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This Document Contains Chapters 5 to 6 Chapter 5 ADMINISTRATIVE Law Operation of Administrative Agencies [5-1] Judicial Review [5-2a] Rulemaking [5-1a] General Requirements Legislative Rules Questions of Law Interpretive Rules Questions of Fact Procedural Rules Legislative Control [5-2b] Enforcement [5-1b] Executive Branch Control [5-2c] Adjudication [5-1c] Disclosure of Information [5-2d] Limits on Administrative Agencies [5-2] Freedom of Information Act Privacy Act Government in the Sunshine Act Cases in This Chapter Chapter Outcomes After reading and studying this chapter, the student should be able to: •Explain the three basic functions of administrative agencies. •Distinguish among the three types of rules promulgated by administrative agencies. •Explain the difference between formal and informal methods of adjudication. •Identify (1) the questions of law determined by a court in conducting a review of a rule or order of an administrative agency and (2) the three standards of judicial review of factual determinations made by administrative agencies. •Describe the limitations imposed on administrative agencies by the legislative branch, the executive branch, and the legally required disclosure of information. TEACHING NOTES Administrative law is the branch of public law created by administrative agencies as rules, regulations, orders, and decisions to carry out the regulatory powers and duties of those agencies. Administrative agencies are governmental entities (other than courts and legislatures) that have authority to affect the rights of private parties. They are referred to as commission, board, department, agency administration, bureau or office. They regulate important matters of national safety, welfare and convenience. Much of federal, state, and local law in this country is established by administrative agencies, which leads some to criticize the power vested in this “fourth branch of government.” Administrative agencies serve an important function, however, relieving the legislative branch from the daunting task of considering every aspect of a specific problem in order to address it. Instead, legislators can pass an enabling statute and create an agency for the task. *** Chapter Outcome *** Explain the three basic functions of administrative agencies. 5-1 Operation of Administrative Agencies Most administrative agencies perform all three of the basic functions of government: (1) making rules; (2) enforcing law; and (3) adjudicating controversies. Administrative process refers to activities in which agencies engage while carrying out rulemaking, enforcement, and adjudicative functions. Congress passed the Administrative Procedure Act (APA) in 1946 to address issues raised by operation of agencies without checks and balances found in the legislative, executive and judicial branches. *** Chapter Outcomes *** Distinguish among three types of rules promulgated by administrative agencies. Explain the difference between formal and informal methods of adjudication. 5-1a Rulemaking Under the APA a rule is "the whole or a part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or process law or policy." Legislative Rules — often called regulations, are substantive rules issued by an administrative agency under the authority delegated to it by the legislature. Legislative rules have the force of law in contrast to interpretive and procedural rules. Most must be promulgated in accordance with the informal rulemaking procedures of the APA, which require prior notice, an opportunity for participation, and publication of a final draft. Formal rulemaking is more complex and involves finding facts, applying legal rules to the facts, and formulating orders. It requires opportunity for a hearing, with testimony and cross-examination of witnesses. Hybrid rulemaking is a procedure that incorporates some of the requirements of formal rulemaking without being as complex. In 1990, Congress enacted the Negotiated Rulemaking Act which authorizes, but does not require, agencies to use negotiated rulemaking. The negotiated agreement would become the basis for the proposed regulation. Interpretive and procedural rules are exempt from the APA. CASE 5-1 MAYO FOUNDATION FOR MEDICAL EDUCATION AND RESEARCH v. UNITED STATES Supreme Court of the United States, 2011 562 U.S. ____, 131 S.CT. 704, 178 L.ED.2D 588 http://scholar.google.com/scholar_case?q=131+S.+Ct.+704&hl=en&as_sdt=2,34&case=3055490070969307951&scilh=0 Roberts, C. J. Most doctors who graduate from medical school in the United States pursue additional education in a specialty to become board certified to practice in that field. Petitioners Mayo Foundation for Medical Education and Research, Mayo Clinic, and the Regents of the University of Minnesota (collectively Mayo) offer medical residency programs that provide such instruction. Mayo’s residency programs, which usually last three to five years, train doctors primarily through hands-on experience. Residents often spend between 50 and 80 hours a week caring for patients, typically examining and diagnosing them, prescribing medication, recommending plans of care, and performing certain procedures. Residents are generally supervised in this work by more senior residents and by faculty members known as attending physicians. In 2005, Mayo paid its residents annual “stipends” ranging between $41,000 and $56,000 and provided them with health insurance, malpractice insurance, and paid vacation time. Mayo residents also take part in “a formal and structured educational program.” [Citation.] Residents are assigned textbooks and journal articles to read and are expected to attend weekly lectures and other conferences. Residents also take written exams and are evaluated by the attending faculty physicians. But the parties do not dispute that the bulk of residents’ time is spent caring for patients. Through the Social Security Act and related legislation, Congress has created a comprehensive national insurance system that provides benefits for retired workers, disabled workers, unemployed workers, and their families. [Citation.] Congress funds Social Security by taxing both employers and employees under FICA on the wages employees earn. [Citations.] Congress has defined “wages” broadly, to encompass “all remuneration for employment.” § 3121(a). The term “employment” has a similarly broad reach, extending to “any service, of whatever nature, performed . . . by an employee for the person employing him.” § 3121(b). Congress has, however, exempted certain categories of service and individuals from FICA’s [and Social Security Act] demands. As relevant here, Congress has excluded from taxation “service performed in the employ of … a school, college, or university … if such service is performed by a student who is enrolled and regularly attending classes at such school, college, or university.” § 3121(b)(10). *** * * * On December 21, 2004, the Department adopted an amended rule prescribing that an employee’s service is “incident” to his studies only when “[t]he educational aspect of the relationship between the employer and the employee, as compared to the service aspect of the relationship, [is] predominant.” [Citation.] The rule categorically provides that “[t]he services of a full-time employee”—as defined by the employer’s policies, but in any event including any employee normally scheduled to work 40 hours or more per week—“are not incident to and for the purpose of pursuing a course of study.” [Citation,] (the full-time employee rule). The amended provision clarifies that the Department’s analysis “is not affected by the fact that the services performed . . . may have an educational, instructional, or training aspect.” [Citation.] The rule also includes as an example the case of “Employee E,” who is employed by “University V” as a medical resident. [Citation.] Because Employee E’s “normal work schedule calls for [him] to perform services 40 or more hours per week,” the rule provides that his service is “not incident to and for the purpose of pursuing a course of study,” and he accordingly is not an exempt “student” under § 3121(b)(10). [Citation.] After the Department promulgated the full-time employee rule, Mayo filed suit seeking a refund of the money it had withheld and paid on its residents’ stipends during the second quarter of 2005. [Citation.] Mayo asserted that its residents were exempt under § 3121(b)(10) and that the Treasury Department’s fulltime employee rule was invalid. [The District Court granted Mayo’s motion for summary judgment. The Government appealed, and the Court of Appeals reversed.] We granted Mayo’s petition for certiorari. [Citation.] We begin our analysis with the first step of the two-part framework announced in Chevron [USA Inc. v. Natural Resources Defense Council, Inc.], [citation], and ask whether Congress has “directly addressed the precise question at issue.” We agree with the Court of Appeals that Congress has not done so. The statute does not define the term “student,” and does not otherwise attend to the precise question whether medical residents are subject to FICA. [Citation.] * * * In the typical case, such an ambiguity would lead us inexorably to Chevron step two, under which we may not disturb an agency rule unless it is “‘arbitrary or capricious in substance, or manifestly contrary to the statute.’” [Citation.] In this case, however, the parties disagree over the proper framework for evaluating an ambiguous provision of the Internal Revenue Code. * * * The principles underlying our decision in Chevron apply with full force in the tax context. Chevron recognized that “[t]he power of an administrative agency to administer a congressionally created … program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress.” [Citation.] * * * Filling gaps in the Internal Revenue Code plainly requires the Treasury Department to make interpretive choices for statutory implementation at least as complex as the ones other agencies must make in administering their statutes. [Citation.] We see no reason why our review of tax regulations should not be guided by agency expertise pursuant to Chevron to the same extent as our review of other regulations. * * * We have held that Chevron deference is appropriate “when it appears that Congress delegated authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that authority.” * * * * * * The Department issued the full-time employee rule pursuant to the explicit authorization to “prescribe all needful rules and regulations for the