BUSINESS LAW

LEARNINGOBJECTIVESAfter studying this appendix, you will be able to…

LO1 Explain the purposes of laws and identify the major sourc-es of law in the United States

LO2 Describe the characteristics of a contract and explain how the terms of contracts are enforced

LO3 Describe how both title and risk pass from the seller to the buyer when a sale occurs

LO4 Provide an overview of the legal principles governing agency, intellectual property, and bankruptcy

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2APPENDIX

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Appendix 2 Business Law A2–3

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Doing business across state boundaries can be complex and frustrating because each state has its own set of laws. The National Conference of Commissioners on Uniform State Laws (NCCUSL) was established to try to find ways to make state laws more consistent. It develops model laws, called uniform acts, which it sponsors before state legislatures. For businesses, the most important uniform act is the Uniform Commercial Code

(UCC). First developed in 1952, the UCC has been adopted by every state, Washington, D.C., and the Virgin Islands. (Louisiana has adopted most of the UCC articles. However, it has chosen not to adopt article 2, which deals with the sale of goods.) The UCC’s articles govern the sales of goods, negotiable instruments, leases, banking transactions, product war-ranties, and several other business topics. The UCC has been modified several times over the years to account for changes in society, technol-ogy, and business practices.1

Administrative Law The best-known sources of administrative laws, which are laws established by government agencies, are the federal com-missions and agencies Congress has created and given the authority to regulate a specific type of activity. Exhibit A2.1 lists some of these agencies and identifies the areas they regulate. (Keep in mind that this list is far from complete.)

State and local governments have also cre-ated agencies with the authority to establish and enforce regulations within their borders. Many state agencies are modeled after similar federal regulatory agencies.

Case Law The body of laws that arise from court decisions is known as case law or common law. Case law governs areas that are not covered by statutory or administrative law. For example, Article 2 of the Uniform Commercial Code governs

The law is reason free from passion.Aristotle

laws Rules that are enforced by the government that govern the conduct and actions of people within a society.

constitution A code that establishes the fundamental rules and principles that govern a particular organization or entity.

statutory law Laws that are the result of legislative action.

Uniform Commercial Code (UCC) A uniform act governing the sale of goods, leases, war-ranties, transfer of funds, and a variety of other business-related activities.

administrative law Laws that arise from regulations estab-lished by govern-ment agencies.

case law (also called common law) Laws that result from rulings, called precedents, made by judges who initially hear a particular type of case.

LO1 The Purpose and Origin of LawsLaws are those rules governing the conduct and actions of people within a society that are enforce-able by the government. Business—in fact, civiliza-tion as a whole—simply couldn’t function without the rule of law. Can you imagine buying a car, borrowing money, investing in securities, or start-ing a business if there were no enforceable rules governing these activities? We need laws to:

• Promote stability and order

• Protect individuals from physical or mental harm

• Protect property from damage or theft

• Promote objectives and standards of behavior that society deems desirable

• Discourage objectives and standards of behav-ior that society deems undesirable

Sources of Law

Just as laws have many purposes, they also arise from many sources.

Constitutional Law A constitution is a code that establishes the fundamental rules and principles that govern a particular organization or entity. A constitution provides the basis for all other laws within that entity. In the United States, the U.S. Constitution is considered to be the supreme law of the land. A law that the courts find is in conflict with the Constitution is said to be unconstitutional and will not be enforced.

The U.S. Constitution reserves certain rights and responsibilities for the individual states. Each state has its own constitution that serves as the supreme law within its boundaries for those issues the U.S. Constitution reserves for state governments.

Statutory Law Legislative bodies enact many more specific laws called statutory laws. Acts or federal statutes are laws passed by the U.S. Congress. State statutes are laws passed by state legislatures, and ordinances are laws passed by city and county governments.

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A2–4 Appendix 2 Business Law

society. The most serious crimes, which are considered inherently evil, are called felonies. Less serious crimes are called misdemeanors. Exhibit A2.2 summarizes the key differences between civil and criminal law cases.

