25
Chapter 2
Courts and Alternative
Dispute Resolution
See Separate Lecture Outline System
INTRODUCTION
Despite the substantial amount of litigation that occurs in the United States, the experience of many students with the
American judicial system is limited to little more that some exposure to traffic court. In fact, most persons have more
experience with and know more about the executive and legislative branches of government than they do about the judicial
branch. This chapter provides an excellent opportunity to make many aware of the nature and purpose of this major branch of
our government.
One goal of this text is to give students an understanding of which courts have power to hear what disputes and when.
Thus, the first major concept introduced in this chapter is jurisdiction. Careful attention is given to the requirements for federal
jurisdiction and to which cases reach the Supreme Court of the United States. It might be emphasized at this point that the
26 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
federal courts are not necessarily superior to the state courts. The federal court system is simply an independent system
authorized by the Constitution to handle matters of particular federal interest.
CHAPTER 2: COURTS AND ALTERNATIVE DISPUTE RESOLUTION 27
Among important points to remind students of during the discussion of this chapter are that most cases in the
textbook are appellate cases (except for federal district court decisions, few trial court opinions are even published), and that
most disputes brought to court are settled before trial. Of those that go through trial to a final verdict, less than 4 percent are
reversed on appeal. Also, it might be emphasized again that in a common law system, such as the United States’, cases are the
law. Most of the principles set out in the text of the chapters represent judgments in decided cases that involved real people in
real controversies.
ADDITIONAL RESOURCES —
VIDEO SUPPLEMENTS
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 2.
Business Law Digital Video Library
CHAPTER OUTLINE
I. The Judiciary’s Role in American Government
The essential role of the judiciary in the American governmental system is to interpret and apply the laws to specific
situations. The judiciary can decide, among other things, whether the laws or actions of the other two branches are
constitutional. The process for making such a determination is known as judicial review. The power of judicial review
enables the judicial branch to act as a check on the other two branches of government, in line with the checks and
balances system established by the U.S. Constitution.
28 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWER TO CRITICAL THINKING QUESTION IN THE FEATURE—
INSIGHT INTO ETHICS
Now that the United States Supreme Court is allowing unpublished decisions to form persuasive
precedent in federal courts, should state courts follow? Why or why not? Yes, because categorizing some
decisions, unpublished or otherwise, as not establishing precedent is arguably unconstitutional. No, because such
decisions are often less significant or may set “bad” precedents and have not traditionally been regarded as
establishing precedent.
ENHANCING YOUR LECTURE—
MARBURY V. MADISON (1803)
In the edifice of American law, the Marbury v. Madisona decision in 1803 can be viewed as the keystone of the
constitutional arch. The facts of the case were as follows. John Adams, who had lost his bid for reelection to the
presidency to Thomas Jefferson in 1800, feared the Jeffersonians’ antipathy toward business and toward a strong
central government. Adams thus worked feverishly to “pack” the judiciary with loyal Federalists (those who believed in
(John Marshall) had succeeded in delivering only forty-two of them by the time Jefferson took over as president.
MARSHALL’S DILEMMA
William Marbury and three others to whom the commissions had not been delivered sought a writ of mandamus
(an order directing a government official to fulfill a duty) from the United States Supreme Court, as authorized by
Section 13 of the Judiciary Act of 1789. As fate would have it, John Marshall had stepped down as Adams’s secretary of
state only to become chief justice of the Supreme Court. Marshall faced a dilemma: If he ordered the commissions
delivered, the new secretary of state (Madison) could simply refuse to deliver them—and the Court had no way to
compel action, because it had no police force. At the same time, if Marshall simply allowed the new administration to
do as it wished, the Court’s power would be severely eroded.
MARSHALL’S DECISION
Marshall masterfully fashioned his decision. On the one hand, he enlarged the power of the Supreme Court by
affirming the Court’s power of judicial review. He stated, “It is emphatically the province and duty of the Judicial
Department to say what the law is. . . . If two laws conflict with each other, the courts must decide on the operation of
each. . . . So if the law be in opposition to the Constitution . . . [t]he Court must determine which of these conflicting
rules governs the case. This is the very essence of judicial duty.”
