CH-3-4 The American Judicial System, Jurisdiction, and Venue – The Legal Environment of Business: A Managerial Approach: Theory to Practice : Book Guide

This Document Contains Chapters 3 to 4 Chapter 3: The American Judicial System, Jurisdiction, and Venue CHAPTER OVERVIEW The chapter provides students with a wide-ranging perspective of the structure and function of American courts. Lawsuits are a reality in daily business operations and business owners and managers should be prepared with a fundamental knowledge of the system. The chapter begins with an explanation of how federal and state courts operate in tandem, examines how law is developed via appellate courts, and concludes with coverage on jurisdiction and venue with consideration of special jurisdiction issues in cyberspace. KEY LEARNING OUTCOMES Outcome Accreditation categories Explain the role and structure of the judiciary in the American legal system and distinguish between state and federal courts. Knowledge; Analysis Articulate how the law develops via adjudication of cases. Knowledge; Analysis Apply the rules of jurisdiction and venue in traditional and cyber settings. Analysis; Critical thinking TEACHING OUTLINE A. Role and Structure of the Judiciary [P.65] Points to emphasize: • The judiciary is a collection of federal and state courts existing primarily to adjudicate disputes and charged with the responsibility of judicial review. • State versus Federal Courts: State courts adjudicate matters dealing primarily with cases arising from state statutory, common, or state constitutional law; while federal courts are concerned with national laws, federal constitutional issues, and other cases that are outside the purview of state courts. Teaching Tip: How the mechanism works Once the discussion of federal and state courts begins, students become anxious to learn the nuts and bolts of a trial. I have found it helpful to simply point out that we have to learn about the structure of the mechanism first (in this chapter), and learn how the mechanism works to resolve disputes in the next chapter. o State Courts: All states have two types of courts: state trial courts and state appellate courts, in which majority of court cases in the United States are filed. • State Trial Courts: Where parties present their cases and evidence. • State trial courts have either general authority (organized into geographic districts) or limited authority (confined to a particular type of dispute) to hear a particular type of case. • For minor matters and cases with a dollar value that is relatively low (typically less than $10,000), states provide local courts. • Trial courts are often divided into those that hear civil matters and those that hear criminal matters. • State Appellate Courts: Primarily concerned with reviewing the decisions of trial courts. • Only appellate courts are considered courts of authority that have the right to set precedent. • States vary as to how state trial court judges are selected (general elections, appointment process, or a combination). o Federal Courts: Consist of U.S. district courts, the U.S. courts of appeal (circuit courts of appeal, and the U.S. Supreme Court). • U.S. District Courts: Serve the same trial function as state trial courts, but for issues involving federal matters or matters involving state law when the parties are from different states and meet other jurisdictional requirements. • Circuit Court of Appeals: The thirteen U.S. courts of appeal, each of which reviews the decisions of federal district courts in the state or several states within its circuit, are the intermediate appellate courts of precedent in the federal system. • The circuits are divided geographically - Figure 3.1: Map of the U.S. Circuits [P.69]. o U.S. Supreme Court: The nine justices of the Supreme Court are the ultimate arbiters of federal law that has both original and appellate jurisdiction to finalize a legal decision on any given case. Teaching Tip: Use the Court Students are fascinated by the inner-workings of the U.S. Supreme Court. Former Chief Justice Rehnquist wrote an excellent book on the process used by the Court to select cases, conferences, and oral argument (The Supreme Court: How it Was and How it Is). Audio recordings and transcripts of oral arguments are available from the Court’s Web site and are an excellent tool for generating interest and discussion. The nomination and confirmation process is also an excellent catalyst for discussion. • The odds of getting to this level are slim; most of these cases involve conflict among the circuits and relatively complex commercial matters (Table 3.1: Supreme Court Case Acceptance Rate [P.70]) • All federal judges are selected via the appointment process. Chalk Talk: Federal and State Courts This is an opportunity to give a little “local color” to your course by creating a grid and asking students to give the specific name of a court from their home state. I use a diagram on the board and fill in as I go along. This also helps students understand how courts operate in tandem. Here is an example the diagram I use for the courts in Pennsylvania. B. How the Law Develops [P.70] Points to emphasize: • State trial courts rule on certain points of state law and render a decision that is binding on the parties, but no one else; only when an appellate court affirms or reverses this decision is that point of law applied to all future cases. • Figure 3.2: Understanding State and Federal Courts [P.70] Concept Summary: Role and Structure of the Judiciary [P.72] C. Jurisdiction and Venue [P.72] Points to emphasize: • Jurisdiction is a court’s authority to decide a particular case based on (1) who the parties are, and (2) the subject matter of the dispute, while venue is a determination of the most appropriate court location for litigating a dispute. • Jurisdiction and Business Strategy: The cost-benefit analysis involving jurisdictional restrictions may affect the managerial decision-making process when a company or individual contemplates filing a lawsuit. • Overview of Jurisdiction: Jurisdiction’s origins lie in the Constitution (Due Process Clause of Fifth & Fourteenth Amendments), while appellate courts and legislatures have shaped the framework used by modern courts to analyze jurisdiction questions. o Two-Part Analysis: A court must have both (1) subject matter jurisdiction (court’s authority over the dispute) and (2) personal jurisdiction (court’s authority over the parties). • Subject Matter Jurisdiction: Authority over the Dispute: State statutes give state trial courts general subject matter jurisdiction on virtually all matters involving a state statute, state common law, or a state constitutional issue. o Federal district courts have limited subject matter jurisdiction: issues involving a federal question or issues in which the U.S. is a party in the litigation. o Federal courts also have subject matter jurisdiction in diversity of citizenship cases when the amount in controversy is more than $75,000. - Original versus Concurrent jurisdiction (Table 3.2: Sets out requirements)[P. 74-75] -Choice of Forum Self-Check: Does a federal district court located in New Jersey have subject matter jurisdiction? [P.75] -Jurisdiction over Property • Personal Jurisdiction: Typically, the focus of a personal jurisdiction analysis