The same wrongful act may result in both civil and criminal trials. For example, an individual who kills someone can be tried for the crime of murder. At the same time, the family of the murder victim may bring action in civil court for wrongful death or for other torts, such as battery (intentional and wrongful physi-cal contact). Because the standard of proof is lower in civil actions, the accused may be found not guilty in the criminal case while still being held liable in the civil court. The O. J. Simpson case is a famous example. Simpson was found not guilty of the crime of murder in the criminal

sales of goods, but has nothing to say about the sale of services. Thus, legal disputes that arise during the sale of services are settled on the basis of case law. Case law is also used when courts decide on the correct interpretation of statutes or administrative regulations that are in dispute.

When a court that first hears a case dealing with a specific issue renders a decision, it sets a precedent. This means that other courts are expected to use this ruling as a guide when they hear cases of a similar nature. Relying on precedents makes the legal process more efficient—courts dealing with the same types of cases don’t have to “reinvent the wheel.” Precedents also make legal rulings more predictable, so that the par-ties involved in a dispute know how and why the court is likely to rule. Courts very rarely contradict a precedent. In fact, when they do, it often makes headlines.

Civil vs. Criminal Law

There are two major branches of law in the United States: civil law and criminal law.

Civil law deals with disputes between private citi-zens. These disputes are settled in the courts when one of the parties initiates a lawsuit against the other. The most common types of cases brought before civil courts involve breach of contract (which we’ll discuss in the next section) and torts. A tort is a private wrong that results in physical or mental harm to an individual, or damage to that person’s property. Intentional torts arise from willful acts. Unintentional torts arise because of careless or irresponsible behavior, known as negligence.

Criminal law involves cases in which the state inves-tigates and prosecutes individuals who have harmed

tort A private wrong that results in physi-cal or mental harm to an individual, or dam-age to that person’s property.

negligence An unin-tentional tort that arises due to care-lessness or irrespon-sible behavior.

crime A wrongful act against society defined by law and prosecuted by the state.

EXHIBIT A2.1 Examples of Federal Regulatory Agencies2

Federal Agency Major Goal of Regulation

Consumer Product Safety Commission (CPSC) Ensure product safety for a wide array of products

Environmental Protection Agency (EPA) Reduce air and water pollution; eliminate environmental hazards, such as lead paint and asbestos

Equal Employment Opportunity Commission (EEOC) Ensure fair and equal policies in employment practices

Federal Communications Commission (FCC) Set standards for communications by radio, television, wire, satellite, and cable

Federal Trade Commission (FTC) Eliminate unfair or deceptive business practices, including false or deceptive advertising

Food and Drug Administration (FDA) Ensure that new medicines are safe and effective; ensure a safe supply of food

Securities and Exchange Commission (SEC) Ensure fair and accurate transactions in markets where securities (stocks and bonds) are traded; set standards of behavior for the dealers and brokers who work in these markets

Transportation Security Administration (TSA) Reduce terrorist threats by improving security procedures at airports, ports, and other transportation facilities

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Appendix 2 Business Law A2–5

other. Consideration might be money, property, or other assets, or it might be a prom-ise to perform a specific act or provide a specific service. It could even be a promise to refrain from performing a cer-tain act that the party could otherwise legally carry out. The promise by one party to provide a gift to another party is not an enforceable contract, since the party receiving the gift does not provide consideration.

3. The parties must have the legal capacity to enter into a contract. Most individuals are free to enter into contracts and are expected to live up to the

contract An agree-ment that is legally enforceable.

consideration Something of value that one party gives another as part of a contractual agree-ment.

LO2 Contracts: The Ties That BindA contract is one of the most important concepts in business. In basic terms, a contract is an agreement that is enforceable in a court of law. Some people think that contracts must be formal written documents that include complex legal language. But many types of contracts don’t have to be in writing. In fact, courts sometimes decide that a contract exists simply because two parties behave in a way that indicates that they have a contrac-tual agreement. A contract that is explicitly spelled out in writing or in words is called an express contract. A contract based on the behavior of the parties is called an implied contract. Although harder to prove, an implied contract can be just as valid as an express contract.

What Makes a Contract Enforceable?

All valid contracts must satisfy four requirements. In addition, some types of contracts must satisfy a fifth requirement. Let’s take a look at each requirement.

1. There must be mutual assent. This means that there must be an offer freely given by one party and freely accepted by the other. The offer must be serious and reasonably certain so that both parties (and possibly the court) can determine what the parties intended. The other party’s acceptance must be voluntary, unconditional, and clearly communi-cated to the party making the offer.