CHAPTER 2: COURTS AND ALTERNATIVE DISPUTE RESOLUTION 29
On the other hand, his decision did not require anyone to do anything. He stated that the highest court did not
have the power to issue a writ of mandamus in this particular case. Marshall pointed out that although the Judiciary
Act of 1789 specified that the Supreme Court could issue writs of mandamus as part of its original jurisdiction, Article
III of the Constitution, which spelled out the Court’s original jurisdiction, did not mention writs of mandamus. Because
Congress did not have the right to expand the Supreme Court’s jurisdiction, this section of the Judiciary Act of 1789 was
unconstitutional—and thus void. The decision still stands today as a judicial and political masterpiece.
APPLICATION TO TODAY’S WORLD
a. 5 U.S. (1 Cranch) 137, 2 L.Ed. 60 (1803).
ENHANCING YOUR LECTURE—
JUDICIAL REVIEW IN OTHER NATIONS
The concept of judicial review was pioneered by the United States. Some maintain that one of the reasons the
doctrine was readily accepted in this country was that it fit well with the checks and balances designed by the founders.
Today, all established constitutional democracies have some form of judicial review—the power to rule on the
constitutionality of laws—but its form varies from country to country.
For example, Canada’s Supreme Court can exercise judicial review but is barred from doing so if a law includes a
provision explicitly prohibiting such review. France has a Constitutional Council that rules on the constitutionality of
FOR CRITICAL ANALYSIS
In any country in which a constitution sets forth the basic powers and structure of government, some
30 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
governmental body has to decide whether laws enacted by the government are consistent with that constitution. Why
might the courts be best suited to handle this task? Can you propose a better alternative?
II. Basic Judicial Requirements
Before a lawsuit can be heard in a court, certain requirements must be met. These requirements relate to jurisdiction,
venue, and standing to sue.
A. JURISDICTION
1. Jurisdiction over Persons or Property
Power over the person is referred to as in personam jurisdiction; power over property is referred to as in
rem jurisdiction.
a. Long Arm Statutes
Generally, a court’s power is limited to the territorial boundaries of the state in which it is located, but
in some cases, a state’s long arm statute gives a court jurisdiction over a nonresident.
CASE SYNOPSIS—
Case 2.1: Southern Prestige Industries, Inc v. Independence Plating Corp.
Independence Plating Corp. (IPC) is a New Jersey firm that provides anodizing services. It does not advertise or
otherwise solicit business in North Carolina. Southern Prestige Industries, Inc., a North Carolina corporation,
contracted with IPC to ship specified machined parts from North Carolina to New Jersey for anodizing. After the parts
were anodized, they were shipped back, and Southern Prestige forwarded the parts to a third party. After thirty-two
transactions, Southern Prestige filed a suit in a North Carolina state court against IPC, alleging breach. IPC asked the
court to dismiss the suit. The court refused, and IPC appealed, arguing that the court lacked personal jurisdiction.
in a different forum.”
…………………………………………………………..…………………………………………………………………
Notes and Questions
Was it fair in this case for the state of North Carolina to assert personal jurisdiction over a firm in New
Jersey? Yes. This suit does not “offend traditional notions of fair play.” The New Jersey company dealt in a
substantial way with the North Carolina firm and could expect to defend itself in litigation in that firm’s state. The
contacts with North Carolina were more than simple advertising. That some harm might follow and would result in
claims in North Carolina was not only to be anticipated—it was predictable. Fair warning that the New Jersey firm’s
activities might subject it to the jurisdiction of North Carolina courts thus existed.
32 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWERS TO QUESTIONS AT THE END OF CASE 2.1
1. What are the factors that the court looked at in determining whether minimum contacts existed between
the defendant and the state of North Carolina? The Court of Appeals of North Carolina stated that North Carolina
courts “look at the following factors in determining whether minimum contacts exist: (1) the quantity of the contacts,
(2) the nature and quality of the contacts, (3) the source and connection of the cause of action to the contacts, (4) the
2. Why did the court state that the convenience of the parties was not “determinative” in this case? The
Court of Appeals of North Carolina pointed out that litigation between parties to interstate transactions “inevitably
ADDITIONAL BACKGROUND—
Long Arm Statutes
A court has personal jurisdiction over persons who consent to it—for example, persons who reside within a court’s
territorial boundaries impliedly consent to the court’s personal jurisdiction. A state long arm statute gives a state
court the authority to exercise jurisdiction over nonresident individuals under circumstances specified in the statute.
