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Business Torts and Ethics Paper

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You own University Heights Pizza, a pizza company that provides mostly home delivery.   One of your drivers, Donald, routinely drives in excess of speed limits when delivering Pizza, and you are aware of these problems.  One night while delivering pizzas, Donald decides to visit a girlfriend.   You are aware that he sometimes does this, and you have not objected as long as the Pizza gets delivered on time.  On the way to his girlfriend’s house, but on the way to deliver a customer’s pizza, Donald runs a red light at high speeds and seriously injures Alice, a driver in another car who had the right of way.   Alice sues University Heights Pizza and Donald.   You assert that  University Heights is not liable for Donald’s fast driving.

 

Write a paper of 750- to 1,050-words answering the following questions posed by this scenario:

  • What is University Height’s best argument that it is not liable to Alice?   Would you agree with this argument? Explain. 
  • What is Alice’s best argument that Donald is liable to Alice?  Explain. 
  • What should University Heights do to prevent risks like Donald?

Cite to at least three scholarly references.

Format your paper consistent with APA guidelines.

Click the Assignment Files tab to submit your assignment

Here is the reading information :

 

Learning Objectives

In this chapter you will learn:

10-1. To compare how tort law is related to property.

10-2. To differentiate the three divisions of torts and to generate a theory

of why torts are so divided.

10-3. To explain the elements of negligence and to relate these elements

to the development of negligence law.

10-4. To analyze why tort litigation is so controversial in society today.

Torts Affecting

Business 10

289

Just as contract law is the way owners

exchange what they own in a propertybased

legal system, so also tort law is an

important part of the same system. The property

fence protects our use of things. It is part of

what we own. But our protected use is not infinite.

It may be absolute but because we live with

other people and what is proper to them, we

may not use things just anyway we please. We

do not have a protected use of a thing if our use

harms what others own, including their persons.

Tort law helps define where the property fence is

when it comes to our use of things. It makes our

use legally wrongful and helps anyone injured

by our wrongful use to get compensation, called

“damages.”

T he word tort means “wrong.” Legally, a tort

is a civil wrong other than a breach of contract.

Tort law sets limits on how people can act and

use their resources so they do not violate the right

290 PART 3 Legal Foundations for Business

others have to their resources. If you think of property as a type of legal fence

surrounding resources, then tort law defines when someone has crossed that

fence wrongfully so that compensation is due to the owner.

Legal wrongs inflicted on the resources of others may be crimes as well as

torts (see Chapter 12), but the law of tort itself is civil rather than criminal.

The usual remedy for a tort is dollar damages. Behavior that constitutes a tort

is called tortious behavior. One who commits a tort is a tortfeasor.

This chapter divides torts into three main categories: intentional torts,

negligence torts, and strict liability torts. Intentional torts involve deliberate

actions that cause injury. Negligence torts involve injury following a failure to

use reasonable care. Strict liability torts impose legal responsibility for injury

even though a liable party neither intentionally nor negligently causes the

injury.

Important to torts are the concepts of duty and causation. One is not liable

for another’s injury unless he or she has a duty toward the person injured.

And, of course, there is usually no liability for injury unless one has caused the

injury. We explain these concepts under the discussion of negligence, where

they are most relevant.

This chapter also covers the topic of damages. The topic concerns the

business community because huge damage awards, frequently against businesses,

have become common in recent years.

>> Intentional Torts

An important element in the following torts is intent, as we are dealing with

intentional torts. Intent is usually defined as the desire to bring about certain

results. But in some circumstances the meaning is even broader, including not

only desired results but also results that are “substantially likely” to result

from an action. Recently, employers who knowingly exposed employees to

toxic substances without warning them of the dangers have been sued for

committing the intentional tort of battery. The employers did not desire their

employees’ injuries, but these injuries were “substantially likely” to result

from the failure to warn.

The following sections explain the basic types of intentional torts. Sidebar

10.1 lists these torts.

LO 10-1

* Torts are divided

into intentional torts,

negligence, and strict

liability.

LO 10-2

Intent is the desire

to bring about certain

results.

• Assault and battery

• Intentional infliction of mental distress

• Invasion of privacy

• False imprisonment and malicious prosecution

• Trespass

• Conversion

• Defamation

• Fraud

• Common law business torts

>> sidebar 10.1

Types of Intentional Torts

CHAPTER 10 Torts Affecting Business 291

1. ASSAULT AND BATTERY

An assault is the placing of another in immediate apprehension for his or

her physical safety. “Apprehension” has a broader meaning than “fear.” It

includes the expectation that one is about to be physically injured. The person

who intentionally creates such apprehension in another is guilty of the tort of

assault. Many times a battery follows an assault. A battery is an illegal touching

of another. As used here, “illegal” means that the touching is done without

justification and without the consent of the person touched.

Hitting someone with a wrench causes physical injury, but as the following

case illustrates, the “touching” that constitutes part of a battery need not

cause physical injury.

case 10.1 >>

HARPER v. WINSTON COUNTY

892 So.2d 346 (Ala. Sup. Ct. 2004)

Sandra Wright, the revenue commissioner of Winston

County, Alabama, fired her employee, Sherry Harper.

Harper sued, claiming among other things that Wright

had committed an assault and battery in grabbing her

and jerking her arm in trying to force her to go to Wright’s

office. Before trial, the court granted summary judgment

in favor of Wright. The plaintiff, Harper, appealed, and

the case reached the Alabama Supreme Court.

SEE, J: . . . Harper argues that the trial court erred in

entering a summary judgment in favor of Wright, on

Harper’s assault and battery claim, because, she claims,

she presented substantial evidence in support of her

claim. Harper argues that Wright admits that she intentionally

grabbed Harper’s arm and, she asserts, Wright’s

grabbing of her arm was offensive. Harper states:

“[Wright] jerked my arm and tried to pull me back.”

She argues that Alabama law does not require that

Wright strike or hit her in order for a battery to occur.

In response, Wright argues that she merely “took a

hold of [Harper’s] hand.” Wright states that she did not

touch Harper in an offensive manner and that she was

only trying to coax Harper into stepping into her office

so that they could continue their conversation away

from the view of the customers and the employees of

the Department. The trial court stated in its summaryjudgment

order that “the undisputed evidence from

Sandra Wright clearly points out that the touching was

not in any way harmful or offensive, but was instead

done in an attempt to bring [Harper] under control.”

The plaintiff in an action alleging assault and battery

must prove “(1) that the defendant touched the

plaintiff; (2) that the defendant intended to touch the

plaintiff; and (3) that the touching was conducted in a

harmful or offensive manner.” In Atmore Community

Hospital, the plaintiff presented evidence indicating

that the defendant “touched her waist, rubbed against

her when passing her in the hall, poked her in the armpits

near the breast area, and touched her leg.” The

plaintiff also presented evidence indicating that “each

of these touchings was intentional, was conducted

with sexual overtones, and was unwelcome.” We held

that these factual assertions constituted substantial

evidence that the defendant had committed a battery.

In Surrency, we stated that an actual injury to the

body is not a necessary element for an assault-and-battery

claim. We also stated that when the evidence as to

whether a battery in fact occurred is conflicting, the

question whether a battery did occur is for the jury.

Quoting Singer Sewing Machine Co., this Court stated:

“To what acts will constitute a battery in a case like

this, the rule is well stated by Mr. Cooley in his work

on Torts. He says: ‘A successful assault becomes a

battery. A battery consists in an injury actually done

to the person of another in an angry or revengeful or

rude or insolent manner, as by spitting in the face, or

in any way touching him in anger, or violently jostling

him out of the way, or in doing any intentional

violence to the person of another.’ The wrong here

consists, not in the touching, so much as in the manner

or spirit in which it is done, and the question of

bodily pain is important only as affecting damages.

Thus, to lay hands on another in a hostile manner is

a battery, although no damage follows; but to touch

another, merely to attract his attention, is no battery

292

A store manager who threatens an unpleasant customer with a wrench,

for example, is guilty of assault. Actually hitting the customer with the wrench

would constitute battery.