2. Both parties must offer consideration, meaning that they each must offer something of value to the

EXHIBIT A2.2 Differences Between Civil and Criminal Law Cases

Civil Law Criminal Law

Nature of action and parties involved

Lawsuits to settle disputes between private individuals

Federal or state government prosecution of parties charged with wrongdoings against society

Examples of cases Intentional torts such as slander, libel, invasion of privacy, wrongful death; unintentional torts arising from negligence; breach of contract

Felonies such as robbery, theft, murder, arson, identity theft, extortion, embezzlement, as well as less serious crimes called misdemeanors

Possible outcomes Liable or not liable Guilty or not guilty

Standard of proof (what is needed for plaintiff to win the case)

Preponderance of evidence (a much less stringent requirement than beyond reasonable doubt)

Proof beyond a reasonable doubt

Goal of remedy Compensate injured party for harm suffered Punish wrongdoer and deter similar behavior

Common remedies Monetary damages (payments of money to compensate the injured party), injunctions against certain types of behavior, or requirements for specific performance

Fines and/or imprisonment; in the most serious felonies, such as premeditated murder, capital punishment (the death penalty) may be imposed

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According to the statute

of frauds, certain types

of contracts must be in

writing to be enforceable.

case. But a civil court found him liable for the wrong-ful death of Ron Goldman and for battery against both Goldman and Simpson’s ex-wife, Nicole Brown.3

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A2–6 Appendix 2 Business Law

terms of these agreements. But common law recognizes that certain individuals are not competent to enter into a bind-ing agreement. For instance, minors (in most states any-one under the age of 18) are assumed to lack the maturity and experience to understand the nature of a contractual agreement. Thus, the law pro-vides minors with the right to disaffirm (cancel) most types of contracts they enter into with adults. Courts may also rule that people who are mentally incom-petent or whose judgment is impaired because of intoxication may lack the legal capacity to enter into contracts. (However, in recent years the courts have become less sympathetic to those seeking to avoid a con-tract due to intoxication.)

4. The contract must be for a legal purpose. This is almost a no-brainer.

Remember, contracts are legally enforce-able agreements. It wouldn’t make sense for a court to enforce an agree-ment requiring one or both of the par-ties to break the law!

5. Most contracts do not have to be in writ-ing to be valid. But there are some notable exceptions to this generalization. According to the statute of frauds, certain types of complex or important contracts must be in writing to be enforceable. Examples include con-tracts for the sale of land, contracts that cannot be completed within a year of their formation, and con-tracts involving the sale of goods valued at $500 or more.

What Happens When a

Party Fails to Satisfy the

Terms of a Contract?

A breach of contract occurs when one of the parties fails to satisfy the terms of the agreement. In such cases, the injured party can seek a remedy by suing in a civil court. But the injured party must seek a remedy within a reasonable time. The time period in which a lawsuit must be initiated is called

the statute of limitations. After this time period has expired, the courts will not hear a lawsuit. The length of the statute of limitations varies significantly among the states. In some states it also varies depending on whether the contract is oral or in writing. For example, in California, the statute of limitations for written con-tracts is four years, whereas for oral contracts it’s only two years. In contrast, in Illinois the period is ten years for written contracts and five years for oral contracts.4

The most common remedy enforced by courts for the breach of a contract is compensatory damages. These are monetary payments that the party who breached the contract must pay to the injured party in order to compensate for the actual losses that result from the breach. Sometimes, if a contract has been breached—but without causing any real harm—the court will award the “injured” party a small monetary payment (such as $1) called nominal damages. At the other extreme, the court may order a party who breaches a contract to pay punitive damages. These are monetary payments that exceed (often far exceed) the amount needed to compensate the injured party for actual losses. Their purpose is to punish the party at fault and to deter similar behavior in the future. Punitive

damages are much more common in cases dealing with torts than in cases dealing with breach of con-

tract, but the courts sometimes award them to punish parties who breach a contract by behav-

ing in a fraudulent or malicious manner. Even though monetary damages are

the most common remedy for a breach of contract, the courts sometimes employ other types of remedies. For instance, when a contract involves the sale of some unique item—such as a rare coin or an unusual piece of artwork—that the injured party could not obtain from any-one but the other party to the contract, the courts may require the remedy of specific performance. This requires the party who breached the contract to do

exactly what the terms of the contract state. In the case of our example, this would require the actual sale of the coin or artwork. The courts do not require specific performance in cases that require personal

services because making someone work personally for another individual could be interpreted as involuntary servitude, which is prohibited by the Thirteenth Amendment to the U.S. Constitution.