enforcement” of the Internal Revenue Code. [Citation.] * * * * * * The full-time employee rule easily satisfies the second step of Chevron, which asks whether the Department’s rule is a “reasonable interpretation” of the enacted text. [Citation.] To begin, Mayo accepts that “the ‘educational aspect of the relationship between the employer and the employee, as compared to the service aspect of the relationship, [must] be predominant’” in order for an individual to qualify for the exemption. [Citation.] Mayo objects, however, to the Department’s conclusion that residents who work more than 40 hours per week categorically cannot satisfy that requirement. Because residents’ employment is itself educational, Mayo argues, the hours a resident spends working make him “more of a student, not less of one.” [Citation.] Mayo contends that the Treasury Department should be required to engage in a case-by-case inquiry into “what [each] employee does [in his service] and why” he does it. [Citation.] Mayo also objects that the Department has drawn an arbitrary distinction between “hands-on training” and “classroom instruction.” [Citation.] We disagree. Regulation, like legislation, often requires drawing lines. Mayo does not dispute that the Treasury Department reasonably sought a way to distinguish between workers who study and students who work, [citation]. * * * The Department reasonably concluded that its full-time employee rule would “improve administrability,” [citation], and it thereby “has avoided the wasteful litigation and continuing uncertainty that would inevitably accompany any purely case-by-case approach” like the one Mayo advocates, [citation]. * * * We do not doubt that Mayo’s residents are engaged in a valuable educational pursuit or that they are students of their craft. The question whether they are “students” for purposes of § 3121, however, is a different matter. Because it is one to which Congress has not directly spoken, and because the Treasury Department’s rule is a reasonable construction of what Congress has said, the judgment of the Court of Appeals must be affirmed. Interpretive Rules — are statements issued by an administrative agency indicating its construction of its governing statute; not automatically binding on private parties or the courts. Procedural Rules — are rules issued by an administrative agency establishing its organization, method of operation, and rules of conduct for practicing before it. CASE 5-2 PEREZ v. MORTGAGE BANKERS ASS’N. Supreme Court of the United States, 2015 575 U.S.____, 135 S.Ct. 1199, 191 L.Ed.2d 186 Sotomayor, J. These cases began as a dispute over efforts by the Department of Labor to determine whether mortgage-loan officers are covered by the Fair Labor Standards Act of 1938 (FLSA), [citation]. [This statute is discussed in Chapter 42.] The FLSA “establishe[s] a minimum wage and overtime compensation for each hour worked in excess of 40 hours in each workweek” for many employees. [Citation.] Certain classes of employees, however, are exempt from these provisions. Among these exempt individuals are those “employed in a bona fide executive, administrative, or professional capacity ... or in the capacity of outside salesman ….” [Citation.] The exemption for such employees is known as the “administrative” exemption. The FLSA grants the Secretary of Labor authority to “defin[e]” and “delimi[t]” the categories of exempt administrative employees. [Citation.] The Secretary’s current regulations regarding the administrative exemption were promulgated in 2004 As relevant here, the 2004 regulations differed from the previous regulations [issued in 1999 and 2001] in that they contained a new section providing several examples of exempt administrative employees. [Citation.] One of the examples is “[e]mployees in the financial services industry,” who, depending on the nature of their day-to-day work, “generally meet the duties requirements for the administrative exception.” [Citation.] The financial services example ends with a caveat, noting that “an employee whose primary duty is selling financial products does not qualify for the administrative exemption.” [Citation.] [In 2006, the Department issued an opinion letter finding that mortgage-loan officers fell within the administrative exemption. In 2010, however, the Wage and Hour Division again altered its interpretation of the FLSA’s administrative exemption as it applied to mortgage-loan officers, concluding that mortgage-loan officers “have a primary duty of making sales for their employers, and, therefore, do not qualify” for the administrative exemption. The Department accordingly withdrew its 2006 opinion letter. Like the 1999, 2001, and 2006 opinion letters, the 2010 Administrator’s Interpretation was issued without notice or an opportunity for comment. MBA filed a complaint in federal District Court challenging the 2010 Administrator’s Interpretation. MBA contended that the 2010 Administrator’s Interpretation was procedurally invalid in light of the D.C. Circuit’s decision in Paralyzed Veterans, which holds that an agency must use notice-and-comment procedures when an agency wishes to issue a new interpretation of a regulation that deviates significantly from a previously adopted interpretation. The District Court granted summary judgment to the Department. On appeal, the D.C. Circuit applied Paralyzed Veterans and reversed. The Department appealed to the U.S. Supreme Court.] When a federal administrative agency first issues a rule interpreting one of its regulations, it is generally not required to follow the notice-and-comment rulemaking procedures of the Administrative Procedure Act (APA or Act). [Citation.] The United States Court of Appeals for the District of Columbia Circuit has nevertheless held, in a line of cases beginning with Paralyzed Veterans of Am. v. D.C. Arena L. P., [citation], that an agency must use the APA’s notice-and-comment procedures when it wishes to issue a new interpretation of a regulation that deviates significantly from one the agency has previously adopted. The question in these cases is whether the rule announced in Paralyzed Veterans is consistent with the APA. We hold that it is not. The APA establishes the procedures federal administrative agencies use for “rule making,” defined as the process of “formulating, amending, or repealing a rule.” [Citation.] “Rule,” in turn, is defined broadly to include “statement [s] of general or particular applicability and future effect” that are designed to “implement, interpret, or prescribe law or policy.” [Citation.] Section 4 of the APA, [citation], prescribes a three-step procedure for so-called “notice-and-comment rule-making.” First, the agency must issue a “[g]eneral notice of proposed rule making,” ordinarily by publication in the Federal Register. [Citation.] Second, if “notice [is] required,” the agency must “give interested persons an opportunity to participate in the rule making through submission of written data, views, or arguments.” [Citation.] An agency must consider and respond to significant comments received during the period for public comment. [Citation.] Third, when the agency promulgates the final rule, it must include in the rule’s text “a concise general statement of [its] basis and purpose.” [Citation.] Rules issued through the notice-and-comment process are often referred to as “legislative rules” because they have the “force and effect of law.” [Citation.] Not all “rules” must be issued through the notice-and-comment process. Section 4(b)(A) of the APA provides that, unless another statute states otherwise, the notice-and-comment requirement “does not apply” to “interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice.” [Citation.] The term “interpretative rule,” or “interpretive rule,” is not further defined by the APA, *** it suffices to say that the critical feature of interpretive rules is that they are “issued by an agency to advise the public of the agency’s construction of the statutes and rules which it administers.” [Citation.] The absence of a notice-and-comment obligation makes the process of issuing interpretive rules comparatively easier for agencies than issuing legislative rules. But that convenience comes at a price: Interpretive rules “do not have the force and effect of law and are not accorded that weight in the adjudicatory process.” [Citation.] *** *** This exemption of interpretive rules from the notice-and-comment process is categorical, and it is fatal to the rule announced in Paralyzed Veterans. Rather than examining the exemption for interpretive rules contained in §4(b)(A) of the APA, the D.C. Circuit in Paralyzed Veterans focused its attention on §1 of the Act. That section defines “rule making” to include not only the initial issuance of new rules, but also “repeal[s]” or “amend[ments]” of existing rules. [Citation.] Because notice-and-comment requirements may apply even to these later agency actions, the court reasoned, “allow[ing] an agency to make a fundamental change in its interpretation of a substantive regulation without notice and comment” would undermine the APA’s procedural framework. [Citation.] *** Because an agency is not required to use notice-and-comment procedures to issue an initial interpretive rule, it is also not required to use those procedures when it amends or repeals that interpretive rule. The straightforward reading of the APA we now adopt harmonizes with longstanding principles of our administrative law jurisprudence. Time and again, we have reiterated that the APA “sets forth the full extent of judicial authority to review executive agency action for procedural correctness.” Fox Television Stations, Inc., [citation]. Beyond the APA’s minimum requirements, courts lack authority “to impose upon [an] agency its own notion of which procedures are ‘best’ or most likely to further some vague, undefined public good.” [Citation.] To do otherwise would violate “the very basic tenet of administrative law that agencies should be free to fashion their own rules of procedure.” [Citation.] These foundational principles apply with equal force to the APA’s procedures for rulemaking. We explained in [citation] that §4 of the Act “established the maximum procedural requirements which Congress was willing to have the courts impose upon agencies in conducting rulemaking procedures.” [Citation.] “Agencies are free to grant additional procedural rights in the exercise of their discretion, but reviewing courts are generally not free to impose them if the agencies have not chosen to grant them.” [Citation.] The Paralyzed Veterans doctrine creates just such a judge-made procedural right: the right to notice and an opportunity to comment when an agency changes its interpretation of one of the regulations it enforces. That requirement may be wise policy. Or it may not. Regardless, imposing such an obligation is the responsibility of Congress or the administrative agencies, not the courts. We trust that Congress weighed the costs and benefits of placing more rigorous procedural restrictions on the issuance of interpretive rules. [Citation.] In the end, Congress decided to adopt standards that permit agencies to promulgate freely such rules—whether or not they are consistent with earlier interpretations. That the D.C. Circuit would have struck the balance differently does not permit that court or this one to overturn Congress’ contrary judgment. [Citation.] *** For the foregoing reasons, the judgment of the United States Court of Appeals for the District of Columbia Circuit is reversed. 