BUS205 Study Guide

Site: Saylor Academy
Course: BUS205: Business Law
Book: BUS205 Study Guide
Printed by: Guest user
Date: Saturday, December 2, 2023, 1:28 PM

Navigating this Study Guide

Study Guide Structure

In this study guide, the sections in each unit (1a., 1b., etc.) are the learning outcomes of that unit. 

Beneath each learning outcome are:

  • questions for you to answer independently;
  • a brief summary of the learning outcome topic; and
  • and resources related to the learning outcome. 

At the end of each unit, there is also a list of suggested vocabulary words.


How to Use this Study Guide

  1. Review the entire course by reading the learning outcome summaries and suggested resources.
  2. Test your understanding of the course information by answering questions related to each unit learning outcome and defining and memorizing the vocabulary words at the end of each unit.

By clicking on the gear button on the top right of the screen, you can print the study guide. Then you can make notes, highlight, and underline as you work.

Through reviewing and completing the study guide, you should gain a deeper understanding of each learning outcome in the course and be better prepared for the final exam!

Unit 1: The Nature and Sources of Law

1a. Identify sources of law in the United States

  • What is the law?
  • What are primary and secondary sources of law?

Nature and Sources of Law

The law is a body of societal rules that regulates conduct. Laws are critical to society because they promote stability by establishing rights and duties parties owe to each other.

There are primary and secondary sources of law. Primary sources are those which embody the substantive rules of law. Examples of primary law include the United States Constitution, case law, and administrative regulations. Secondary legal sources provide an overview of the law. They help to explain, interpret, and/or analyze the law. Examples of secondary law include legal encyclopedias, law reviews, and restatements of law.

Constitutional Law

In the United States, there are two sources of constitutional law: the United States Constitution and state governments. The United States Constitution is the supreme law of the land. It established the three branches of government (executive, legislative, and judicial). It also granted each branch-specific powers in order to establish checks and balances so that no one branch of government becomes too powerful.

The first ten amendments to the United States Constitution are called the Bill of Rights. The Bill of Rights protects citizens (and sometimes business organizations) from certain government actions. For example, both citizens and business organizations have the right to be free of unreasonable searches and seizures by the government.

Statutory Law

Statutory law is drafted by legislative bodies, such as the United States Congress or state legislatures. Federal statutory law is superior to state law. Therefore, federal law generally supersedes conflicting state law.

Administrative Agency Regulation

Administrative agencies assist the legislative branch of government in the implementation of laws. Congress creates administrative agencies through enabling legislation that sets forth the agency's purpose and the scope of its regulatory powers. Administrative agencies have three primary functions:

  1. Issue rules that have the effect of law
  2. Conduct investigations to ensure compliance with agency rules and take administrative action against violators
  3. Adjudicate disputes through formal hearings

Common Law

Common law is judge-made law. To promote stability and predictability, courts abide by similar rulings issued by other courts or a higher court within the same jurisdiction. Stare decisis means "to let the decision stand"; this is how precedent is formed. If there is no case precedent, a state may exercise its police power to regulate areas like health, welfare, and safety of citizens, as elements of public policy.

To review these topics, see Sources of Law and Rule of Law.


1b. Describe the function and role of courts in the US legal system, and identify types of jurisdiction

  • How are the state and federal courts structured?
  • How does the Supreme Court do its work?
  • What are the primary differences between trial and appellate courts?
  • What are the types of jurisdiction? How would you describe each type?

An Overview of the U.S. State Court System

State courts are typically comprised of trial courts, intermediate appellate courts, and supreme courts. Trial courts are known as courts of original jurisdiction because they are where lawsuits are commenced. Trial courts may have general jurisdiction or subject matter jurisdiction. Trial courts with general jurisdiction can hear both civil and criminal cases. Subject matter jurisdiction restricts the types of cases a trial court can hear. For example, a trial court may only be allowed to hear family law or small claims cases.

State intermediate appellate courts review trial court proceedings. The primary focus of their review involves questions of law and procedure.

Supreme Courts are typically the highest court in a state. As the highest court in the state, the supreme court's judgments regarding state law are final. It is important to note that the highest state court names differ from state to state. The highest state court may be called a superior court, circuit court, or district court. For example, New York's trial courts are referred to as supreme courts; whereas, the New York Court of Appeals is the name designated for New York's highest court.

An Overview of the U.S. Federal Court System

The federal court system is comprised of U.S. district courts, U.S. courts of appeals, and the United States Supreme Court. The U.S. district courts are trial courts; they have the power to hear cases involving federal law or diversity of citizenship. Federal question cases are those that concern the U.S. Constitution or federal law. Federal district courts can exercise diversity jurisdiction over civil cases involving state law because diversity cases are subject to both federal and state court jurisdiction (concurrent jurisdiction). When an out-of-state plaintiff feels he or she cannot receive a fair trial in state court, he or she may petition to have the case transferred to a federal district court (this is called "removal"). Diversity of jurisdiction requires that all plaintiffs and defendants be citizens of different states and that the amount in controversy exceeds $75,000.

The federal court system consists of thirteen intermediate appeals courts. These intermediate appellate courts are called U.S. circuit courts, and they have jurisdiction over appeals from district courts within their designated circuits. Most cases are disposed of at the circuit court level since an appeal to the U.S. Supreme Court is rarely granted.

The United States Supreme Court is the highest court in the land. It has both original and appellate jurisdiction. The Supreme Court has original jurisdiction over disputes between states. At its discretion, the Supreme Court hears appeals from lower courts in matters regarding constitutional law. If the Supreme Court decides to review a case, it will issue an order called a writ of certiorari. This is a formal order that requires the lower court to submit the case record for the Supreme Court review.

How Trial Courts Differ from Appellate Courts

Unlike appellate courts, trial courts are triers of fact. The judge or jury determines the facts of the case by closely examining witness testimony and evidence presented by the parties.

Appellate courts review the trial court's ruling. Appellate courts examine questions of law or legal errors, and they do not have trials. Appellate courts cannot examine or call upon new or old witnesses to testify.

To review the court system, read Trial and Appellate Courts.


Unit 1 Vocabulary

This vocabulary list includes terms that might help you with the review items above and some terms you should be familiar with to be successful in completing the final exam for the course.

Try to think of the reason why each term is included.

  • common law
  • jurisdiction
  • rule of law
  • stare decisis
  • precedent
  • police power
  • enabling legislation
  • federalism
  • Bill of Rights
  • statutory law
  • US Constitution
  • subject matter jurisdiction
  • federal question
  • original jurisdiction
  • diversity jurisdiction
  • general jurisdiction
  • subject matter jurisdiction
  • questions of law
  • diversity of citizenship
  • removal
  • writ of certiorari

Unit 2: Litigation vs. Alternative Dispute Resolution

2a. Describe the process of litigation from trial through appeal

  • How are jurors selected?
  • What is the trial process?

How Juries are Selected for Trial

Juries are selected through a process called voir dire. The attorneys query the jurors to determine which jurors would be the best fit for their case. They also exclude those jurors who may be biased. If the juror is biased, the attorney can have the individual dismissed for cause. Attorneys can also use peremptory challenges which allow them to dismiss jurors without stating a specific reason. Courts only allow a certain number of peremptory challenges during voir dire.

The Trial Process

Trials begin with opening statements from both attorneys. The attorneys give an abbreviated outline summarizing their cause of action and the evidence they will use to support their case. After opening statements, the plaintiff's attorney will present a case based on the plaintiff's version of the facts. The plaintiff's attorney will present evidence along with witness testimony. Direct examination involves the direct questioning of the witness. After the plaintiff has finished its direct examination of a witness, the defendant can question the witness through cross-examination.

After the plaintiff's case has been concluded, the defendant's attorney can motion for a directed verdict to have the plaintiff's case dismissed. A motion for a directed verdict is granted in cases where the plaintiff has not provided evidence sufficient enough to support the cause of action.