Finally, courts also sometimes issue injunctions against the party

that breaches a contract. An injunction is a court order that prevents someone from perform-

statute of frauds A requirement that certain types of contracts must be in writing in order to be enforceable.

breach of contract The failure of one party to a contract to perform his or her contractual obliga-tions.

statute of limitations The time period within which a legal action must be initiated.

compensatory dam-ages Monetary pay-ments that a party who breaches a contract is ordered to pay in order to com-pensate the injured party for the actual harm suffered by the breach of contract.

specific perfor-mance A remedy for breach of contract in which the court orders the party com-mitting the breach to do exactly what the contract specifies.

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Appendix 2 Business Law A2–7

LO4 Other Legal Principles: What the Law Says About Agency, Intellectual Property, and BankruptcyBusiness law is a broad field, so it is impossible to adequately cover all of its aspects in a short appendix. We’ll close by taking a brief look at three other important topics: princi-pal–agent relationships, protection of intellectual property, and bankruptcy.

Principal–Agent Relationships

A principal–agent relationship exists when one party, called the principal, gives another party, called the agent, the authority to act and enter into binding con-tracts on the principal’s behalf. An agent’s scope of

authority is the extent to which the agent has the authority to represent the principal. This authority can arise in several ways. Express authority is authority that is explicitly spelled out, either orally or in writing. Implied authority is not explicitly spelled out but is based on the court’s recognition that agents must have the authority to act in certain ways in order to perform their duties. Apparent authority arises when the princi-pal behaves in a way that leads third parties to reason-ably believe that the principal–agent relationship exists, even when no such agency actually exists. When a principal is responsible for creating the perception of an agency relationship, the courts will hold the principal liable for any contracts the apparent agent enters into that are within the scope of the apparent agency.

Agents and principals each have certain duties to the other. For example, the obligations of an agent to a principal include:

• Loyalty: Agents must act solely in the interests of the principal. In other words, an agent is supposed to do what is best for the principal rather than what is best for the agent or a third party.

the party who actually has the title to the good. One important prin-ciple is that if one party breaches the contract, risk of loss usually falls on that party. Otherwise, the UCC rules generally place the risk of loss on the party that is most likely to have insurance against a loss or on the party that is in the best position to prevent a loss.

ing a certain act. For example, suppose a star baseball pitcher signs a contract with a team and then decides he doesn’t want to play for that team. A court probably wouldn’t force the pitcher to play for that team because that would represent involuntary servitude. But it might issue an injunction preventing the player from pitching for any other team (even in a rival league) for the term of the contract.

sale A transaction in which the title (legal ownership) to a good passes from one party to another in exchange for a price.

title Legal evidence of ownership.

principal–agent relationship A rela-tionship in which one party, called the prin-cipal, gives another party, called the agent, the authority to act in place of, and bind the principal when dealing with, third parties.

principal A party who agrees to have someone else (called an agent) act on his or her behalf.

agent A party who agrees to represent another party, called the principal.

scope of authority (for an agent) The extent to which an agent has the author-ity to act for and rep-resent the principal.

LO3 Sales: Transferring Ownership A sale occurs when the title (legal ownership) to a good passes from one party to another in exchange for a price. Article 2 of the Uniform Commercial Code gov-erns sales of goods, while precedents established by case law govern the sales of services.

Sales contracts must have all of the elements of contracts that we mentioned in the previous section—mutual assent, consideration, legal capacity, and legal purpose. But the UCC interprets some of these ele-ments more leniently for sales contracts than for most other types of contracts. For example, courts can enforce sales contracts even if important elements, such as the price of the goods being sold or the means of delivery, are not specified in the agreement. In fact, the UCC includes rules for “filling in” the missing blanks in a sales contract. What is important under the UCC is the clear intent of the two parties to enter into a sales contract. Let’s see how the UCC deals with two other important issues involving sales contracts.