5-1b Enforcement Agencies are also empowered to investigate certain conduct to determine whether the statute or the agency's legislative rules have been violated. Agencies have traditionally been accorded great discretion to compel disclosure of information, subject to constitutional limitations. 5-1c Adjudication After concluding an investigation, the agency may use formal or informal methods to resolve the matter. Informal procedures, which include advising, negotiating and settling, constitute the majority of administrative adjudication. In 1990, Congress enacted the Administrative Dispute Resolution Act to authorize and encourage Federal agencies to use mediation, conciliation, arbitration and other dispute resolution techniques. The formal procedure by which an agency resolves a matter (called adjudication) involves finding facts, applying legal rules, and formulating orders. An order is the final disposition made by an agency. NOTE: See the textbook for a detailed description of the process involved in adjudication. 5-2 Limits on Administrative Agencies An important and fundamental part of administrative law is the limits imposed by judicial review by the courts upon the activities of administrative agencies. Courts are not supposed to substitute their judgment on matters of policy for the agency's judgment, but the legislature and the executive branch may address the wisdom of an agency's action. Legally required public disclosure of agency actions provides further protection for the public. NOTE: See Figure 5-1: Limits on Administrative Agencies. 5-2a Judicial Review Judicial review, the process by which courts examine governmental action, is available unless precluded by statute; it acts as a control on a particular rule of an agency. A court may either compel agency action unlawfully withheld or set aside impermissible agency action. General Requirements — Parties seeking judicial review must have been injured by the agency action (called “having standing”) and must have exhausted administrative remedies. CASE 5-3 SACKETT v. ENVIRONMENTAL PROTECTION AGENCY Supreme Court of the United States, 2012 566 U.S. ___, 132 S.CT. 1367, 182 L.Ed.2d 367 http://scholar.google.com/scholar_case?q=132+S.CT.+1367&hl=en&as_sdt=2,34&case=13663798285804514473&scilh=0 Scalia, J. [The Clean Water Act (Act) prohibits “the discharge of any pollutant by any person,” without a permit, into the “navigable waters,” which the Act defines as “the waters of the United States.” If the Environmental Protection Agency (EPA) determines that any person is in violation of this restriction, the Act directs the agency either to issue a compliance order or to initiate a civil enforcement action. When the EPA prevails in a civil action, the Act provides for a civil penalty not to exceed $37,500 per day for each violation. According to the government, when the EPA prevails against any person who has been issued a compliance order but has failed to comply, that amount is increased to $75,000. The Sacketts own a two-thirds-acre residential lot in Bonner County, Idaho. Their property lies just north of Priest Lake, but it is separated from the lake by several lots containing permanent structures. In preparation for constructing a house, the Sacketts filled in part of their lot with dirt and rock. Some months later, they received from the EPA a compliance order, which stated that their residential lot contained navigable waters and that their construction project violated the Act by placing fill material on the property. On that basis the order directs them immediately to restore the property pursuant to an EPA work plan and to provide the EPA with access to the site and all records and documents related to the conditions at the site. The Sacketts, who do not believe that their property is subject to the Act, asked the EPA for a hearing, but that request was denied. They then brought an action in the U.S. District Court for the District of Idaho, seeking declaratory and injunctive relief. Their complaint contended that the EPA’s issuance of the compliance order was “arbitrary [and] capricious” under the Administrative Procedure Act (APA) and that it deprived them of “life, liberty, or property, without due process of law,” in violation of the Fifth Amendment. The District Court dismissed the claims for want of subject-matter jurisdiction. The U.S. Court of Appeals for the Ninth Circuit affirmed, concluding that the Act “preclude[s] pre-enforcement judicial review of compliance orders” and that such preclusion does not violate the Fifth Amendment’s due process guarantee. The U.S. Supreme Court granted certiorari.] The Sacketts brought suit under Chapter 7 of the APA, which provides for judicial review of “final agency action for which there is no other adequate remedy in a court.” [Citation.] We consider first whether the compliance order is final agency action. There is no doubt it is agency action, which the APA defines as including even a “failure to act.” [Citation.] But is it final? It has all of the hallmarks of APA finality that our opinions establish. Through the order, the EPA “‘determined’” “‘rights or obligations.’” [Citation.] * * * Also, “‘legal consequences . . . flow’” from issuance of the order. [Citation.] * * * The issuance of the compliance order also marks the “‘consummation’” of the agency’s decisionmaking process. [Citation.] As the Sacketts learned when they unsuccessfully sought a hearing, the “Findings and Conclusions” that the compliance order contained were not subject to further agency review. * * * The APA’s judicial review provision also requires that the person seeking APA review of final agency action have “no other adequate remedy in a court,” [Citation.] In Clean Water Act enforcement cases, judicial review ordinarily comes by way of a civil action brought by the EPA under [citation]. But the Sacketts cannot initiate that process, and each day they wait for the agency to drop the hammer, they accrue * * * an additional $75,000 in potential liability. The other possible route to judicial review—applying to the Corps of Engineers for a permit and then filing suit under the APA if a permit is denied—will not serve either. * * * Nothing in the Clean Water Act expressly precludes judicial review under the APA or otherwise. But in determining “[w]hether and to what extent a particular statute precludes judicial review,” we do not look “only [to] its express language.” [Citation.] The APA, we have said, creates a “presumption favoring judicial review of administrative action,” but as with most presumptions, this one “may be overcome by inferences of intent drawn from the statutory scheme as a whole. The Government offers several reasons why the statutory scheme of the Clean Water Act precludes review. [The Supreme Court found that these arguments did not support an inference that the Clean Water Act’s statutory scheme precluded APA review.] * * * We conclude that the compliance order in this case is final agency action for which there is no adequate remedy other than APA review, and that the Clean Water Act does not preclude that review. We therefore reverse the judgment of the Court of Appeals and remand the case for further proceedings consistent with this opinion. *** Chapter Outcome *** Identify the questions of law determined by a court in conducting a review of a rule or order of an administrative agency. Questions of Law — The scope of judicial review is limited to determining whether the agency has: (1) exceeded its authority; (2) properly interpreted the applicable law; (3) violated any constitutional provision; or (4) acted contrary to the procedural requirements of the law. CASE 5-4 FCC v. FOX TELEVISION STATIONS, INC. Supreme Court of the United States, 2009 556 U.S. 502, 129 S.Ct. 1800, 173 L.Ed.2d 738 http://scholar.google.com/scholar_case?q=129+S.CT.+1800&hl=en&as_sdt=2,34&case=2103709062574873617&scilh=0 Scalia, J. Federal law prohibits the broadcasting of “any … indecent … language,” [citation], which includes expletives referring to sexual or excretory activity or organs, see [citation]. This case concerns the adequacy of the Federal Communications Commission’s explanation of its decision that this sometimes forbids the broadcasting of indecent expletives even when the offensive words are not repeated. * * * * * * Congress has given the Commission various means of enforcing the indecency ban, including civil fines, see § 503(b)(1), and license revocations or the denial of license renewals, [citation]. The Commission first invoked the statutory ban on indecent broadcasts in 1975, declaring a daytime broadcast of George Carlin’s “Filthy Words” monologue actionably indecent. [Citation.] At that time, the Commission announced the definition of indecent speech that it uses to this day, prohibiting “language that describes, in terms patently offensive as measured by contemporary community standards for the broadcast medium, sexual or excretory activities or organs, at times of the day when there is a reasonable risk that children may be in the audience.” [Citation.] * * * In the ensuing years, the Commission took a cautious, but gradually expanding, approach to enforcing the statutory prohibition against indecent broadcasts. * * * Although the Commission had expanded its enforcement beyond the “repetitive use of specific words or phrases,” it preserved a distinction between literal and nonliteral (or “expletive”) uses of evocative language. [Citation.] The Commission explained that each literal “description or depiction of sexual or excretory functions must be examined in context to determine whether it is patently offensive,” but that “deliberate and repetitive use … is a requisite to a finding of indecency” when a complaint focuses solely on the use of nonliteral expletives. [Citation.] In 2004, the Commission took one step further by declaring for the first time that a nonliteral (expletive) use of the F- and S-Words could be actionably indecent, even when the word is used only once. The first order to this effect dealt with an NBC broadcast of the Golden Globe Awards, in the performer Bono commented, “‘This is really, really, f* * *ing brilliant.’” * * * * * * This case concerns utterances in two live broadcasts aired by Fox Television Stations, Inc., and its affiliates prior to the Commission’s Golden Globes Order. The first occurred during the 2002 Billboard Music Awards, when the singer Cher exclaimed, “I’ve also had critics for the last 40 years saying that I was on my way out every year. Right. So f* * * ‘em.” [Citation.] The second involved a segment of the 2003 Billboard Music Awards, during the presentation of an award by Nicole Richie and Paris Hilton, principals in a Fox television series called “The Simple Life.” Ms. Hilton began their interchange by reminding Ms. Richie to “watch the bad language,” but Ms. Richie proceeded to ask the audience, “Why do they even call it ‘The Simple Life?’ Have you ever tried to get cow s* * * out of a Prada purse? It’s not so f* * *ing simple.” [Citation.] Following each of these broadcasts, the Commission received numerous complaints from parents whose children were exposed to the language. On March 15, 2006, the Commission released Notices of Apparent Liability for a number of broadcasts that the Commission deemed actionably indecent, including the two described above. [Citation.] * * * The order first explained that both broadcasts fell comfortably within the subject-matter scope of the Commission’s indecency test because the 2003 broadcast involved a literal description of excrement and both broadcasts invoked the “F-Word,” which inherently has a sexual connotation. [Citation.] The order next determined that the broadcasts were patently offensive under community standards for the medium. * * * The order explained that the Commission’s prior “strict dichotomy between ‘expletives’ and ‘descriptions or depictions of sexual or excretory functions’ is artificial and does not make sense in light of the fact that an ‘expletive’s’ power to offend derives from its sexual or excretory meaning.” * * * Although the Commission determined that Fox encouraged the offensive language by using suggestive scripting in the 2003 broadcast, and unreasonably failed to take adequate precautions in both broadcasts, [citation], the order * * * declined to impose any forfeiture or other sanction for either of the broadcasts, [citation]. * * * The [Second Circuit] Court of Appeals reversed the agency’s orders, finding the Commission’s reasoning inadequate under the Administrative Procedure Act. [Citation.] The majority was “skeptical that the Commission [could] provide a reasoned explanation for its ‘fleeting expletive’ regime that would pass constitutional muster,” but it declined to reach the constitutional question. [Citation.] We granted certiorari, [citation]. The Administrative Procedure Act, [citation], which sets forth the full extent of judicial authority to review executive agency action for procedural correctness, [citation], permits (insofar as relevant here) the setting aside of agency action that is “arbitrary” or “capricious,” [citation]. Under what we have called this “narrow” standard of review, we insist that an agency “examine the relevant data and articulate a satisfactory explanation for its action.” Motor Vehicle Mfrs. Assn. of United States, Inc. v. State Farm Mut. Automobile Ins. Co., [citation]. We have made clear, however, that “a court is not to substitute its judgment for that of the agency,” [citation], and should “uphold a decision of less than ideal clarity if the agency’s path may reasonably be discerned,” [citation]. In overturning the Commission’s judgment, the Court of Appeals here relied in part on Circuit precedent requiring a more substantial explanation for agency action that changes prior policy. * * * We find no basis in the Administrative Procedure Act or in our opinions for a requirement that all agency change be subjected to more searching review. * * * The statute makes no distinction, however, between initial agency action and subsequent agency action undoing or revising that action. To be sure, the requirement that an agency provide reasoned explanation for its action would ordinarily demand that it display awareness that it is changing position. An agency may not, for example, depart from a prior policy sub silentio or simply disregard rules that are still on the books. [Citation.] And of course the agency must show that there are good reasons for the new policy. But it need not demonstrate to a court’s satisfaction that the reasons for the new policy are better than the reasons for the old one; it suffices that the new policy is permissible under the statute, that there are good reasons for it, and that the agency believes it to be better, which the conscious change of course adequately indicates. This means that the agency need not always provide a more detailed justification than what would suffice for a new policy created on a blank slate. * * * In such cases it is not that further justification is demanded by the mere fact of policy change; but that a reasoned explanation is needed for disregarding facts and circumstances that underlay or were engendered by the prior policy. Judged under the above described standards, the Commission’s new enforcement policy and its order finding the broadcasts actionably indecent were neither arbitrary nor capricious. First, the Commission forthrightly acknowledged that its recent actions have broken new ground, taking account of inconsistent “prior Commission and staff action” and explicitly disavowing them as “no longer good law.” [Citation.] * * * There is no doubt that the Commission knew it was making a change. That is why it declined to assess penalties * * *. Moreover, the agency’s reasons for expanding the scope of its enforcement activity were entirely rational. * * * Even isolated utterances can be made in “pander[ing,] … vulgar and shocking” manners, [citation], and can constitute harmful “‘first blow[s]’” to children, [citation]. It is surely rational (if not inescapable) to believe that a safe harbor for single words would “likely lead to more widespread use of the offensive language.” [Citation.] * * * The judgment of the United States Court of Appeals for the Second Circuit is reversed, and the case is remanded for further proceedings consistent with this opinion. [In deciding this case on remand, the Second Circuit Court of Appeals found the FCC’s policy unconstitutionally vague and invalidated it in its entirety. The U.S. Supreme Court vacated the Second Circuit’s decision but ruled against the FCC’s imposing sanctions against Fox. The Supreme Court explained that under the Due Process Clause laws must give fair notice of conduct that is forbidden or required and laws that are impermissibly vague must be invalidated. The Court held that because the FCC failed to give Fox fair notice prior to the broadcasts in question that fleeting expletives could be found actionably indecent, the FCC’s standards as applied to these broadcasts were vague, and therefore the FCC’s orders must be set aside. The Supreme Court noted that its decision (1) does not address the First Amendment implications of the FCC’s indecency policy; (2) leaves the FCC free to modify its current indecency policy in light of its determination of the public interest and applicable legal requirements; and (3) leaves the courts free to review the current policy or any modified policy in light of its content and application. FCC v. Fox Television Stations, Inc., 567 U. S. ____, 132 S. Ct. 2307, 183 L. Ed. 2d 234 (2012).] *** Chapter Outcome *** List the three standards of judicial review of factual determination made by administrative agencies. Questions of Fact — When reviewing questions of fact, courts use one of these tests: (1) the arbitrary and capricious test, which requires only that the agency had a rational basis for its decision, (2) the substantial evidence test, which requires that the conclusions reached are supported by "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion" or (3) in rare cases (only when the enabling statute provides), the court may apply the unwarranted by the facts standard, which permits the court to try the facts de novo. *** Chapter Outcome *** Describe the limitations imposed on administrative agencies by the legislative branch, the executive branch, and the legally required disclosure of information. 5-2b Legislative Control The legislature may exercise control through its budgetary power, by amending the agency's enabling statute; by establishing general guidelines such as the APA; by reversing or changing an agency rule through legislation; through review of agencies by Congressional oversight committees; and through the Congressional power to confirm high-level administrative appointments. 5-2c Executive Branch Control The President has the power to appoint and remove the chief administrator of an executive agency, but he has less control of independent agencies, because commissioners serve for a fixed term that is staggered with the President's term of office. The President also submits a budget to Congress and can impound monies or restructure agencies unless disapproved by Congress. NOTE: See textbook, Figure 5-1: Limits on Administrative Agencies. 