If no motion for directed verdict is made or granted, the defendant will proceed with his or her case. Like the plaintiff, the defendant will present evidence and witness testimony. The defendant's witnesses are subject to cross-examination by the plaintiff's attorney.

Closing arguments are made after the defendant's case has been concluded. During closing arguments, attorneys summarize their case's main points. They emphasize the strengths of their case while pointing out the weaknesses in the opposing side's case.

Before the case goes to the jury, the judge will issue jury instructions. The instructions will include the applicable law the jury is required to apply to the case. The burden of proof in a civil case is a preponderance of the evidence. This means one party has proven that it is more likely than not telling the truth. For a criminal case, the burden of proof is beyond a reasonable doubt and the prosecution bears the burden of proof. This means the prosecution must prove that the defendant has committed the crime and that no other logical explanation exists to prove otherwise. After the jury has reached a decision, it will issue its verdict. The court will discharge the jury and the judge will enter a judgment accordingly. The losing party has the option to appeal the judgment. On appeal, the appellate court will only examine the record to determine if a legal error has been made.

To review the trial process, read The Trial and Appeal.


2b. Identify methods of alternative dispute resolution and explain how they differ from each other

  • What is negotiation?
  • What is mediation?
  • What is arbitration?
  • How do the various forms of alternative dispute resolution differ from one another?

This table will give you an overview of the various forms of ADR.

Form of ADR

ADR Process

Third-Party Involvement

Role of the Parties


During negotiation, the parties bargain in an attempt to resolve the conflict. The negotiation may be undertaken with or without attorney involvement.

There is no 3rd party involvement in the negotiation between the parties.

The disputing parties retain control over the negotiation and determine its outcome.


A 3rd party neutral assists disputing parties with reaching a mutually acceptable resolution to their dispute.

The 3rd party is called a mediator. The mediator acts as an intermediary between the parties. The mediator's job is to encourage the parties to seek common ground in resolving their dispute.

The mediator can make suggestions about how to resolve the dispute. However, the parties retain control over the mediation and they ultimately decide how to resolve their dispute.


During arbitration, the parties attend a formal hearing and present their dispute to a 3rd party neutral who rules on the case.

The 3rd party neutral is called an arbitrator. The arbitrator acts like a judge or jury.

The arbitrator decides how to resolve the dispute. After the parties have presented their cases and evidence, the arbitrator will issue a ruling on the case. The arbitrator's ruling may be binding or non-binding.

To review, read Negotiation, Mediation, and Arbitration.


2c. Explain the relative benefits and drawbacks of litigation and alternative dispute resolution

  • What are some of the benefits and drawbacks of alternative dispute resolution?
  • In what scenarios might one choose ADR over litigation? When might one prefer litigation?


Of all the types of alternative dispute resolution, negotiation is by far the simplest. In a negotiation, the parties consult with each other for the purpose of reaching a potential settlement agreement and they bargain at length over the terms of the potential settlement agreement. Negotiation is beneficial because it can take place before or even during a trial. It can help save the parties from lengthy and costly litigation. A key drawback to negotiation can be the lack of equal bargaining power between the parties. If there is a great imbalance in bargaining power, the weaker party may be coerced into accepting a less than favorable settlement.

Principled negotiation is popular among disputing parties because it emphasizes a "win-win" outcome versus a "win-lose" outcome to bargaining. Unlike litigation, principled negotiation is non-adversarial. To review, read Negotiation.


Mediation is more advantageous than litigation and arbitration because it allows the parties to retain control over how their dispute is resolved. Because they have ownership of the decision-making process, the parties are more likely to abide by the terms of their agreement. Mediation is also not as costly and time-consuming as litigation and arbitration. A drawback to mediation is that not all disputes are suitable for mediation. There are some disputes that are better resolved in court, such as those where a party is combative or uncooperative. In addition, litigation is appropriate where a party refuses to make a good faith effort to resolve the dispute. In this instance, the intervention of a 3rd party neutral to resolve the dispute is necessary. To review, read Mediation.


Arbitration is similar to litigation in that it is adversarial. Arbitration and litigation are appropriate in contentious disputes because they utilize neutral 3rd parties to resolve the conflict. Overall, arbitration is more beneficial than litigation because it is private, less costly, and less time-consuming. Unlike litigation, arbitration allows the parties to preserve their ongoing relationship by keeping their dispute private. Arbitration saves parties both time and money because it is more expeditious than litigation. Parties are not forced to deal with scheduling delays associated with the congested court system. The arbitration process is flexible in that arbitrators are not subject to the strict procedural rules that are associated with formal court proceedings. For example, arbitration rules governing the presentation of evidence are less restrictive. To review, read Arbitration.


Unit 2 Vocabulary

This vocabulary list includes terms that might help you with the review items above and some terms you should be familiar with to be successful in completing the final exam for the course.

Try to think of the reason why each term is included.

  • voir dire
  • for cause
  • peremptory
  • opening statement
  • direct examination
  • appeal
  • cross-examination
  • directed verdict
  • closing arguments
  • burden of proof
  • beyond a reasonable doubt
  • preponderance of the evidence
  • verdict
  • judgment notwithstanding the verdict
  • jury nullification
  • judgment
  • execution
  • garnished
  • res judicata
  • negotiation
  • mediation
  • mediator
  • arbitration
  • arbitrator

Unit 3: Torts

3a. define tort and terms related to torts, generally

  • What is a tort?
  • What is respondeat superior?
  • What are the bases for imposing tort liability?
  • What is the tort doctrine of strict liability?
  • What are the two categories of damages are awarded for tort liability?

A tort is a civil wrong other than a breach of contract. It results when a party's action or inaction causes harm or injury to another. A party who commits a tort is called a tortfeasor. Note that under the doctrine of respondeat superior, an employer is held liable for employee conduct, unless it can demonstrate the employee was on a frolic and detour at the time he or she committed the tort. Courts typically grant monetary damages for tort infractions. Compensatory damages provide for monetary award that reflects the actual value of the loss, harm, or injury suffered. Punitive damages are awarded are those awarded above and beyond compensatory damages. They are intended to punish a party for egregious conduct. Punitive damages seek to deter the party from engaging in egregious conduct in the future.

There are 3 types of torts: intentional tort, negligence, and strict liability. An intentional tort occurs when a tortfeasor acts with intent to cause the damage or harm that results from his or her action. Negligence occurs when a tortfeasor is held liable for an unintentional act because he or she has failed to act in a way a reasonable person would have acted. Negligence per se occurs when a party violates a statute or ordinance and that violation causes injury to another. For example, State A's statute imposes a criminal fine on landlords who fail to maintain safe premises. If a landlord fails to maintain his or her apartment building's roof, and a tenant is injured by falling debris, the landlord has committed negligence per se. Strict liability is imposed under tort law without regard to how careful or careless a tortfeasor may have been. For example, many states have enacted dram shop acts. Dram shop acts impose strict liability on bars and other establishments that serve drinks to obviously intoxicated patrons who later cause injuries to third parties.

To review, watch Business Law and read Torts.


3b. Identify and discuss the elements of the tort of negligence

  • What are the elements of the tort of negligence?


There are 4 basic elements of negligence:

  1. Duty: A defendant owes the plaintiff a duty of reasonable care.
  2. Breach: A duty is breached when the defendant fails to behave as a reasonable person would have under the same or similar circumstances.
  3. Causation:
    1. Actual causation: "But for" the defendant's act or omission, the plaintiff would not have been injured.
    2. Proximate causation: The plaintiff's injury was a foreseeable consequence of the defendant's act or omission.
  4. Damages: The plaintiff suffered loss, harm, or injury as a result of the defendant's behavior.

To review, read Negligence.


3c. identify and discuss the elements of an intentional tort

  • What is an intentional tort?
  • What are some examples of intentional torts?

An intentional tort requires the intent to cause a wrongful act and that the wrongful act causes injury or harm to another party. The tortfeasor must be substantially certain that his or her conduct would lead to the commission of the wrongful act. The tortfeasor's act must be voluntary.