How and When Does Title Pass

from Seller to Buyer?

If the sales contract includes conditions that deter-mine when the title to the goods passes from seller to buyer, the UCC states that these conditions are binding. However, if the sales contract does not specify when the title passes, the UCC provides specific guidelines that the parties can apply. In general, these rules are based on the principle that the title passes when the seller’s performance of duties related to the delivery of the good has been completed.

Which Party Assumes Risk of Loss

If the Goods Are Lost, Damaged,

or Destroyed During the Process of

Transferring Them from Seller to Buyer?

According to the UCC, if the contract specifies who bears the risk, then the courts must apply those terms. If the contract is silent on this issue, the UCC provides guidelines for the courts to use when assigning risk. Interestingly, these rules don’t always assign the risk to

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A2–8 Appendix 2 Business Law

• Performance: Agents must use any special skills or knowl-edge they possess and make a sincere effort to carry out their assigned duties.

• Notification: Agents must keep the principal informed on all matters relevant to their relationship.

• Obedience: Agents must obey all lawful instructions issued by the principal in the course of carrying out their duties.

• Accounting: Agents must keep accurate records of any expenses or resources used in the course of fulfilling their responsibilities and make these records available to the principal.

The obligations of the principal to the agent include:

• Compensation: The principal must provide reason-able compensation for services performed. The compensation must be made in a timely manner.

• Reimbursement: The principal must reimburse the agent for any reasonable and necessary expenses that the agent incurs while acting for the principal.

• Indemnification: Principals must protect agents from personal losses they might suffer when carry-ing out their principal’s lawful instructions.

• Safe Working Conditions: The principal must pro-vide safe equipment, working premises, and condi-tions for agents.

• Cooperation: Principals must cooperate with and assist their agents in the performance of their duties.

In general, as long as agents act within the scope of their authority, principals are liable for contracts their agents enter into when acting on their behalf. In cases where the principal is undisclosed—so that the third party is not aware of the fact that the agent is acting on behalf of someone else—the agent also may be held liable if the contract is breached.

Agents are personally responsible for any torts they commit. But the principal may also be liable for an agent’s torts if the agent is representing the principal and is acting within the scope of authority granted by the principal. This reflects a common law principle called respondeat superior, which means “let the master be held accountable.” However, principals are not respon-sible for crimes committed by their agents, unless they authorize or participate in the criminal act.

Bankruptcy

Bankruptcy refers to procedures governed by federal law that provide the means for debtors who are unable

to meet their obligations to discharge their debts and get a fresh start. Bankruptcy proceedings can be either voluntary or involuntary. The difference between the two is who initiates the bankruptcy; debtors initiate vol-untary bankruptcies, while creditors initiate involuntary bankruptcies. Either way, the goal of bankruptcy law is to provide fair treatment to both debtors and creditors.

There are three common bankruptcy procedures, each named after the specific chapter of federal bank-ruptcy law where it is covered: Chapter 7, Chapter 11, and Chapter 13. We will confine our discussion to a description of the basic distinctions among these three common forms of bankruptcy. But don’t be fooled by our simple overview of these differences; the actual processes involved in each form of bankruptcy are quite complex, involving a lot of planning, negotiation, and paperwork.

Chapter 7 bankruptcy involves selling off a debtor’s assets to raise cash—a process known as liquidation. The proceeds of the liquidation are then used to pay creditors. The sale of assets and payment of creditors is handled by a court-appointed trustee. Once this process has been carried out, most debts are considered to be fully discharged. However, certain types of debts, such as back taxes, child support, and alimony cannot be dis-charged through bankruptcy.

One of the goals of bankruptcy is to allow debtors a fair chance to get a fresh start, so Chapter 7 bank-ruptcies don’t leave them destitute and penniless. Under Chapter 7, debtors are allowed to keep some equity in a home and automobile as well as funds invested in retirement accounts and certain types of personal property. In fact, after exempting protected assets, many Chapter 7 debtors have few (or no) assets worth liquidating—meaning that creditors may receive only a small fraction of what they are owed (or perhaps nothing at all).

