Chapter 1 Introduction to Law

The law dictates virtually every aspect of a business’s operations, including its creation and operations, its treatment of workers, and its duties to consumers, the environment, and society. It also provides avenues for those with claims against the business to proceed against it. As a businessperson, minimizing exposure to legal liability—both of the business and personally—is essential. A solid understanding of the legal environment can help minimize this exposure and allow you to navigate the regulatory environment of your particular industry. While it is true that you can always hire an attorney to help with legal issues, it is impractical and cost prohibitive to have an attorney’s input on every decision that must be made. To avoid unnecessary problems, businesspeople must know how to operate their businesses lawfully. But, they also must know how to resolve legal disputes, how to minimize liability exposure, and what the effects of their business practices are on others.

The Theranos case is an example of a situation that any business person would want to avoid.  And, of course, most business leaders will never find themselves facing federal fraud charges. However, in today’s business climate, simply staying on the “right side” of the law is not enough. People expect more from businesses today than just merely abiding by the law. For example, we may also want to consider what it means to do business fairly. Fair to whom? Fair to shareholders? Fair to employees? Fair to the consumers who will purchase a business’s products? Sometimes difficult questions are not answerable by studying law alone. However, a study of business ethics can help guide our responses. One common dilemma, for example, involves tradeoffs. To increase shareholder profits, labor costs may need to be reduced by using cheaper labor. If employees are paid less, they may be less well-off, but shareholders may be happier. Should labor costs be reduced? 

Some questions are answerable by law, but sometimes law can be misinterpreted, and this can result in clashes. One relatively recent example revolved around marriage equality, which was recognized as a civil right by the U.S. Supreme Court. Before the U.S. Supreme Court issued this significant opinion, several states recognized same-sex marriage as lawful and prohibited discrimination based upon sexual orientation. Regardless of this fact, some businesses that operated within those states discriminated by withholding services from same-sex couples who attempted to hire them, including florists, wedding cake decorators, and photographers. As those businesses discovered, withholding services violated the law, and unlawful business practices can result in serious legal consequences, including stiff financial penalties.

However, even though it is unlawful to maintain unlawful business practices, it is also unlawful for government entities to violate the civil rights of people. In one narrowly decided case, the U.S. Supreme Court found that “the state’s overt hostility to the sincerely held religious beliefs of the defendant ran afoul of the First Amendment.” State laws must remain neutral, rather than hostile to religion. Often in business, it’s important to consider not just what the law says, but why the law exists.

In these cases, we see legal positions that clash. Specifically, these cases raised conflicts between First Amendment rights (e.g., freedom to exercise religion, free speech) and other civil rights. As these cases illustrate, it’s important for businesspersons to consider not just what the law says but why it exists, and how business practices might be perceived by others. A good perception can help a business succeed in the long term, but a bad perception might invite scorn, exclusion, or even litigation.

If a business violates a person’s civil rights—regardless of whether that person is an employee or a customer—our legal system provides a forum and process to redress that harm. Moreover, public opinion is likely to be poor about a business that violates a person’s civil rights, and that will have very real consequences for that business. However, a business that operates within the boundaries of law and with a strong commitment to ethics is likely to be unimpeded by legal and public image problems that are easy to avoid.

Reflect on how legal conflicts might arise in your chosen field or industry. How can you create business practices and policies that do not conflict with law, are not perceived by others as unfair or abusive, and permit your business to move forward as a well-regarded entity in the community? The study of law can help you shape your understanding of the legal and ethical environment of business, which will ultimately help you create sound business practices and policies and establish a good civic reputation.

Check out the following section, Positive Impact to Society, to learn how some businesses may be revising their very purpose for being. 

Our legal system is not perfect. But, learning about law can help you recognize its reach and limits, and even where changes would be beneficial. A person who understands the structure of our system of government and the sources from which it draws its authority will be able to identify what it is our lawmakers are permitted to do as a legitimate exercise of power, and what types of things lie outside of those powers. The exercise of governmental power through lawmaking is also a participatory process, and individual people can make their voices heard. 

As you think about these questions and the many other questions that will arise during your study of the legal and ethical environment of business, try to set aside any preconceived notions that you may have about law and the legal system. Many who are new to the study of law find themselves initially swayed by a particular type of fiction about the legal system. Students may harbor a sense of repugnance to law or suspicions about the legal system, because they have heard that frivolous lawsuits are brought by a litigious public waiting to pounce at the smallest slight, along with money-grubbing attorneys waiting to cash in.

In reality, the law is a dynamic, sophisticated field. Frivolous lawsuits are not permitted to advance in our legal system, and most attorneys are committed to justice and fairness. They work hard to protect their clients’ legal interests and simply do not have the desire or the time to pursue frivolous claims. Indeed, there is no incentive for them to pursue such claims, because our legal system does not reward such behavior. Often, people form their opinions about the law and the legal system from various mass media sources. But keep in mind that our media outlets are in the business to make money. Often, they will focus on a particular fact of a case and sensationalize it rather than diligently relay all known facts and the legal questions presented by those facts. The first approach sells, but the latter approach is generally too technical to hold the public’s interest. 

This book does not teach you how to practice law or conduct legal research. That is the work of attorneys. Legal research is a sophisticated method of research that seeks to determine the current state of the law regarding narrowly defined legal issues. Legal research helps guide behavior, to ensure compliance and steer clear of avoidable legal trouble. When you need an answer regarding a specific legal issue, you will contact your attorney, who will research the issue, inform you of the results of that research, and advise you of the decisions you must make with respect to that issue.

The goals of this book are practical. Think about your study of the legal environment of business as a map by which you must navigate your business dealings. We want to teach you how to read this map so that you are able to understand the law and how it affects your business and your life. An understanding of the law can help you to avoid serious missteps, which can prospectively and proactively minimize your legal liability exposure. This is much preferred to being in constant reactionary mode. As you have probably heard, ignorance of the law is no defense for violating the law.

This chapter provides an overview of the legal system. We begin with a discussion of what the law is, and then we turn our attention to the sources of law, the rule of law, the reasons why rule of law is important to business, and how law affects business disciplines such as management, marketing, finance, and accounting.