Examples of Intentional Torts

  • An assault is an intentional, unexcused act that creates in another person a reasonable apprehension or fear of immediate harmful or offensive contact.
  • A battery is a completed assault. It is any unconsented touching, even if physical injuries aren't present.
  • Intentional infliction of emotional distress results when a party engages in an intentional act that amounts to extreme and outrageous conduct and the intentional act causes another party to suffer emotional distress.
  • Invasion of privacy results when a person's name or likeness is used for commercial purposes without their permission. Invasion of privacy also includes the invasion of a person's physical solitude through such acts as spying or eavesdropping.
  • Misappropriation occurs when a person or company uses someone else's name, likeness, or other identifying characteristics without permission.
  • False imprisonment occurs when someone intentionally confines or restrains another person's movement or activities without justification.
  • Trespass to land occurs whenever someone enters onto, above, or below the surface of land owned by someone else without the owner's permission.
  • Trespass to personal property is the unlawful taking or harming of another's personal property without the owner's permission.
  • Defamation is the act of wrongfully hurting a living person's good reputation.
  • Slander is verbal defamation that is communicated to a third party.
  • Libel is written defamation that is published to a third party.
  • Trade disparagement happens when someone publishes false information about another person's product.
  • Misrepresentation occurs when businesses make false claims about their products in marketing their products to the public.
  • Fraud involves the misrepresentation of facts (not opinions) with the knowledge that they are false or with reckless disregard for the truth.
  • Tortious interference prohibits the intentional interference with a valid and enforceable contract.

To review intentional torts, watch Business Law.


3d. Identify which torts are considered strict liability torts

  • What is strict liability?
  • What are some examples of strict liability torts?

The doctrine of strict liability holds a party liable for damages and/or injuries regardless of the amount of care undertaken by the party to prevent harm. Strict liability is imposed on parties engaged in ultrahazardous activities, such as mine blasting or transporting dangerous chemicals. Owning or possessing dangerous animals that harm or injure others can also be a basis for the imposition of strict liability on a party. Under strict product liability law, manufacturers are strictly liable for defective products that are unreasonably dangerous to consumers. Furthermore, manufacturers are obligated to warn consumers about potential hazards associated with their products. Failure to do so will subject a manufacturer to strict product liability.

To review, read section Strict Liability.


3e. Determine tort liability by applying elements of negligence to hypothetical scenarios

  • What are the steps for applying elements of negligence to hypothetical scenarios?
  • What are the defenses to tort liability?

Oliver's Snack Shack

Oliver Brown is the owner of Oliver's Snack Shack located in a large sports stadium. Oliver runs the grill. His 2 employees make drinks and ring up customer orders. Despite his best efforts, Oliver is having trouble getting his employees to take sanitation seriously. He has disciplined his employees and even re-trained them about food safety protocol. At half-time, Oliver is so swamped with hungry fans demanding fries and spicy wings that he cannot closely supervise his employees, so he has placed the following reminder on the ice machine:


USE DESIGNATED "ICE ONLY" SCOOPS—Make sure they are clean!

To Oliver's dismay, several customers have become ill from the Norovirus that has been linked to the Snack Shack's ice machine. Oliver's employees admitted that they used their bare hands and soft drink cups to scoop ice from the machine. The customers are suing Oliver for emergency room visits, lost wages, and for pain and suffering. Oliver is upset about the lawsuit and thinks it is unfair. He thinks he will win the lawsuit because he did his best to supervise his employees.

QUESTION: Will Oliver win his case?

ANSWER: No, Oliver will not win his case. Oliver failed to supervise the employees to ensure that they complied with food safety rules. It is this negligent supervision and Oliver's own failure to maintain a clean ice machine that led to the ice becoming contaminated. It was the contaminated ice that led to customer food poisoning.

Negligence Analysis:

  1. Duty: Was there a duty? Yes, as a food vendor, Oliver owed a duty to his customers to provide food that is safe for consumption and to maintain sanitary conditions.
  2. Breach: Was there a breach? Yes, Oliver breached the duty by failing to adequately supervise employees and by failing to maintain a clean ice machine.
  3. Causation:
    1. Was there actual causation? Yes, "but for" Oliver's inaction (failure to supervise employees and failure to maintain a clean ice machine), the customers would not have caught the Norovirus.
    2. Was there proximate causation? Yes, it is foreseeable that customers would become ill from contaminated ice.
  4. Damages: Were there damages? Yes, the customers suffered damages in the form of hospital bills, lost wages, and pain and suffering.

To review, read section Negligence.

Defenses to Tort Liability

There are several defenses to tort liability. Assumption of risk is one such defense. If the plaintiff knowingly and voluntarily assumes the risk of participating in a dangerous activity, then the defendant is not liable for injuries incurred. Under contributory negligence, a plaintiff's own negligence, no matter how minor, bars the plaintiff from any recovery. In states that follow pure comparative negligence, a plaintiff's recovery will be reduced in proportion to her or her degree of fault. Even if the plaintiff is found to be at greater fault than the defendant, plaintiff will still be allowed to recover damages. In states that follow modified comparative negligence, a plaintiff will not recover any damages, if the plaintiff is more than 50% at fault.


Unit 3 Vocabulary

This vocabulary list includes terms that might help you with the review items above and some terms you should be familiar with to be successful in completing the final exam for the course.

Try to think of the reason why each term is included.

  • tort
  • negligence per se
  • respondeat superior
  • intentional tort
  • negligence
  • negligence per se
  • strict liability
  • dram shop acts
  • duty
  • breach of duty
  • actual causation
  • proximate causation
  • compensatory damages
  • punitive damages
  • assault
  • battery
  • intentional infliction of emotional distress
  • invasion of privacy
  • misappropriation
  • false imprisonment
  • trespass to land
  • trespass to personal property
  • defamation
  • slander
  • libel
  • trade disparagement
  • misrepresentation
  • fraud
  • tortious interference
  • strict liability
  • assumption of risk
  • contributory negligence
  • pure comparative negligence
  • modified comparative negligence

Unit 4: Contracts

4a. Identify and discuss the essential elements of a valid contract

  • How is a contractual agreement formed?
  • What is consideration?
  • What are some reasons why a party may lack capacity to contract?
  • Why might a contract not be enforceable due to issues of legality?

The essential elements needed to form a valid contract are:

  1. Agreement. contract is a legally enforceable promise. It is based on an agreement between parties. The agreement includes an offer made by one party (offeror) and an acceptance of the offer by another party (offeree). The offeror promises to undertake an action or to refrain from taking action. The offeree assents to an offer when his or her acceptance "mirrors" the terms of the offer.
  2. Consideration: The contractual agreement must be supported by consideration, which is a bargained-for exchange for something of value. Something of value can be money, goods, services, or the performance of an action that one is not legally required to do. Note that a gift does not constitute consideration.
  3. Capacity: The parties to the contract must possess the legal capacity to contract. Incapacity is an issue where a party is a minor, intoxicated, or mentally incompetent.
  4. Legality: Contracts that violate the law are void and therefore unenforceable. In addition, courts heavily scrutinize contracts that violate public policy. Courts have the discretion not to enforce contracts that violate public policy.

To review, read Formation.


4b. Explain unilateral and bilateral contracts, and identify examples of these types of contracts

  • What is a unilateral contract?
  • What is a bilateral contract?
  • What is an example of a unilateral contract and a bilateral contract?

A unilateral contract is one in which a party accepts an offer by performing the contract. For example, Arthur entered a contest to win an iPhone. He complied with the contest instructions by filling out his information and submitting the contest form online by the deadline. This is an example of a unilateral contract because the offer could only be accepted by submitting the properly completed contest form online by the designated deadline. The offer could only be accepted by the offeree's (Arthur) performance.

A bilateral contract is one in which the parties exchange a promise for a promise. For example, Ellie offers to buy Monica's outdoor shed for $400. Ellie tells Monica that she will pay for the shed when she receives her paycheck in two weeks. Monica agrees to the offer and promises to sell Ellie the shed when Ellie receives her paycheck two weeks. In this scenario, a bilateral contract is formed once the promises are exchanged between the parties.