2. INTENTIONAL INFLICTION OF MENTAL DISTRESS

Intentional infliction of mental distress is a battery to the emotions. It arises

from outrageous, intentional conduct that carries a strong probability of

causing mental distress to the person at whom it is directed. Usually, one who

sues on the basis of an intentional infliction of mental distress must prove

that the defendant’s outrageous behavior caused not only mental distress but

also physical symptoms, such as headaches or sleeplessness.

The most common cases of intentional infliction of mental distress (also

called emotional distress ) have concerned employees who have been discriminated

against or fired. Many such cases, however, do not involve the type of

outrageous conduct necessary for the mental distress tort.

This tort usually

requires the plaintiff to

prove not only mental

distress but also

physical symptoms.

and not unlawful. And to push gently against one, in

the endeavor to make way through a crowd, is no

battery; but to do so rudely and insolently is and may

justify damages proportioned to the rudeness. . . .”

Alabama courts have recognized that privilege can

be a defense to a plaintiff’s claim that the defendant

battered her. This Court has held that when a merchant

suspects a customer of shoplifting, it is reasonable for

the merchant’s employee to use reasonable force to

ensure that the suspected shoplifter is detained.

In this case, there is no question that Wright intended

to touch Harper’s arm; it is the “manner or spirit”

in which Wright touched Harper’s arm that is in dispute.

Harper testified at the June 13, 2000, hearing

that Wright forcefully grabbed her arm. Wright testified

that she reached for Harper’s arm in an attempt to lead

her into her office so they could continue their discussion

away from the public area. In Surrency, we noted

that “to touch another, merely to attract his attention,

is no battery and not unlawful. While it is certainly

>> CASE QUESTIONS

1. The defendant in this case did not hurt the plaintiff, Harper. Explain why the

defendant might still be liable for the tort of battery.

2. Do all touchings constitute a battery? Discuss and give examples to support your

conclusion.

3. In litigation what is the difference between a question of law and a question of

fact? What does the Alabama Supreme Court decide in this case about whether this

alleged battery is a question of law or a question of fact? Discuss.

[continued]

conceivable that this type of touching is all that occurred

in this case, Harper presents substantial evidence to the

contrary. Harper testified at her hearing that Wright

“jerked” her arm. In her response to Wright’s motion

for a summary judgment, Harper states that Wright’s

touch greatly offended her and that this fact is evidenced

by the fact that she filed her complaint with the

Winston County Commission on May 9, 2000. In her

complaint, Harper states that “[Wright] grabbed my

arm and tried to force me to go with her.” Reviewing

the facts in the light most favorable to Harper, as this

Court is required to do on an appeal from a summary

judgment, we conclude that the question whether a battery

occurred in this case—specifically, whether Wright

touched Harper in a harmful or offensive manner—is a

question of fact for the jury to decide.

We reverse the summary judgment in favor of

Wright on Harper’s assault-and-battery claim; and we

remand this case to the trial court for proceedings consistent

with this opinion.

CHAPTER 10 Torts Affecting Business 293

In the business world, other examples of infliction of mental distress come

about from the efforts of creditors to extract payment from their debtors. Frequent,

abusive, threatening phone calls by creditors might provide the basis

for a claim of intentional infliction of mental distress. As torts go, this one is

of fairly recent origin. It is a judge-made tort, which furnishes a good example

of how the courts are becoming increasingly sensitive to the range of injuries

for which compensation is appropriate. In some states, courts have gone so far

as to establish liability for carelessly inflicted mental distress, such as the distress

of a mother who sees her child negligently run down by a delivery truck.

3. INVASION OF PRIVACY

The tort of invasion of privacy is one that is still in the early stages of legal

development. As the statutes and court cases recognize it, the tort at present

comprises three principal invasions of personal interest. An invasion of any

one of these areas of interest is sufficient to trigger liability.

Most commonly, liability will be imposed on a defendant who appropriates

the plaintiff’s name or likeness for his or her own use. Many advertisers

and marketers have been required to pay damages to individuals when pictures

of them have been used without authorization to promote products, or when

their names and identities have been used without permission for promotional

purposes. Before using anyone’s picture or name, an advertiser must obtain a

proper release from that person to avoid possible liability. See Sidebar 10.2 .

That you can

recover damages for

misappropriation of

likeness illustrates that

you own your name

and likeness in certain

respects.

A second invasion of privacy is the defendant’s intrusion upon the plaintiff’s

physical solitude. Illegal searches or invasions of home or possessions,

illegal wiretapping, and persistent and unwanted telephoning can provide the

basis for this invasion-of-privacy tort. In one case, a woman even recovered

Michael Jordan’s name is one of the most recognizable

in all of sports. Jordan has filed several lawsuits

against advertisers who have used his name without

permission in connection with the promotion of their

products. For instance, he sued Avon for $100 million

in connection with a Father’s Day promotion that

used his identity. Avon and Jordan settled that case.

More recently, Jordan sued two Chicago-area grocery

stores for using his name in order to attract customers

to their stores. Sports and entertainment stars

especially often sue businesses that use their identities

without permission.

In general, the law considers a right to privacy

as “a right to be left alone.” But notice how similar a

right to privacy is to the property right. Privacy, like

property, is a right to exclude others from interfering

with something that is privately proper to someone.

Would it have been simpler if the law had developed

by saying that people have property in their identities?

Why do you think the law didn’t develop this way?

Privacy concerns arose as new technologies like

cameras and recorders made it easy to peer into the

lives of others. The same concerns continue today

with the Internet and computers. Legislatures have

passed a variety of laws concerning privacy. As with

the common law causes of action mentioned in this

section of the text, some of the new privacy acts

and statutes don’t even mention the word “privacy.”

Chapter 18 on consumer protection covers some

of the new privacy laws. In general, concern about

various privacy issues illustrate how law develops to

meet changing needs in society.

>> sidebar 10.2

Privacy, Michael Jordan, and Society

294 PART 3 Legal Foundations for Business

damages against a photographer who entered her sickroom and snapped a

picture of her. Employers who enter their employees’ homes without permission

have also been sued successfully for invasions of privacy. If the invasion

of privacy continues, it may be enjoined by the court. Jacqueline Kennedy

Onassis sought and obtained an injunction that forbade a certain photographer

from getting too close to her and her children. Under this tort, the invasion

of physical solitude must be highly objectionable to a reasonable person.

The third invasion of personal interest that gives rise to the invasionof-

privacy tort is the defendant’s public disclosure of highly objectionable,

private information about the plaintiff. A showing of such facts can be the

basis for a cause of action, even if the information is true. Thus, publishing in

a newspaper that the plaintiff does not pay his or her debts has been ruled to

create liability for the defendant creditor. Communicating the same facts to

a credit-reporting agency or the plaintiff’s employer usually does not impose

liability, however. In these cases, there has been no disclosure to the public in

general. Also, the news media are protected under the First Amendment when

they publish information about public officials and other public figures.

4. FALSE IMPRISONMENT AND MALICIOUS

PROSECUTION

Shoplifting accounts for some $18 billion a year in business losses, almost

1% of retail sales. Claims of false imprisonment stem most frequently in

business from instances of shoplifting. This tort is the intentional unjustified

confinement of a nonconsenting person. Although most states have statutes

that permit merchants or their employees to detain customers suspected of

shoplifting, this detention must be a reasonable one. The unnecessary use of

force, lack of reasonable suspicion of shoplifting, or an unreasonable length

of confinement can cause the merchant to lose the statutory privilege. The

improperly detained customer is then able to sue for false imprisonment. Allegations

of battery are also usually made if the customer has been touched. Not

all false imprisonment lawsuits arise because of shoplifting. In one instance

a KPMG employee sued for false imprisonment alleging that his manager

blocked a door with a chair during a performance review and caused the

employee to have to remain in the room against his will.

