Mba1034 cg law ethics week 9 law & markets 2013

LAWAND

MARKETS

Stephen Ong, BSc(Hons) Econs (LSE), MBA International Business(Bradford)

Visiting Fellow, Birmingham City UniversityVisiting Professor, Shenzhen University

MBA1034 GOVERNANCE, LAW & ETHICS

• Discussion: CEO Hubris1

• Law of Torts, Property & Product Liability2

• Case Discussion: Obesity and McLawsuits3

Today’s Overview

1. Open Discussion

• Petit, Vale´rie and Bollaert, Helen (2012) Flying Too Close to the Sun? Hubris Among CEOs and How to Prevent it, Journal of Business Ethics, 2012: 108: pp.265–283

2. THE LAW

Overview• Introduction• The common law• Property• Intellectual property• Contracts• Torts• The product safety problem and social efficiency• Entitlements, liability, and social efficiency• Products liability• Imperfections in the liability system

Introduction

• Markets are the cornerstone of a free enterprise system• The law plays a principal role in: –Reducing uncertainties –Supporting exchange in

markets

Common Law• Used in the United Kingdom, the United

States, and most of the other former English colonies

• Common law countries typically have an adversarial system of litigation in which: – Each party advocates its side of the dispute – Judges and juries render decisions based

on the evidence, the arguments provided, and precedents

Property•The set of rights to control a tangible or intangible thing

Intellectual Property

• The basic trade-off in the protection of intellectual property is between: – Benefits to society from the use of ideas and

inventions and the incentives for their creation

Information and Incentives

Intellectual Property• The appropriability of the returns

from a discovery depends on two principal factors:–How easy it is for others to replicate

the discovery–Strength of the public protection for

the discovery

Appropriability of Returns

Example : Appropriability of Returns and Peer-to-Peer Systems

Intellectual Property Protection

• Patents• Copyright• Trademarks and trade secrets

Contracts

• Governed by:–Common law –Statutes pertaining to particular

types of contracts and transactions

14-15

Enforceability

• Central issues in contracts are:–Which contracts are

enforceable–When can they be breached–What damages are due in the

event of a breach

Breach

• Breaches are allowed because: –Under some circumstances it is

economically efficient not to fulfill the conditions of the contract

Remedies

• Courts use two basic types of remedies in the event of breach:–Damages–Specific performance

Torts

• Civil wrongs - Wrongs done by one person to another

The Product Safety Problem

Social Costs of Injuries Prevented

14-21

Entitlements and Their Protection

• Rules for protecting entitlements–Property rule–Liability rule

The Assignment of Social Costs and the Choice Between Liability

and Regulation• There are five principles for the

assignment of costs and the choice between the institutions of liability and regulation

1. Products Liability

• A branch of the common law of torts

14-24

2. Allowable Defenses under Strict Liability• Some defenses are allowed

under strict liability but:–They vary among the states

• In all of these defenses, the burden of proof is on the defendant

3. Preemption

• Some federal legislation preempts states from adding requirements beyond those stated in the federal law–Could be explicit or implicit in

the law

4. Damages

• Principal form of damages awarded in liability cases is compensatory–Compensation for the loss

incurred

The Politics of Products Liability

• Strong incentives to take liability issues into the legislative arena are provided by:–The costs and consequences of

liability cases–The proportion of awards that go

to trial lawyers

Imperfections In the Liability System

• Liability system has been criticized on: –Equity grounds–Distributive grounds–Efficiency grounds

CASE DISCUSSION : OBESITY ANDMCLAWSUITS

Case - Nonmarket Environment of McDonald’s• Obesity - Economists studied the

increase in the body mass index and concluded that it was due to several factors:– Increase in calorie intake– Decrease in strenuousness of work– Decrease in cost of food due to

technological change leading people to eat more

1-31

Case - Nonmarket Environment of McDonald’s• Meal and Menu Nutrition Information - Public

attention to the obesity issue led to the introduction of the Menu Education and Labeling Act (MEAL) in the House and the Senate

• Healthy Lifestyles - As a result of the concern about obesity, McDonald’s suspended its promotion of supersize meals

1-32

Case - Nonmarket Environment of McDonald’s• Children’s Advertising– McDonald’s promoted its trademark golden

arches on Barbie dolls and backpacks– Some schools had McDonald’s days for lunch– Used plastic toys for promotion

1-33

Case - Obesity and McLawsuits

• To deal with the McLawsuits, McDonald’s and other restaurants could continue to defend themselves in court on a case-by- case basis

• McDonald’s could also seek legislation to shield restaurants and food processors from liability

• The public attention to the obesity issue led to the introduction of the Menu Education and Labeling Act (MEAL)

• The fast-food industry also faced the possibility that state attorneys would file lawsuits seeking reimbursement for Medicare costs of obese people

Core Readings• Baron, David P.(2013) Business and its environment, 7th

Edition, Pearson, Ch.14• Cheeseman, Henry R.(2013) Business law, 8th Edition,

Prentice Hall. Ch.5-6.

