Who is the principal and who is the agent in this scenario? By which method was an agency relationship formed between Scott and Blatt? What facts would the court consider most important in determining whether Scott was an employee or an inde- pendent contractor?

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Agency Relationships


James Blatt hired Marilyn Scott to sell insurance for the Massachusetts Mutual Life Insurance Company. Their contract
stated, “Nothing in this contract shall be construed as creating the relationship of employer and employee.” The con–
tract was terminable at will by either party. Scott financed her own office and staff, was paid according to performance,
had no taxes withheld from her checks, and could legally sell products of Massachusetts Mutual’s competitors. Blatt
learned that Scott was simultaneously selling insurance for Perpetual Life Insurance Corporation, one of Massachusetts
Mutual’s fiercest competitors. Blatt therefore withheld client contact information from Scott. Scott complained to
Blatt that he was inhibiting her ability to sell insurance for Massachusetts Mutual. Blatt subsequently terminated their
contract. Scott filed a suit in a New York state court against Blatt and Massachusetts Mutual. Scott claimed that she had
lost sales for Massachusetts Mutual—and commissions—as a result of Blatt’s withholding contact information from
her. Using the information presented in the chapter, answer the following questions.

1. Who is the principal and who is the agent in this scenario? By which method was an agency relationship formed
between Scott and Blatt?

2. What facts would the court consider most important in determining whether Scott was an employee or an inde–
pendent contractor?

3. How would the court most likely rule on Scott’s employee status? Why?

4. Which of the four duties that Blatt owed Scott in their agency relationship has probably been breached?

Does the fact that Brock owned shares in Sunglow establish a conflict of interest? Why or why not? Suppose that Firm Body brought an action against Brock claiming that he had breached the duty of loyalty by not disclosing his interest in Sunglow to the other directors. What theory might Brock use in his defense?

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Corporations


David Brock was on the board of directors of Firm Body Fitness, Inc., which owned a string of fitness clubs in New
Mexico. Brock owned 15 percent of the Firm Body stock and was also employed as a tanning technician at one of the
fitness clubs. After the January financial report showed that Firm Body’s tanning division was operating at a substantial
net loss, the board of directors, led by Marty Levinson, discussed terminating the tanning operations. Brock success–
fully convinced a majority of the board that the tanning division was necessary to market the clubs’ overall fitness
package. By April, the tanning division’s financial losses had risen. The board hired a business analyst, who conducted
surveys and determined that the tanning operations did not significantly increase membership.
A shareholder, Diego Peñada, discovered that Brock owned stock in Sunglow, Inc., the company from which Firm
Body purchased its tanning equipment. Peñada notified Levinson, who privately reprimanded Brock. Shortly there–
after, Brock and Mandy Vail, who owned 37 percent of the Firm Body stock and also held shares of Sunglow, voted
to replace Levinson on the board of directors. Using the information presented in the chapter, answer the following
questions.

1. What duties did Brock, as a director, owe to Firm Body?

2. Does the fact that Brock owned shares in Sunglow establish a conflict of interest? Why or why not?

3. Suppose that Firm Body brought an action against Brock claiming that he had breached the duty of loyalty by not
disclosing his interest in Sunglow to the other directors. What theory might Brock use in his defense?

4. Now suppose that Firm Body did not bring an action against Brock. What type of lawsuit might Peñada be able to
bring based on these facts

Would Davidson Masonry automatically be taxed as a partnership or a corporation? 2. Is Davidson Masonry member managed or manager managed?

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Limited Liability Business Forms


The city of Papagos, Arizona, had a deteriorating bridge in need of repair on a prominent public roadway. The city
posted notices seeking proposals for an artistic bridge design and reconstruction. Davidson Masonry, LLC, which was
owned and managed by Carl Davidson and his wife, Marilyn Rowe, decided to submit a bid to create a decorative con–
crete structure that incorporated artistic metalwork. They contacted Shana Lafayette, a local sculptor who specialized
in large-scale metal creations, to help them design the bridge. The city selected their bridge design and awarded them
the contract for a commission of $184,000.
Davidson Masonry and Lafayette then entered into an agreement to work together on the bridge project. Davidson
Masonry agreed to install and pay for concrete and structural work, and Lafayette agreed to install the metalwork at
her expense. They agreed that overall profits would be split, with 25 percent going to Lafayette and 75 percent going to
Davidson Masonry. Lafayette designed numerous metal sculptures of trout that were incorporated into colorful deco–
rative concrete forms designed by Rowe. Davidson performed the structural engineering. The group worked together
successfully until the completion of the project. Using the information presented in the chapter, answer the following
questions.