Critics of Chapter 7 bankruptcy long claimed that it often was abused by people who wanted to permanently escape responsibility for debts that they might eventually be able to repay. Partly in response to these criticisms, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005. This law makes it more difficult for individu-als to qualify for Chapter 7 bankruptcy protection. For instance, it requires debtors to take a “means test” to determine whether they have sufficient income to repay their debts; debtors with sufficient income under this test are not allowed to file for Chapter 7 protection—though they may still qualify for other types of bank-ruptcy protection. The law also requires debtors to meet with a credit counselor in the six months prior to filing for bankruptcy.5

Chapter 11 bankruptcy allows a debtor to reorga-nize its operations. Under this version of bankruptcy, the debtor submits a plan to the bankruptcy courts, which

Chapter 7 bankruptcy A form of bankruptcy that discharges a debtor’s debts by liquidating assets and using the proceeds to pay off creditors.

Chapter 11 bankruptcy A form of bankruptcy used by corporations and individuals that allows the debtor to reorganize opera-tions under a court-approved plan.

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Appendix 2 Business Law A2–9

then must approve or disapprove its provisions. The plan typically calls for only a partial repayment of debts. It may also propose changes to (or the termination of) burdensome contracts as well as other changes in its operations. Individuals can file for Chapter 11, but it is more commonly used by corporations.

Chapter 13 bankruptcy is similar to Chapter 11, except that it is only available to individual debtors. Under Chapter 13, individuals work with a court-appointed trustee to establish a court-approved plan that adjusts their debt payments to a more manageable level. This often involves spreading the payments over a longer time period; it also may involve repaying only a portion of the total amount owed. The debtor must agree to turn over enough income to the trustee to ensure that the plan will succeed. Under Chapter 13, debtors are allowed to keep their home, car, and other personal assets—as long as they make all of the required payments. Once the plan has been completed, the debts are considered fully discharged.

Intellectual Property

The term property refers to the legal right of an owner to exclude nonowners from having access to a par-ticular resource. While we generally think of property in terms of land, buildings, and physical goods, the

law also recognizes intellectual

property—for example, the right of an inventor, innovator, writer, or artist to own their creations and prevent others from copying or using these creations without their permission. Three common types of intellectual property rights are patents, trademarks, and copyrights.

A patent gives an inventor a legal monopoly over that invention for a limited time period. During that period, others may not copy the invention without the inven-tor’s approval. It is important to note that a mere idea is not patent-able. To obtain a patent, an inven-tor must create a new application that is:

• Nonobvious: The application must represent some insight that was not readily apparent from existing knowledge in the field.

• Novel: The application must represent a new and different use of this insight.

• Useful: The application must be more than a mere curiosity; it must result in a useful outcome.

Patenting a “Splice” of Life

Is it legal to patent the genetic material found within the human body? Is it ethical to do so? Is it economically desir-able? These questions have been argued since 1980, when a Supreme Court ruling allowed the first genetic patent. The debate shows no signs of ending.

Since 2001 the Patent and Trademark Office has granted a patent to any researcher able to describe a “novel” (previously undiscovered) genetic sequence and demonstrate a utility (benefit) for this sequence once it is isolated from its natural state. To date, more than 20% of the genes in the human body have already been patented.

The economic rationale for genetic patents is the same as for other patents: it allows inventors (or, more accurately, discoverers) of genes to reap the financial rewards from their efforts. Proponents of genetic patents argue that unless researchers are granted ownership over their genetic discoveries, few would be willing to put in the long hours and incur the high costs of their research. Thus, supporters of genetic patents argue that they create the incentives needed to stimulate medical research and discovery.

But critics of genetic patents—and there are many of them—see things differently. Some religious leaders believe it is wrong to patent the basic components of human life. The American Medical Association is concerned that pace of research will slow and the cost of research will increase as patent holders require other researchers to pay royalties to obtain access to their genes. And some conservative observers argue that patents prevent competition and undermine market efficiency.

Until recently the courts consistently sided with the pro-patent side of this debate. But in 2010 United States District Court Judge Robert Sweet overturned the patents held by Myriad Genetics on two breast cancer genes. The judge ruled that the genes couldn’t be patented since they occurred naturally, and dismissed the procedure used to obtain these patents as a “lawyer’s trick.” Judge Sweet’s ruling was widely praised by medical organizations and patients’ rights groups. If his ruling survives an expected appeal it could call into question the validity of many other genetic patents.6

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Chapter 13 bankruptcy A form of bankruptcy that allows individual debtors to set up a repayment plan to adjust their debts.

property The legal right of an owner to exclude nonown-ers from having access to a particular resource.

intellectual property Property that results from intellectual or cre-ative efforts.

patent A legal monopoly that gives an inventor the exclusive right over the invention for a limited time period.