Next Week’s Ideas for Discussion

• Gabaix, Xavier, Landier, Augustin and Sauvagnat, Julien (2013) CEO pay and firm size: an update after the crisis,NBER working paper 19078, May 2013

QUESTIONS?

APPENDIX I :TORTS

Introduction to Intentional Torts and Negligence

• Injured party brings civil lawsuit to seek compensation for a wrong done to the party

• Damages available–Tort damages–Punitive damages

• If the victim of a tort dies, beneficiaries can bring a wrongful death action against defendant

5-2

Intentional Torts

• Assault–Threat of immediate harm or

offensive contact–Any action that arouses reasonable

apprehension of imminent harm–Actual physical contact is

unnecessary5-3

Intentional Torts

• Battery–Unauthorized and harmful or

offensive physical contact with another person–Direct physical contact between

victim and perpetrator unnecessary–May accompany assault

5-4

Intentional Torts

• Doctrine of transferred intent–Party A intends to harm Party B,

but actually injures Party C–Law transfers perpetrator’s intent

from target to actual victim–Party C can sue the perpetrator

5-5

Intentional Torts

• False imprisonment–Intentional confinement or restraint of

another person without authority or justification and without that person’s consent• Physical force• Barriers• Threats of physical violence• False arrest

5-6

Intentional Torts

• Shoplifting and merchant protection statutes–Merchants may stop, detain, and

investigate suspected shoplifters if:• There are reasonable grounds for suspicion• Suspects are detained for only reasonable time• Investigations are conducted in reasonable

manner

5-7

Case 1: False Imprisonment

• Case–Walmart Stores, Inc. v. Cockrell– 61 S.W.3d 774, Web 2001 Tex. App. Lexis 7992– Court of Appeals of Texas

• Issue– Does the shopkeeper’s privilege protect Walmart

from liability under the circumstances of the case?

5-8

Intentional Torts

• Misappropriation of the right to publicity–Attempt by another person to appropriate a

living person’s name or identity for commercial purposes–Tort of appropriation–Plaintiff’s recourse:• Recover the unauthorized profits made by the offender• Obtain an injunction preventing further unauthorized

use of his or her identity

5-9

Intentional Torts

• Invasion of the right to privacy–Violation of a person’s right to live

his or her life without being subjected to unwanted and undesired publicity–Placing person in a “false light”

5-10

Intentional Torts

• Defamation of character–Types• Slander• Libel

–Plaintiff must prove that:• Defendant made an untrue statement of fact about

plaintiff• Statement was intentionally or accidentally published to

a third party

5-11

Intentional Torts

• Disparagement

– Untrue statement made about products, services, property, or reputation of a business

• Intentional misrepresentation (Fraud)–Wrongdoer deceives another person out of

money, property, or something of value

5-12

Intentional Torts

• Intentional infliction of emotional distress

– Extreme and outrageous conduct that intentionally or recklessly causes severe emotional distress to another person

– Also known as tort of outrage

• Malicious prosecution

– Frivolous lawsuit maliciously brought

– Prevailing defendant sues original plaintiff to recover damages for injuries

5-13

Unintentional Torts (Negligence)

• Unintentional Tort: A doctrine that says a person is liable for harm that is the foreseeable consequence of his or her actions

• Negligence: Omission to do something which a reasonable person would do, or doing something which a prudent and reasonable person would not do

5-14


• Elements of a Negligence Lawsuit– The defendant owed a duty of care to the plaintiff– The defendant breached the duty of care– The plaintiff suffered injury– The defendant’s negligent act caused the

plaintiff’s injury– The defendant’s negligent act was the proximate

cause of the plaintiff’s injuries

5-15


• Duty of care: Obligation not to cause any unreasonable harm or risk of harm– Tests used to determine whether a duty of care

was owed:

• Reasonable person standard• Reasonable professional standard

• Breach of duty of care: Failure to exercise care or to act as a reasonable person would act

5-16


• Injury to plaintiff – Personal injury or damage to the plaintiff’s

property

– Damages cannot be recovered if the plaintiff suffered no injury

– Damages recoverable depend on the effect of the injury on the plaintiff’s life or profession

5-17

Case 2: Damages for Negligence

• Case

–Clancy v. Goad

–858 N.E.2d 653, Web 2006 Ind. App. Lexis 2576 (2006)

–Court of Appeals of Indiana

• Issue

–Were the damages awarded to Dianna Goad excessive?