1. Would Davidson Masonry automatically be taxed as a partnership or a corporation?

2. Is Davidson Masonry member managed or manager managed?

3. Suppose that during construction, Lafayette asked Carl Davidson to rent space in a warehouse that was close to
the bridge so that she could work on her sculptures near the site where they would eventually be installed. Carl
Davidson signed the rental contract in his own name rather than the name of the LLC. The other members of
Davidson Masonry were not aware of the rental agreement. In this situation, would a court likely hold that David–
son Masonry was liable on the contract that Carl Davidson had entered? Why or why not?

4. Now suppose that Rowe has an argument with her husband and wants to withdraw from being a member of David–
son Masonry. What is the term for such a withdrawal, and what effect would it have on the LLC

Assume that Del Rey files a lawsuit against La Grande Enchilada, claiming that his franchise was wrongfully terminated. What is the main factor that a court would consider in determining whether the franchise was wrongfully terminated?

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Small Businesses and Franchises

Carlos Del Rey decided to open a Mexican fast-food restaurant and signed a franchise contract with a national chain
called La Grande Enchilada. The contract required the franchisee to strictly follow the franchisor’s operating manual
and stated that failure to do so would be grounds for terminating the franchise contract. The manual set forth detailed
operating procedures and safety standards, and provided that a La Grande Enchilada representative would inspect the
restaurant monthly to ensure compliance.
Nine months after Del Rey began operating his restaurant, a spark from the grill ignited an oily towel in the kitchen.
No one was injured, but by the time firefighters were able to put out the fire, the kitchen had sustained extensive dam-
age. The cook told the fire department that the towel was “about two feet from the grill” when it caught fire. This was
in compliance with the franchisor’s manual that required towels be placed at least one foot from the grills. Nevertheless,
the next day La Grande Enchilada notified Del Rey that his franchise would terminate in thirty days for failure to fol-
low the prescribed safety procedures. Using the information presented in the chapter, answer the following questions.

1. What type of franchise was Del Rey’s La Grande Enchilada restaurant?

2. If Del Rey operates the restaurant as a sole proprietorship, who bears the loss for the damaged kitchen? Explain.

3. Assume that Del Rey files a lawsuit against La Grande Enchilada, claiming that his franchise was wrongfully terminated. What is the main factor that a court would consider in determining whether the franchise was wrongfully
terminated?

4. Would a court be likely to rule that La Grande Enchilada had good cause to terminate Del Rey’s franchise in this
situation? Why or why not?
Debate This . . . A partnershi

What must Janet do before filing a petition for relief under Chapter 7? How much time does Janet have after filing the bankruptcy petition to submit the required schedules? What hap- pens if Janet does not meet the deadline?

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Creditor-Debtor Relations and Bankruptcy


Three months ago, Janet Hart’s husband of twenty years died of cancer. Although he had medical insurance, he left
Janet with outstanding medical bills of more than $50,000. Janet has two teenage daughters to support. She has worked
at the local library for the past ten years, earning $1,500 per month. Since her husband’s death, she has also received
$1,500 in Social Security benefits and $1,100 in life insurance proceeds every month, for a total monthly income of
$4,100. After making the mortgage payment of $1,500 and paying the amounts due on other debts, Janet has barely
enough left to buy groceries for her family. She decides to file for Chapter 7 bankruptcy, hoping for a fresh start. Using
the information presented in the chapter, answer the following questions.

1. What must Janet do before filing a petition for relief under Chapter 7?

2. How much time does Janet have after filing the bankruptcy petition to submit the required schedules? What hap–
pens if Janet does not meet the deadline?

3. Assume that Janet files a petition under Chapter 7. Further assume that the median family income in the geographic area in which Janet lives is $49,300. What steps would a court take to determine whether Janet’s petition
is presumed to be “substantial abuse” using the means test?

4. Suppose that the court determines that no presumption of substantial abuse applies in Janet’s case. Nevertheless, the
court finds that Janet does have the ability to pay at least a portion of the medical bills out of her disposable income.
What would the court likely order in that situation?

Would a court be likely to consider Holcomb a merchant under the UCC? Why or why not? Did the parties have a valid contract under the UCC? Were any terms left open in the contract? If so, which terms? How would a court deal with open terms?