5-2d Disclosure of Information Requiring agencies to disclose information about their actions makes them more accountable to the public. Congress has enacted disclosure statutes to enhance the public and political oversight of the activities of administrative agencies. Freedom of Information Act — Permits agencies to deny access to nine categories of records: 1. records that are specifically authorized to be kept secret in the interest of national defense or foreign policy, 2. records that are related solely to the internal personnel rules and practices of an agency, 3. records that are specifically exempted from disclosure by statute, 4. trade secrets and commercial or financial information that is privileged or confidential, 5. inter-agency or intra-agency memorandums, 6. personnel and medical files the disclosure of which would constitute a clearly unwarranted invasion of personal privacy, 7. investigatory records compiled for law enforcement purposes, 8. records that relate to the regulation or supervision of financial institutions, and 9. certain geological and geophysical information and data. Privacy Act — The Privacy Act of 1974 prohibits unauthorized disclosures of certain government records pertaining to individuals that a Federal agency maintains and retrieves by an individual’s name or other personal identifier, including social security number. It also gives individuals the right to review and copy records about themselves, to find out if these records have been disclosed, and to request corrections or amendments of these records. Government in the Sunshine Act — Requires meetings of many Federal agencies to be open to the public. Agencies may close meetings generally on the same grounds which they may refuse disclosure of records under the Freedom of Information Act and for other listed reasons. Chapter 6 CRIMINAL Law Nature of Crimes [6-1] Burglary [6-3e] Essential Elements [6-1a] Extortion and Bribery [6-3f] Classification [6-1b] Forgery [6-3g] Vicarious Liability [6-1c] Bad Checks [6-3h] Liability of a Corporation [6-1d] Defenses to Crimes [6-4] White-Collar Crime [6-2] Defense of Person or Property [6-4a] Computer Crime [6-2a] Duress [6-4b] Racketeer Influenced & Corrupt Organizations Act [6-2b] Mistake of Fact [6-4c] Crimes Against Business [6-3] Entrapment [6-4d] Larceny [6-3a] Criminal Procedure [6-5] Embezzlement [6-3b] Steps in Criminal Prosecution [6-5a] False Pretenses [6-3c] Fourth Amendment [6-5b] Robbery [6-3d] Fifth Amendment [6-5c] Sixth Amendment [6-5d] Cases in This ChapterPeople v. Farell State of South Dakota v. Morse Louisiana v. Hamed Chapter Outcomes After reading and studying this chapter, the student should be able to: •Describe criminal intent and the various degrees of mental fault. •Identify the significant features of white-collar crimes, corporate crimes, and Racketeer Influenced and Corrupt Organizations Act (RICO). •List and define the crimes against business. •Describe the defenses of person or property, duress, mistake of fact, and entrapment. •List and explain the constitutional amendments affecting criminal procedure. TEACHING NOTES Criminal law is designed to punish the wrongdoer, in contrast to civil law, which compensates the victim. In a criminal case, the defendant is prosecuted by the government, who must prove the defendant’s guilt beyond a reasonable doubt. The defendant is presumed innocent until proven guilty. Criminal law is relevant to business law both because businesses can receive criminal sanctions for wrongdoings and because businesses sustain considerable losses as the victims of crimes. 6-1 Nature of Crimes A crime is any act or omission forbidden by public law designed to protect society. Punishment includes fines, imprisonment, probation, or death. Crimes are prohibited in order to protect and safeguard the government (as in treason), human life (as in murder), and property (as in larceny). Criminal law today is almost exclusively defined by legal statute. *** Chapter Outcome *** Describe criminal intent and the various degrees of mental fault. 6-1a Essential Elements Two elements must be present to define an act as a crime: (1) the wrongful, or overt, act (known as actus reus), and (2) the criminal, or mental, intent (known as mens rea). Actus reus refers to all elements of a crime that are not mental, including the physical act that must be performed, the circumstances under which it must be performed, and the consequences of the act. Mens rea, or mental fault, refers to all mental elements of a crime, either subjective or objective. Most common law and some statutory crimes require subjective fault. Some crimes only require objective fault, whereas other statutory crimes require no fault at all. Types of subjective fault: purposeful, knowing, and reckless. • A person acts purposely, or intentionally, if his conscious goal is to engage in a prohibited conduct or to cause a prohibited result. • A person acts knowingly if he is aware that his conduct is prohibited, and he realizes that a prohibited result is almost certain to occur. • A person acts recklessly if he consciously disregards a substantial and unjustifiable risk that his conduct is prohibited or that it will cause the prohibited result. For objective fault to occur, a person must deviate substantially from the standard of care that a reasonable person would be expected to observe under the given circumstances. In criminal statutes, objective fault is defined by such terms as carelessness or negligence. Today, many regulatory statutes that affect society’s health or safety have totally dispensed with a crime’s mental element and impose criminal liability without fault. Under the statutes, despite any care that a person might exercise, it is a crime to perform a specified act or to bring about a certain result. NOTE: See Figure 6-1: Degrees of Mental Fault CASE 6-1 PEOPLE v. FARELL Supreme Court of California, 2002 48 P.3d 1155, 28 Cal.4th 381, 121 Cal.Rptr.2d 603 http://scholar.google.com/scholar_case?case=12312804905483823177&q=28,+Cal.4th+381&hl=en&as_sdt=2,34 George, C. J. In this case we determine whether [California] Penal Code section 1203.044, which requires the imposition of a minimum county jail sentence as a condition of probation upon conviction of certain theft offenses, applies to the theft of property other than money, including trade secrets. We conclude that it does. I On April 18, 1997, [a] * * complaint was filed charging defendant with the theft of a trade secret * * *. It was further alleged as a sentence enhancement that the loss exceeded $2.5 million * * *, and as a restriction on the granting of probation that the theft was of an amount exceeding $100,000 within the meaning of sections 1203.044 * * *. Defendant pleaded no contest to the theft charge, * * *. He objected, however, to the potential application of section 1203.044 to his sentence. * * * A hearing was held in the superior court on the limited question of whether section 1203.044 applies to the theft of property other than money, including trade secrets. The court concluded that the provision applies to the theft of all property of a certain value, including trade secrets. * * * The Court of Appeal reversed, concluding that section 1203.044 applies only to the theft of what it termed “monetary property.” We granted the Attorney General’s petition for review. II Defendant stands convicted of theft, specifically a violation of [California statute] which provides: “(b) Every person is guilty of theft who, with intent to deprive or withhold the control of a trade secret from its owner, or with an intent to appropriate a trade secret to his or her own use or to the use of another, does any of the following: 1. Steals, takes, carries away, or uses without authorization, a “trade secret.” The statute defines the term “trade secret” as follows: “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: A. Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and B. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” [Citation.] The trial court determined that section 1203.044 applies to such a theft. This statute, entitled The Economic Crime Law of 1992, requires that a defendant who is convicted of certain theft offenses and is granted probation shall be sentenced to at least 90 days in the county jail as a condition of probation. * * * As relevant to the present case, the statute provides: “This section shall apply only to a defendant convicted of a felony for theft of an amount exceeding fifty thousand dollars ($50,000) in a single transaction or occurrence. This section shall not apply unless the fact that the crime involved the theft of an amount exceeding fifty thousand dollars ($50,000) in a single transaction or occurrence is charged in the accusatory pleading and either admitted by the defendant in open court or found to be true by the trier of fact. * * * The Court of Appeal determined that section 1203.044 may not be applied to persons convicted of the theft of trade secrets. It examined the words of the statute and the legislative history of the enactment and, concluding that the statute is at best ambiguous, applied the so-called rule of lenity to give defendant the benefit of the doubt. * * * Our task is one of statutory interpretation and, “as with any statute, [it] is to ascertain and effectuate legislative intent. [Citations.] We turn first to the words of the statute themselves, recognizing that ‘they generally provide the most reliable indicator of legislative intent.”’ [Citation.] We examine the meaning of the phrase “convicted of a felony for theft of an amount exceeding fifty thousand dollars,” keeping in mind that the words must be interpreted in context. [Citation.] In outlining the circumstances under which a person given a probationary term for a theft offense must be sentenced to a minimum period in custody * * * does not specify that the theft must involve cash—or that it must involve what is referred to by the Court of Appeal as “monetary property” and by defendant as a “cash equivalent.” The crime of theft, of course, is not limited to an unlawful taking of money. * * * The crime of theft may involve the theft of trade secrets; indeed, * * * the Legislature specified that the theft of trade secrets is akin to the theft of any other property. * * * In the absence of evidence to the contrary, we may infer that when the Legislature referred in section 1203.044 to persons “convicted of a felony for theft,” it had in mind the general definition of theft, including the broad categories of property that may be the subject of theft. * * * * * * To interpret section 1203.044 as limited to the theft of cash or cash equivalents also would be inconsistent with express legislative intent. The Legislature addressed problems of certain white collar crimes, specifically theft, in enacting section 1203.044. As the Legislature’s own statement of intent discloses, that body intended to remedy the perceived relative unfairness arising from the light probationary sentences meted out to white collar criminals, as well as to provide reliable tools to ensure that victims of white collar criminals receive restitution, and to provide financial support for investigation and prosecution of white collar crime. The Legislature declared in enacting section 1203.044: “[M]ajor economic or ‘white collar’ crime is an increasing threat