5-18


• Causation– Causation in fact (actual cause): A person who

commits a negligent act is not liable unless actual cause can be proven

– Proximate cause (legal cause): A point along a chain of events caused by a negligent party after which this party is no longer legally responsible for the consequences of his or her actions

5-19

Case 3: Duty of Care

• Case–James v. Meow Media, Inc.–300 F.3d 683, Web 2002 U.S. App.

Lexis 16185 (2002)–United States Court of Appeals for the

Sixth Circuit

5-20

Case 3: Duty of Care

• Issue–Are the video and

movie producers liable to the plaintiffs for selling and licensing violent video games and movies to Carneal, who killed the plaintiffs’ three children? 5-21

Special Negligence Doctrines

• Professional malpractice

– The liability of a professional who breaches his or her duty of ordinary care

– Breach of reasonable professional standard

• Negligent infliction of emotional distress– Permits a person to recover for emotional distress

caused by the defendant’s negligent conduct

5-22


• Negligence per se–Violation of a statute that proximately

causes an injury

• Res ipsa loquitur• Defendant had exclusive control of the

situation that caused the plaintiff’s injury

• Injury would not have ordinarily occurred but for someone’s negligence

5-23


• Good Samaritan laws

–Protects medical professionals who stop and render emergency first aid• Relieves them from liability for ordinary

negligence

• No relief for gross negligence or intentional or reckless conduct

–Laypersons not trained in CPR not covered

5-24

Defenses Against Negligence

• Superseding or intervening event–An event for which defendant is not

responsible• Assumption of risk–Plaintiff knowingly and voluntarily

participates in a risky activity that results in injury

5-25

Case 4: Assumption of the Risk

• Case

– Lilya v. The Greater Gulf State Fair, Inc.

– 855 So.2d 1049, Web 2003 Ala. Lexis 57

– Supreme Court of Alabama

• Issue

– Was riding a mechanical bull an open and obvious danger for which Lilya had voluntarily assumed the risk when he rode the mechanical bull?

5-26

Defenses Against Negligence

• Contributory negligence–Plaintiff who is partly at fault for his

or her own injuries cannot recover against negligent defendant

• Comparative negligence–Damages apportioned according to

fault– Pure comparative negligence– Partial comparative negligence (50% rule)

5-27

Strict Liability

• Strict liability is liability without fault• A participant in a covered activity

will be held liable for any injuries caused by the activity, whether or not he or she was negligent• Abnormally dangerous activities

5-28

APPENDIX II :PRODUCT LIABILITY

Introduction to Product and Strict Liability

• Product Liability: Liability of manufacturers, sellers, lessors, and others for injuries caused by defective products

• Strict Liability: A plaintiff may recover punitive damages if the defendant’s conduct has been reckless or intentional

6-2

Product Liability: Negligence

• Negligence

–Requires the defendant to be at fault for causing the plaintiff’s injuries

–The plaintiff must prove that:• The defendant breached a duty of due care to

the plaintiff

• This breach caused the plaintiff’s injuries

–Only a party who was actually negligent is liable to the plaintiff

6-3

Product Liability: Negligence

• Failure to exercise duty of care includes:–Failing to assemble a product carefully–Negligent product design–Negligent inspection or testing of a product–Negligent packaging–Failure to warn of the dangerous

propensities of a product

6-4

Product Liability: Misrepresentation

• Misrepresentation–Occurs when a seller or lesser

either:• Fraudulently misrepresents the quality of

a product• Conceals a defect in it

–Recovery is limited to persons who relied on the misrepresentation

6-5

Product Liability: Strict Liability

• Doctrine of strict liability in tort–Strict liability is liability without fault–Makes manufacturers, distributors,

wholesalers, retailers, and others in the chain of distribution of a defective product liable for the damages caused by the defect, irrespective of fault