The tort of malicious prosecution is often called false arrest. Malicious

prosecution arises from causing someone to be arrested criminally without

proper grounds. It occurs, for instance, when the arrest is accomplished simply

to harass someone. In Albany, New York, a jury awarded a man $200,000

for malicious prosecution. His zipper had broken, leaving his fly open, and

a store security guard had him arrested for indecent exposure even after he

explained that he had not noticed the problem.

5. TRESPASS

To enter another’s land without consent or to remain there after being asked

to leave constitutes the tort of trespass. A variation on the trespass tort

arises when something (such as particles of pollution) is placed on another’s

land without consent. Although the usual civil action for trespass asks for an

injunction to restrain the trespasser, the action may also ask for damages.

Union pickets walking on company property (in most instances), customers

refusing to leave a store after being asked to do so, and unauthorized persons

Don’t forget that

the First Amendment

protects you when you

publish even highly

personal truthful

information about

public officials and

public figures.

One false imprisonment

lawsuit arose

when a tow-truck

operator towed a car

with the driver still in it.

CHAPTER 10 Torts Affecting Business 295

entering restricted areas are all examples of trespass. Note that trespass is often

a crime as well as a tort. Intentional wrongdoing is frequently criminal.

Trespass concerns the crossing of an owner’s boundaries. Today, trespass

usually refers to violating the physical boundaries of an owner’s land, but

in legal history trespass was the legal remedy for direct injuries caused by

another to one’s person as well. The famous British constitutional historian

Frederick Maitland wrote, “Trespass is the fertile mother of actions.” By this

he meant that many of our modern day causes of action in tort—like battery—

come from trespass. Now do you appreciate better the connection of tort

law to property in our legal system? In an important sense, we own ourselves

and various things we have acquired, and those who violate our boundaries

become liable to compensate us.

6. CONVERSION

Conversion is the wrongful exercise of dominion (power) and control over

the personal (nonland) resources that belong to another. Conversion deprives

owners of their lawful right to exclude others from such resources. The deprivation

may be either temporary or permanent, but it must constitute a serious

invasion of the owner’s legal right. Abraham Lincoln once convinced

an Illinois court that a defendant’s action in riding the plaintiff’s horse for

15 miles was not sufficiently serious to be a conversion since the defendant

had returned the horse in good condition. The plaintiff had left the horse with

the defendant to be stabled and fed.

Conversion often arises in business situations. Stealing something from

an employer is conversion, as is purchasing—even innocently—something

that has been stolen. Failing to return something properly acquired at the

designated time, delivering something to the wrong party, and destruction or

alteration of what belongs to another are all conversions when a deprivation

of ownership is serious or long-lived. Even if you intend to return something,

if you have converted it you are absolutely liable for any damage done to it.

A warehouse operator who improperly transfers stored goods from a designated

to a nondesignated warehouse is absolutely liable when a tornado

destroys the goods or when a thief steals them.

7. DEFAMATION

Defamation is the publication of untrue statements about another that hold

up that individual’s character or reputation to contempt and ridicule. “Publication”

means that the untruth must be made known to third parties. If

defamation is oral, it is called slander. Written defamation, or defamation

published over radio or television, is termed libel.

False accusations of dishonesty or inability to pay debts frequently bring

on defamation suits in business relationships. Sometimes, such accusations

arise during the course of a takeover attempt by one company of another

through an offering to buy stock. In a recent instance, the chairman of one

company called the chairman of a rival business “lying, deceitful, and treacherous”

and charged that he “violated the standards by which decent men do

business.” If untrue, these remarks provide a good example of defamation of

character. At one major university, a former business professor received a

multimillion-dollar settlement following allegations made by university administrators

that he had vandalized the new business school. The allegations cost

The reason for

emphasizing how tort

relates to property

is to show you how

our legal system has

historically centered

on the concept of

exclusive right, which

applies to your person

as well as to land

and other physical

resources.

In one case a student

drove a rental car

into Mexico although

the lease specifically

prohibited crossborder

driving.

When an earthquake

destroyed the car

while it was parked in

Mexico City, the rental

company successfully

sued the student for

conversion.

Is it defamation of

character to say that

someone is gay or

lesbian? How about

that someone is

of a different race

than is correct? Is

calling someone

a “communist”

defamatory?

296 PART 3 Legal Foundations for Business

him a deanship at another university. Punitive or punishment damages, as

well as actual damages, may be assessed in defamation cases.

Individuals are not the only ones who can sue for defamation. A corporation

can also sue for defamation if untrue remarks discredit the way the corporation

conducts its business. Untruthfully implying that a company’s entire

management is dishonest or incompetent defames the corporation.

Nearly one-third of all defamation suits are currently brought by employees

against present and former employers. Often these suits arise when

employers give job references on former employees who have been discharged

for dishonesty. As a result, many employers will now not give job references

or will do no more than verify that former employees did work for them.

There are two basic defenses to a claim of defamation. One defense is

that the statements made were true. Truth is an absolute defense. The second

defense is that the statement arose from privileged communications. For

example, statements made by legislators, judges, attorneys, and those involved

in lawsuits are privileged under many circumstances.

Defamation and the First Amendment Because of the First

Amendment, special rules regarding defamation apply to the news media.

These media are not liable for the defamatory untruths they print about public

officials and public figures unless plaintiffs can prove that the untruths

were published with “malice” (evil intent, that is, the deliberate intent to

injure) or with “reckless disregard for the truth.” Public figures are those who

have consciously brought themselves to public attention. See Sidebar 10.3 .

In 2008, publisher

Judith Reagan and

her employer News

Corporation settled

her $100 million

lawsuit against

News Corporation

for defaming her by

saying it had fired

her because she had

made anti-Semitic

remarks.

The U.S. Supreme Court issued the “public official”

standard requiring defamation plaintiffs to prove

“malice” or “reckless disregard for the truth” in New

York Times v. Sullivan, 376 U.S. 254 (1964), a case

involving criticism of an Alabama police commissioner.

The Court extended essentially the same standard

to defamation cases against “public figures” in

Curtis Publishing Co. v. Butts, 388 U.S. 130 (1967).

The facts of this case are interesting.

The Saturday Evening Post, one of the nation’s

leading feature story magazines for many years,

published a story about the University of Georgia’s

athletic director and former football coach Wallace

(“Wally”) Butts and the University of Alabama’s football

coach Paul (“Bear”) Bryant. The Post alleged that

in a telephone conversation overheard accidentally

by an Atlanta insurance salesman, Butts told Bryant

how to beat Georgia in an upcoming game. “Before

the University of Georgia played the University of

Alabama. . . , Wally Butts . . . gave to Bear Bryant

Georgia’s plays, defensive patterns, all the significant

secrets Georgia’s football team possessed.” The article

continued, “The Georgia players, their moves analyzed

and forecast like those of rats in a maze, took a

frightful physical beating.” Georgia lost the game, and

Alabama went on to win the national championship.

Although the conversation between the two

coaches may really have involved only a routine request

to exchange game films, Butts ended up being forced

to resign as athletic director. Both he and Bryant sued

the Post for defamation. The coaches won their lawsuit,

which was appealed to the Supreme Court.

The Court determined that the two coaches were

“public figures” and that the First Amendment protected

comment about them in much the same way

it protected comment about public officials. However,

the Court also concluded that the coaches had met

their heavy burden of proof. It affirmed the judgment

against the Post. Within a short time, the Saturday

Evening Post went out of business.

>> sidebar 10.3

Football Coaches as Public Figures

CHAPTER 10 Torts Affecting Business 297

Plaintiffs’ verdicts in media defamation cases are often overturned by trial

or appellate judges. In one instance a Houston investment firm, now defunct,

sued The Wall Street Journal, claiming that a story published by the newspaper

caused the firm to go out of business. Following a huge jury verdict, the

trial judge threw out $200 million in damages, ruling that the firm had not

proved the newspaper published certain statements with knowledge of their

falsity or with reckless disregard for the truth.