to California’s economy and the well-being of its citizens. The Legislature intends to deter that crime by ensuring that every offender, without exception, serves at least some time in jail and by requiring the offenders to divert a portion of their future resources to the payment of restitution to their victims.” White collar criminals granted probation too often complete their probation without having compensated their victims or society. Probation accompanied by a restitution order is often ineffective because county financial officers are often unaware of the income and assets enjoyed by white collar offenders. * * * Thus, it is the Legislature’s intent that the financial reporting requirements of this act be utilized to achieve satisfactory disclosure to permit an appropriate restitution order. White collar criminal investigations and prosecutions are unusually expensive. These high costs sometimes discourage vigorous enforcement of white collar crime laws by local agencies. Thus, it is necessary to require white collar offenders to assist in funding this enforcement activity. * * * We observe that the term “white collar crime” is a relatively broad one and is not limited to losses involving cash or cash equivalents. It generally is defined as “[a] nonviolent crime usu[ally] involving cheating or dishonesty in commercial matters. Examples include fraud, embezzlement, bribery, and insider trading.” [Citation.] The Legislature has applied the term “white collar crime” to fraud and embezzlement * * *, a statute that provides for enhanced prison terms for recidivists committing these offenses when the offense involves a pattern of “taking of more than one hundred thousand dollars.” Like the crime of theft, fraud and embezzlement are not limited to the unlawful acquisition of cash or cash equivalents. [Citations.] Indeed, frequently fraud and embezzlement simply are methods by which a charged theft is accomplished. [Citations.] Because the crime of theft includes a wide range of property and the term “white collar crime” has a broad meaning, we find it improbable that the Legislature intended to address only the theft of cash or cash equivalents * * *. It is far more reasonable to conclude that the Legislature intended the provision to apply to all thefts of property of a particular value. Any other interpretation would permit many white collar thieves to continue to receive light probationary sentences and to evade strict restitution requirements. From the usual meaning of the terms used in section 1202.044, the purpose of the enactment, and the Legislature’s parallel use of the same terms in other statutes, one must conclude that section 1203.044 is not limited to thefts of cash or cash equivalents. * * * For the foregoing reasons, the judgment of the Court of Appeal is reversed. 6-1b Classification Mala in se — wrongs in themselves or morally wrong, such as murder. Mala prohibita — not morally wrong but declared wrongful by law, such as the failure to drive on the right side of the road. From the standpoint of an offense’s seriousness: Felony — a serious crime (punishable by death or imprisonment in the penitentiary). Misdemeanor — a less serious crime (punishable by a fine or imprisonment in a local jail). 6-1c Vicarious Liability The term vicarious liability refers to liability imposed upon one person for another person’s acts. Employers are vicariously liable for their employees’ criminal acts if they have participated in or otherwise authorized the act. Employers are not ordinarily liable for employees’ unauthorized criminal acts, but may be subject to a criminal penalty for unauthorized acts of managers or advisers acting within the scope of their employment. In some cases, an employer can be held criminally liable for even unauthorized acts of an employee. 6-1d Liability of a Corporation Historically, corporations were not held criminally liable because of the corporation’s inability to possess criminal intent. Today, corporate liability may exist for the violation of a statute that imposes liability without fault or when a high corporate officer or the board of directors perpetrates the offense. Of course, corporations are punished for crimes by fines rather than imprisonment. Nonetheless, individuals affiliated with the corporation who bear responsibility for a criminal act may face either fines or imprisonment, or both. NOTE: See textbook for a description of an adequate compliance program. *** Chapter Outcome*** Identify the significant features of white-collar crimes, corporate crimes, and Racketeer Influenced and Corrupt Organizations Act (RICO). 6-2 White-Collar Crime The U.S. Justice Department defines white-collar crime as any nonviolent crime that involves deceit, corruption, or a breach of trust — includes acts committed by individuals, such as embezzlement and forgery, as well as crimes committed on behalf of a corporation, such as commercial bribery, false advertising, antitrust violations, and safety and health crimes related to consumer and business products. In response to the business scandals involving companies such as Enron, WorldCom, Global Crossing, Adelphia, and Arthur Andersen, in 2002 Congress passed the Sarbanes-Oxley Act. The Act establishes new criminal penalties including: (1) making it a crime to defraud any person or to obtain any money or property fraudulently in connection with any security of a public company with penalties of a fine and/or up to 25 years imprisonment, and (2) imposing fines and/or imprisonment of up to 20 years for knowingly altering, destroying, mutilating, or falsifying any document with the intent of impeding a federal investigation. In addition, the Act substantially increases the penalties for existing crimes including: (1) mail and wire fraud (five year maximum increased to twenty-five year maximum) and (2) violation of Securities and Exchange Act (ten year maximum increased to twenty year maximum). 6-2a Computer Crime A special type of white-collar crime that involves the use of a computer to steal money or services, to remove personal or business information, or to tamper with such information. Computer crime, or cybercrime, is best categorized based on whether the computer was the instrument or the target of the crime. Examples of cybercrimes using computers as the instrument of the crime include the distribution of child pornography, money laundering, illegal gambling, copyright infringement, illegal communication of trade secret, and fraud involving credit cards, e-commerce, and securities. Cybercrime with a computer as a target of the crime attacks a computer’s confidentiality, integrity, or availability; examples include theft or destruction of proprietary information, vandalism, denial of service, website defacing and interference, and implanting malicious code. Every state now has laws targeting cybercriminals. Originally passed in 1984, and amended in 1986, 1994, and 1996, the Computer Fraud and Abuse Act protects a broad range of computers that facilitate interstate and international commerce and communications. The Act makes it a crime with respect any computer that is used in interstate commerce or communications (1) to access or damage it, without authorization; (2) to access it with the intent to commit fraud; (3) to traffic in passwords for it; and (4) to threaten to cause damage to it with the intent to extort money or anything of value. Spam — unsolicited commercial electronic mail—has become the most prevalent method used for distributing pornography, perpetrating fraudulent schemes, and introducing viruses, worms, and Trojan horses into personal and business computer systems. In response, Congress enacted the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 or the CAN-SPAM Act of 2003, which went into effect on January 1, 2004. In enacting the statute Congress determined that senders of spam should not mislead recipients as to the source or content of such mail and that recipients of spam have a right to decline to receive additional spam from the same source 6-2b Racketeer Influenced and Corrupt Organizations Act (RICO) RICO was enacted in 1970 with the stated purpose of terminating organized crime’s infiltration of legitimate businesses. The act imposes severe civil and criminal penalties for enterprises that engage in a pattern of racketeering, which is defined as the commission of two or more predicate acts within a ten-year period. A predicate act is any of several criminal offenses listed in RICO. Nine major categories of state crimes and 26 federal crimes are defined, including murder, kidnapping, arson, extortion, drug dealing, securities fraud, mail fraud, and bribery. RICO is controversial because businesses that are not involved in organized crime may still meet the “pattern of racketeering” test and be subject to fines, prison terms and treble damages in civil suits. Criminal conviction under the law may result in (1) fines of up to $250,000 ($500,000 for an organization) or twice the amount of gross profits or other proceeds from the offense and/or (2) a prison term of up to twenty years or for life if the violation is based on a racketeering activity for which the maximum penalty includes life imprisonment. *** Chapter Outcome*** List and define the offenses against business. 6-3 Crimes Against Business In the United States, crimes against business property amount to losses in the hundreds of billions of dollars each year. In this section, you will learn about several serious property crimes: (1) larceny, (2) embezzlement, (3) false pretenses, (4) robbery, (5) burglary, (6) extortion and bribery, (7) forgery, and (8) bad checks. 6-3a Larceny Elements: (1) trespassory (2) taking and (3) carrying away of (4) personal property (5) of another (6) with the intent to deprive the victim permanently of the goods (not necessarily by force). 6-3b Embezzlement Defined as the (a) fraudulent (b) conversion of (c) the property (d) of another (e) by one who is in lawful possession of it. Conversion is any act that seriously interferes with the owner’s rights in the property. The key distinction between larceny and embezzlement is that with embezzlement, the thief is in lawful possession of the property at the time of the theft. 