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Sales and Lease Contracts


Guy Holcomb owns and operates Oasis Goodtime Emporium, an adult entertainment establishment. Holcomb
wanted to create an adult Internet system for Oasis that would offer customers adult-theme videos and “live” chat room
programs using performers at the club. On May 10, Holcomb signed a work order authorizing Thomas Consulting
Group (TCG) “to deliver a working prototype of a customer chat system, demonstrating the integration of live video
and chatting in a Web browser.” In exchange for creating the prototype, Holcomb agreed to pay TCG $64,697. On
May 20, Holcomb signed an additional work order in the amount of $12,943 for TCG to install a customized firewall
system. The work orders stated that Holcomb would make monthly installment payments to TCG, and both parties
expected the work would be finished by September.
Due to unforeseen problems largely attributable to system configuration and software incompatibility, the project
required more time than anticipated. By the end of the summer, the Web site was still not ready, and Holcomb had
fallen behind in his payments to TCG. TCG threatened to cease work and file a suit for breach of contract unless the
bill was paid. Rather than make further payments, Holcomb wanted to abandon the Web site project. Using the infor–
mation presented in the chapter, answer the following questions.

1. Would a court be likely to decide that the transaction between Holcomb and TCG was covered by the Uniform
Commercial Code (UCC)? Why or why not?Commercial Code (UCC)? Why or why not?

2. Would a court be likely to consider Holcomb a merchant under the UCC? Why or why not?

3. Did the parties have a valid contract under the UCC? Were any terms left open in the contract? If so, which terms?
How would a court deal with open terms?

4. Suppose that Holcomb and TCG meet in October in an attempt to resolve their problems. At that time, the parties
reach an oral agreement that TCG will continue to work without demanding full payment of the past due amounts
and Holcomb will pay TCG $5,000 per week. Assuming the contract falls under the UCC, is the oral agreement
enforceable? Why or why not?

Suppose that Sun Farms contacts every basil grower in the country and buys the last remaining chemical-free basil anywhere. Nevertheless, Sun Farms is able to ship only 1,475 pounds to Val’s. Would this fulfill Sun Farms’ obligations to Val’s? Why or why not?

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Contract Performance, Breach, and Remedies


Val’s Foods signs a contract to buy 1,500 pounds of basil from Sun Farms, a small organic herb grower, as long as an
independent organization inspects the crop and certifies that it contains no pesticide or herbicide residue. Val’s has a
contract with several restaurant chains to supply pesto and intends to use Sun Farms’ basil in the pesto to fulfill these
contracts. While Sun Farms is preparing to harvest the basil, an unexpected hailstorm destroys half the crop. Sun Farms
attempts to purchase additional basil from other farms, but it is late in the season, and the price is twice the normal
market price. Sun Farms is too small to absorb this cost and immediately notifies Val’s that it will not fulfill the con–
tract. Using the information presented in the chapter, answer the following questions.

1. Suppose that the basil does not pass the chemical-residue inspection. Which concept discussed in the chapter might
allow Val’s to refuse to perform the contract in this situation?

2. Under which legal theory or theories might Sun Farms claim that its obligation under the contract has been dis–
charged by operation of law? Discuss fully.

3. Suppose that Sun Farms contacts every basil grower in the country and buys the last remaining chemical-free basil
anywhere. Nevertheless, Sun Farms is able to ship only 1,475 pounds to Val’s. Would this fulfill Sun Farms’ obligations to Val’s? Why or why not?

4. Now suppose that Sun Farms sells its operations to Happy Valley Farms. As a part of the sale, all three parties agree
that Happy Valley will provide the basil as stated under the original contract. What is this type of agreement called?

Did Amstel’s bid meet the requirements of an offer? Explain. Was there an acceptance of the offer? Why or why not? How is an offer terminated? Assuming that Durbin did not inform Amstel that he was rejecting the offer, was the offer terminated at any time described here? Explain.

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Formation of Traditional and E-Contracts


Shane Durbin wanted to have a recording studio custom-built in his home. He sent invitations to a number of local
contractors to submit bids on the project. Rory Amstel submitted the lowest bid, which was $20,000 less than any
of the other bids Durbin received. Durbin called Amstel to ascertain the type and quality of the materials that were
included in the bid and to find out if he could substitute a superior brand of acoustic tiles for the same bid price. Amstel
said he would have to check into the price difference. The parties also discussed a possible start date for construction.
Two weeks later, Durbin changed his mind and decided not to go forward with his plan to build a recording studio.
Amstel filed a suit against Durbin for breach of contract. Using the information presented in the chapter, answer the
following questions.