is on the conditions of the controversy and the actions of the defendant. o Out-of-State Defendants: (1) The court’s jurisdiction must be authorized by a state long-arm statute; and (2) the court must ensure that exercising jurisdiction over an out-of-state defendant meets the constitutional requirements of fairness and due process (determined by examining some level of minimum contacts and a finding that the defendant purposefully availed themselves). o Injurious Effects: Courts will also consider if whether it was reasonably foreseeable that the defendant’s actions would have an injurious effect on a resident of that state (narrowly applied to cases involving intentional injurious acts). o Physical Presence: The physical presence of an out-of-state party in a particular state is generally an automatic basis for jurisdiction over the defendant by both that state’s courts and federal trial courts within that state. Case 3.1 Clemens v. McNamee, 615 F.3d 374 (5th Cir. 2010) [P. 78] Facts: McNamee had been an athletic trainer who had worked for both the Toronto Blue Jays and New York Yankees baseball teams and after authorities convinced McNamee that they had sufficient evidence to convict him for injecting athletes with anabolic steroids, McNamee agreed to cooperate with investigators in exchange for immunity from prosecution. During an interview with investigators, McNamee admitted that he had administered the drugs to star pitcher Roger Clemens both in Toronto and New York. McNamee repeated these allegations to Major League Baseball investigators and to a reporter during an interview with Sports Illustrated. In 2008, Clemens, a resident of Texas, filed suit against McNamee for defamation in Texas. The trial court dismissed the suit due to lack of personal jurisdiction because the focal point of McNamee’s statements was not in Texas. Clemens appealed. Issue: Does the Texas court have jurisdiction over McNamee based on the injurious/harmful effects on Clemens? Ruling: The Court of Appeals for the Fifth Circuit upheld the trial court’s ruling in favor of McNamee and dismissed Clemens’s complaint. The court analyzed McNamee’s contacts with the sate and Texas within the context of the alleged defamation claim and concluded that McNamee did not have sufficient minimum contacts as required by the long-arm statute and due process. The court held that to support personal jurisdiction a defamation claim, the forum must be the “focal point” of the story. Answers to Case Questions 1. What is the practical implication of this decision? Does it mean that Clemens cannot bring suit for defamation in any court? Answer: This decision simply means that Clemens cannot file suit in Texas. Practical Implication: The decision means Clemens cannot bring suit in Texas because McNamee’s statements did not have sufficient contacts with the state. However, Clemens could still potentially bring a defamation suit in a court where McNamee's statements had a significant impact or where McNamee had sufficient contacts related to the defamatory claims. 2. If McNamee had claimed that he injected Clemens with the drugs while in Texas, would that change the court’s analysis? How? Answer: Perhaps. The Calder standard involves injurious effects for a defamation claim. Thus, the focal point is the news story about Texas activities which may be enough for the Texas court to have personal jurisdiction over McNamee. Change in Analysis: If McNamee had claimed that he injected Clemens with drugs while in Texas, it would likely change the court’s analysis. The court would then consider Texas as having a more direct connection to the defamation claim, potentially meeting the minimum contacts requirement necessary for personal jurisdiction. o Voluntary: A court has personal jurisdiction if the parties agree to litigate in a specific court. o Voluntary agreements are usually done through a forum selection clause written in a contract between the parties (Shute v. Carnival Cruise Lines. o Figure 3.3: Sample Forum Selection Clause [P.79] Case 3.2 Estate of Weingeroff v. Pilatus Aircraft, 566 F.3d 94 (3rd Cir. 2009) [P.79] Facts: Weingeroff was a passenger on a plane manufactured by a Pilatus, a Swiss company, and was killed when the plane crashed when approaching a small airport in PA. Weingeroff’s estate brought a diversity action in a federal district court situated in the Eastern District of PA alleging negligence and product liability against Pilatus. Pilatus claimed they had no offices, no agents, no commercial transactions with PA residents, and no physical presence in the state that constitutes purpose availment, and thus sought to dismiss the case for lack of personal jurisdiction. Weingeroff off pointed to evidence that (1) Pilatus had a nationwide marketing campaign in the U.S. to sell its planes; and (2) Pilatus has purchased over $1 million in products, services, and equipment from PA suppliers. Issue: Has Pilatus purposefully availed themselves by some affirmative act sufficient to satisfy personal jurisdiction in PA? Ruling: No. The court pointed out that (1) Pilatus had not sold any aircraft to purchasers in PA or shipped anything directly to persons or entities in PA; (2) Pilatus has not advertised or marketed its products in PA and did not design the plane for the PA market specifically; and (3) the $1 million in purchases from suppliers in PA represented less than 1 percent of Pilatus’s total annual purchases for an approximately five-year period. Answers to case questions: 1. What facts could you change that may sway the court’s judgment in analyzing personal jurisdiction over Pilatus in this case? Answer: In order to have personal jurisdiction over Pilatus in this case the facts would have to require contacts that amount to a deliberate reaching into PA to target its citizens. In this context, the court’s judgment would be swayed if the facts indicated that Pilatus advertised or marketed its products specifically in PA and to PA residents as opposed to a mere derivative benefit of its attempt to exploit the U.S. as a national market. Moreover, a finding that Pilatus shipped planes directly to persons or business in PA would likely sway the court’s judgment in finding that Pilatus purposefully availed themselves in this case. 2. Does this decision mean that Weinger off is without any legal recourse against Pilatus unless the case is brought in Swiss courts? Answer: Yes because the federal and state courts lack personal jurisdiction over Pilatus. The only way that Weinger off could have legal recourse against Pilatus in the U.S. is if the parties voluntarily agreed to litigate in a specific court within the country. 