6-3c False Pretenses Elements: a) a materially false representation of an existing fact b) which causes the victim c) to pass title to d) his property to the wrongdoer e) who knows his representation to be false and intends thereby to defraud the victim. Note use of subjective reasonableness test: if the victim is actually deceived, the test is satisfied. Gullibility or lack of due care on the part of the victim is no defense. CASE 6-2 STATE OF SOUTH DAKOTA v. MORSE Supreme Court of South Dakota, 2008 753 N.W.2d 915, 2008 SD 66 http://scholar.google.com/scholar_case?case=4959207354232635251&q=753+N.W.2d+915&hl=en&as_sdt=2,34 Konenkamp, J. [Janice Heffron orally contracted with her neighbor, Wyatt Morse, to convert her second-floor bedroom into a bathroom in five weeks for $5,000. According to Janice, Morse repeatedly stated that he could do it “easy, quick, cheap.” Janice told her mother, Maxine Heffron, who would finance the project, about Morse’s offer. Maxine and Janice then went to Morse’s home, where he showed them the bathroom he had restored. Janice and Maxine were impressed. Morse also told them that he had plumbing experience, that his work would be above and beyond code, and that the local inspector did not inspect his work because he was so good. Maxine wanted to pay using personal checks to assure a paper trail, but Morse convinced her to pay him with cash. According to Janice, he wanted to be paid in cash to avoid the Internal Revenue Service. They agreed that Morse would convert the room into a bathroom, install an antique claw-foot tub (one that he would provide personally), put wainscoting on the walls, install an old tin ceiling like the one in his bathroom, and install crown molding. Morse began work in January 2006. His efforts continued until the second week of March. He installed plumbing fixtures and he removed the old water heater and installed a new one. He ran a freeze-proof spigot outside the house. He put in a bathroom vent with an antique vent cover. He custom built a bathroom cabinet at no extra cost to the Heffrons. He mounted wainscoting and crafted a surrounding shelf with rope lighting. He put in a faux tin ceiling, with crown molding and trim. He installed water pipes and a new drain stack. The project took longer and cost more than originally agreed. Morse ran into difficulties when he attempted to install a tankless water heater. He was never able to install the tankless heater and ended up installing a traditional tanked water heater. Morse also experienced problems with some of the pipes he installed. Janice told him that they were leaking. He repaired them and blamed the leaks on bad batches of solder. Maxine paid Morse somewhere between $6,000 and $6,500 cash. In March 2006, Morse fell and aggravated his already bad back. Before Janice and Maxine hired him, Morse had told them that he had a back condition. After his fall in March, he came to the job site less and less. Then, after the second week in March he stopped coming entirely. The Heffrons tried contacting him through phone calls, personal visits, and certified mail. He never responded. After Morse abandoned the project, Janice contacted a licensed plumber, who examined Morse’s work and gave Janice an estimate on the cost of completing the project. The plumber pointed out several deficiencies in Morse’s work. In particular, Morse incorrectly installed the water heater, the pipes for the sink, lavatory, and bathtub. He used S-traps, illegal in South Dakota, and improperly vented the floor drains. Because he installed the water heater incorrectly, carbon monoxide was leaking into Janice’s home. In sum, Morse’s work on the bathroom, in the opinion of the licensed plumber, had no value to the home. On October 12, 2006, Morse was indicted for grand theft by deception in violation of South Dakota law. A jury returned a guilty verdict. Morse was sentenced to five years in prison. He appealed asserting that the evidence was insufficient to sustain the verdict. Morse argues that the State failed to prove he had the requisite intent to defraud the Heffrons. He does not dispute that the work he did on Janice’s home was faulty and resulted in the Heffrons having to pay considerably more in repairs. Nonetheless, he claims that his faulty work created a classic breach of contract claim, because when he entered into the agreement to remodel the bathroom, he believed he was capable of doing quality work and fully intended on completing the project. The State, on the other hand, argues that Morse “created and reinforced the false impression in the minds of Jan and Maxine Heffron that he was licensed to, and capable of, installing a second floor bathroom.” More particularly, the State contends that Morse “deceived” the Heffrons on his ability to do the work, “misled” them with his statements that his work would be above code, and “took actions to further reinforce the false impression that he was able to properly install the bathroom.” Theft by deception is a specific intent crime. [Citation.] Intent to defraud “‘means to act willfully and with the specific intent to deceive or cheat, ordinarily for the purpose of either causing some financial loss to another or bringing about some financial gain to one’s self.’” [Citation.] Therefore, Morse must have had the “purpose to deceive.” [Citation.] “‘It is only where [actors do] not believe what [they] purposely caused [their victims] to believe, and where this can be proved beyond a reasonable doubt, that [these actors] can be convicted of theft.’” [Citation.] * * * There are a number of cases involving construction contracts where courts have found the evidence sufficient to prove deceptive theft, or related criminal conduct. In those cases, however, there was either circumstantial or direct evidence to establish the requisite intent. For example, in [citation], an appeals court held that the jury could infer intent when at the time Cash obtained the money he had no intention to complete the work because he took the money and never performed. In State v. Rivers, the Iowa Supreme Court upheld the defendant’s conviction for theft by deception because he had a pattern of deceptive conduct. [Citation.] Rivers was a self-employed contractor, who obtained multiple remodeling jobs, took money as a down payment, persuaded his customers to give him more money, and then never completed the work. * * * Here, Morse was convicted of theft by deception, defined in SDCL 22-30A-3. It states in part: [a]ny person who obtains property of another by deception is guilty of theft. A person deceives if, with intent to defraud, that person: (1) Creates or reinforces a false impression, including false impressions as to law, value, intention, or other state of mind. However, as to a person’s intention to perform a promise, deception may not be inferred from the fact alone that that person did not subsequently perform the promise; … (3) Fails to correct a false impression which the deceiver previously created or reinforced, or which the deceiver knows to be influencing another to whom the deceiver stands in a fiduciary or confidential relationship; … The term, deceive, does not, however, include falsity as to matters having no pecuniary significance or puffing by statements unlikely to deceive reasonable persons. Based on our review of the record, in a light most favorable to the verdict, Morse: (1) failed to complete the project in five weeks for $5,000 as promised; (2) performed work that was not “above and beyond code” as promised; (3) lied about obtaining a building permit; (4) lied about the reasons he could not get the tankless water heater installed and why the pipes were leaking; (5) returned the water heater and did not give the $186 refund to Maxine; (6) never provided Janice or Maxine receipts for materials purchased; (7) quit working on the project prematurely and without explanation; and (8) never responded to the Heffrons’ attempts to contact him. These facts do not prove the elements of theft by deception. There is no evidence that Morse had a purpose to deceive or intended to defraud the Heffrons when he agreed to remodel Janice’s bathroom. Although his work was not above and beyond code, the State never argued that Morse knew he would do faulty work. Janice and Maxine both testified that Morse took them up to his house and showed him the remodeling that he did to his own bathroom. They both said they were impressed. It cannot be inferred that Morse intended to defraud the Heffrons because his work product was not up to code. Moreover, the State never argued or presented evidence that Morse took Maxine’s money with the intention of never performing under their agreement. * * * The parties made their agreement in December 2005, and no one disputes that Morse worked regularly on the project from January 2006 until the second week of March. While Morse failed to complete the project in five weeks for $5,000 as promised, the State never claimed that he knew it would take longer and charge more, and tricked the Heffrons into believing him. Neither Janice nor Maxine claimed that Morse deceived them into paying him more money when the project took longer than anticipated. * * * To sustain a conviction, each element of an offense must be supported by evidence. [Citation.] Theft by deception is a specific intent crime, and therefore, the State was required to prove beyond a reasonable doubt that Morse had the specific intent to defraud the Heffrons when he agreed to remodel the bathroom. Here the evidence offered by the State “is so insubstantial and insufficient, and of such slight probative value, that it is not proper to make a finding beyond a reasonable doubt that [Morse] committed all of the acts constituting the elements ofthe offense[.]” Reversed. 6-3d Robbery Larceny with the added elements that (1) the property is taken directly from the victim or in the victim's presence and (2) is accomplished through force or threat of force. Robbery may be aggravated by (1) use of a deadly weapon, (2) intent to kill, (3) serious bodily injury, or (4) commission of the crime by two or more persons 6-3e Burglary Most statutes define as (1) entry (2) into a building (3) with intent to commit a felony in the building. 6-3f Extortion and Bribery Extortion, also called blackmail, is defined in most cases as the making of threats for the purpose of obtaining money or property. Bribery, in contrast, is the offering of money or property to a public official in order to influence that official’s decision. 6-3g Forgery Intentional falsification of a document with intent to defraud. 