Plaintiffs’ verdicts in defamation cases are often overturned by appellate

courts. Because of the constitutional protection given to speech and the

media, appellate judges reexamine trial evidence very closely to determine

whether the necessary elements of defamation had been proven.

8. FRAUD

Business managers must be alert to the intentional tort of fraud. A fraud is an

intentional misrepresentation of a material fact that is justifiably relied upon

by someone to his or her injury. An intentional misrepresentation means a lie.

The lie must be of a material fact—an important one. The victim of the fraud

must justifiably rely on the misrepresentation and must suffer some injury,

usually a loss of money or other resource one owns.

Fraud applies in many different situations. Business frauds often involve

the intentional misrepresentation of property or financial status. Lying about

assets or liabilities in order to get credit or a loan is a fraud. Likewise, intentionally

misrepresenting that land is free from hazardous waste when the

seller knows that toxic chemicals are buried on the land constitutes fraud.

You can also prove fraud by giving evidence that another has harmed you

by failing to disclose a material (important) hidden fact. The fraud of failure

to disclose arises when the defendant is under a legal duty to disclose a fact,

such as when a defendant seller knows that the foundations of a house are

weakened by termites and must disclose this to the buyer.

Likewise, a defendant who has intentionally concealed an important fact

and has induced reliance on it to the plaintiff’s injury is liable for fraud. Following

the financial collapse that began in 2007, hundreds of plaintiffs filed

fraud lawsuits against banks, other financial institutions, and various of their

executives based on concealment. In one such case, the former chief executive

of Countrywide Financial agreed to pay $67.5 million to settle a fraud case

brought by the Securities and Exchange Commission. The alleged fraud was

the intentional concealment of the risks of subprime mortgages from investors

in the then-largest national mortgage lender. Note that not only the common

law but also many statutes regulating the financial industry provide for

causes of action based on fraud.

In another concealment case, New York State filed a lawsuit based on

fraud against Guidant Corporation. The complaint alleged that heart defibrillators

manufactured by the company were defective and that the implanted

devices had already failed in 28 patients. Further, the complaint asserted that

Guidant had known of the defect for several years and concealed this information

while continuing to sell the defibrillators. Said New York’s former

attorney general, “Concealment of negative facts that might influence a consumer

to purchase another manufacturer’s product is the essence of fraud.”

Fraud is not only a tort but a crime as well. Do you understand the difference

between torts and crimes? (See Sidebar 10.4 .)

According to a survey

by the Association

of Certified Fraud

Examiners, U.S.

companies lose an

average of 6% of their

profit to fraud.

298 PART 3 Legal Foundations for Business

Some torts are crimes and some are not. How do

we make sense out of this? Crimes, which you will

study in Chapter 13, generally require intent (also

called willfulness ). The prosecutor has to prove that

the defendant intended to cross the proper boundaries

(property) established by law. If the primary purpose

of the state (government) is to protect people

and their resources with the legal fence of property,

as was thought by many framers of the Constitution,

it becomes clear that most crimes, which are

offenses against the proper order (property order)

enforced by the government, involve the most serious

and intentional crossings of the legal fences that

protect people. These crossings injure or harm what

belongs to people and the state punishes such harm.

But people also deserve compensation because of

the injury. That is where tort law comes in.

The most serious torts like assault, battery, conversion,

and fraud, which are also frequently crimes,

are all intentional. Accidental boundary crossings are

usually not criminal unless they are extremely reckless,

but when they injure what belongs to an owner,

the owner can still get compensation through tort

law, for example, through proof of unreasonable and

careless boundary crossing called negligence (see

Sections 11–13). Likewise, certain other accidental

boundary crossings that cause injury, like the sale

of a defective product, result in the person crossing

the legal fence being held strictly liable, that is, liable

even in the absence of unreasonable behavior in the

crossing (see Sections 15–17). However, because

these torts are unintentional, they are usually not

crimes as well.

Since torts are civil and crimes are, well, criminal

in nature, they have different burdens of proof,

as explained in Chapter 4. The judge instructs the

jury that the plaintiff must prove the tort by a preponderance

of the evidence but instructs the jury in

a criminal case that the prosecutor must prove the

victim’s intentional injury by the defendant beyond a

reasonable doubt. The burdens of proof are different

because to deprive criminal defendants of their freedom

is considered much more serious than merely

to deprive them civilly of their money. And burdens

of proof exist in both civil and criminal cases because

to punish a criminal defendant to protect the proper

order of the state or to compensate a civil plaintiff for

a wrongful boundary crossing involves the taking of

something that was previously proper to defendants,

whether it is their freedom, their money, or some

other resource belonging to them.

Do you understand better now why the same

trespass across a legal fence can be both a tort and

a crime?

>> sidebar 10.4

Tort or Crime? Or Both?

Additional Fraud Examples Fraud also can be committed in the

hiring process. For instance, courts have found employers liable for misrepresenting

to employees about conditions at a business that later affect

employment adversely. In one case, former professional football player Phil

McConkey received a $10 million award because his employer misrepresented

the status of merger talks with another company. McConkey lost his

job the year after he was hired when the two companies merged.

Other instances of business fraud can include:

• Misrepresentation in employment. Screenwriter Benedict Fitzgerald sued

actor–director Mel Gibson and his production company for defrauding

him into taking a much smaller salary based on their representation that

the movie budget was only $4 million–$7 million instead of the estimated

$25 million–$50 million that had been actually budgeted.

• Misrepresentation about products. The tobacco industry is beginning to

lose lawsuits when plaintiffs allege fraud based on the industry’s claiming

CHAPTER 10 Torts Affecting Business 299

for years that no tobacco consumption harm had been scientifically

proved when it knew that such harm had been established. In 2008, for

instance, the Oregon Supreme Court affirmed a $79.5 million punitive

damage award in the fraud case of deceased smoker Jesse Williams.

• Concealment about products. Farmers and growers have received over

$1 billion from DuPont in settlements based on the damage the fungicide

Benlate caused various plants. DuPont allegedly committed fraud by concealing

that Benlate could cause crop damage even when the company

was asked about the possibility.

• Nondisclosure to third parties about home sale prices. Fannie Mae, the

nation’s largest investor in home loans, told lenders in 2008 that it considered

certain “practices that may distort or artificially inflate” house prices

to be potentially fraudulent. Fannie Mae referenced situations where

home developers or builders represented that they sold homes in an area

for reported high prices but in reality gave back part of the purchase price

to buyers. The concern is that such practices can defraud future home buyers

in that development into paying higher prices than they actually should

and also mislead banks that loan money for home mortgages in the area.

The previous chapter on contracts discussed fraud as voiding a contract.

But fraud is also an intentional tort, and one who is a victim of fraud can sue

for damages, including punitive or punishment damages. Today many frauds,

as well as other intentional torts, occur on the Internet. See Sidebar 10.5 .

A variety of intentional torts take place on the

Internet. Defamation occurs when e-mailers place

messages on Listservs or public chatrooms that

hold others up to “public contempt or ridicule.”

Intentional infliction of mental distress arises, for

example, when threats are made via e-mail or websites.

A jury in Oregon awarded plaintiffs over $100

million when it found that a website threatened

abortion providers. When computer hackers break

into company databases, trade secrets are easily

misappropriated.

Perhaps the most common intentional cyberrelated

tort is fraud. The Federal Trade Commission

has released a list of such frauds or scams that include

a variety of pyramid schemes, fraudulent auctions,

deceptive travel offers, sale of unmiraculous “miracle”

products, health care rip-offs, phony credit card

charges, and work-at-home frauds. There was even a

“rebate” check sent to consumers that if cashed gave

them new Internet service that could not be canceled.

The FTC reports that its enforcement actions against

Internet scams have risen steadily in recent years.