To review, read Formation.


4c. Identify and describe situations in which a contract can fail

  • When does a breach of contract occur?
  • In what situations can contracts become unenforceable?

Breach of Contract

A breach of contract occurs under a variety of circumstances. For example, a party may fail to perform its obligations according to the terms of the contract. A party may fail to abide by time obligations, or may only partially satisfy the terms of the agreement.

A material breach is a substantial breach that results from performance that is far below what is reasonably acceptable. The aggrieved party can terminate the contract and sue for damages. A non-material breach is a minor breach. For a non-material breach of contract, the aggrieved party must still perform the contract but can sue for damages. A non-material breach can consist of minor delays or deviations from the term of the contract. With respect to anticipatory repudiation, the breaching party communicates (through an express statement or action) that he or she has no intention of performing the contract. With respect to anticipatory repudiation, the non-breaching party may terminate the contract. The non-breaching party has a duty to mitigate damages.

To review, watch Breach of Contract.

Unenforceable Contracts

Although an agreement may have the requirements necessary to form a contract, it may still not be enforceable under the law. A contract may fail due to illegality or a party's lack of capacity.

If a party is forced into a contract based upon a threat, the party can either rescind the contract or use duress as a defense against contract enforcement. If a party's contract is oppressive, a court will refuse to enforce it due to unconscionability. When a party uses his or her special relationship to exert influence over a vulnerable party, the contract is voidable because of undue influence. Undue influence is a defense that can be used when one party ceases to be able to exercise his or her free will due to the superior power and influence exerted over that party by the other.

The Statute of Frauds requires that certain types of contracts must be in writing and signed by the defendant to be enforceable against the defendant. Examples of contracts that fall within the Statute of Frauds include contracts for the sale of land; contracts made in consideration of marriage; contracts agreeing to pay the debts of another; contracts that cannot be performed within one year; and contracts for the sale of goods with a price of five hundred dollars or more. These types of contracts are required to be in writing to be enforceable according to the Statute of Frauds.

Mistake, misrepresentation, and fraud are three additional reasons why a contract can be avoided. A contract can be avoided due to a mistake where both parties are mistaken as to a material fact or one of the parties has made an error in computation. The misrepresentation defense can be asserted where the contract was based on a false statement made by a party with the intent to mislead the other party. The fraud defense can be asserted against a party that used deception to acquire money or property.

Impossibility may prevent the performance of a contract due to changed circumstances. For example, a natural disaster, the death of a party, the destruction subject of the contract, or the subsequent illegality of the subject matter would all make a contract impossible to perform.

The defense of commercial impracticability can be used when circumstances affect a party's ability to perform the contract to the extent that performance has become extraordinarily difficult or unfair. Requiring performance of the contract would cause undue hardship on the party. For example, ACME contracts with a supplier for a cleaning solution. Subsequently, the government issues regulations that make acquiring the key ingredients for the cleaning solution extremely difficult. In this scenario, the supplier can be excused from performing the contract because of impracticality.

Frustration of purpose is when the contract has become essentially worthless to one party because circumstances beyond his or her control have defeated the party's purpose for entering the contract. For example, ACME contracts with a realtor to purchase property for mixed-use development with the understanding that ACME will be able to get the property rezoned. The parties do not anticipate the zoning change to be problematic until later when the city refuses to rezone the property for mixed-use development. In this scenario, ACME can avoid the contract due to frustration of purpose. To review, read Performance and Discharge, Breach, Defenses, Equitable Remedies and Unenforceable Contracts.


4d. Summarize the remedies available for breach of contract

  • What are the two types of equitable remedies available for breach of contract?
  • What damages can be awarded for breach of contract?

Equitable Remedies

Two equitable remedies for breach of contract are quasi-contract and promissory estoppel. A quasi-contract is a legal obligation imposed by law to avoid unjust enrichment. The court creates a quasi-contract because the parties never entered into an actual agreement.

Promissory estoppel enforces a promise where a party has justifiably relied on the promise to his or her detriment. The person's reliance must be substantial and reasonable. Reliance damages are awarded based on a breach of contract or a party's reasonable reliance on a promise. The doctrine of promissory estoppel requires the party to have a reasonable reliance on a promise and that the party relies on the promise to his or her detriment.


  • Compensatory damages are actual damages that are attributable to a breach of contract. They compensate the non-breaching party for losses that result from the breach of contract.
  • Consequential damages are indirect losses that arise from a breach of contract. Consequential damages must be reasonably foreseeable at the time the contract was formed.
  • Specific performance might be required under certain types of contracts when the subject matter is unique, such as in contracts for the sale of land.

To review, watch Breach of Contract and read Performance and Discharge, Breach, Defenses, Equitable Remedies.


4e. Apply elements of contract law to hypothetical contract law problems

  • How would you apply elements of contract law to determine whether or not a contract is enforceable?

Sonia Mason took out a $185,000 mortgage loan from Big Bank to finance her home purchase. Years later, Sonia fell behind in making her mortgage payments. She met with the bank and it offered not to foreclose on Sonia's mortgage as long as she made a final lump sum payment of $15,000 by March 1. Sonia signed the agreement. By March 1, Sonia could only raise $10,000 to pay the bank. The bank refused to accept the $10,000 payment.

Sonia would like to know if her agreement with the bank is enforceable. Since the bank won't accept the $10,000 payment, she would like to know if she can use the money to resume making monthly payments on her mortgage.

Apply elements of contract law to the scenario and explain whether the Sonia's agreement with the bank is enforceable or unenforceable.

  1. What constituted the agreement?
    1. Offer: The bank offered to accept a lump sum payment of $15,000 by March 1.
    2. Acceptance: Sonia agreed to make a payment of $15,000 to the bank by March 1.
  2. Was there consideration?
    1. The consideration was a forbearance on the part of the bank. It had the legal right to foreclose on Sonia's mortgage, but agreed not to do so if she kept her promise to pay the $15,000 by March 1.
  3. Was the contract a legal one?
    1. Yes, the contract was for a legal purpose (home mortgage loan).
  4. Was there capacity to consent to contract?
    1. Yes, the parties had capacity and consent to contract (no facts indicate otherwise).
  5. Was there a breach of contract?
    1. Yes, there was a breach of contract. Sonia failed to keep her promise to pay the bank $15,000 by March 1. She breached her contract with the bank. It can foreclose on Sonia's mortgage.
    2. The bank does not have to accept the $10,000 payment, nor does it have to allow Sonia to resume making monthly payments on her mortgage.


4f. Describe the different types of negotiable instruments and explain the UCC requirements for this type of formal contract

  • What are the two main types of negotiable instruments?
  • What makes an instrument negotiable?

Types of Negotiable Instruments

A promissory note is a promise to pay. The maker and the payee are the 2 parties in a promissory note transaction. A loan (like a student or car loan) is an example of a promissory note.

A draft is an order directing someone else to pay money on your behalf. The drawer, drawee, and payee are the 3 parties in a draft transaction. A check is an example of a draft.


To be negotiable, the instrument must be in writing and it must be signed by the maker or drawer. The negotiable instrument must contain an unconditional promise or order to pay a specific amount of money. The negotiable instrument must be payable on demand or at a definite time. Finally, the negotiable instrument must be payable to order or bearer.

To review, read subunit 4.1.


Unit 4 Vocabulary

This vocabulary list includes terms that might help you with the review items above and some terms you should be familiar with to be successful in completing the final exam for the course.

Try to think of the reason why each term is included.