3. Suppose the plane has crashed and injured a pedestrian on the ground. Given the court’s reasoning, would the victim be able to bring a case against Pilatus in a Pennsylvania (state or federal) court? Answer: No, the court would apply the same reasoning in holding that they lack personal jurisdiction over Pilatus. Concept Summary: Jurisdiction [P.80] • Venue: The legal concept that defines the most appropriate location for the trial. o Typically, state statutes provide that venue in a civil case is where the defendant resides or is headquartered, while in a criminal case the venue is ordinarily where the crime is committed. Legal Implications in Cyberspace: Minimum Contacts over the Internet [P.81] • The Zippo Standard: A sliding scale approach (based on three points along the scale: passive, interactive, and integral to the business model) for measuring the amount of minimum contacts a party has based on the interactivity of a Web site. • Zippo Manufacturing Company v. Zippo Dot Com, Inc. o Passive: On one far end of the continuum, a party with a passive Web site that provided information that could be accessed by any Internet user cannot be the sole basis for personal jurisdiction. o Interactive: The middle of the continuum applies when a Web site provides users with some interactive function where users may exchange information, purchase products, download or upload material via the Web site, or other uses that involve the user activity beyond merely viewing the content of the Web site. o Integral to Business Model: The other far end of the scale is a business where the use of the Web site is an integral part of a business model and is used to accomplish commercial transactions with residents in the state of the court’s jurisdiction. o Figure 3.4: Zippo Sliding Scale Test [P.83] • Adoption of the Zippo Standard: Soon after Zippo was decided, several other courts began to use the same type of analytical framework. Self-Check: Would the court have personal jurisdiction under the Zippo standard? [P.84] Case 3.2 Mink v. AAAA Development LLC, 190 F.3d 333 (5th Cir. 1999) [P.85] Facts: Mink, a Texas resident, developed a computer program and, while awaiting a patent, was approached about potential marketing services by AAAA (a Vermont corporation). In the negotiations, Mink shared ideas and information on his system with AAAA, and later filed suit in a federal district court in Texas against AAAA alleging that they conspired to copy his program for financial gain. AAAA did not own property or have any other contact in Texas, but they did maintain a Website to advertise its software over the internet. The site was available to all users, including residents of Texas. Issue: Is the Web site along a sufficient contact to warrant jurisdiction in Texas? Ruling: No. In expressly adopting the Zippo standard, the court reasoned that although the Web site did have some level of interactivity, it was not sufficient to satisfy the minimum contacts requirement. Answers to case questions: 1. Where did AAAA Web site fall on the sliding scale of the Zippo standard? Answer: AAAA’s Web site falls primarily on the passive end of the continuum because it could be accessed by an Internet user and had minimal interactive functions. 2. As a practical matter, what happens to Mink’s case now? May he refile it in another court? Answer: As a practical matter Mink’s case is dismissed because it lacks personal jurisdiction. He could file his case in a Vermont federal district court, which would have personal jurisdiction over AAAA. However, it is important to note that the cost-benefit analysis involving jurisdictional restrictions may affect Mink’s decision-making process because litigating disputes in out-of-state courts will increase the costs of litigation. Talking Points: Additional Discussion Questions on the Zippo standard 1. Does anyone in this class sell merchandise from a website? Answer: Selling Merchandise Online: If anyone sells merchandise from a website, the legal implications of their online transactions are important to consider. 2. If so, where does your transaction fall on the Zippo scale? Answer: Zippo Scale: Transactions on the Zippo scale vary from passive (informational websites) to active (conducting business). If the website involves substantial interaction or transactions with users in multiple states, it might fall in the middle or upper end of the scale. 3. How could a business protect themselves from being hauled into an out of state court on the basis of their website? Answer: Protecting Against Out-of-State Jurisdiction: Businesses can protect themselves by including a jurisdiction clause in their terms of service, limiting where disputes can be resolved. Additionally, they should ensure compliance with relevant state laws and avoid targeting or engaging in substantial business activities in states where they do not wish to be subject to jurisdiction. D. E-Mail and Minimum Contacts [P.85] Points to emphasize: • E-mail communication between parties with ongoing business relationships has been found to be sufficient minimum contacts by a limited number of courts. E. International Jurisdiction for Internet Transactions [P.86] Points to emphasize: • Country of Origin Standard: In international Web transactions, generally the courts in the location of the Web site’s servers will have jurisdiction over any disputes arising out of the use of the Web site. • Other Theories of Jurisdiction in Electronic Commerce: Australia’s highest court issued a decision in 2002 that American-based publisher Down Jones could be sued in Australia for defamation based on an article that appeared on its Web site, even though Dow Jones has no presence in Australia and its Web site and infrastructure are located in New Jersey. Concept Summary: Minimum Contacts on the Internet [P.87] END OF CHAPTER PROBLEMS, QUESTIONS AND CASES Theory to Practice [P.88] 1. In Wilmington v. Santiago, courts in Maryland (Santiago’s headquarters) and Delaware (based on Santiago’s minimum contacts) would have personal jurisdiction. Given the nature of the dispute, state courts would typically have subject matter jurisdiction. But it is important to note that because the amount in controversy exceeds 75,000, a federal court would also have subject matter jurisdiction. [Ties to “Jurisdiction”] 2. The allegations involve conduct in Delaware and both parties are relatively close to Delaware, so that court would likely have venue. [Ties to “Venue”] 3. This will now make it more expensive to litigate the dispute. Wilmington will have to use a cost-benefit analysis in deciding whether it is worth it to pursue Santiago in an out of state court. [Ties to “Jurisdiction and Business Strategy”] 4. Probably not. Parts did not purposefully avail themselves to Delaware ad had only brief advertising contacts. The fact that the parts ended up in Delaware is not sufficient (Asahi case). [Ties to “Minimum Contacts”] 5. Parts would now have to be considered under the Zippo standard. If the Web site falls into the “interactive” side, then Parts has minimum contacts. But having a Web site alone is NOT sufficient for minimum contacts. Parts must still have purposefully availed themselves to Delaware residents/businesses in order for the Delaware court to have jurisdiction. [Ties to “Minimum Contacts”] 6. A court would use the Zippos sliding scale test. [Ties to “Jurisdiction in Cyberspace”]. Manager’s Challenge [P.89] A sample answer to all Manager’s Challenge questions is provided in the student and instructor versions of this textbook’s Web site www.mhhe.com/melvin. Case Summary 3.1: Personal Jurisdiction: Bickford v. Onslow Memorial Hospital Foundation [P.89] 1. Does the Maine court have jurisdiction over Onslow? Answer: No. The Maine court lacks personal jurisdiction over Onslow unless it could be shown that Onslow has sufficient minimum contacts with Maine according to Maine long-arm statutes. Case Summary 3.2: Jurisdiction: Forum Selection Clause: M/S Bremen v. Zapata Off-Shore Co. [P.90] 1. Does the court in Tampa have jurisdiction? Answer: No. 2. Why or why not? Answer: The parties signed a forum selection clause that obligates the parties to litigate any dispute arising out of the contract in an International Commercial Court in London. 