David Oliveiri Basic Business Law BPP432/80 Basic Business Law (BPP432/80) 2007 Fall Quarter Syllabus Review – Our Contract!! David Oliveiri

David OliveiriBasic Business Law BPP432/80

Basic Business Law (BPP432/80) 2007 Fall Quarter

Syllabus Review – Our Contract!!

David Oliveiri


Logistics Course: Basic Business Law (BPP 432/80) -- 2007 Fall

Quarter

Time: 5:50-8:50PM Thursdays (except 9/18 and 11/20)

Me: David Oliveiri, Office: CS4-110E, Phone: x55144, E-Mail: [email protected]

My Assistant: Pamela Bamann (x52246; CS-3-211A)

Text: Smith & Roberson’s Business Law, Mann & Roberts, 13th Edition (Thomson/West, 2006); ISBN 0-324-20486-8

Course Web-Site: http://simonexchange.rochester.edu


Course Objectives

• To develop familiarity with selected laws, regulations, legal principles, and legal processes that govern (a) efficient exchange, generally; and (b) how and in what ways managers and entrepreneurs organize and interact to facilitate exchange.

• Law of “Contracts,” “Agency,” “Business Associations.”• Emphasis on United States Law; But…• Emphasis on Spirit or Intent of Law

• To understand and appreciate the constraints, risks, and opportunities that the legal environment provides to business managers and entrepreneurs.

• Transactional Focus• Managerial Decision-Making in a Legal Environment• Business Risk Management, “Bargain-Arounds,” Commercial Rights and

Responsibilities … Business Valuation


Letter from Business Supplier:

“I’m changing our Existing Agreement by revising

the due dates of my deliveries, price you will pay for

deliveries, when your payments are due, the penalties you

will incur if payments are late, and how partial payments

are to be applied to what you owe me.

Best Regards, …”


Law and the Credit Card Industry

David Oliveiri

The Changes: We are changing your Card

Agreement by revising the provisions concerning

the default rate, promotional offers, periodic

finance charges, minimum due, and application of

payments to the minimum due.



State “Usury” Rates – Legislative Ceiling on Interest Rates.

1980 Citibank “Squeeze” -- New York State Usury Laws and Double-Digit Inflation Rates -- "You are lending money at 12% and paying 20%..."

1978 US Supreme Court Decision (Marquette National Bank v. First of Omaha Service Corp.) – “National banks only have to obey the interest-rate caps of the state they are chartered in, not that of the state where a bank's customer lives.”

South Dakota Legislature Eliminated Usury Ceiling – Revenue Measure.




Default Rate: All your annual percentage rates (APR’s) may increase if you default under any Card Agreement that you have with us because you fail to make a payment to us when due, you exceed your credit line, or you make a payment to us that is not honored. In these circumstances, we may automatically increase your APRs (including any promotional APRs) on all balances to the Default APR, which equals the Prime Rate plus up to 22.1 5%. As of September 1, 2006, the Default ANNUAL PERCENTAGE RATE is 30.40%. Which corresponds to a daily periodic rate of 0.0833%.


Right to Opt Out: To opt out of these changes, you must write us by November 30, 2006, indicating that you are opting out. Write us at Citibank. c/o Customer Service,1 Center, P.O. Box 45147, Jacksonville, Florida, 32232-5147, and include your name, address, and account number. If you notify us by that time that you do not accept these changes, your account will be closed and you may pay off the balance of your account under the current terms. However, use of your card after the effective date of these changes is deemed acceptance of the changes even if you have notified us that you do not wish to accept the charges.


Effective October 1, 2006, Citibank (South

Dakota), N.A. will be the issuer of your account.

From that date, the words "we, us, and our" as

used in your Card Agreement will refer to

Citibank (South Dakota), N.A.


Evaluation of Performance

Midterm Examination (10/18) 33 1/3%

Cumulative Final 33 1/3%

Participation (Team-Based + Individual) 33 1/3%


Learning Approach – Typical Class

Pre-Read (Assignments in Outline; Supplementary Readings) Handouts for Week Lecture (Non-Exhaustive; Lecture Slides/Outlines Distributed) Self-Tests/Selected End-of-Chapter Problems (Answers

Distributed) Team-Based Presentations (Graded, Beginning 10/4)

– 2 per Quarter– Assigned Teams (by September 27)– Grading Criteria: (1) Quality of Analysis and Issue Identification;

(2) Specificity and Clarity of Recommendations; and (3) Credibility and Persuasiveness

– All Team Members Graded Equally; Exception: Free Rider Petition

Active Class Participation Essential!


Tests

Midterm Exam 10/18; Final Exam Period 12/3 - 12/8

Open-Book, Open Notes

“Non-Cumulative” Final

Format -- Short-Answer

“Unless previously arranged and fully agreed to by the instructor (generally, due to extreme uncontrollable circumstances), failure to attend or take the Midterm or Final at its assigned time will result in a grade of 0 for that particular grade component.”