  • offer
  • acceptance
  • mirror image
  • counteroffer
  • revocation
  • mutual assent
  • consideration
  • capacity
  • legality
  • unilateral
  • bilateral
  • illusory promise
  • infancy doctrine
  • substantial performance
  • quasi-contract
  • promissory estoppel
  • reliance damages
  • disaffirm
  • impossibility
  • duress
  • economic duress
  • material breach
  • non-material breach
  • anticipatory repudiation
  • unconscionability
  • Statute of Frauds
  • Mistake
  • Misrepresentation
  • Fraud
  • impracticability
  • frustration of purpose
  • compensatory damages
  • consequential damages
  • specific performance
  • duty to mitigate
  • promissory note
  • draft
  • negotiability

Unit 5: Property Law

5a. Distinguish between real and personal property, and identify examples of each

  • How does real property differ from personal property?
  • What are some examples of real property?
  • What are some examples of personal property?

Real property is land and interests in land such as mineral rights. Real property includes anything attached to land or that is a part of the land, such as buildings, plants, and subsurface minerals. Unlike personal property, real property is not movable. Personal property is movable property. It is not land, nor is it fixed to real property. Examples of personal property include equipment, furniture, supplies, and intellectual property such as trade secrets and patents. To review, read Personal Property and Real Property.


5b. Define tangible and intangible personal property, distinguish between both types of property, and identify examples of each

  • What is tangible personal property?
  • What is intangible personal property?
  • How does tangible personal property differ from intangible personal property?
  • What are some examples of tangible and intangible personal property?

Tangible personal property is personal property that has a physical existence. Intangible personal property does not have a physical existence. Tangible property comprises of all types of real property and physical personal property, such as equipment, vehicles, and buildings. Movable tangible property is called chattel. Once personal property has become attached to land, it is treated like real property and it is called a fixture. Intangible property is personal property that does not have a physical quality, such as customer lists, licensing agreements, and mineral rights. Like tangible property owners, intangible personal property owners are afforded ownership rights and protection under the law. For example, owners of intangible personal property can demand royalties for the use of their intellectual property. Owners may also prohibit or restrict use of their intellectual property. To review, read Personal Property.


5c. Identify the various interests in real property and how they pass

  • What are the interests conveyed in a quitclaim deed?
  • What are the interests conveyed in a warranty deed?
  • What is adverse possession?

Types of Deeds

An interest in real property can be conveyed by a quitclaim deed. A quitclaim deed is a legal instrument through which a person called the grantor conveys property to another called the grantee. The grantor can only convey his or her current interest in the property. The grantor does not claim to have title to the property or that the grantor has good title to the property.

A warranty deed is a legal instrument through which a grantor guarantees to the grantor that the property being conveyed is free of liens or easements. It differs from a quitclaim deed in that grantor conveys title and a warranty against defects in the title as well as encumbrances.

To review, read Real Property.

Squatter's Rights & Adverse Possession

Squatter's rights to property are acquired by adverse possession. That is, an individual who is wrongfully in possession of the original owner's property can acquire ownership rights by meeting state statutory requirements. Adverse possession requires continuous possession (possession of the property without interruption). Possession must be open and notorious (visible). Possession of the real property must meet the designated statutory time (usually 5-20 years). The possession must be hostile (done without the owner's permission) and it must be actual and exclusive (actual physical occupation of the property that excludes others from the property). To review, read Real Property.

Types of Ownership Interests

A party's interest right in land is called an estate. An estate gives the party the right to possess, use, and enjoy the property. The type of interest conveyed to an owner depends on the language contained in the document of conveyance (for example, deed or will). The following are examples of estates:

  • A fee simple absolute is the maximum estate permitted under the law. There are no restrictions or conditions placed on ownership of this estate.
  • A fee simple defeasible is subject to a condition of ownership or a future event. If the condition is violated or a future event happens, ownership in the land reverts back to the original owner or the person the original owner designates.
  • A life estate grants ownership interest in land for the life of the designated person.

Co-ownership represents another way in which one or more parties can own property together. The following are examples of co-ownerships:

  • A tenancy in common grants all owners an undivided interest in the property, equal rights of possession, and a divisible interest.
  • A joint tenancy grants a surviving owner the right of survivorship. This means the surviving owner receives the ownership interests of the deceased owner.
  • A tenancy by the entirety is reserved exclusively for spouses. It grants the surviving spouse a right to survivorship.

To review, read Real Property.

Non-Possessory Interests in Land

Easements and covenants are non-possessory interests in land. An easement gives a person the right to use another person's land for a particular purpose. Easements may be express or implied. For example, a landowner may give a party permission to use part of their property for a utility easement.

A covenant is a voluntary restriction on land use. For example, a homeowner's association may enforce rules (covenants) agreed to by property owners that dictate how the property owners use their land. The rules (covenants) may restrict the types of lawn ornaments property owners can display or where certain types of activities can be held on the property.

Leasehold Interests

A leasehold estate is one in which the property owner (landlord) grants the right to possession to a party called a tenant.

  • A tenancy for years is a tenancy for a designated period of time.
  • A periodic tenancy is a tenancy for a particular period of time that renews automatically if the landlord fails to terminate it.
  • A tenancy at will is a open tenancy (has no set period of time) and the landlord or tenant may terminate the tenancy at anytime.
  • Tenancy at sufferance occurs when a tenant remains on the property after the right of possession has ended and without the landlord's consent.

To review, read section Real Property.


Unit 5 Vocabulary

This vocabulary list includes terms that might help you with the review items above and some terms you should be familiar with to be successful in completing the final exam for the course.

Try to think of the reason why each term is included.

  • real property
  • personal property
  • tangible personal property
  • intangible personal property
  • quitclaim deed
  • warranty deed
  • adverse possession
  • fee simple absolute
  • fee simple defeasible
  • life estate
  • tenancy in common
  • joint tenancy
  • tenancy by the entirety
  • easement
  • covenant
  • tenancy for years
  • periodic tenancy
  • tenancy at will
  • tenancy at sufferance
  • leasehold
  • assignment

Unit 6: Intellectual Property

6a. Identify the requirements to hold a valid trademark, and determine what can and cannot be trademarked

  • What are the legal requirements for a trademark?
  • What cannot be trademarked?

A trademark is any kind of name, logo, motto, device, sound, color, or look that identifies the origin of a particular good or service. To qualify for trademark protection, a mark must be either distinctive or have acquired a secondary meaning. Arbitrary and fanciful marks meet the distinctiveness requirement. An arbitrary mark makes random use of a word and it does not describe the product (Apple computers, for example). A fanciful mark is distinctive because it is a made-up word (Gatorade, for example). A suggestive mark meets the distinctiveness requirement because it hints at the product's function ( Theraflu, for example). Marks that have a secondary meaning acquire trademark protection when consumers associate the mark with a particular good or service.

Trademarks lose their protection if they become generic. Genericide is a process through which a mark refers to a class of goods as opposed to being associated with a specific producer or origin.

Marks that cause confusion among consumers cannot be trademarked. The law also prohibits trademark dilution, which results from a party using the same or similar mark as an established trademark with the purpose of diluting its reputation. It is not necessary to prove consumer confusion in a trademark dilution case. The trademark owner must prove injury and actual economic harm. Finally, trademarks must be used in commerce in order to receive trademark protection. Abandoned marks lose their trademark protection due to non-use.

To review, read Trademarks.


6b. Identify the requirements to hold a valid patent, and apply this knowledge to determine what can or cannot be patented

  • What are the legal requirements to hold a valid patent?
  • When can a patent be granted? When can a patent not be granted?

Patent Requirements

An inventor can qualify for patent protection by meeting three requirements. First, the invention must be novel, which means it is brand new and has not been previously used. Second, the invention must be useful, meaning it serves a practical purpose. Third, the invention must be non-obvious, meaning that it must not be evident in light of current technology. To review, read Patents.

Types of Patents

There are 3 types of patents: utility, design, and plant patents. Utility patents may be granted for machines, processes, articles of manufacture, compositions of matter, or for improvements to any of those items. A design patent may be granted for ornamental designs for an article of manufacture. A plant patent covers inventions or discoveries of asexually reproduced plants (e.g., plants produced through methods such as grafting).

It is important to note that physical phenomena, the laws of nature, abstract ideas, and artistic works cannot be patented. Mere ideas for an invention cannot be patented.

Big Pharm, Inc.