3. Will the forum selection clause be enforced? Why or why not? Answer: The forum selection clause would likely be enforced because Zapata, a non resident party, agreed to the jurisdiction of the International Commercial Court in London when they did no alter that part of the contract prior to signing the agreement. Case Summary 3.3: Purposeful Availment: Pennzoil v. Colelli [P.90] 1. Has Colelli purposefully availed itself to Pennsylvania to warrant personal jurisdiction? Answer: A court would likely find that Colelli had purposefully availed itself to Pennsylvania to warrant personal jurisdiction. Here, Colelli has placed goods in the stream of commerce and as a result benefited economically from the sale of the final product in Pennsylvania, indirectly benefiting from Pennsylvania laws that regulate and facilitate commercial activity. The fact that sixty percent of the oil produced by Ohio producers, supplied by Colelli, was shipped to refineries in Pennsylvania, indicates that Colelli benefited economically from Pennsylvania sales. These benefits accrue regardless of whether Colelli directly conducts business in Pennsylvania and therefore they have purposefully availed itself to Pennsylvania. Case Summary 3.4: Minimum Contacts: World-Wide Volkswagen Corp. v. Woodson [P.90] 1. Who prevails and why? Answer: World-Wide Volkswagen Corp. prevails because the Oklahoma court does not have personal jurisdiction. 2. Are the minimum contacts requirements being met? Why or why not? Answer: No. According to the facts, World-Wide Volkswagen Corp. did not have any business in Oklahoma, had no agents in Oklahoma, and showed no advertisement in Oklahoma. Therefore, Woodson seeks to establish minimum contact through this one isolated incident that occurred in Oklahoma and that is insufficient absent any systematic contact. 3. Since the car is inherently mobile, does that mean that jurisdiction is appropriate in any state where the car has traveled? Answer: No. Though it might be foreseeable that an automobile is inherently mobile and may travel into any state, foreseeability alone is not a sufficient benchmark for personal jurisdiction. Foreseeability comes into play when the defendant’s contracts with the forum state are such that the defendant can foresee that he will be held under the forum state’s jurisdiction if conflict arises. Just because a product is put into the stream of commerce doe not equate to a formation of sufficient contacts with every state. Case Summary 3.5: Minimum Contacts Via the Web and the Zippo Standard: Toys “R” Us, Inc. v. Step Two, S.A. [P.91] 1. Does the Federal court in New Jersey have subject matter jurisdiction over this case? Answer: Yes, the Federal court in New Jersey has subject matter jurisdiction over this case under Diversity of Citizenship, assuming that the amount in controversy is more than $75,000. 2. Has Step Two purposefully availed themselves in New Jersey and, thus, have the requisite minimum contacts? Why or why not? Answer: No. There is insufficient evidence that Step Two purposefully availed itself of the privilege of conducting business in New Jersey such that an intent to interact with New Jersey is demonstrated. In fact, Step Two has never made a sale in the United States. 3. Analyze this case under both the Zippo and Asahi frameworks. Describe the analysis and potential outcome under each. Which one is the correct test to use and why? Answer: Under the Zippo and Asahi frameworks, the level of interactivity seems to go beyond the passive point. Here, Step Two’s Web site is more then a “billboard advertisement.” However, on the other end of the continuum, the Web Site is not an Integral business model per say vis-à-vis accomplishing commercial transactions with residents in New Jersey. Therefore, the Web site falls within the interactive point where the middle of the continuum applies. For cases that fall into this category, the court would be required to examine the interactivity more closely on a case-by-case basis with a focus on the level of interactivity and commercial nature of the Web Site. In analyzing this test, the fact that no direct evidence was presented indicating Step-Two made any direct transactions to New Jersey residents, the case falls on the passive side of the scale and no minimum contacts exist. Case Summary 3.6: In Rem Jurisdiction; Office Depot v. Zuccarini [p. 91] 1. Does in rem and quasi in rem jurisdiction encompass ownership of domain names? Answer: The statute makes domain names a basis for jurisdiction in the same way that property ownership is the basis for jurisdiction. Ownership of Domain Names: In rem and quasi in rem jurisdiction can encompass domain names, as they involve property interests that can be seized or adjudicated. Domain names are treated as property for these purposes. 2. Is the court exercising in rem or quasi in rem jurisdiction. Answer: Quasi in rem (in rem is determining title). Type of Jurisdiction: The court is exercising in rem jurisdiction over the domain names. In rem jurisdiction allows a court to adjudicate rights to property within its control, including domain names. 3. Why can the court obtaining jurisdiction to allow the sezure and sale of assets without personal jurisdiction authority? Answer: Quasi in rem jurisdiction allows a court’s jurisdiction over property within their boundaries. Jurisdiction Without Personal Authority: The court can seize and sell assets under in rem jurisdiction because it is focusing on the property itself (the domain names), not the personal liability of individuals. This type of jurisdiction allows for action directly against the property. Case Summary 3.7; Jurisdiction through Website, Tempur-Pedic International v. Go Satellite Inc. [P. 92]. 1. What standard should the court apply to determine whether the website constitutes sufficient contacts to warrant jurisdiction? Answer: Zippo sliding scale. Standard for Jurisdiction: The court should apply the Zippo sliding scale test to determine whether the website constitutes sufficient contacts. This test assesses the level of interactivity and commercial nature of the website to establish jurisdiction. 2. Does the court have personal jurisdiction over Satellite? Why or why not? Answer: Probably. The type of contacts are highly interactive (billing, shipping, chatting) and fall on the minimum contacts side of the scale. Personal Jurisdiction: Whether the court has personal jurisdiction over Satellite depends on the findings under the Zippo test. If Satellite's website is deemed interactive and engages in substantial commercial activity with residents in the court's jurisdiction, then personal jurisdiction is likely. 