6-3h Bad Checks Issuing a check with insufficient funds to cover the check. Most jurisdictions require defendants to know they do not have enough money to cover the check. CASE 6-3 LOUISIANA v. HAMED Court of Appeal of Louisiana, Fourth Circuit, 2014 147 So.3d 1191 Belsome, J. The defendant, Zuhair Hamed, was charged by bill of information with one count of issuing a worthless check in the amount of five hundred dollars or more. The bill was later amended to indicate that the worthless check was in the amount of fifteen hundred dollars or more. *** On September 18, 2007, Little Castro, L.L.C. (doing business as Discount City) entered into a credit sales agreement with fuel supplier, Ballard Petroleum, Inc. Ballard Petroleum agreed to provide fuel and Discount City would pay the obligation within ten days from the date of the invoice or next load. Ameer Hamed, the defendant's son, personally guaranteed payment on behalf of his establishment, Discount City. The defendant was listed as a contact on the credit application filed by his son. During October of 2007, Ballard Petroleum made six fuel deliveries in a twelve-day period. However, the checks for those deliveries totaling approximately $126,000 were returned for nonsufficient funds (NSF). On November 1, 2007, the defendant rode with Mr. Jim Ballard, the owner of Ballard Petroleum, to the bank, where he issued him a cashier's check in the amount of $126,061.30 to cover the returned checks. On the next day, another NSF check in the amount of $20,597.08 was returned to Ballard Petroleum. The check, dated October 26, 2007, was for a fuel delivery on October 16, 2007. The defendant was not a member of Silwady's Group L.L.C., the listed account holder on the check. Also, he was not a member of Little Castro, L.L.C. (Discount City). Thus, he was acting as an agent for these businesses. In an effort to resolve the matter, Mr. Ballard made several attempts to contact the defendant, but he was unable to reach him. On November 6, 2007, pursuant to instruction from the Worthless Check Division of the District Attorney’s office, Ballard Petroleum sent a certified letter notifying Discount City of the dishonored check. In response to the letter, the defendant acknowledged the debt and advised Mr. Ballard that he would reimburse him. By April of 2009, after the District Attorney’s office became involved, the defendant paid $7,000.00 towards the balance. There were no additional payments made, and charges were eventually filed against the defendant in October of 2011. [The defendant pled not guilty at arraignment. After a motions hearing, the trial court found no probable cause to substantiate the charges. The defendant subsequently waived his right to a jury trial and elected to proceed with a bench trial. At the conclusion of trial, the trial court found the defendant guilty as charged. The trial court denied all post-verdict motions, and the defendant was sentenced to four years in the Department of Corrections, suspended, with four years of active probation, as well as a $1,000.00 fine, court costs, and restitution costs. After a hearing, the magistrate court ordered the defendant to pay $13,626.08 in restitution. The defendant appealed.] The defendant first argues that the evidence was insufficient for a rational trier of fact to find that the elements of the crime of issuing worthless checks were proven beyond a reasonable doubt. The court in [citation] recognized the elements required to convict a defendant for issuing a worthless check as follows: Under [Louisiana Statute], to obtain a conviction for issuing of a worthless check the state is required to prove beyond a reasonable doubt that: (1) defendant issued, in exchange for anything of value, whether the exchange is contemporane¬ous or not; (2) a check, draft or order for the payment of money upon any bank or other depository; (3) knowing at the time of the issuing that the account on which drawn has insufficient funds with the financial institution on which the check is drawn to have the instrument paid in full on presentation; and (4) the instrument was issued with intent to defraud. The proper inquiry under [the Louisiana statute] is whether a defendant knew that he had not sufficient credit with the bank, not whether his actual monetary balance was sufficient to cover a check, draft or order for payment issued by him. [Citation.] In this case, the knowledge element is lacking. The State points to two facts to support its argument that the knowledge element was met: 1) the multitude of NSF checks written to the victim before and after the date of the check at issue; and 2) the defendant’s acknowledgment that he owed the debt and would reim¬burse Ballard Petroleum. First, there is no evidence in the record that the de¬fendant knew there were insufficient funds in the bank on August 26, 2007. While Mr. Ballard testified that he went to the bank with the defendant, who issued him a cashier’s check for the returned checks on November 1, 2007; this took place after the checks had already been written. Thus, it does not serve to establish that the de¬fendant had knowledge of the insufficient funds at the time the checks were written. Likewise, the defendant’s acknowledgement of the debt after he received the certi-fied letter does not prove the defendant’s knowledge at the time the check was issued. *** this was not the defendant’s personal (or business) account. Significantly, the account holder, here, was Silwady’s Group, a limited liability company that was not owned by the defendant [but did involve the defendant’s son]. Thus, it is reasonable to conclude that the defendant was merely an agent, who was directed to write checks without knowledge of the status of the account. The fact that he continually attempted to reimburse Ballard Petro¬leum supports this conclusion. Under these circumstances, presenting account records alone is insufficient to prove the defendant’s knowledge. The record fails to provide sufficient evidence for a rational trier of fact to conclude that defendant had the knowledge that Silwady Group did not have sufficient funds with the bank for payment of the check when he signed it. [Citation.] Accordingly, we find that the evidence was legally insufficient to convict the defendant of issuing worthless checks. In light of this conclusion, we pretermit any discussion of the defendant’s remaining assignments of error. For these reasons, we reverse the defendant’s conviction and sentence. *** Chapter Outcome*** Describe the defenses of person or property, duress, mistake of fact, and entrapment. 6-4 Defenses to Crimes Defendants found to have committed criminal acts will not be convicted if they have a valid defense such as the absence of an element required to make the act a crime or an excuse that bars criminal liability. Defenses include the following: 6-4a Defense of Person or Property Individuals may use reasonable force to protect themselves, other individuals, and their property. Does not include deadly force in the defense of property without threat of bodily harm. 6-4b Duress Applies when one is threatened with immediate, serious bodily harm to himself or another person unless he engages in criminal activity; does not excuse murder. 6-4c Mistake of Fact If a person reasonably believes the facts are such that his conduct would not be a crime, then the law will treat the facts as he reasonably believed them to be. 6-4d Entrapment Arises when a law enforcement official induces a person to commit a crime when that person would not have done so without the persuasion of the official. *** Chapter Outcome*** List and explain the constitutional amendments affecting criminal procedure. 6-5 Criminal Procedure All states, as well as the federal government, have procedures for initiating and coordinating criminal prosecutions. The first ten amendments to the U.S. Constitution (known as the Bill of Rights) also guarantee many defenses and rights of the accused: NOTE: See Fig. 6-2: Constitutional Protection for the Criminal Defendant. 6-5a Steps in Criminal Prosecution Suspect is arrested, booked and charged. Next, a preliminary hearing is held to determine probable cause. If probable cause exists, the next stage is either indictment or information. An indictment is issued by a grand jury if it finds evidence sufficient for a trial. An information is a formal accusation issued by a prosecuting officer. (This sometimes precedes arrest.) At the arraignment, the defendant is formally charged and he enters a plea. If he pleas "not guilty," he must stand trial, either a jury trial or a bench trial (no jury). In a criminal trial: (1) The defendant is presumed innocent. (2) The burden of proof on the prosecution is to prove criminal guilt beyond a reasonable doubt (i.e., proof that is entirely convincing, satisfied to a moral certainty). (3) The defendant cannot be required to testify. The trial begins with the jury’s selection, if the defendant chooses a jury trial, followed by opening statements from the prosecutor and the defense attorney. The prosecution presents evidence first; then the defense offers its case. After the testimony, both sides present their closing statements, and then the judge instructs the jury as to applicable law, at which time the jury retires to arrive at a verdict. If the verdict is "not guilty," the matter ends there. Neither the state nor the federal government has the right to appeal. If the verdict is "guilty," the presiding judge will enter a judgment of conviction and set a court time for sentencing. At that time, the defendant may make a motion for a new trial (due to prejudicial error) or appeal to an appellate review court (alleging error by the trial court). 6-5b The Fourth Amendment Prohibits unreasonable searches and seizures to obtain incriminating evidence. Evidence obtained in violation of the Fourth Amendment is generally prohibited from introduction in trial (by the exclusionary rule) in order to discourage illegal police conduct. In order to obtain a search warrant to conduct a legal search, police must demonstrate probable cause to believe the search will reveal evidence of criminal activity. 6-5c The Fifth Amendment Requires a grand jury for indictment in capital crimes, prevents double jeopardy (being tried for the same offense twice), protects against self-incrimination, and prohibits deprivation of life or liberty without due process of law. 6-5d The Sixth Amendment Requires that the accused receive a speedy and public trial by an impartial jury, and that he be informed of the accusation’s nature, confronted with the witnesses who testify against him, allowed to obtain witnesses in his favor, and allowed the right to competent counsel. Instructor Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637

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