>> sidebar 10.5

Internet Torts

Fraud and Corporate Governance Antifraud laws are a major

weapon in the enforcement of good corporate governance. Much corporate

misgovernance, especially by managers, arises because of misrepresentations

of fact about corporate assets or liabilities. These misrepresentations

usually induce investors to buy corporate stock shares at higher prices and

benefit corporate managers or others inside the corporation who sell their

300 PART 3 Legal Foundations for Business

stock. Sometimes a misrepresentation that raises the stock price obtains a

bonus or other perk for managers or a loan for the corporation. Usually, a

misrepresentation amounts to fraud because investors (who become owners)

or lenders rely on it to their injury, that is, they lose some or all of their

investment.

Many specific laws create civil and criminal liability for the fraud of

corporate managers and other corporate agents. As you think about fraud,

remember that it violates the principle of property. One does not acquire

proper ownership by defrauding others of their resources. Fraud does not

respect the equal property right of others.

9. COMMON LAW BUSINESS TORTS

The label business torts embraces different kinds of torts that involve intentional

interference with business relations.

Injurious Falsehood Injurious falsehood, sometimes called trade

disparagement, is a common business tort. It consists of the publication of

untrue statements that disparage the business owner’s product or its quality.

General disparagement of the plaintiff’s business may also provide basis for

liability. As a cause of action, injurious falsehood is similar to defamation of

character. It differs, however, in that it usually applies to a product or business

rather than character or reputation. The requirements of proof are also somewhat

different. Defamatory remarks are presumed false unless the defendant

can prove their truth. But in disparagement cases the plaintiff must establish

the falsity of the defendant’s statements. The plaintiff must also show actual

damages arising from the untrue statements.

As an example of injurious falsehood, consider the potential harm to

Procter & Gamble of the assertions that associated its former logo of moon

and stars with satanism. The company threatened to sue a number of individuals.

In another instance Warnaco sued Calvin Klein, alleging that Klein

had made publicly disparaging remarks about how Warnaco made Calvin

Klein clothing under license. The lawsuit alleged that Klein “falsely accused

[Warnaco] of effectively ‘counterfeiting’ Calvin Klein apparel.”

Intentional Interference with Contractual Relations A second

type of business tort is intentional interference with contractual relations.

Probably the most common example of this tort involves one company raiding

another for employees. If employees are under contract to an employer for a

period of time, another employer cannot induce them to break their contracts.

In a variation on this tort, the brokerage firm PaineWebber Group sued Morgan

Stanley Dean Witter & Company over PaineWebber’s merger agreement

with J. C. Bradford & Company. PaineWebber claimed that Morgan Stanley

pursued “a carefully planned, broadbased campaign to raid Bradford personnel

and interfere with the merger agreement between PaineWebber and Bradford.”

One of the most famous tort cases in history involved interference with

a contract of merger. In that case a jury awarded Pennzoil over $10 billion

against Texaco for persuading Getty Oil to breach an agreement of merger

with Pennzoil. After Texaco filed for bankruptcy, Pennzoil accepted a settlement

of around $3 billion.

Do remember that

you can be sued for

making statements

about a competitor’s

product that the

competitor considers

false.

Don’t induce the

employees of another

company to come

to work for you

when they are under

contract to work for a

period of time.

CHAPTER 10 Torts Affecting Business 301

>> Negligence

The second major area of tort liability involves unreasonable behavior that

causes injury. This area of tort is called negligence. In the United States more

lawsuits allege negligence than any other single cause of action.

Negligence takes place when one who has a duty to act reasonably acts

carelessly and causes injury to another. Actually, five separate elements make

up negligence, and the following sections discuss these elements. Sidebar 10.6

also summarizes them. In business, negligence can occur when employees

cause injury to customers or others; when those invited to a business are

injured because the business fails to protect them; when products are not

carefully manufactured; when services, such as accounting services, are not

carefully provided; and in many other situations.

10. DUTY OF CARE

A critical element of the negligence tort is duty. Without a duty to another

person, one does not owe that person reasonable care. Accidental injuries

occur daily for which people other than the victim have no responsibility,

legally or otherwise.

Duty usually arises out of a person’s conduct or activity. A person doing

something has a duty to use reasonable care and skill around others to avoid

injuring them. Whether one is driving a car or manufacturing a product, she

or he has a duty not to injure others by unreasonable conduct.

Usually, a person has no duty to avoid injuring others through nonconduct.

There is no general duty requiring a sunbather at the beach to warn

a would-be surfer that a great white shark is lurking offshore, even if the

sunbather has seen the fin. There is moral responsibility but no legal duty

present.

When there is a special relationship between persons, the situation

changes. A person in a special relationship to another may have a duty to

avoid unreasonable nonconduct. A business renting surfboards at the beach

would probably be liable for renting a board to a customer who was attacked

by a shark if it knew the shark was nearby and failed to warn the customer.

The special business relationship between the two parties creates a duty to

take action and makes the business liable for its unreasonable nonconduct.

LO 10-3

* A person doing

something has a legal

duty to act reasonably

to avoid injuring

others.

Existence of a duty of care owed by the defendant

to the plaintiff.

Unreasonable behavior by the defendant that

breaches the duty.

Causation in fact.

Proximate causation.

An actual injury.

>> sidebar 10.6

Elements of Negligence

302 PART 3 Legal Foundations for Business

In recent years, negligence cases against businesses for nonconduct have

grown dramatically. Most of these cases have involved failure to protect customers

from crimes. The National Crime Prevention Institute estimates that

such cases have increased tenfold since the mid-1970s.

One famous case involved the Tailhook scandal. A group of male naval

aviators was sexually groping female guests as they walked down the hallway

at a Hilton hotel. (Remember that an unconsented-to touching is an intentional

tort.) One of the females who was sexually touched sued the Hilton

hotel for negligence in knowing of the aviators’ behavior and failing to protect

her. A jury awarded her a total of $6.7 million against Hilton.

The extent of a business’s duty to protect customers is still evolving. Note

that in Case 10.2 the New Hampshire Supreme Court says that the defendant

restaurant has no special relationship to the plaintiff, but still rules that it

may have a duty to protect restaurant customers.

case 10.2 >>

IANNELLI v. BURGER KING CORP.

200 N. H. Lexis 42 (N. H. Sup. Ct. 2000)

MCHUGH, J.: The plaintiffs, Nicholas and Jodiann

Iannelli, individually and on behalf of their three children,

brought a negligence action against the defendant,

Burger King Corporation, for injuries sustained

as a result of an assault at the defendant’s restaurant.

During the late afternoon or early evening hours of

December 26, 1995, the Iannelli family went to the

defendant’s restaurant for the first time. Upon entering

the restaurant, the Iannellis became aware of a

group of teenagers consisting of five males and two

females, whom they alleged were rowdy, obnoxious,

loud, abusive, and using foul language. Some in the

group claimed they were “hammered.” Initially this

group was near the ordering counter talking to an

employee whom they appeared to know. The Iannellis

alleged that one of the group almost bumped into

Nicholas. When that fact was pointed out, the teenager

exclaimed, “I don’t give an F. That’s his F’ing problem.”

Nicholas asked his wife and children to sit down

in the dining area as he ordered the food. While waiting

for the food to be prepared, Nicholas joined his family

at their table. The teenagers also moved into the dining

area to another table. The obnoxious behavior and

foul language allegedly continued. One of the Iannelli

children became nervous. Nicholas then walked over

to the group intending to ask them to stop swearing.

As Nicholas stood two or three feet from the closest of

the group, he said, “Guys, hey listen, I have three kids.”

Whereupon, allegedly unprovoked, one or more of the

group assaulted Nicholas by hitting him, knocking him

to the ground and striking him in the head with a chair.

The plaintiffs argue that a commercial enterprise

such as a restaurant has a general duty to exercise reasonable

care toward its patrons, which may include a

duty to safeguard against assault when circumstances

provide warning signs that the safety of its patrons

may be at risk. The most instructive case, given the

issues presented, is Walls v. Oxford Management Co.