6-6


• Liability without fault–Does not require the injured person to

prove that the defendant breached a duty of care–Casual sales and transactions by

nonmerchants are not covered–Applies only to products, not services

6-7


• Chain of distribution

–Comprises of:• Manufacturers • Distributors• Wholesalers and retailers• Lessors• Subcomponent manufacturers

–All parties in the chain of distribution of a defective product are strictly liable for the injuries it causes

6-8


• Parties who can recover for strict liability– Any injured party– Privity of contract not required– Recovery possible even if the injured party had

no contractual relations with the defendant– Bystanders and non-users are entitled to the same

protection as users

6-9


• Damages recoverable for strict liability– Damages recoverable vary by jurisdiction– Property damage recoverable in most jurisdictions– Economic loss in few jurisdictions– Some jurisdictions limit the dollar amount of the

award– Punitive damages generally allowed if defendant

recklessly or intentionally injured the plaintiff

6-10

Product Defects

• To recover for strict liability, the injured party must first show that the product that caused the injury was somehow defective

• The injured party does not have to prove who caused the product to become defective

• Plaintiff can allege multiple product defects in one lawsuit

6-11

Product Defects

• Defect in manufacturing• Defect in design• Defective packaging• Failure to warn• Inadequate instructions

6-12

Case 6.1: Defect in Manufacture

• Case– Shoshone Coca-Cola Bottling Company v.

Dolinski– 82 Nev. 439, 420 P.2d 855, Web 1966 Nev. Lexis

260– Supreme Court of Nevada

6-13

Case 1: Defect in Manufacture

• Issue– Should the state of Nevada judicially adopt the

doctrine of strict liability? If so, was there a defect in the manufacture of the Squirt bottle that caused the plaintiff’s injuries?

6-14

Defect in Design

• Defect that occurs when a product is improperly designed

• Evaluation of adequacy of a product’s design:– Risk-utility analysis– Consumer expectation test

6-15

Case 2: Design Defect

• Case– Domingue v. Cameco Industries, Inc.– 936 So.2d 282, Web 2006 La. App. Lexis 1593

(2006)– Court of Appeal of Louisiana

• Issue– Is the forward blind spot on Cameco’s 405-B

dump truck a design defect?

6-16

Defect in Design

• Crashworthiness doctrine:

– Automobile manufacturers have duty to design automobiles taking into account the possibility of a second collision

– They should take into account the possibility of harm from a person’s body striking something inside the automobile in the case of a car accident

6-17

Failure to Warn

• Defect that occurs when a manufacturer does not place a warning on the packaging of products that could cause injury if the danger is unknown

• Proper and conspicuous warning insulates all in chain of distribution

• Failure to warn is a defect that will support a strict liability action

6-18

Defect in Packaging

• Manufacturers owe a duty to design and provide safe packages for their products

• Containers should be:– Tamperproof– Clearly indicate tampering

• Defective packaging subjects the chain of distribution to strict liability

6-19

Other Product Defects

• Failure to provide adequate instructions• Inadequate testing of products• Inadequate selection of component parts or materials• Improper certification of the safety of a product

6-20

Defenses to Product Liability

• Generally known dangers–Certain products are inherently

dangerous–These products are known to the

general population to be inherently dangerous–Sellers are not strictly liable for failing

to warn of generally known dangers6-21


• Government contractor defense –Contractors that manufacture products

to government specifications are not usually liable if such a product causes injury

• Abnormal misuse of the product –Relieves the seller of product liability if

the user abnormally misused the product 6-22


• Supervening event

–The manufacturer or seller is not liable if:

•A product is materially altered or modified after it leaves the seller’s possession

• The alteration or modification causes an injury

6-23


• Assumption of risk• Defendant must prove that the

plaintiff:»Knew and appreciated the risk»Voluntarily assumed the risk

6-24


• Statute of limitations –Plaintiff must bring action within a

certain number of years from the time that he or she was injured by the defective product–Limitation period set by each state–Defendant is relieved of liability if

action is not brought within limitation period 6-25


• Statute of repose

–Limits the seller’s liability to a certain number of years from the date when the product was first sold

–Varies from state to state

6-26


• Plaintiff partially at fault–Types•Contributory negligence•Comparative negligence

6-27


• Contributory negligence –Plaintiff who contributed to own

injuries cannot recover from the defendant in negligence–Contributing plaintiff cannot recover

damages even if the product was defective

6-28


• Comparative negligence– Applies when a plaintiff is partially responsible

for causing his own injuries– Liability is assessed proportionately to the degree

of fault of each party– Damages are apportioned proportionally between

the plaintiff and the defendant

6-29