Exam-Taking Success Strategies For Basic Business Law


Outline

Week Topic Reading

1. (9/18: 7:10-8:30PM; What is Law? Effective Decision-Making S&R 1, 2, 3

9/20) in a Legal Environment

{Class Exercises on What is Law;

Effective Decision-Making}

2. (9/27) Facilitating Exchange; S&R 9, 10

Value of Contracts; Creating Enforceable

Rights -- Mutual Assent Requirement

… + Supplementary Readings


Success Strategy for Basic Business Law

Spot Issues Among Complex Commercial Facts

Identify Pertinent Areas of Law That Impact Business Goals, Results

Clear Thought/Statement/Concision to Define Risks, Compliance Costs, “Bargain-Arounds,” Opportunities


Basic Business Law (BPP432/80) 2007 Fall Quarter

Instructor: David Oliveiri

Week 1: What is Law? Effective

Decision-Making in a Legal Environment?


Agenda

The Big Picture

What is Law?

What Law Applies?

The Lawmaking Process

Managerial Implications

Summary; Q&A


The Intersection of Law & Business

Yahoo! is an internet service provider with a principal place of

business in Santa Clara, California.



Yahoo! is an internet service provider with a principal place of business in Santa Clara, California.

Its American website, www.yahoo.com, targets US users and provides many services including auction sites, message boards, and chat rooms, for which Yahoo! users supply much of the content.

Nazi discussions have occurred in Yahoo!’s chat rooms and Nazi-related paraphernalia have appeared for sale on its auction website.


Section R645-2 of the French Criminal Code bans exhibition of Nazi propaganda for sale and prohibits French citizens from purchasing or possessing such material.

Although a Yahoo! Subsidiary, Yahoo! France, operates www.yahoo.fr in France and removes all Nazi material from its site to comport with French law, French users can still access the American Yahoo! Website that carries Nazi-related discussions and auction items.



In April 2000, LICRA and UEJF (two French associations) discovered that they could access www.yahoo.com in France and view Nazi materials.

On May 22, 2000 a French court, at the request of LICRA and UEJF, issued an order requiring Yahoo!—subject to a fine of 100,000 Francs (approximately $13,300) per day—to prohibit access to Nazi artifacts on its site and to warn that viewing such material violates French law.



How Does this Situation Affect Yahoo?

Status Quo — Prior to French Litigation No Care “Yahoo” Care

No Care -100,0 -100,-10

“French Public”

Care -110,0 -20,-10

•No Cooperation

•Cost of Care (i.e., Filtering Content) = 10

•Cost of “Injury” = 100

•Probability of Injury Given 2-Party Care = 10%


Effect of French Court’s Holding

New Status Quo – Imposition of a Rule

No Care “Yahoo” Care

No Care -100,0 -100,-10

“French Public”

Care -10,-100 -20,-10

Results: 1. Shifts Costs

2. Influences Future Behavior

3. Barrier to Entry?


Learnings

Understand What Law Is/Where It Comes From

Understand What Particular Laws Apply to Transactions/ Business Activities

Understand Nature and Role of Lawmaking

Understand Why Law is Important to Business Managers

Understand How Business Managers Make Effective Business Decisions in a Legal Environment


Some Perspective: A Big Picture

Business EnvironmentTechnology

ComputersTelecommunicationsProduction Methods

Markets Competitors Customers Supplies

Regulation Taxes Antitrust International

Business StrategyAsset StructureCustomer base

Nature of knowledge creation

Organizational ArchitectureDecision-right assignment

Reward systemPerformance-evaluation system

Incentives and Actions

Firm Value

Source: Managerial Economics and Organizational Architecture, Brickley, Smith, Zimmerman


What Isn’t Law? Example: Bausch & Lomb ReNu MoistureLoc Timeline

4/10/06: FDA and CDC issue public health alerts about Fusarium keratitis and a link to ReNu MoistureLoc solution

4/21/06: FDA and CDC announce investigation of B&L’s Greenvilleplant

4/27/06: Wall Street Journal reportsBausch & Lomb knew about Fusarium infections in Hong Kong in November 2005


What Isn’t Law? Morals?

– Wall Street Journal 5/16/06 – “Bausch & Lomb issued a worldwide recall of its ReNu with MoistureLoc contact-lens solution.” Annual MoistureLoc Sales = $100 Million; Recall Cost = $50-75 Million

Ethics?– Bausch & Lomb Web Site – “The health and safety of your eyes has always

been our first priority.”

Law?• Potential Product Liability of $.5-1 Billion. “After thousands of tests, there is

no evidence of MoistureLoc contamination, tampering, or counterfeiting. That leads us to believe that there may be some aspect of the MoistureLoc formula, when combined with certain environmental factors, lens wear and care practices, and other factors, that might increase the risk of Fusarium infection in rare circumstances.”