3. Name some examples of “interactivity” that a court may consider when analyzing personal jurisdiction through a website? Answer: Credit card transactions, PayPal transactions, shipping, chatting with customer service, e-mail with links and downloads, video streaming for advertising. Examples of Interactivity: Examples include allowing users to make purchases directly through the website, offering detailed product information or customer support, and engaging in targeted marketing or advertising to residents of the forum state. Quick Assessment Questions (QAQs) 1. According to the Court Mink v. AAAA Development, which of the following is true? a. If a Web site maintains some level of interactivity, it must be sufficient to satisfy the minimum contacts requirement. b. Under the Zippo standard, the showing that a Web site is accessible to residents is sufficient to establish minimum contacts. c. Under the Zippo standard, passive Web sites that provide information that can be accessed by any Internet user alone do not provide a basis for personal jurisdiction. d. Under the Zippo standard, the “billboard” test indicates it is likely that minimum contacts are established. e. None of the above Answer: c 2. Which of the following is considered a court of authority? a. U.S. Supreme Court b. U.S. District Court c. Intermediate State Appellate Court d. a and c e. all of the above Answer: d 3. Widget Co. contracts to sell $90,000 of widgets to Dennis, a resident of Pennsylvania. Widget Co. is a Delaware-based company with a manufacturing facility in Pennsylvania. Upon receiving the widgets, Dennis finds them to be defective. Dennis may file suit against Widget Co. in: a. The Circuit Court of Appeals b. A U.S. District Court in Pennsylvania c. A Pennsylvania State Trial Court d. a and c e. b and c Answer: e 4. The decisions of trial courts are binding only on the parties in that particular matter. A) True B) False Answer: A 5. Federal courts may have subject matter jurisdiction over all cases involving parties from two different states (or if one party is from outside the United States). A) True B) False Answer: B 6. The International Shoe sliding scale test applies to establish whether or not minimum contact exists via a Web site. A) True B) False Answer: B Chapter 4: Resolving Disputes: Litigation and Alternative Dispute Resolution Options CHAPTER OVERVIEW Coverage in this chapter continues the discussion of the American courts of the previous chapter with an overview and explanation of how parties resolve legal disputes. The chapter begins with a managerial approach towards understanding dispute resolution by putting it in the context of business planning. Although the process of civil litigation is explained with some degree of detail, the chapter also includes significant coverage of alternative dispute resolution (ADR) options that are in use in the business environment. KEY LEARNING OUTCOMES Outcome Accreditation Categories Articulate how dispute resolution can be used as part of business planning Application, Critical Thinking Explain the process of civil litigation as a method of resolving disputes. Knowledge, Critical Thinking, Ethics Identify several methods of alternative dispute resolution (ADR) and explain potential advantages and drawbacks of using ADR. Application, Critical thinking TEACHING OUTLINE A. Dispute Resolution and Business Planning [P.95] Points to emphasize: • Dispute resolution options are an important part of business planning and strategy that requires a thoughtful cost-benefit analysis. • Table 4.1: Dispute Resolution Options for Classic Retail Outlet vs. SignCo. [P.96], provides a comparative table of a cost benefit analysis for resolving a hypothetical legal dispute. B. Civil Litigation [P.97] Points to emphasize: • Civil litigation is the term used to describe a dispute resolution process where the parties and their counsel argue their view of a civil controversy in a court of law. C. Stages of Litigation [P.97] Points to emphasize: • It is important to note that the timing of these stages may sometimes overlap. • Prelawsuit: Demand and Prelitigation Settlement Negotiations: When a dispute arises, one party will make a demand (informal or formal) of the other party in which the principals lay out the basics of the dispute and demand a certain action; this is followed by an informal prelitigation settlement discussion. o Standing: In order for one party to maintain a lawsuit against another party: (1) injury in fact; and (2) harm that is direct, concrete, and individualized; and (3) has a legal redress (remedy). Chalk Talk: Stages of Litigation I find that students benefit from seeing the stages of litigation on the board during this lecture. I write each stage across the top of the board an fill in as I cover each component of each stage. Use the Concept Summary on p. 107 as a guide. For example for the first two stages I write: • Pleadings Stage: o Complaint and Summons: If informal attempts at resolution fail, the plaintiff initiates the lawsuit by filing a complaint and arranges for service of the defendant with a summons. o Figure 4.1: Sample Complaint: Classic Retail Outlets, Inc. v. Signs Designs Company [P.99] o Answer: Responds to each paragraph of the complaint in an attempt to narrow the scope of the issues in controversy (if the defendant fails to answer within the prescribed time, she is said to default and will generally lose the case without the benefit of a trial) o Figure 4.2: Sample Answer: Classic Retail Outlets, Inc. v. Signs Designs Company [P.100] o Counterclaim: Filed in addition to the answer when the defendant believes that the plaintiff has caused her damages arising out of the very same set of facts as articulated in the complaint. o Cross-Claim: Filed when the defendant believes that a third party is either partially or fully liable for the damages that the plaintiff has suffered and, therefore, should be involved as an indispensable party in the trial. • Motions: A document filed by one party that requests court action in a matter pertaining to the litigation (Table 4.2: Motions Used During Litigation [P.102]) Legal/Ethical Reflection and Discussion: Issue: Potential of abuse of the discovery process. • Discovery Stage: The legal process for the orderly exchange of evidence. o Unless protected by a legal privilege, all information relative to the case is subject to methods of discovery. o Methods of Discovery: The rules for exchanging information during discovery are set out in the Rules of Civil Procedure and are accomplished primarily by four methods: depositions, interrogatories, requests for production, and request for admissions. • Depositions: Method of discovery where a witness gives sworn testimony to provide evidence prior to trial. • Interrogatories: Method of discovery where one party submits written questions to the opposing party attempting to gather evidence prior to trial. • Requests for production: Requests, usually very wide in scope, aimed at producing specific items to help one party discover some important fact in the case. • Discovery does have some important limits such as in the case of legally protected business information. [Connects to Bridgestone case on P. 104] • Request for Admissions: A set of statements sent from one litigant to an adversary, for the purpose of determining what facts are in dispute and which facts both parties accept as true. Case 4.1 20/20 Financial Consulting, Inc. v. John Does 1-5 [P. 104] Facts: After 20/20 Financial Consulting (20/20) discovered allegedly defamatory statements about their firm posted on various websites and blogs by anonymous authors, they conducted an unsuccessful preliminary investigation to discover the names of the authors from the operators of the websites and blogs. 