The following is New York’s long arm statute, New York Civil Practice Laws and Rules Section 302 (NY CPLR § 302).
MCKINNEY’S CONSOLIDATED LAWS OF NEW YORK ANNOTATED
CHAPTER EIGHT OF THE CONSOLIDATED LAWS
ARTICLE 3—JURISDICTION AND SERVICE, APPEARANCE AND CHOICE OF COURT
§ 302. Personal jurisdiction by acts of non-domiciliaries
CHAPTER 2: COURTS AND ALTERNATIVE DISPUTE RESOLUTION 33
section, a court may exercise personal jurisdiction over any non-domiciliary, or his executor or administrator, who in
1. transacts any business within the state or contracts anywhere to supply goods or services in the state; or
3. commits a tortious act without the state causing injury to person or property within the state, except as to a cause of
action for defamation of character arising from the act, if he
(i) regularly does or solicits business, or engages in any other persistent course of conduct, or derives substantial
4. owns, uses or possesses any real property situated within the state.
(b) Personal jurisdiction over non-resident defendant in matrimonial actions or family court proceedings. A
court in any matrimonial action or family court proceeding involving a demand for support, alimony, maintenance,
distributive awards or special relief in matrimonial actions may exercise personal jurisdiction over the respondent or
defendant notwithstanding the fact that he or she no longer is a resident or domiciliary of this state, or over his or her
executor or administrator, if the party seeking support is a resident of or domiciled in this state at the time such
2. Jurisdiction over Subject Matter
Subject-matter jurisdiction involves limitations on the types of cases a court can hear.
3. Jurisdiction of the Federal Courts
34 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
a. Federal Questions
A suit can be brought in a federal court whenever it involves a question arising under the Constitution,
a treaty, or a federal law.
b. Diversity of Citizenship
A suit can be brought in a federal court whenever it involves citizens of different states, a foreign
ADDITIONAL BACKGROUND—
Diversity of Citizenship
Under Article III, Section 2 of the United States Constitution, diversity of citizenship is one of the bases for federal
jurisdiction. Congress further limits the number of suits that federal courts might otherwise hear by setting a minimum
The following is the statute in which Congress sets out the requirements for diversity jurisdiction, including the
UNITED STATES CODE
TITLE 28. JUDICIARY AND JUDICIAL PROCEDURE
PART IV—JURISDICTION AND VENUE
CHAPTER 85—DISTRICT COURTS; JURISDICTION
§ 1332. Diversity of citizenship; amount in controversy; costs
(a) The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum
or value of $75,000, exclusive of interest and costs, and is between—
(1) citizens of different States;
(2) citizens of a State and citizens or subjects of a foreign state;
(3) citizens of different States and in which citizens or subjects of a foreign state are additional parties; and
(4) a foreign state, defined in section 1603(a) of this title, as plaintiff and citizens of a State or of different States.
For the purposes of this section, section 1335, and section 1441, an alien admitted to the United States for permanent
CHAPTER 2: COURTS AND ALTERNATIVE DISPUTE RESOLUTION 35
(b) Except when express provision therefore is otherwise made in a statute of the United States, where the plaintiff
who files the case originally in the Federal courts is finally adjudged to be entitled to recover less than the sum or value
impose costs on the plaintiff.
(c) For the purposes of this section and section 1441 of this title—
(1) a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where
it has its principal place of business, except that in any direct action against the insurer of a policy or contract of liability
(2) the legal representative of the estate of a decedent shall be deemed to be a citizen only of the same State as the
decedent, and the legal representative of an infant or incompetent shall be deemed to be a citizen only of the same
State as the infant or incompetent.
(d) The word “States”, as used in this section, includes the Territories, the District of Columbia, and the Commonwealth
of Puerto Rico.