1. Did Amstel’s bid meet the requirements of an offer? Explain.

2. Was there an acceptance of the offer? Why or why not?

3. How is an offer terminated? Assuming that Durbin did not inform Amstel that he was rejecting the offer, was the
offer terminated at any time described here? Explain.

Why might a corporation’s managers agree to pay a large fine rather than to be indicted and proceed to trial? How does a manager determine the optimal amount of legal research to undertake to prevent her or his company from violating the many thousands of federal regulations?

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The Criminalization of American Business


What do Bank of America, Citigroup, JPMorgan Chase, and Goldman Sachs have in common? All paid hefty fines for purportedly misleading investors about mortgage-backed securities. In fact, these companies paid the government a total of $50 billion in fines. The payments were made in lieu of criminal prosecutions.Today, several hundred thousand federal rules that apply to businesses carry some form of criminal penalty. That is in addition to more than four thousand federal laws, many of which carry criminal sanctions for their violation. From 2000 to the beginning of 2017, about 2,200 corporations either were convicted or pleaded guilty to violating federal statutes or rules.

Criminal Convictions
The first successful criminal conviction in a federal court against a company—the New York Central and Hudson River Railroad—was upheld by the Supreme Court in 1909 (the violation: cutting prices) Many other successful convictions followed.One landmark case developed the aggregation test, now called the Doctrine of Collective Knowledge.b This
test aggregates the omissions and acts of two or more persons in a corporation, thereby constructing an actusreus and areus and are us men srea out of the conduct and knowledge mens rea out of the conduct and knowledge mens rea
of several individuals.Not all government attempts at applying criminal law to corporations survive. In 2013, for example, Sentinel Offender Services, LLC, prevailed on appeal. There was no actual evidence to show that the company had acted with specific intent to commit theft by deception.c In 2014, FedEx Corporation was indicted for purportedly illegally shipping prescription drugs ordered through Web sites. FedEx has chosen to proceed to trial in the U.S. District Court for the Northern District of California in San Francisco.d Many companies, however, choose to reach settlement agreements with the government rather than fight criminal indictments.

Many Pay Substantial Fines in Lieu of Prosecution

More than three hundred corporations reached so-called non-prosecution agreements with the government from 2000 to the beginning of 2017. These agreements typically involve multimillion- or multibillion-dollar fines. This number does not include fines paid to the Environmental Protection Agency or to the Fish and Wildlife Service.According to law professors Margaret Lemos and Max Minzner, “Public enforcers often seek large monetary awards for self-interested reasons divorced from the public interest and deterrents. The incentives are strongest when enforcement agencies are permitted to retain all or some of the proceeds of enforcement.”

Business Questions

1. Why might a corporation’s managers agree to pay a large fine rather than to be indicted and proceed to trial?

2. How does a manager determine the optimal amount of legal research to undertake to prevent her or his company from violating the many thousands of federal regulations?

Would the name Hallowed receive protection as a trademark or as trade dress? Explain.Hallowed receive protection as a trademark or as trade dress? Explain.Hallowed. If Trent and Xavier had obtained a patent on Hallowed, would the release of Halo 2 have infringed on their patent? Why or why not?

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Intellectual Property Rights


Two computer science majors, Trent and Xavier, have an idea for a new video game, which they propose to call Hal–
lowed. They form a business and begin developing their idea. Several months later, Trent and Xavier run into a problem
with their design and consult a friend, Brad, who is an expert in designing computer source codes. After the software
is completed but before Hallowed is marketed, a video game called Halo 2 is released for both the Xbox and the Play–
station systems. Halo 2 uses source codes similar to those of Hallowed and imitates Hallowed’s overall look and feel,
although not all the features are alike. Using the information presented in the chapter, answer the following questions.

1. Would the name Hallowed receive protection as a trademark or as trade dress? Explain.Hallowed receive protection as a trademark or as trade dress? Explain.Hallowed

2. If Trent and Xavier had obtained a patent on Hallowed, would the release of Halo 2 have infringed on their patent?
Why or why not?

3. Based only on the facts described above, could Trent and Xavier sue the makers of Halo 2 for copyright infringement? Why or why not?

4. Suppose that Trent and Xavier discover that Brad took the idea of Hallowed and sold it to the company that produced Halo 2. Which type of intellectual property issue does this raise?