Mba1034 cg law ethics week 9 law & markets 2013

LAW
AND
MARKETS
Stephen Ong, BSc(Hons) Econs (LSE),
MBA International Business(Bradford)
Visiting Fellow, Birmingham City University
Visiting 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

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

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

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

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 AND
MCLAWSUITS

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

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

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

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
unnecessary
5-3

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 dangers
6-21

• 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

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