20/20 filed suit naming five unknown authors as “John Doe” defendants and sought a court order to conduct expedited discovery in an attempt to establish the true identities of the authors. The rules that govern federal court procedures allow expedited discovery if the information obtained will make trial more efficient. Issue: Should 20/20 be given the opportunity to pursue their claim against the unknown defendants through use of discovery? Ruling: The U.S. District Court in Colorado found in favor of 20/20 and granted their request for expedited discovery. The court ruled that since the plaintiffs had exhausted reasonable attempts to identify the defendants through non-judicial means, they were entitled to use the tools of discovery in order to help them locate the anonymous authors of the alleged defamation. Answers to Case Questions: 1. Formal discovery has the force to law and can be compelled. Answer: Formal Discovery Force: Yes, formal discovery has the force of law and can be compelled. Courts can issue orders to compel the production of documents, testimony, or other evidence as part of the discovery process, and non-compliance can result in legal penalties. 2. Formal discovery must follow certain procedures. Answer: Discovery Procedures: Formal discovery must adhere to specific procedures outlined by the Federal Rules of Civil Procedure or state equivalents. This includes proper notice, adherence to deadlines, and compliance with limits on the scope of discovery to ensure it is relevant and proportional to the case. Case 4.2 Bridgestone Americas Holding, Inc. v. Mayberry, 854 N.E.2d 355 (Indiana 2006) [P.104] Facts: Mayberry filed a product liability action against Bridgestone alleging that tire tread separation cause a car accident that killed her son. During pretrial discovery, Mayberry sought the formula for the steel belt skim stock on the tire in question. Bridgestone objected to these requests and moved for a court order to prevent disclosure of all trade secrets used to produce the tires, including the skim stock formula. Issue: May a business protect trade secrets from discovery upon request of the opposing party? Ruling: Yes. Bridgestone demonstrated that the skim stock formula qualified as a trade secret, and Mayberry failed to meet their burden to show that the information is relevant and necessary to bring the material to trial. Answers to case questions: 1. If Bridgestone’s formula for the tire were already known to its competitors, would they have been able to protect it from discovery? Why or why not? Answer: Under these circumstances, a court would most likely determine that Bridgestone’s formula for the tire was discoverable. If the formula was already known to its competitors, then it would not have qualified as a trade secret. As such, Bridgestone would fail to meet its burden using the three-part test. 2. Under what circumstances would potential harm of disclosure outweigh the need for the information in a trial using the three-part test? Answer: Potential harm of disclosure may outweigh the need for the information in a trial in cases regarding a qualified trade secret that is a central asset to the party opposing discovery. In these cases, disclosure of the trade secret would likely put a company out of business or place them at an excessive disadvantage to their competition. SELF-Check: Methods of Discovery [p. 105]: Answers on P. 121 • Pretrial Conference: A meeting between the attorneys for the parties and the judge in the case several weeks prior to trial, with the objectives of encouraging settlement and resolving any outstanding motions or procedural issues that arose during the pleadings or discovery stages. • Trial: Takes place in front of a judge as the finder of law and with a jury as the finder of fact, or in some cases, the judge will act as both the finder of fact and the finder of law (bench trial). o Jury Selection & Opening: The trial begins with the process of asking potential jurors questions to reveal any prejudices that may affect their judgment of the facts; once the jury is selected, the attorneys present their theory of the case and what they hope to prove to the jury in opening statements. o Testimony and Submission of Evidence: After the opening statements, the plaintiff’s attorney asks questions in a direct examination of the witnesses on the plaintiff’s list to introduce relevant evidence, and the defendant’s attorney may then conduct cross-examinations of the witnesses (this process is repeated for the defendant’s witnesses). o Closing Arguments and Charging the Jury: Following the testimony and submission of the evidence, the attorneys sum up the case in a closing argument; the judge then proceeds with the charging of the jury by giving them instructions on how reach a factual decision in the case (the standard of proof in a civil case is preponderance of the evidence). o Deliberations and Verdict: After receiving the charge, jurors engage in deliberations until they reach a verdict, if they cannot agree on a verdict, this is known as a hung jury and the litigants must start the process all over again. o Posttrial Motions and Appeals: The losing party can file a posttrial motion to try and convince the original judge that the verdict was flawed, and they may appeal to a higher court that engages in judicial review to decide whether any errors were committed during the trial. o Collecting the Judgment: Although the prevailing party may have received a court judgment stating what she is entitled to recover from the defendant, collecting judgments may sometimes be difficult. Concept Summary: Stages of Litigation [P.107] Business Ethics Perspective: Ethical Issues Involved in Abusive Litigation [P.108] Teaching Tip: Springboard for Business Ethics Students are often interested in discussing abuse of the litigation process. This Business Ethics Perspective feature outlines a hypothetical legal dilemma involving abusive litigation, asks students to apply the Alston case, then provides questions that center on the ethical reasoning analysis. It is an excellent introduction to business ethics and corporate social responsibility which is covered the next chapter. D. Alternative Dispute Resolution [P.109] Points to emphasize: • ADR is the process by which disputes involving individuals or businesses are resolved outside of the federal or state court systems through the help of third parties. • The primary advantages of ADR are reductions in costs and time, preserving business relationships and privacy. • Informal ADR: Often involves the parties negotiating face to face or through intermediaries to arrive at a mutually agreeable solution without the use of a formal process. • Formal ADR: The primary methods of ADR are arbitration, mediation, expert evaluation, or some hybrid form of those methods and they usually arise as a result of a contract between two parties that have agreed ahead of time to resolve any disputes using a certain method. o When the agreement is by contract, sometimes the parties argue that the clause is not valid because it is too burdensome on one of the parties. Case 4.3 Hooters v. Phillips (1999): [P. 111] Facts: Phillips began working as