In Walls, a tenant of an apartment complex alleged

that the owner’s negligent maintenance of its property

allowed her to be subjected to a sexual assault in the

parking lot. We held that as a general principle landlords

have no duty to protect tenants from criminal

attacks. In as much as landlords and tenants have a

special relationship that does not exist between a commercial

establishment and its guests, it follows that the

same general principle of law extends to restaurants

and their patrons. We recognized in Walls, however,

that particular circumstances can give rise to such a

duty. These circumstances include when the opportunity

for criminal misconduct is brought about by the

actions or inactions of the owner or where overriding

foreseeability of such criminal activity exists.

Viewing the evidence in the light most favorable to

the plaintiffs, we must decide whether the behavior of

the rowdy youths could have created an unreasonable

risk of injury to restaurant patrons that was foreseeable

to the defendant. If the risk of injury was reasonably

303

Note that the duty to act reasonably also applies to professional providers,

like doctors, lawyers, CPAs, architects, engineers, and others. In most negligence

cases, however, the standard of reasonableness is that of a reasonable

person. In negligence cases involving professionals, the negligence standard

applied is that of the reasonable professional. The negligence of professionals

is called malpractice.

As Sidebar 10.7 suggests, professional negligence is a controversial area

of tort law.

11. UNREASONABLE BEHAVIOR—BREACH OF DUTY

At the core of negligence is the unreasonable behavior that breaches the

duty of care that the defendant owes to the plaintiff. The problem is how do

we separate reasonable behavior that causes accidental injury from unreasonable

behavior that causes injury? Usually a jury determines this issue,

but negligence is a mixed question of law and fact. Despite the trend for

judges to let juries decide what the standard of reasonable care is, judges

also continue to be involved in the definition of negligence. A well-known

definition by Judge Learned Hand states that negligence is determined by

“the likelihood that the defendant’s conduct will injure others, taken with

A train rounds a bend

but cannot stop in

time to avoid running

over an intoxicated

person who has fallen

asleep on the track. A

jury is not likely to find

the railroad’s behavior

“unreasonable.”

[continued]

foreseeable, then a duty existed. We hold that the teenagers’

unruly behavior could reasonably have been anticipated

to escalate into acts that would expose patrons to

an unreasonable risk of injury. The exact occurrence or

precise injuries need not have been foreseen.

Viewed in a light most favorable to the plaintiffs,

the evidence could support a finding that the teenagers’

obnoxious behavior in the restaurant was open and

notorious. Because the group was engaging in a conversation

at times with a restaurant employee, it could

be found that the defendant was aware of the teenagers’

conduct. The near physical contact between one

teenager and Nicholas Iannelli at the counter and the

indifference expressed by the group member thereafter

could be deemed sufficient warning to the restaurant

manager of misconduct such that it was incumbent

upon him to take affirmative action to reduce the risk

of injury. The plaintiffs allege that at least one other

restaurant patron expressed disgust with the group’s

actions prior to the assault. The manager could have

warned the group about their behavior or summoned

the police if his warnings were not heeded.

In summary, the trial court’s ruling that as a matter

of law the defendant owed no duty to the plaintiffs

to protect them from the assault was error. While as

a general principle no such duty exists, here it could

be found that the teenagers’ behavior in the restaurant

created a foreseeable risk of harm that the defendant

unreasonably failed to alleviate. Accordingly, we

reverse and remand.

>> CASE QUESTIONS

1. Under the decision in this case, when does a duty arise for the defendant restaurant

to protect its customers?

2. What does the court suggest that the restaurant manager should have done in this

case that would have satisfied the duty?

3. What do you think is the difference in this case between a “special relationship”

duty and the duty of the restaurant?

304 PART 3 Legal Foundations for Business

the seriousness of the injury if it happens, and balanced against the interest

which he must sacrifice to avoid the risk.”

Examples of Negligence Failure to exercise reasonable care can cost

a company substantial sums. In one instance the licensed owner of a National

Car Rental agency in Indianapolis was ordered to pay $5.5 million to a man

who slipped on the floor and broke his hip. To save overtime pay the rental

agency had had its floors mopped during, instead of after, normal working

hours. Unaware that someone was mopping the floors behind him, the plaintiff

had stepped backwards, slipped, and fallen on the wet floor.

In another case arising from unreasonable behavior, Wal-Mart Stores

agreed to pay two young girls a settlement of up to $16 million. A store

employee had sold the girls’ father a shotgun used to kill their mother in spite

of the fact that a federal form filled out by the buyer indicated that he was

under a restraining order. Federal law bars those under restraining orders

from purchasing guns.

Even before the terrorist attacks of 9/11, New York’s World Trade Center

(WTC) had been bombed. In 2005 a Manhattan jury determined that

the Port Authority of New York was negligent in the earlier attack, which

involved a blast from a truck filled with explosives that terrorists had driven

into the public parking lot under the WTC. Six people died and over a

thousand were injured. Is it an example of litigation gone wild to hold the

Port Authority liable for a terrorist act? Consider that before the bombing

a report commissioned by the Port Authority, which controlled the WTC

Few people would disagree that physicians are extremely

unhappy about the rapidly growing insurance

premiums they have to pay. Some physicians have

gone on strike; others have left the practice of medicine.

The exact causes of the situation, however, are

difficult to determine. Consider the following and

make your own evaluation.

• Studies suggest between 44,000 and 98,000

people die annually from medical errors.

• A study in the New England Journal of Medicine

found that 9 out of 10 patients who suffer disability

from medical errors go uncompensated.

• In 2004 total payments for medical malpractice

claims fell 8.9% nationally.

• As of 2005, 27 states have capped malpractice

awards.

• In 2004 malpractice insurance costs for various

medical specialties rose between 6.9% and 24.9%.

Question: what would be the impact on the cost

of malpractice insurance if physicians had patients

sign arbitration clauses before providing service

in all but emergency cases? These clauses might

provide that disputes with a physician be resolved

before an arbitration board appointed by the state

medical association. These clauses are currently not

widely used and are specifically prohibited by several

states. But under the Federal Arbitration Act,

the state prohibitions are likely preempted by the

federal law because medical practice has a substantial

impact on interstate commerce. The Supreme

Court has already ruled that law practice has such

an impact, so it is likely that medical practice does

as well.

Sources: BusinessWeek, The New York Times, Department of Health and

Human Services.

>> sidebar 10.7

Medical Malpractice Crisis

CHAPTER 10 Torts Affecting Business 305

parking, had specifically warned against such a bombing and recommended:

“Eliminate all public parking at the World Trade Center.” Citing potential

loss of revenue, the Port Authority had declined to follow the report’s

recommendation.

Willful and Wanton Negligence A special type of aggravated

negligence is willful and wanton negligence. Although this does not reveal

intent, it does show an extreme lack of due care. Negligent injuries inflicted

by drunk drivers show willful and wanton negligence. The significance of this

type of negligence is that the injured plaintiff can recover punitive damages

as well as actual damages. For example, following the Exxon Valdez oil spill

in Alaska, commercial fishers sued Exxon for damage to their livelihoods.

A jury awarded substantial actual and punitive damages when it found that

Exxon was willful and wanton in allowing the ship captain to be in charge of

the ship when they knew he was an alcoholic.

In 2005 a New Jersey state court awarded a 2-year-old boy $105 million

for an accident that left him permanently paralyzed from the neck down. A

drunken Giants football fan had caused the accident. Before driving, the fan

consumed at least 12 beers sold to him by a Giants Stadium concessionaire.

The award for willful and wanton negligence against the concessionaire is the

largest ever for the careless sale of alcohol. The award included $30 million in

compensatory and $75 million in punitive damages.

Because employers are also liable for the intentional torts of employees

in advancing the interests of their employers (see Chapter 14), employers face

punitive damage awards in those instances even when they are also liable for

simple negligence, or have not acted negligently at all. (See Sidebar 10.8 .)

* Willful and wanton

negligence allows

an injured plaintiff

to recover punitive

as well as actual

damages.

