a preponderance of the evidence. Answer: False 6. Business records of a corporation are not subject to Fifth Amendment safeguards. Answer: True Solution Manual for The Legal Environment of Business: A Managerial Approach: Theory to Practice Sean P. Melvin, Michael A. Katz 9780078023804
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