a bartender at a Hooters restaurant in South Carolina in 1989. Five years later, Hooters initiated an alternative dispute resolution program among its employees. As part of that program, the company conditioned eligibility for raises, transfers, and promotions upon an employee signing an agreement to arbitrate employment-related disputes related to among others, discrimination or sexual harassment claims. The agreement provided for binding arbitration in accordance with a standard set of rules which were created and administered by Hooters. In 1994 and again in 1995, Phillips signed the agreement but did not obtain a copy of rules. In 1996, Phillips quit her job and refused to arbitrate based on the unfairness of the Hooters arbitration rules. Among the provisions should found to be unfair were: • Having to select arbitrators exclusively from a list provided by Hooters; • Hooters’ rights to expand the scope of the arbitration, to move for summary dismissal, and to record the proceeding without any similar right for the employee; • Hooters’ unilateral authority to bring an arbitration award to court in order to vacate or modify the award if they could show that the panel had exceeded its authority. After Phillips notified them that she intended to file suit for sexual harassment and employment discrimination, Hooters filed suit to compel arbitration. Issue: Is arbitration clause was unenforceable and void because it was not a true meeting of the minds required for an enforceable agreement between the parties? Ruling: Generally, the FAA requires courts to enforce them. However, the rules created by Hooters were so biased as to create a question as to fundamental fairness and the court held that the arbitration clause was invalid. Answers to Case Questions: 1. The question is intended to spur discussion on the using arbitration clauses to protect the employer versus fundamental fairness to employees. Answer: Arbitration Clauses and Fairness: Using arbitration clauses can protect employers by offering a less formal, often quicker resolution process. However, fairness must be a priority to ensure that arbitration is not disproportionately beneficial to one party. Employers should ensure that arbitration rules are balanced and transparent to avoid issues of unfairness. 2. Perhaps. One problem that Hooters has in this case is that they did not provide a copy of the rules. But the court was still convinced that the problem was that the rules themselves were too one-sided. Answer: Hooters’ Issue: Yes, the court found that the arbitration rules were fundamentally unfair, not just because Phillips lacked a copy, but because the rules were excessively biased in favor of Hooters. This lack of balance rendered the arbitration clause unenforceable. • Arbitration: In arbitration, the parties submit their dispute to one or more arbitrators, present evidence and limited witness testimony, and then a decision is made which is either binding or nonbinding depending on the agreement of the parties. o Legally Mandated Arbitration: Certain civil lawsuits are required to go through a nonbinding arbitration hearing before the case proceeds to trial in an attempt to encourage settlement. o Federal Arbitration Act: A statute in which Congress endorsed the use of arbitration as the preferred dispute resolution method in matters governed by federal law so long as the parties agreed to an arbitration clause. • The FAA provides a means for enforcing both arbitration agreements and the decisions of arbitrators though the use of federal courts (Gilmer v. Interstate/Johnson Lane Corporation ) Case 4.4 American Express v. Italian Colors Restaurant (2013) [P. 113] Facts: American Express (Amex) entered into agreements with Italian Colors Restaurant and other merchants (Merchants) who accept American Express credit cards. The agreement contains an arbitration clause which requires that all disputes between Amex and the Merchants be resolved through arbitration and prohibits any claim from being arbitrated on a class action basis. Nonetheless, Merchants filed a class action against Amex alleging violation of federal antitrust statutes. Amex moved to compel individual arbitration, but Merchants argued that the clause was invalid because the cost of expert analysis necessary to prove their antitrust allegations would greatly exceed the maximum recovery for an individual merchant plaintiff. Issue: Is the clause was unenforceable because of the prohibitive cost structure? Holding: The U.S. Supreme Court ruled in favor of Amex. The Court held that the Federal Arbitration Act (FAA) does not permit courts to invalidate a contractual waiver of legal rights based solely on the grounds that a plaintiff’s dispute resolution costs exceeds any potential amounts to be recovered. The Court concluded that the FAA reflects the overarching principle that arbitration is a matter of contract and that courts had a responsibility to rigorously enforce arbitration agreements according to their terms. Answers to Case Questions: 1. Perhaps. But the Court made clear that the arbitration clause was a matter of contract between two parties and courts should not interfere. Answer: Enforceability of the Clause: The Court upheld the arbitration clause, reinforcing that arbitration agreements are to be enforced according to their terms as stipulated in the Federal Arbitration Act (FAA). The prohibitive cost argument alone does not invalidate such agreements unless they undermine the overall fairness of the arbitration process. 2. The question is intended to spur discussion on whether an agreement via the merchants’ agreement was “voluntary.” Answer: Voluntariness of the Agreement: Whether the agreement was truly voluntary can be debated. While the Court emphasized enforcement of contractual terms, it is worth discussing if the lack of a class action option and high individual arbitration costs create a coercive environment that compromises genuine consent. • Mediation: ADR where a mediator is appointed to listen to the grievances and the arguments of both sides and communicate each party’s concerns to the other in an attempt to work toward a mutually satisfactory resolution (no decision is rendered). o Mediation is sometimes required by statute or court procedure before bringing a dispute to trial. • Expert Evaluation: Method of ADR where an independent expert acts as the neutral fact-finder; particularly useful for parties involved in a business dispute where the issues are somewhat complex and related to the intricacies of a certain industry or profession. Solutions For Managers: Online Dispute Resolution [P.114] • Hybrid Form of ADR: (Sometimes known as med-arb) Both parties first submit to mediation for a set period of time and if the mediation fails, the process then moves to binding arbitration. Concept Summary: Alternative Dispute Resolution (ADR) [P.117] END OF CHAPTER PROBLEMS, QUESTIONS AND CASES Theory to Practice [P. 118] 1. CP will likely move to end the litigation and compel arbitration consistent with the arbitration clause in the new lease. [Ties to ADR] 2. It is significant that the original lease did not have an arbitration clause because it casts doubt on the enforceability of the arbitration clause in the new lease. The fact that the new arbitration clause requires the parties to