The “Complication” of Stakeholders– Wall Street Journal 5/16/06 – “…the company’s stock rallied [up 13%],

reflecting investors’ confidence that its explanation would put the matter to rest, and that other Bausch solutions may not have the same problem.”


Law and Morals

“ThouShalt Not Kill”

“You must driveOn the right sideOf the road”

“You should notSilently stand by andWatch a blind manWalk off a cliff”

Source: Smith and Roberson’s Business Law, Mann & Roberts (Thomson/Southwestern, 13 th Ed. 2006)


Law and Morals

“Don’tMarketDefective Products”

Court X: “Strict Product Liability of ABC Corp. For Product Y”

“You should notsilently stand by andwatch a customer hurt herself with your product”


Stakeholder Model of Business

Corporation

Managers

Employee

s

Community

Stockholders

Suppliers

Customers

Source: Smith and Roberson’s Business Law, Mann & Roberts (Thomson/Southwestern, 13th Ed. 2006)


What is Law/Who Makes Law?

Constitution The US

Constitution imposes limits on the way managers can do business in

the US? [Art I, Sec. 8-” Congress

shall have power …To regulate

Commerce with foreign Nations,

and among several states…]


Spending Uncle Sam's Money

By

T. Dart Walker(1869 - 1914)




Sarbanes-Oxley

Securities Act of ’34 -- SEC – Regs

New York’s General Obligations Law

PATRIOT ACT “Banking” Regulations…

Legislation/Statutes (Administrative Agencies/ Regulations)


Court Decisions Precedent/”Stare Decisis” or “Let the Decision

Stand”

– A lower court in a state must always follow the decisions of a higher state court in its jurisdiction?

– A California Supreme Court decision must be followed by a trial-level court in Las Vegas?

Common Law “Database”

– An 1864 decision by a court on a particular matter is still good law?



What is Law?/Other Considerations

Private Models (Uniform Commercial Code, Other Uniform Laws) – “Statutes-in-Waiting”

International Legal Context– Common Law – UK, Australia, Canada, US

– Code-Based Systems – Western Europe; Roman Influences

– Socialist Systems – Russia, Eastern Europe

– Religion-Based Systems – Middle East


What is Law?Bottom Lines

Law = C + S + R + D

C > S > R > D

Subject To…D Interpreting C,S,R


What Law Applies to a Particular Situation?

--Two Simon alums (Texas and Virginia)

--A drink in New York City

--Internet kiosks in California coffee houses

--Each agrees to invest $35,000

--Cocktail napkin contract; both sign

THEN, One alum refuses to proceed with the deal.

What Law Applies? C, S, R, D of United States, Texas, Virginia, New York, and/or California?

What Law Applies = f (Place, Type of Conduct, Hierarchy, Intent?)

When Does This Even Matter?


What Law Applies? Geographic Sources of Law

(C, S, R, D) – United States


A Court Won’t Entertain Dispute Unless

It Has … Jurisdiction

Jurisdiction

Parties Subject Matter

In rem Personal Quasi in rem

State Concurrent Federal



Subject Matter Jurisdiction – The Types of Disputes Particular Courts

Can Entertain

Exclusive Federal Jurisdiction1. Federal crimes2. Bankruptcy3. Patents4. Copyright and trademarks5. Admiralty6. Antitrust7. Suits against the United

States8. Specified Federal statutes

Concurrent Jurisdiction1. Federal questions2. Diversity of Citizenship

Exclusive StateJurisdiction;EverythingElse

FederalMatters



Role of Lawsuits (Or Threat of Lawsuits)

Adjudicate Disputes

Confer Rights

Enforce Rights

Lawsuits (or Threat of Lawsuits) = Mechanism to Apply Law = f (Jurisdiction, C>S>R>D, Interpretation, Validity)


Mechanisms of Legal System–Lawsuits and Lawmaking

Judicial Lawmaking : Lawsuits = Disputes, Disputes = Facts + Law

– Stages - Summons/Complaint, Answer, Discovery, Motions, Pretrial Conference, Trial, Appeal

– Written Opinions of Court = Common Law– Decision “Philosophies” of Judges -- Rights-Based

Justice, Distributive Justice, Economic Efficiency

Non-Judicial Lawmaking = Statutes, Regulations, To Address “Public” Issues

– Supply = Politicians and Political Process– Demand = Special Interests

END RESULT: LAW


Why is Law and Lawmaking Important to Business

Managers?