The caller identified himself as a police officer and

told the McDonald’s assistant manager that Louise

Ogburn had stolen the purse of a customer who had

recently left the restaurant and should be searched.

For more than an hour the assistant manager and

other McDonald employees detained, searched, and

even committed sexual battery against Ogburn at the

instruction of the caller. However, the caller was not a

police officer and the call was a hoax.

Ogburn sued McDonald’s and the jury awarded

her a million dollars in actual damages for pain and

suffering and $5 million in punitive damages against

the company. To understand why McDonald’s is liable,

you have to understand that numerous instances

of such hoaxes were known to the company involving

various fast-food restaurants, yet the jury found that

the company had not reasonably trained its employees

such calls might be hoaxes.

If McDonald’s negligence were extreme, that

is, willful and wanton, that would justify the $5 million

punitive damage award, but McDonald’s is also

liable for the intentional torts of its employees that

justify awarding punitive damages. In this case the

employees committed such intentional torts as false

imprisonment and battery in the course of Ogburn’s

detention. Such detention advanced the interests of

McDonald’s in dealing with dishonest employees and

made the intentional acts accompanying Ogburn’s

treatment the company’s responsibility when they

turned out to be wrongful.

>> sidebar 10.8

Strip Search Hoax Costs McDonald’s $6.1 Million

306 PART 3 Legal Foundations for Business

12. CAUSATION IN FACT

Before a person is liable to another for negligent injury, the person’s failure

to use reasonable care must actually have “caused” the injury. This observation

is not so obvious as it first appears. A motorist stops by the roadside

to change a tire. Another motorist drives past carelessly and sideswipes the

first as he changes the tire. What caused the accident? Was it the inattention

of the second motorist or the fact that the first motorist had a flat tire? Did

the argument the second motorist had with her boss before getting in the car

cause the accident, or was it the decision of the first motorist to visit one more

client that afternoon? In a real sense, all these things caused the accident.

Chains of causation stretch out infinitely.

Still, in a negligence suit the plaintiff must prove that the defendant actually

caused the injury. The courts term this cause in fact. In light of the many

possible ways to attribute accident causation, how do courts determine if a

plaintiff’s lack of care, in fact, caused a certain injury? They do so very practically.

Courts leave questions of cause in fact almost entirely to juries as long

as the evidence reveals that a defendant’s alleged carelessness could have been

a substantial, material factor in bringing about an injury. Juries then make

judgments about whether a defendant’s behavior in fact caused the harm.

A particular problem of causation arises where the carelessness of two or

more tortfeasors contributes to cause the plaintiff’s injury, as when two persons

are wrestling over control of the car which strikes the plaintiff. Tort law

handles such cases by making each tortfeasor jointly and severally liable for

the entire judgment. The plaintiff can recover only the amount of the judgment,

but she or he may recover it wholly from either of the tortfeasors or get

a portion of the judgment from each.

Approximately 40 states have limited joint and several liability in certain

cases, for example, medical injury cases. In these states and types of cases,

multiple defendants are each liable usually only for that portion of the damages

juries believe they actually caused.

13. PROXIMATE CAUSATION

It is not enough that a plaintiff suing for negligence prove that the defendant

caused an injury in fact. The plaintiff also must establish proximate causation.

Proximate cause is, perhaps, more accurately termed legal cause. It represents

the proposition that those engaged in activity are legally liable only

for the foreseeable risk that they cause.

Defining proximate causation in terms of foreseeable risk creates further

problems about the meaning of the word foreseeable. In its application, foreseeability

has come to mean that the plaintiff must have been one whom

the defendant could reasonably expect to be injured by a negligent act. For

example, it is reasonable to expect, thus foreseeable, that a collapsing hotel

walkway should injure those on or under it. But many courts would rule

as unforeseeable that someone a block away, startled upon hearing the loud

crash of the walkway, should trip and stumble into the path of an oncoming

car. The court would likely dismiss that person’s complaint against the hotel

as failing to show proximate causation.

Another application of proximate cause doctrine requires the injury to be

caused directly by the defendant’s negligence. Causes of injury that intervene

Many states are

currently modifying

the common law of

torts regarding rules

like that of joint and

several liability.

British Petroleum

promised $20 billion

to pay for claims

arising from its oil spill

in the Gulf. To date,

only about a fifth of

that amount has been

paid out by claims

adjusters. Part of the

problem relates to

proximate causation.

How do claimants

prove, for instance,

that a falloff in

business miles inland

is directly caused by

the oil spill instead

of poor business

practice, or for some

other reason?

CHAPTER 10 Torts Affecting Business 307

between the defendant’s negligence and the plaintiff’s injury can destroy the

necessary proximate causation. Some courts, for instance, would hold that it

is not foreseeable that an owner’s negligence in leaving keys in a parked car

should result in an intoxicated thief who steals the car, crashing and injuring

another motorist. These courts would dismiss for lack of proximate cause

a case brought by the motorist against the car’s owner. For one of the most

famous tort cases in history, see Sidebar 10.9 .

Helen Palsgraf stood on the loading platform on the

Long Island Railroad. Thirty feet away, two station

guards were pushing a man onto a departing train

when one guard dislodged an unmarked package

held by the man. The package, which contained fireworks,

fell to the ground with a loud explosion.

The explosion caused a heavy scale to fall on

Helen Palsgraf, injuring her. She sued the railroad

for the negligence of its guard and won at trial and

in the appellate court. Three justices of the Court of

Appeals (New York’s supreme court) agreed with the

lower courts: “The act [of the guard] was negligent.

For its proximate consequences the defendant is

liable.”

However, four justices of the Court of Appeals

decided that proximate causation was “foreign to

the case before us.” The majority ruled that what the

guard did could not be considered negligence at all

in relation to the plaintiff Palsgraf. The guard owed

no duty to someone 30 feet away not to push a passenger—

even carelessly—onto a train. The Court of

Appeals reversed the damage award to the plaintiff.

The famous Palsgraf case illustrates the complexity

of legal analysis. Question: Was it negligent for the

passenger to carry fireworks in a crowded railroad

station? Why didn’t the plaintiff just recover damages

from the passenger?

Source: Palsgraf v. Long Island R.R., 162 N.E. 99 (1928).

>> sidebar 10.9

Explosion on the Long Island Railroad

14. DEFENSES TO NEGLIGENCE

There are two principal defenses to an allegation of negligence: contributory

negligence and assumption of risk. Both these defenses are affirmative

defenses, which means that the defendant must specifically raise these defenses

to take advantage of them. When properly raised and proved, these defenses

limit or bar the plaintiff’s recovery against the defendant. The defenses are

valid even though the defendant has actually been negligent.

Contributory Negligence As originally applied, the contributory

negligence defense absolutely barred the plaintiff from recovery if the

plaintiff’s own fault contributed to the injury “in any degree, however

slight.” The trend today, however, in the great majority of states is to offset

the harsh rule of contributory negligence with the doctrine of comparative

responsibility (also called comparative negligence and comparative fault ).

Under comparative principles, the plaintiff’s contributory negligence does

not bar recovery. It merely compares the plaintiff’s fault with the defendant’s

and reduces the damage award proportionally. For example, a jury

determined damages at $3.1 million for an Atlanta plaintiff who was run

over and dragged by a bus. But the jury then reduced the damage award

308 PART 3 Legal Foundations for Business

by 20% ($620,000) on the basis that the plaintiff contributed to his own

injury by failing reasonably to look out for his own safety in an area where

buses come and go.

Adoption of the comparative negligence principle seems to lead to more

frequent and larger awards for plaintiffs. This was the conclusion of a study

by the Illinois Insurance Information Service for the year following that state’s

adoption of comparative negligence.

