12 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
COST-BENEFIT ANALYSIS
Before bringing a lawsuit, a manager must now take into account the possibility of long delays before the
case is resolved. A cost-benefit analysis for undertaking litigation must include the delays in the calculations.
Managers can no longer just stand on principle because they know that they are right and that they will win a
lawsuit. They have to look at the bigger picture, which includes substantial court delays.
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CRITICAL THINKING
What are some of the costs of increased litigation delays caused by court budget cuts? Most
attorneys require a retaining fee. The longer this fee is held by the attorney, the higher the present value cost
In response to budget cuts, many states have increased their filing fees. Is this fair? Why or why
not? Some argue that those businesses that avail themselves of the court system should pay a higher
a. B&B Hardware Inc. v. Hargis Industries, Inc., ___ U.S. ___, 135 S.Ct. 1295, 191 L.Ed.3d 222 (2014).
1. Trial Courts
a. General Jurisdiction
Trial courts with general jurisdiction include county, district, and superior courts.
b. Limited Jurisdiction
2. Appellate. or Reviewing, Courts
In most states, after a case is tried, there is a right to at least one appeal. Few cases are retried on
CASE SYNOPSIS—
Case 2.3: Johnson v. Oxy USA, Inc.
Jennifer Johnson was working for Oxy USA, Inc., when Oxy changed the job’s requirements. To meet the
CHAPTER 2: COURTS AND ALTERNATIVE DISPUTE RESOLUTION 13
new standards, Johnson took certain courses. Oxy’s “Educational Assistance Policy” was to reimburse
employees for the cost. Johnson further agreed that Oxy could withhold the reimbursed amount from her final
paycheck if she quit Oxy within a year. When she resigned less than a year later, Oxy withheld that amount
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Notes and Questions
as heavy enough to warrant the expense.
Forty states have intermediate appellate courts. Ten states—Delaware, Maine, Montana, Nevada,
New Hampshire, Rhode Island, South Dakota, Vermont, West Virginia, and Wyoming—have only a
single level of appeal, which is of course the state’s supreme court. Why the difference? The primary
reason that most states have intermediate appellate courts is the size of the state’s caseload. Crowded
When the legal systems in the states were formed, a single appellate court was generally considered
sufficient. In the nineteenth and twentieth centuries, most states’ caseloads increased significantly. This was
due to—
• Population growth.
3. Highest State Courts
B. THE FEDERAL COURT SYSTEM
The federal court system is also three-tiered with a level of trial courts and two levels of appellate courts,
including the United States Supreme Court.
1. U.S. District Courts
Federal trial courts of general jurisdiction are called district courts. (A district may consist of an
14 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
2. U.S. Courts of Appeals
U.S. courts of appeal hear appeals from the decisions of the district courts located within their
3. The United States Supreme Court
The court at the top of the federal system is the United States Supreme Court to which further ap-
peal is not mandatory but may be possible.
a. Appeals to the Supreme Court
b. Petitions Granted by the Court
IV. Alternative Dispute Resolution
The advantage of alternative dispute resolution (ADR) is its flexibility. Normally, the parties themselves can
control how the dispute will be settled, what procedures will be used, and whether the decision reached
(either by themselves or by a neutral third party) will be legally binding or nonbinding. Approximately 95
percent of cases are settled before trial through some form of ADR.
A. NEGOTIATION
B. MEDIATION
In mediation, the parties attempt to come to an agreement with the assistance of a neutral third party, a
C. ARBITRATION
A more formal method of ADR is arbitration, in which a neutral third party or a panel of experts hears a
dispute and renders a decision. The decision can be legally binding. Formal arbitration resembles a trial.
The parties may appeal, but a court’s review of an arbitration proceeding is more restricted than a review
of a lower court’s proceeding.
1. The Arbitration Decision
An arbitrator’s award will be set aside only if—
2. Arbitration Clauses
Virtually any commercial matter can be submitted to arbitration. Often, parties include an arbitration
clause in a contract. Parties can also agree to arbitrate a dispute after it arises.
ADDITIONAL BACKGROUND—
ADR and the Courts
States in which one or more
local state court has—
States in which one or more
federal court has—
Arbitration
Mediation
Arbitration
Alabama
Alaska
Arizona
California
Delaware
Washington
Alabama
Alaska
Arizona
California
Connecticut
New Jersey
New Mexico
New York
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Alabama
Arizona
California
Connecticut
Florida
16 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
West Virginia
Wisconsin
CHAPTER 2: COURTS AND ALTERNATIVE DISPUTE RESOLUTION 17
3. Arbitration Statutes
Most states have statutes (often based on the Uniform Arbitration Act of 1955) under which
4. The Issue of Arbitrability
A court can consider whether the parties to an arbitration clause agreed to submit a particular
5. Mandatory Arbitration in the Employment Context
Generally, mandatory arbitration clauses in employment contracts are enforceable.
D. OTHER TYPES OF ADR
New types of ADR have emerged.
• Early neutral case evaluation—The parties select a neutral third party (generally an expert in the
subject of the dispute) to evaluate their positions. This forms the basis for negotiations.
E. PROVIDERS OF ADR SERVICES
A major provider of ADR services is the American Arbitration Association (AAA). Most of the largest law
F. ONLINE DISPUTE RESOLUTION
When outside help is needed to resolve a dispute, there are a number of Web sites that offer online
V. International Dispute Resolution
International treaties sometimes stipulate arbitration for resolving disputes.
A. FORUM-SELECTION AND CHOICE–OF-LAW CLAUSES
B. ARBITRATION CLAUSES
Parties to international contracts may include arbitration clauses to be applied if disputes arise.