Dr. Katz is a botanist and he works for the Big Pharm, Inc. drug company. His employer invests a considerable amount of money and resources in the development of a medicine to combat asthma. As part of his research, Dr. Katz conducts experiments on rare plant species from tropical rainforests. Dr. Katz has had much success with his experiments and Big Pharm, Inc. would like to seek a plant patent for Dr. Katz's work. Some of the plants Dr. Katz has produced by grafting. Others were produced from seeds collected in the field. Big Pharm, Inc. would also like to patent a general idea Dr. Katz has for plant grafting techniques. Are any of these patentable?


  • Plants produced from seeds: Big Pharm, Inc. cannot patent inventions or discoveries from the plants because they were naturally produced from seeds.
  • Grafted plants: Big Pharma, Inc. can seek a patent for Dr. Katz's asexually reproduced plants. The plants were produced through grafting.
  • General Ideas: Big Pharma, Inc. cannot seek a patent for Dr. Katz's general idea for plant grafting techniques. An idea alone cannot be patented.

To review, read Patents.


6c. Define copyright, and determine when a copyright has been or has not been violated

  • What is a copyright?
  • How can a copyright be violated?
  • What is fair use?

Copyright Law

Copyright protects a creative expression. The creative expression is automatically copyrighted if it is an original work (not copied) and fixed in a durable medium. Copyright protection lasts for seventy years after the death of the author. If there is more than one author, the copyright expires seventy years after the death of the last surviving author. If a company, such as a publisher, owns a copyrighted work, the copyright expires ninety-five years from the date of publication, or one hundred twenty years from the date of creation, whichever comes first.

Copyright Infringement

Copyright infringement occurs when someone uses a copyrighted work without permission or violates the terms of a copyright license. Copyright infringement also occurs when a party assists someone in violating a copyright, or in the creation of a device that assists in violating a copyright.

Fair Use Exception

Fair use is a legal exception to copyright infringement. In limited circumstances, party can reproduce a copyrighted work for commentary, criticism, news reporting, teaching, or research. The party does not have to seek the owner's permission or pay the owner royalties. To determine whether a use is fair, the court will examine the following factors:

  • the purpose and character of the use
  • the nature of the copyrighted work
  • the amount and substantiality of the portion used
  • the effect of the use on the potential market for the copyrighted work

To review, read Copyright.


6d. Identify and describe the body of law that protect trade secrets, and apply this knowledge to determine situations in which trade secrets will or will not be protected

  • What is a trade secret?
  • When are trade secrets be protected or unprotected under the law?

Trade Secret

A trade secret is any secret information that an organization has in its possession that gives the organization a competitive advantage over its competitors. This information may include a process, formula, pattern, program, device, method, technique, or compilation. An owner of a trade secret can sue for misappropriation and seek damages against infringers. Damages may include actual loss and unjust enrichment not captured by actual loss. Additionally, in cases of willful or malicious misappropriation, double damages may be awarded, as well as attorney's fees.

Trade Secret Protection

To qualify as a trade secret, an organization's information must remain unknown to others. The information must be of sufficient originality and actual or potential economic value so as to make the trade secret owner more competitive over others in its industry. An organization loses its trade secret protection once it is revealed to others.

To review, read Trade Secrets.


6e. Analyze the impact of the digital era on intellectual property rights

  • What impact has the digital era had on intellectual property rights?

The digital era has posed great challenges for intellectual property owners. To combat abuse, Congress enacted the Anticybersquatting Consumer Protection Act (ACPA) in 1999. The act prohibits cybersquatting where a party registers a domain that is the same or confusingly similar to another party's trademark. The law also prohibits cybersquatting where a party has a bad faith intent profit from the misuse of the registered domain name.

To combat intellectual property theft, the government enacted the Digital Millennium Act which prohibits the pirating of copyrighted material. The law also prohibits third parties from circumventing security measures used to protect copyrighted material.

To review, read Trademarks.


Unit 6 Vocabulary

This vocabulary list includes terms that might help you with the review items above and some terms you should be familiar with to be successful in completing the final exam for the course.

Try to think of the reason why each term is included.

  • trademark
  • trade dress
  • service mark
  • certification mark
  • collective mark
  • genericide
  • dilution
  • patent requirements
  • utility patent
  • design patent
  • plant patent
  • patent trolls
  • copyright
  • fair use
  • trade secret
  • misappropriation
  • Anticybersquatting Consumer Protection Act (ACPA)
  • Digital Millennium Act

Unit 7: Employment Law

7a. Distinguish between employment-at-will and contractual employment

  • How does employment-at-will differ from contractual employment?
  • What are the limitations placed on employment-at-will?

Contractual employment differs from employment-at-will in that it sets forth the terms and conditions of employment. This means that an employee cannot be terminated without cause. Employment-at-will allows either party in an employment relationship to terminate at any time and for any reason.

The right to terminate an at-will employee is not absolute. An employer may not violate the law when terminating an employee (engage in unlawful discrimination, for example). An employee cannot be terminated for performing his or her civic duty (such as serving on a jury). An employee cannot be terminated for reporting employer misconduct (whistleblowing) or for refusing to violate the law. Likewise, an employer cannot terminate an employee for exercising a legal right (such as filing for workers' compensation).

There are other reasons why courts place limitations on employment-at-will. Under contract law, a court may hold that an employer is required by law to comply with the implied promise of good faith and fair dealing. Concern for public policy may also be a reason for a court to limit employment-at-will.

Contract law can impact employment-at-will where the employer has adopted an employee handbook for the workplace. An employee handbook can create a binding contract with employees. Therefore, an employer must follow its own policies and procedures as set forth in the handbook. Otherwise, the employer may be liable for breach of contract.

To review, read Employment-at-will.


7b. Identify and discuss laws that generally regulate the employer-employee relationship

  • Which laws generally regulate the employer-employee relationship?

Title VII of the 1964 Civil Rights Act prohibits unlawful discrimination. It applies to employers with more than fifteen employees. It eliminates job discrimination on the basis of race, color, religion, sex, and national origin.

Any act of discrimination on any of these bases is illegal. These acts may be a refusal to hire, a discharge or termination, a temporary layoff or retrenchment, compensation, an opportunity for advancement, or any other term or condition of employment. Title VII allows for 3 causes of action. In a disparate impact case, the plaintiff must prove to the court that the employer engaged in intentional discrimination against the plaintiff. If there is no intentional discrimination, the plaintiff must prove disparate impact. That is, the plaintiff must prove that the employer used practices or policies that had a discriminatory effect on the protected class. To successfully defend against a disparate impact case, an employer must prove business necessity. For the business necessity defense, the employer must show that its practices or policies were job related and necessary for the job function. Lastly, Title VII also prohibits acts of retaliation against anyone who complains about, or participates in, any employment discrimination complaint.

The Lily Ledbetter Fair Pay Act of 2009 gives victims the right to file a complaint within 180 days of their last discriminatory paycheck. The law is powerful in that it starts the statute of limitations over with each discriminatory paycheck.

The Equal Pay Act of 1963 seeks to eliminate the wage gap between women and men by prohibiting pay discrimination. All forms of compensation are covered by the act, including benefits such as vacation and compensation such as salary and bonus.

The Age Discrimination in Employment Act of 1967 (ADEA) prohibits age discrimination against employees who are least 40 years of age. Bona fide occupational qualification can also serve as a defense to age discrimination. Mandatory retirement is required in some industries due to public safety concerns. For example, airline pilots are required to retire at age 65.

The Pregnancy Discrimination Act of 1978 amended Title VII to make it illegal to discriminate on the basis of pregnancy, childbirth, or related medical conditions. This means employers cannot refuse to hire a woman because she is pregnant or is considering becoming pregnant, or because of prejudices held by coworkers or customers about pregnant women.

The Americans with Disabilities Act of 1990 prohibits unlawful discrimination against qualified disabled workers. It also prohibits discrimination against workers who are perceived as having disabilities. To be qualified, disabled workers must be able to perform essential job duties. The employer may be required to provide reasonable accommodation to assist disabled workers with performing essential job tasks. However, employers are not required to endure undue hardship (incur great expense to accommodate a disabled employee, for example).