4. Exclusive v. Concurrent Jurisdiction
When both state and federal courts have the power to hear a case, concurrent jurisdiction exists. When a
case can be heard only in federal courts or only in state courts, exclusive jurisdiction exists. Federal courts
B. JURISDICTION IN CYBERSPACE
The basic question in this context is whether there are sufficient minimum contacts in a jurisdiction if the only
connection to it is an ad on the Web originating from a remote location.
ANSWER TO VIDEO QUESTION LTR. A
What standard would a court apply to determine whether it has jurisdiction over the out–of-state computer
firm in the video? A court would apply a “sliding–scale” standard to determine if the defendants (Wizard Internet) had
36 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
1. The “Sliding–Scale” Standard
To date, the answer has generally been no. One approach is the sliding scale, according to which a passive
ad is not enough on which to base jurisdiction while doing considerable business online is. Some of the
controversy involves cases in which the contact is more than a passive ad but less than a lot of activity.
ANSWER TO VIDEO QUESTION LTR. B
What factors is a court likely to consider in assessing whether sufficient contracts existed when the only
connection to the jurisdiction is through a Web site? The facts in the video indicate that there might be some
interactivity through Wizard Internet’s Web site. The court will likely focus on Wizard’s Web site and determine what
ANSWER TO VIDEO QUESTION LTR. C
How do you think the court would resolve the issue in this case? Wizard Internet could argue that the site is
not “interactive” because software cannot be downloaded from the site (according to Caleb). That would be the
defendant’s strongest argument against jurisdiction. The court, however, would also consider any other interactivity.
The facts state that Wizard has done projects in other states and might have clients in Montana (although Anna and
2. International Jurisdictional Issues
The minimum-contact standard can apply in an international context. As in cyberspace, a firm should
attempt to comply with the laws of any jurisdiction in which it targets customers.
C. VENUE
CHAPTER 2: COURTS AND ALTERNATIVE DISPUTE RESOLUTION 37
D. STANDING TO SUE
CASE SYNOPSIS—
Case 2.2: Oregon v. Legal Services Corp.
Legal Services Corp. (LSC) provides federal funds to local legal assistance programs for individuals who cannot
afford legal assistance. LSC restricts the use of the funds for some purposes, including participating in class-action suits.
To cut costs, Oregon directed legal assistance programs in the state to consolidate where separate organizations
provided services in the same geographic area. This integrated programs that received LSC funds with programs that
were engaged in restricted activities. Oregon filed a suit in a federal district court against LSC, alleging that because of
…………………………………………………………..…………………………………………………………………
Notes and Questions
Considering the decision in this case, what could a state do to support the continued funding of local
legal services programs without altering its policies to conform to LSC’s restrictions? In the circumstances of
this case, the state of Oregon might re-separate the non-conforming legal services programs. Or, as the court in the
Oregon case pointed out, “Oregon may continue to regulate its legal service programs as it desires” and it “is free to
avoid any or all indirect effects of [LSC’s] regulations by simply increasing its own taxes to fund its desired policies.”
Oregon filed this action against LSC, alleging that the “program integrity” rule thwarted the state’s policies
governing its legal services programs, in violation of the U.S. Constitution’s Tenth Amendment. The state sought to
enjoin LSC from enforcing the rule and its restrictions in Oregon. What does the Tenth Amendment provide? The
have standing to pursue claims alleging violations of the Tenth Amendment by the federal government. But, as the
Oregon case shows, to bring a claim under the Tenth Amendment, a state must first allege facts relating to a
relevant injury.
38 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”
QUESTION IN CASE 2.2
Under what circumstances might a state suffer an injury that would give it the standing to sue to block the
enforcement of restrictions on the use of federal funds? If the state were the direct recipient of the federal funds
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 2.2
Would it be ethical for a state to change its policies to follow LCS’s restrictions and continue the
funding? As to whether it would be ethical for a state to alter its policies to align with LSC’s restrictions to continue
III. The State and Federal Court Systems
A. THE STATE COURT SYSTEM
Many state court systems have a level of trial courts and two levels of appellate courts.
1. Trial Courts
Trial courts with limited jurisdiction include local municipal courts (which handle mainly traffic cases), small
2. Appellate. or Reviewing, Courts
3. Highest State Courts
In all states, there is a higher court, usually called the state supreme court. The decisions of this highest
B. THE FEDERAL COURT SYSTEM