18 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
TEACHING SUGGESTIONS
1. Divide students into small groups and assign one of the text chapter’s end–of– chapter problems to each
group. Have each group determine whether or not the assigned problem is one that would lend itself to alter–
native dispute resolution. If not, why not? If so, which form of alternative dispute resolution would the
group recommend?
2. Obtain a standard arbitration agreement form from a national arbitration organization such as the
people organize the world. That is, the law includes customs, traditions, rules, and objectives that people
3. Some students may find it enlightening to be reminded the law corresponds to the many ways in which
4. In the courtroom, changes are being wrought by television. There is an increasing reliance on video
testimony. Children who allege physical or sexual abuse, for example, may give video testimony outside a
courtroom to be shown during trial proceedings. Lawyers who represent accident victims often commission
Cyberlaw Link
Ask your students to what extent those who send e-mail over the Internet should be liable for the content
of their messages in states other than their own (or nations other than the United States). Is the existence of
a Web site a sufficient basis to exercise jurisdiction?
DISCUSSION QUESTIONS
1. If a corporation is incorporated in Delaware, has its main office in New York, and does business in
California, but its president lives in Connecticut, in which state(s) can it be sued? Delaware, New York, and
CHAPTER 2: COURTS AND ALTERNATIVE DISPUTE RESOLUTION 19
2. What is the difference between a court of general jurisdiction and a court of limited jurisdiction? A
court with general jurisdiction can hear virtually any type of case, except a case that is appropriate for a court with
3. What is the role of a court with appellate jurisdiction? Courts of appellate jurisdiction are reviewing
4. When may a federal court hear a case? Federal courts have jurisdiction in cases in which federal
questions arise, in cases in which there is diversity of citizenship, and in some other cases. When a suit involves a
5. When may the United States Supreme Court hear a case? The United States Supreme Court has original
6. When may a court exercise jurisdiction over a party whose only connection to the jurisdiction is via
the Internet? One way to phrase the issue is when, under a set of circumstances, there are sufficient minimum
7. How does the process of negotiation work? In the process of negotiation, the parties come together in-
formally, with or without attorneys to represent them. Within this informal setting the parties air their differences and
8. What is the principal difference between negotiation and mediation? The major difference between
negotiation and mediation is that mediation involves the presence of a third party called a mediator. The mediator
9. What is arbitration? The process of arbitration involves the settling of a dispute by an impartial third party
20 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
10. What kinds of disputes may be subject to arbitration? The FAA requires that courts give deference to all
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Have students prepare a chart showing the relationships between the various courts having jurisdiction in
your state. (There is a digest of each state’s courts in Martindale-Hubbell Law Directory, which might be placed on
reserve in the library.) Assign a few jurisdiction hypotheticals. For example—Through which of these courts
2. Ask the class to research the reasons behind the earlier hostility of the courts towards arbitration procedures.
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 5: In International Shoe Co. v. State of Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95
(1945), the state of Washington sought unemployment contributions from the International Shoe Company based on
commissions paid to its sales representatives who lived in the state. International Shoe claimed that its activities
within the state were not sufficient to manifest its “presence.” It argued that (1) it had no office in Washington; (2) it
employed sales representatives to market its product in Washington, but no sales or purchase contracts were made
in the state; and (3) it maintained no inventory in Washington. The company claimed that it was a denial of due
process for the state to subject it to suit. The Supreme Court of Washington ruled in favor of the state, and
International Shoe appealed to the United States Supreme Court.
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Footnote 9: In Zippo Manufacturing Co. v. Zippo Dot.Com, Inc., 952 F.Supp. 1119 (W.D.Pa. 1997), a
federal district court proposed three categories for classifying the types of Internet business contact: (1) substantial
business conducted online, (2) some interactivity through a Web site, and (3) passive advertising. Jurisdiction is
proper for the first category, improper for the third, and may or may not be appropriate for the second. Zippo
Footnote 19: Cleveland Construction, Inc. (CCI), was the general contractor on a project to build a grocery
store in Houston, Texas. CCI hired Levco Construction, Inc., as a subcontractor to perform excavation and grading.
The contract provided that any dispute would be resolved by arbitration in Ohio. When a dispute arose, Levco filed a
suit against CCI in a Texas state court. CCI sought to compel arbitration in Ohio under the Federal Arbitration Act
(FAA). Because a Texas statute allows a party to void a contract provision that requires arbitration outside Texas, the
court denied CCI’s request. CCI appealed.
The United States Supreme Court affirmed the Washington Supreme Court’s decision—International Shoe
had sufficient contacts with the state to allow the state to exercise jurisdiction constitutionally over it. The Court found
that the activities of the Washington sales representatives were “systematic and continuous,” resulting in a large
volume of business for International Shoe. By conducting its business within the state, the company received the
benefits and protections of the state laws and was entitled to have its rights enforced in state courts. Thus,
International Shoe’s operations established “sufficient contacts or ties with the state . . . to make it reasonable and
just according to our traditional conception of fair play and substantial justice to permit the state to enforce the
obligation” that the company incurred there.
Considering the relative bargaining power of the parties, was it fair to enforce the arbitration clause in
this contract? Yes, because either party could have refused to agree to the contract when it contained the arbitration
Why do you think that Levco did not want its claim decided by arbitration? A party is typically reluctant
to enter into a proceeding that he or she (or it) believes will have an unfavorable result. Levco might have had a less
22 UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
How would business be affected if each state could pass a statute, like the one in Texas, allowing
parties to void out-of-state arbitrations? If all states could pass statutes like the one in Texas, many parties would
probably be less inclined to transact business. An arbitration provision allows a party to limit the burden and expense