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In the United States, patents are granted by the U.S. Patent and Trademark Office (PTO). To receive a patent, the inventor must file an application and pay a filing fee. The application must clearly explain the purpose of the invention, how it differs from cur-rent products in the same field, and how it would be produced and used. The PTO will grant a patent only after a thorough investigation of the application to

make sure it satisfies the criteria mentioned above—a process that often takes several years.

Most patents offer protection for 20 years, but there are exceptions. For example, patents for new plants are for 17 years and patents for designs are for 14 years. While the patent is in force, its holder can sue anyone who infringes on the patent by using or producing the invention without permission. If the holder’s suit is successful, the courts typically award the inventor damages for the unauthorized use and often apply additional court remedies. For example, the courts might require the violator to destroy items that infringe on the patent and bar the violator from similar infringements in the future. However, once the pat-ent expires, the invention becomes part of the public domain—meaning that others are free to use and mar-ket the invention without obtaining permission from the inventor.

A trademark is a distinctive mark, symbol, word, phrase, or motto used to uniquely identify the goods of a particular business. When you see the “swoosh” you know it’s a Nike product. Similarly, many customers immediately think of Maxwell House coffee when they hear the phrase “good to the last drop.”

Trademarks can be acquired in two ways. First, a company can acquire a trademark simply by being the first to use some distinctive mark in commerce. However, this type of trademark typically is confined to the specific geographic area in which the com-pany sells its

products. The second way to acquire a trademark is to be the first to register the mark with the U.S. Patent and Trademark Office. A registered trademark gives the company nationwide protection—even if it only sells its products in a limited area.

The registration of a trademark initially provides pro-tection from unauthorized use for a ten-year period, but this protection can be renewed for an unlimited number of additional ten-year periods. Firms often use the sym-bol ® to indicate that their trademark is registered.

Owners of a trademark can sue others who make unauthorized use of it in civil court. If the owner of the trademark is successful, the courts may award damages; in the case of a registered trademark, the courts may award treble damages—monetary pay-ments equal to three times the actual damages. The courts will also bar the infringer from further use of the trademark.

Trademark protection may be lost if the general public begins using the trademark to refer to a gen-eral type of good rather than with a good produced by a specific company. (When this happens, the mark is said to be “genericized.”) At one time, the names aspirin, zipper, and escalator (among many others) were trademarks. However, over time people began using these terms to refer to a general class of goods. Once this happened the courts ruled that they had become generic terms and were no longer entitled to trademark protection.7

A copyright gives an author, artist, or other creative individual the exclusive right to own, produce, copy, and sell their own creative works and to license others to do so. Copyrights are granted only for original works that display some degree of creative or intellectual content. Still, this covers a lot of territory; copyrights protect a variety of works from unauthorized use, including books, plays, paintings, musical compositions, motion pictures, video games, and computer programs. The period of protection is the creator’s remaining life plus

an additional 70 years after the creator’s death.

As with holders of pat-ents and trademarks, owners

of copyrighted material can sue unauthorized users of their prop-erty in civil court. If the court rules favorably, it may award the plaintiff any profits earned by the infringer as well as damages for any other harm suffered. The court may also order the destruction of any infringing works and bar the infringer from

future violations.

trademark A mark, symbol, word, phrase, or motto used to identify a com-pany’s goods.

copyright The exclu-sive legal right of an author, artist, or other creative indi-vidual to own, use, copy, and sell their own creations and to license others to do so.

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Appendix 2 Business Law A2–11

It is important to realize that copyrights don’t provide complete protection against all use of the covered material. Under fair use doctrine, parts of a copyrighted work may be used without the creator’s explicit permission if certain conditions are met. For example,

a teacher can distribute copies of small sections of a copyrighted book to students in order to illustrate

a key concept. Similarly, critics, reviewers, and commentators are generally allowed to quote

limited passages of copyrighted material without explicit permission.

WHAT ELSE? RIP & REVIEW CARDS IN THE BACK

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