travel to California may be significant in that courts may invalidate an arbitration clause is it is found too burdensome on one of the parties. [Ties to ADR] 3. Hooters v. Phillips: Unenforceable as too one-sided. American Express v. Italian Colors: Arbitration clause enforceable under the Federal Arbitration Act because the plaintiff had not shown that the clause precluded her from exercising legal rights. [Ties to ADR] 4. To resolve this dispute, MII could 1) file a lawsuit, 2) use ADR, 3) engage in an informal settlement, or 4) revise the contract and continue the relationship. This question is intended to spur a discussion of dispute resolution options similar to the ones used in Table 4.1. [Ties to Dispute Resolution and Business Planning] 5. MII could attempt to obtain that information through • deposition of a CP manager who knew about the leak; and/or • interrogatories to CP management requesting information on the leak; and/or • request for production of any evidence (such as memoranda, e-mail, photos or letters) • request for admission that CP has actual knowledge of the leak. [Ties to Discovery Stage] 6. The Bridgestone case sets out the factors for protecting trade secrets from misappropriation during discovery. First, the party opposing discovery must show that the information constitutes a trade secret. The burden then shifts to the other party to show why the information is relevant and necessary. The court then weighs the need against potential harm to reach a decision. [Ties to Discovery Stage] Manager’s Challenge [P. 118] A sample answer to all Manager’s Challenge exercises are provided in the student and instructor versions of the textbook’s Web site www.mhhe.com/Melvin. Case Summary 4.1: Arbitration Provision in Contract: Doctor’s Assocs. Inc. v. Casarotto [P.118] 1. Is the arbitration provision enforceable? Why or why not? Answer: Yes. The arbitration provision is enforceable under the FAA which requires that “a written provision of […] a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such a contract…shall be valid, irrevocable, and enforceable, save upon such grounds as exists at law…for the revocation of any contract. 2. Suppose Montana state law required that an arbitration provision be underlined in the text of the contract and also noted on the first page of the contract. In such instances, would the arbitration provision still be enforceable? Why or why not? Answer: No. The FAA is a federal statute and therefore it preempts any state laws that are in direct conflict, as is the case here. Case Summary 4.2: Request for Production: Infinite Energy, Inc. v. Thai Heng Chang [P.119] 1. Who prevails and why? Answer: Infinite prevails because everything relevant to the dispute is discoverable unless the information is protected by a legal privilege. 2. Is this information necessary for Infinite’s case? Why or why not? Answer: Yes. Chang has allegedly leaked confidential information to competitors and it is realistic that if he had done so, he would have done it through an email account other than his work account, making such email accounts material to the case and within the scope of discovery. Case Summary 4.3: Arbitration Clauses and Public Policy: Exxon Shipping Corporation v. Exxon Seaman’s Union [P.119] 1. Who prevails and why? Answer: Exxon Shipping Corporation because while the federal labor laws embodied a strong policy favoring the settlement of labor disputes by arbitration, that policy was required to yield to the public policy and failure to do so is grounds for when courts may set aside the award of an arbitrator. Case Summary 4.4: ADR in Consumer Contracts: AutoNation USA Corporation v. Leroy [P.120] 1. Did the trial court rule correctly? Explain. Answer: No. The Retail Installment Contract, while it did not have an arbitration clause, falls under the clause in the Purchase Agreement since the Installment Contract came into effect only if there was a Purchase Agreement. Case Summary 4.5: Enforceability: Brower v. Gateway [P. 120] 1. How would you rewrite Gateway’s clause to be sure that it would be judged reasonable by the New York Court? Answer: One way Gateway could amend their arbitration clause is by mandating that any disputes arising out of the purchase of a product $2,000 or more be arbitrated before the International Chamber of Commerce. In doing so, they would effectively mitigate the unreasonable burden placed on parties alleging a claim against Gateway according to the court’s analysis. For those purchases less than $2,000, Gateway would need to find a more reasonable forum for arbitration or else it is likely the court would find the clause invalid as they have in the case at bar. 2. In this case, Brower was the named plaintiff in a potential class action against Gateway. What are the practical implications of Gateway’s loss in this case? If Gateway had prevailed, would that change the cost-benefit analysis involved in deciding whether to settle the case? Answer: The implications of this case were that significant since the cumulative claims of all of the class members may now proceed in a U.S. court rather than in an international arbitration. If Gateway would have won, they would have a significant advantage because the costs of international arbitration would likely exceed the benefits of pursuing the claim against Gateway. Case Summary 4.6: Privileged Information: Hickman v. Taylor [P. 121 1. Should information gathered be privileged? Answer: This question is intended to spur discussion on the role of attorney- client privilege in litigation. Yes, information gathered during legal preparation should be privileged to ensure candid communication between attorneys and their clients. 2. Does this privilege give corporations an advantage? Answer: In some cases it gives one party advantages, but the central role of the privilege should also be viewed in a wider context. The privilege can give corporations an advantage by protecting strategic insights and legal strategies from being disclosed to opposing parties. 3. Do you agree with the SCOTUS decision? Answer: This question is intended to spur discussion on the role of an attorney in terms of autonomy. Agreeing with the SCOTUS decision depends on balancing the need for legal protection with ensuring fair access to information. Quick Assessment Questions (QAQs) 1. Which of the following pleadings brings a third party into the litigation? a. Counterclaim b. Motion for Summary Judgment c. Summons d. Cross Claim e. Interrogatories Answer: d 2. Which of the following is an advantage of ADR? a. Cost b. Time c. Privacy d. Preserving the business relationship e. All of the above Answer: e 3. What discovery technique(s) can be used to obtain a statement from a witness to a civil litigation? a. Depositions b. Interrogatories c. Requests for Production d. Request for Admission e. a and b Answer: a 4. Unless protected by a legal privilege, all information relative to the case is subject to discovery. Answer: True 5. Parties to a civil litigation may file motions only during the discovery stage. Answer: False 6. Mediation provides the parties with a decision on who prevails in the dispute. Answer: False Solution Manual for The Legal Environment of Business: A Managerial Approach: Theory to Practice Sean P. Melvin, Michael A. Katz 9780078023804