The Occupational Safety and Health Act requires certain workplace safety and health standards. The act imposes on each employer a general duty to furnish a place of employment free from recognized hazards likely to cause death or serious physical harm to employees.

The Fair Labor Standards Act (FLSA) determines the minimum wage employees are to be paid. It also requires overtime pay for non-exempt employees who work in excess of 40 hours per week. The Davis-Bacon Act (prevailing wage law) requires that workers employed by government contractors are paid the prevailing wage. The prevailing wage is the wage set by the Department of Labor based on the employee's location and job category. To review, read Other Employment-Related Laws and Prevailing Wage Laws.


7c. Describe the process of and rights under collective bargaining

  • How are unions formed?
  • What acts constitute unfair labor practices under collective bargaining?


Unions can be formed if at least 30% of the workforce signs work cards or petition the National Labor Relations Board for an election. The National Labor Relations Board will certify the union if it receives a majority of the votes. Alternatively, an employer may choose to recognize the union if it has determined that a majority of the workers make it known that they want union representation. A clear indication would be a majority of the workers signing union-authorization cards. To review, read Your Right to Form a Union.

Unfair Labor Practices under Collective Bargaining

Unfair labor practices are those that interfere with worker's right to bargain collectively. Workers have the right to choose their representatives for collective bargaining. Among other things, the National Labor Relations Act requires an employer to acknowledge a duly elected union, negotiate in good faith, refrain from dominating and/or controlling the union, and refrain from interfering with workers' right to participate in concerted activities.

To review, read Collective Bargaining FAQs.


Unit 7 Vocabulary

This vocabulary list includes terms that might help you with the review items above and some terms you should be familiar with to be successful in completing the final exam for the course.

Try to think of the reason why each term is included.

  • employment-at-will
  • wrongful discharge
  • employment discrimination
  • protected class
  • Title VII of the 1964 Civil Rights Act
  • retaliation
  • bona fide occupational qualification (BFOQ)
  • Equal Employment Opportunity Commission (EEOC)
  • Lilly Ledbetter Fair Pay Act of 2009
  • disparate treatment
  • disparate impact
  • business necessity
  • Equal Pay Act of 1963
  • Age Discrimination in Employment Act of 1967
  • Pregnancy Discrimination Act of 1963
  • Americans with Disabilities Act of 1990
  • Fair Labor Standards Act (FLSA)
  • minimum wage
  • Davis-Bacon Act (prevailing wage law)
  • Occupational Safety and Health Act
  • unionization
  • collective bargaining
  • unfair labor practices

Unit 8: Criminal Law and Business

8a. Compare and contrast misdemeanors and felonies, and identify examples of each

  • What is the difference between misdemeanors and felonies?
  • What is an example of a misdemeanor?
  • What is an example of a felony?

Misdemeanors are less serious crimes, and they involve petty offenses such as disorderly conduct. Felonies are more serious offenses. Both misdemeanors and felonies can result in fines or jail time for offenders. Fines are usually stiffer for felonies. Misdemeanors and felonies can carry a year-long jail sentence. Unlike felonies, jail time imposed for misdemeanors cannot extend beyond a year. Possession of a controlled substance over a certain amount is an example of a felony. Theft of merchandise over a certain monetary amount can also be a felony (for example, some states make it a felony to steal merchandise valued at over $1000). Misdemeanors can include minor traffic offenses and public intoxication. To review, read The Nature of Criminal Law, Constitutional Rights, Defenses, and Punishment.


8b. Identify criminal acts related to the business world

  • What are some criminal acts related to the business world?

Bribery occurs when someone pays a government official to influence the official's decision or actions in his or her official capacity for the benefit of the person paying the bribe. Antitrust activities are those that reduce or eliminate economic competition. Fraud involves the use of deception to acquire money or property. Larceny is the trespassory taking of property with the intent to deprive the owner of the property. Racketeering activities include crimes such as loan-sharking, bookmaking, money laundering, counterfeiting, smuggling, blackmailing, human trafficking, and other similar crimes. Money laundering occurs when money gained from illegal activities are processed through a seemingly legitimate business to "clean" the funds from association with criminal activities. Extortion is when someone obtains property through coercion. Another example of extortion is when a neighborhood gang extracts "protection payments" from local businesses. Identity theft occurs when a thief obtains credit in an otherwise creditworthy person's name.

To review, read Crime.


8c. Define and discuss white-collar crime

  • What are white-collar crimes?

White-collar crime is a term used to describe nonviolent crimes committed by people in their professional capacity, or by organizations. These crimes are committed for financial gain, often through deception.

Securities fraud is when someone uses deception to circumvent the regulations or statutes interpreted by the U.S. Securities and Exchange Commission (SEC) to acquire money or property. Insider trading is an example of securities fraud. It happens when a party uses confidential information to trade stock to his or her advantage.

Insurance fraud is the use of deception to receive insurance funds. Arson is a common method of insurance fraud. Arson involves the act of intentionally setting fire to property.

Financial institution fraud is fraud against banks and other similar institutions, such as credit unions. Money laundering is a type of financial institution fraud. It occurs when money gained from illegal activities are processed through a seemingly legitimate business to "clean" the funds from association with criminal activities.

A Ponzi scheme is a pyramid scheme, where people pay in. Those at the top of the pyramid may receive something that appears to be a return on their investment, but those at the bottom do not.

Embezzlement is a common crime, and it occurs when someone takes property that was in his or her possession lawfully and then converts it to his or her own use. Embezzlement differs from larceny because larceny requires the trespassory taking of property with the intent to deprive the owner of the property. Embezzlement can involve forgery. Forgery is counterfeiting someone else's signature or other document. Wire fraud occurs when the act of embezzlement involves the use electronic communications.

To review, read Crime.


Unit 8 Vocabulary

This vocabulary list includes terms that might help you with the review items above and some terms you should be familiar with to be successful in completing the final exam for the course.

Try to think of the reason why each term is included.

  • bribery
  • antitrust
  • fraud
  • larceny
  • racketeering
  • money laundering
  • extortion
  • identity theft
  • white-collar crime
  • securities fraud
  • insurance fraud
  • arson
  • financial institution fraud
  • Ponzi scheme
  • embezzlement
  • forgery
  • wire fraud

Unit 9: Business Organizations

9a. Identify and describe the various forms of business organization

  • How are business organizations formed?
  • How are business organizations managed?
  • Which types of liability are associated with the various types of business forms?
  • Which types of tax liability are associated with the various types of business forms?

A sole proprietorship does not require formal paperwork to form. The sole proprietor is the sole manager of the business. The sole proprietor is personally responsible for business debt and taxes.

General partnerships can be formed by a verbal or written agreement. This means no formal paperwork is required by the state to form a general partnership. Like a sole proprietorship, there is no legal separation of the partners from their general partnership (they are one and the same). It can be formed by two or more parties that are working towards a common business interest and sharing in the profits and losses of the business. The partners manage the business and their liability exposure is unlimited. The partners are jointly and severally liable for partnership debt. Therefore, a debt collector can sue all partners for the partnership debt or elect to sue a specific partner or partners. Only the partners are taxed, not the general partnership itself.

Limited partnerships are formed through a written agreement. The limited partnership must comply with the state statutory law governing limited partnerships. Limited partners do not participate in the management or control of the limited partnership. Their liability is limited to their capital contribution. The general partners manage the limited partnership and they are personally liable for the business’ debts. For tax purposes, the partners are usually taxed, unless the limited partnership opts to be taxed as a corporation.

A corporation is formed by an agreement and it must comply with the state statute that governs corporations. A board of directors manages the corporation and owner liability is limited to capital contribution. The corporation is double taxed.

An S corporation is formed by an agreement and it must comply with the state statutory law governing corporations. A board of directors manages the S corporation and ownership liability is limited to capital contribution. The owners of the business must formally declare S corp status with the IRS. The S corporation is unique in that the shareholders can elect to have the business taxed like a partnership. The S corporation shareholders are taxed, not the business entity.