Legal Rules Define Enforceable Rights for Deal-Making, Conduct of Business

– Legal Rules Minimize Information Costs!– Legal Rules Minimize Transaction Costs!– And …”Inefficient” Legal Rules May Provide a Predictable “Starting

Point for Bargains”

Law Impacts Enterprise Value– Threats of VIOXX, Bausch & Lomb MoistureLoc Lawsuits?– EEOC, EPA, SEC Investigations?– The role of Due Diligence and Purchase Agreement Warranties and

Representations in Corporate Mergers and Acquisitions

Criminal Liability


Managerial Analysis of Legal Issues

“Legal Issues” = Disputes, Transactions, Activities

Litigation Example: Decisions to Sue

– Expected Value Test (Positive Expected Value => Sue; Negative Expected Value => Do Not Sue)

– EV = NPV Recovery – NPV Cost

– EV = f (timing, probabilities, cash flows); In US, Each Party Pays Their Own Costs!

– Impact of Asymmetric or Complete Information


But Only A Very Small Percentage of Cases

Go To Trial!


Managerial Analysis of Legal Issues

Litigation Example: Decisions to Settle– Once Again, Expected Value Test

– But … No Positive Expected Value Choice, Generally; So, Minimize Expected Loss

– => Settle When Expected Value of Settlement is Greater Than Expected Value of Defending Lawsuit!

– Game Theory Issue: Would You Ever Settle a Frivolous Lawsuit?

Suppose it costs a disreputable customer of your business $500 to file a frivolous lawsuit that seeks $50,000 in damages, and it costs you $1000 to employ a lawyer and respond to the complaint by formal answer or motion. Suppose further that if you ignore the lawsuit and do not respond you will suffer a default judgment in the amount of $50,000! Would you be willing to settle even though you know that the suit is frivolous and that the plaintiff will drop the suit if you make a formal response? Does your business strategy (and answer) change if all of your customers have complete information?


Advanced Applications

Decision TreesYou have just received a letter from customer’s lawyer, threatening to sue your company for a million dollars in damages resulting from the malfunction of your company’s product. You are trying to decide whether to defend the lawsuit vigorously or settle. The customer’s lawyer has offered to settle for $600,000 if you accept this offer within 48 hours. After that, there will be no further settlement discussion. You learn from your lawyer that it would cost $100,000 to defend this action thru trial and that you have a 30% chance of winning (i.e. avoiding liability). On the other hand, there is a 50% chance that a jury will award the plaintiff a million dollars in damages, and a 20% chance that you will convince a jury that you are responsible for no more than $300,000 in damages. Should you settle or go to trial, assuming there are no game theory issues with settlement?


Decision Trees

Litigate: TrialCost-$100k

Settle; -$600k

Win (+$0);30% chance

Lose Big (-$1,000k);50% chance

Lose Small (-$300k);20% chance

Note: The probabilities ofall uncertain outcomes mustAdd up to 100%


Litigate: TrialCost-$100k

Settle; -$600k

Win; $0 EV

Lose Big; -$500k EV

Lose Small; -$60k EV

Note: To calculate ExpectedValues, work backward (right-toleft) in a decision tree

-$660 EV

-$600 EV

Decision Trees


Advanced Application: Game Theory

Thelma and Louise are executives of Endrun Corp. They have been involved in a pattern of securities laws violations for some time. Today, both Thelma and Louise have been arrested on warrants obtained by the local federal prosecutor. They are being held in separate cells, and are not allowed to communicate with each other. The federal prosecutor meets with Thelma and Louise separately and makes the following offer to each of them:

– “Confess and Cooperate with us! If your testimony helps us convict your partner in crime and get a 10 year sentence for her, we will recommend a one year sentence for you.”

– “We will offer the same deal to your partner! If you don’t confess, and your partner testifies against you and helps us get a conviction, you’ll get 10 years.”

– “If you and your partner both confess, the best I can do is get you a 5 year sentence.”

Thelma and Louise are unable to communicate with each other. But they know that if neither of them decides to help the federal prosecutor, it is likely that they will be convicted of a lesser crime and get 3 year sentences. What will Thelma and Louise do?


Thelma’s Choices

Confess Silence

Confess

Silence

Louise’s Choices5, 5 1, 10

10, 1 3, 3

Advanced Application: Game Theory


Thelma/Louise Applications


Summary/Q & A

Law and Lawmaking are Important to Business

Law and Lawmaking Affect Business Rights, Behavior, and Value

“Law” Comes From Multiple Sources – A Vast Matrix (50 states, 13 Federal Circuits, ? Countries)

Law and Ethics Are Not The Same Thing; But Each Affect Business Value

Law, Lawsuits (Actual or Potential), and Lawmaking Help Businesses Order Affairs

Business Managers Use Specific Tools to Make Decisions in a Legal Environment

Yahoo?

Documents

David Oliveiri Basic Business Law BPP432/80 Basic Business Law (BPP432/80) 2007 Fall Quarter Syllabus Review – Our Contract!! David Oliveiri