A limited liability company is formed by an agreement and it must comply with state statutory law governing limited liability companies. Members generally manage the limited liability company, but they may opt to have a manager run the company instead. Owner liability is limited to capital contribution and members are taxed unless the business has opted to be taxed as a corporation.

To review, read Sole ProprietorshipsPartnershipsCorporations, and Limited Liability Entities.


9b. Discuss the advantages and disadvantages of each type of business organization

  • What are the advantages and disadvantages of a sole proprietorship?
  • What are the advantages and disadvantages of a general partnership?
  • What are the advantages and disadvantages of a limited partnership?
  • What are the advantages and disadvantages of a corporation?
  • What are the advantages and disadvantages of an S corporation?
  • What are the advantages and disadvantages of a limited liability company?

A sole proprietorship is advantageous because it easy to form and the sole proprietor does not have to share control of the business with others. A disadvantage of a sole proprietorship is that the sole proprietor is solely responsible for business debt. Also, the sole proprietorship terminates upon the death of the sole proprietor.

A general partnership is advantageous in that is easily formed (does not require formal paperwork to be filed with the state). The managers also share equal control over the business, unless otherwise agreed to. A general partnership is that it is treated like a disregarded entity for tax purposes, and so income "flows through" to the partners who pay ordinary income tax on the business income. A major disadvantage of a general partnership is that general partners are jointly and severally liable for partnership business debt. Another problem with the general partnership form is that it can be created even if the parties do not consider themselves to be partners. For example, a court can declare that a general partnership exists when the parties have a common interest in a business and they share in the profits and losses in that business.

A limited partnership is advantageous because it offers liability protection for limited partners. Limited partners are not personally liable for the debts of the business; whereas, general partners are personally liable for the debts of the limited partnership. A limited partner is liable only to extent of their investment in the business. A disadvantage of the limited partnership is that limited partners are excluded from controlling the business. Only general partners are allowed to manage the business. In certain circumstances, a limited partner can lose their limited liability status. It is therefore important that limited partners avoid domination over business operations.

The corporate form of business is advantageous because shareholder liability is limited to their capital investment. The corporate form of business also allows for a perpetual existence. A corporation can also continue to exist long after its founders have died. A major disadvantage of the corporate form is that it is subject to double taxation. In addition to state filing requirements, corporations are also subject to extensive government regulation.

The S corporation business form is advantageous in that ownership liability is limited to capital contribution. The shareholders can elect to have the business taxed like a partnership. S corporations are at a disadvantage in they can have no more than 100 shareholders. S corporations are also governed by complicated tax law.

The limited liability company business form is advantageous in that it allows members to choose how they wish to manage the business. All the members can manage the business or they can designate a member or members to manage the business. Also, members are not personally liable for the debts of the business. There are some disadvantages associated with limited liability companies. For one, they are subject to strict state regulations (can only be created by complying with state filing requirements). Furthermore, since they are a separate legal entity from their members, members must take care to interact with LLCs at arm’s length, because the risk of piercing the veil exists with LLCs as much as it does with corporations.

To review, read Sole ProprietorshipsPartnershipsCorporations, and Limited Liability Entities.


Unit 9 Vocabulary

This vocabulary list includes terms that might help you with the review items above and some terms you should be familiar with to be successful in completing the final exam for the course.

Try to think of the reason why each term is included.

  • sole proprietorship
  • general partnership
  • joint and several liability
  • limited partnership
  • corporation
  • stock
  • shareholder
  • ultra vires
  • closely-held corporation
  • preemptive rights
  • board of directors
  • proxy
  • shareholder derivative lawsuit
  • dividend
  • business judgement rule
  • double taxation
  • S corporation
  • Limited liability company
  • Operating agreement
  • Limited liability partnership
  • Limited liability limited partnership

Unit 10: Business Regulation

10a. Identify and describe the major laws regulating business in the United States

  • What is the Securities Act of 1933?
  • What is the Investment Advisers Act of 1940?
  • What is the purpose of Blue Sky Laws?
  • What is the Sarbanes Oxley Act of 2002?
  • What is the Clayton Act?

The Securities Act of 1933 requires the disclosure of material information (any pertinent facts that an average investor would need to make an informed decision about whether or not to invest money in a security).

The Investment Advisers Act of 1940 requires investment advisers to disclose conflicts of interest. For example, an adviser must disclose whether or not they have an interest in the securities they are selling to investors.

Blue Sky Laws are securities laws that were enacted as a result of fraud cases involving unsuspecting investors who were promised high returns on their investments. The investors were said to have fallen victim to fraudulent offers that promised a "piece of the great blue sky". To combat this widespread problem, Kansas and other states began regulating the issuance and sale of securities within their jurisdictions.

The Sarbanes Oxley Act of 2002 attempts to improve corporate governance and accountability by imposing regulations on public accounting firms and corporate executives. Both criminal and civil sanctions can be imposed for violations of the act.

The Clayton Act specifically prohibits anti-competitive or monopolistic behavior. The Clayton Act Congress enacted the Clayton Act as a way to further strengthen antitrust laws, such as the Sherman Act. The Sherman Act prohibits anti-competitive behavior in interstate commerce. The Clayton requires a probable adverse impact on competition. A party charged with violating the Clayton Act must therefore rebut the argument of a probability of an adverse impact. The Clayton Act prohibits:

  1. Discrimination in prices charged different purchasers of the same commodities.
  2. Conditioning the sale of one commodity on the purchaser's refraining from using or dealing in commodities of the seller's competitors. Clayton Act, Section 3.
  3. Acquiring the stock of a competing corporation. Clayton Act, Section 7. Because the original language did not prohibit various types of acquisitions and mergers that had grown up with modem corporate law and finance, Congress amended this section in 1950 (the Celler-Kefauver Act) to extend its prohibition to a wide variety of acquisitions and mergers.
  4. Membership by a single person on more than one corporate board of directors if the companies are or were competitors. Clayton Act, Section 8.

To review, watch Federal Securities Regulation in the United States, State Securities Regulation in the United States, and The Sarbanes-Oxley Act, and read History and Basic Framework of Antitrust Laws in the United States.


10b. Discuss the role of regulation in the business world

  • What role does the Securities and Exchange Commission play in regulating business?
  • What role does the Federal Trade Commission play in regulating business?

The Securities and Exchange Commission (SEC) issues rules that regulate the sale of securities. The Securities and Exchange Commission requires companies to register their securities statements and filings. The agency also has an annual reporting and filing requirement to ensure full disclosure by companies selling securities.

The Securities and Exchange Commission can enforce its agency rules related to securities statutes and impose penalties (such as fines) for non-compliance. The Securities and Exchange Commission has the power to conduct administrative hearings through which it can impose sanctions on violators. For example, it can suspend a securities dealer's license for misconduct.

To review, watch Federal Securities Regulation in the United States.

The Federal Trade Commission (FTC) supports antitrust law by regulating business trade practices. The FTC is authorized by Congress to make "trade regulation rules" which set forth industry-specific fair trade practices. The FTC specifically prohibits unfair or deceptive trade practices. The FTC is empowered to enforce antitrust laws through cease and desist orders. It can only impose civil penalties for violations. To review, read History and Basic Framework of Antitrust Laws in the United States.


Unit 10 Vocabulary

This vocabulary list includes terms that might help you with the review items above and some terms you should be familiar with to be successful in completing the final exam for the course.

Try to think of the reason why each term is included.

  • Securities Act of 1933
  • Investment Advisers Act of 1940
  • Howey Test
  • Blue Sky Laws
  • Sarbanes Oxley Act of 2002
  • Clayton Act
  • Administrative Procedures Act
  • administrative agency
  • quasi-judicial
  • Consumer Product Safety Commission
  • Environmental Protection Agency
  • Small Business Administration
  • Securities and Exchange Commission
  • Federal Trade Commission (FTC)