Assumption of Risk If contributory negligence involves failure to use

proper care for one’s own safety, the assumption-of-the-risk defense arises

from the plaintiff’s knowing and willing undertaking of an activity made

dangerous by the negligence of another. When professional hockey first

came to this country, many spectators injured by flying hockey pucks sued

and recovered for negligence. But as time went on and spectators came to

realize that attending a hockey game meant that one might occasionally be

exposed to flying hockey pucks, courts began to allow the defendant owners

of hockey teams to assert that injured spectators had assumed the risk of

injury from a speeding puck. It is important to a successful assumption-ofthe-

risk defense that the assumption was voluntary. Entering a hockey arena

while knowing the risk of flying pucks is a voluntary assumption of the risk.

However, that the injured person has really understood the risk is also significant

to the assumption-of-the-risk defense. In one 2007 case, a University

softball coach smacked his player in the face with a bat while demonstrating

a batting grip to her. She required surgery for multiple fractures of her face

and sued the coach and his employer, the university. The court denied the

assumption-of-the-risk defense, asserting that it was up to the jury to determine

whether the coach had acted negligently in hitting his player. The court

observed that the player did not appreciate the risk of being hit by her coach

with the bat.

Courts have often ruled that people who imperil themselves while attem pting

to rescue their own or others’ property from a risk created by the defendant

have not assumed the risk voluntarily. A plaintiff who is injured while

attempting to save his possessions from a fire negligently caused by the defendant

is not subject to the assumption-of-the-risk defense.

Assumption of the risk may be implied from the circumstances, or it

can arise from an express agreement. Many businesses attempt to relieve

themselves of potential liability by having employees or customers agree

contractually not to sue for negligence, that is, to assume the risk. Some

of these contractual agreements are legally enforceable, but many will be

struck down by the courts as being against public policy, especially where a

business possesses a vastly more powerful bargaining position than does its

employee or customer.

>> Strict Liability in Tort

Strict liability is a catchall phrase for the legal responsibility for injury-causing

behavior that is neither intentional nor negligent. There are various types of

strict liability torts, some of which are more “strict” than others. What ties

Contractual notices

regarding assumption

of the risk are more

likely to be enforced

if they prominently

bring to attention the

risk involved.

People injured by a

baseball at a baseball

game or a golf ball

on the golf links also

usually assume the

risk. Does someone

assume the risk of a

racing car veering off

a race track and going

over a barrier and into

the crowd?

CHAPTER 10 Torts Affecting Business 309

them together is that they all impose legal liability, regardless of the intent or

fault of the defendant. The next sections discuss these torts and tort doctrines.

15. STRICT PRODUCTS LIABILITY

A major type of strict tort liability is strict products liability, for the commercial

sale of defective products. In most states any retail, wholesale, or

manufacturing seller who sells an unreasonably dangerous defective product

that causes injury to a user of the product is strictly liable. For example, if a

forklift you are using at work malfunctions because of defective brakes and

you run off the edge of the loading dock and are injured, you can sue the

retailer, wholesaler, and manufacturer of the product for strict liability. The

fact that the retailer and wholesaler may have been perfectly careful in selling

the product does not matter. They are strictly liable.

Strict products liability applies only to “commercial” sellers, those who

normally sell products like the one causing injury, or who place them in the

stream of commerce. Included as commercial sellers are the retailer, wholesaler,

and manufacturer of a product, but also included are suppliers of defective

parts and companies that assemble a defective product. Not included as

a commercial seller is your next door neighbor who sells you her defective

lawnmower. The neighbor may be negligent, for instance, if she knew of the

defect that caused you injury and forgot to warn you about it, but she cannot

be held strictly liable.

An important concept in strict products liability is that of “defect.” Strict

liability only applies to the sale of unreasonably dangerous defective products.

There are two kinds of defects. Production defects arise when products

are not manufactured to a manufacturer’s own standards. Defective brakes

on a new car are a good example of a production defect. Another example

involves the clam chowder in which a diner found a condom, which led

in 2005 to a rapid settlement between the diner and a seafood restaurant

chain. Design defects occur when a product is manufactured according to

the manufacturer’s standards, but the product injures a user due to its unsafe

design. Lawsuits based on design defects are common but often very controversial.

Recent such lawsuits have included one against Ford that claimed

Ford should have designed its vans to have a heat-venting system so children

accidentally locked in the vans would be safe. Lack of adequate warnings

concerning inherently dangerous products can also be considered a design

defect. American Home Products settled a wrongful death lawsuit for an estimated

$10 million. The lawsuit alleged that the company had not adequately

warned users of its diet drug about the risks of hypertension, which had been

linked to diet-drug use.

In practice, strict products liability is useful in protecting those who suffer

personal injury or property damage. It does not protect businesses that

have economic losses due to defective products. For instance, a warehouse

that loses profits because its defective forklift will not run cannot recover

those lost profits under strict products liability. The warehouse would have

to sue for breach of contract. However, if the forklift defect causes injury to

a worker, the worker can successfully sue the forklift manufacturer for strict

products liability.

Don’t forget that

strict products liability

applies only against

commercial sellers.

In one case, a jury

found the defendant

liable when its

cleaning product

warned users to “vent”

rooms being cleaned

but failed to say “vent

to outside.” Vapors

from the product

injured several people

when it was used in

a room with a closed

circulation venting

system.

310 PART 3 Legal Foundations for Business

Under strict products liability, contributory negligence is not a defense

but assumption of the risk is. The assumption-of-the-risk defense helped

protect tobacco manufacturers from health injury liability for many years.

Misuse is another defense that defendants commonly raise in product liability

cases. Removing safety guards from equipment is a common basis for the

misuse defense. Defendants have also argued that if a product meets some

federally required standard, it cannot be considered defective. Most courts,

however, have ruled that federal standards only set a minimum requirement

for safe design and that meeting federal standards does not automatically

keep a manufacturer from being sued for strict products liability.

In recent years many states have changed or modified the rules of product

liability. See Sidebar 10.10 . These changes to the rules of products liability

(and modifications to the rules of medical malpractice) are often known generally

as “tort reform.” The federal government has also enacted tort reform

that applies to product liability. As of 2005, federal courts can decide any

class-action lawsuit involving over $5 million and involving persons from

different states. Federal plaintiffs in such class-action lawsuits need no longer

claim the usual $75,000 jurisdictional amount.

The rapid growth of products litigation during the past

two decades has brought forth many calls for “tort

reform.” Numerous states have changed their laws

to modify the tort doctrines discussed in this section

and chapter. At the federal level, comprehensive tort

reform has been strongly advocated although it has

not passed as of this writing. Some of the tort reforms

proposed or passed by the states include:

• Permitting only negligence actions against retailers

and wholesalers unless the product manufacturer

is insolvent.

• Eliminating strict liability recovery for defective

product design.

• Barring products liability claims against sellers if

products have been altered or modified by a user.

• Providing for the presumption of reasonableness

defense in product design cases in which

the product meets the state-of-the-art; that is,

the prevailing industry standards at the time of

product manufacture.

• Creating a statute of repose that would specify

a period (such as 25 years) following product

sale after which plaintiffs would lose their rights

to bring suits for product-related injuries.

• Reducing or eliminating punitive damage awards

in most product liability cases.

Importantly, note that not all, or even most, of these

reforms have been adopted by every state.

>> sidebar 10.10

Tort Reform

Another important development in products liability is that in nearly

every state product liability case based on design defects, failures to warn

adequately and testing inadequacies are now decided according to “reasonableness”

standards, making these product liability cases based on the negligence.

Consider the following case involving Ford Motor Company’s failure

to test a seatbelt sleeve.

311

case 10.3 >>

BRANHAM v. FORD MOTOR CO.

701 S.E.2d 5 (S.C. Sup. Ct. 2010)

Hale was driving several children to her house in her

Ford Bronco. No one was wearing a seatbelt. Hale

admittedly took her eyes off the road and turned to the

backseat to ask the children to quiet down. When she

took her eyes off the road, the Bronco veered towards

the shoulder of the road, and the rear right wheel left

the roadway. She responded by overcorrecting to the

left. Her overcorrection caused the Bronco to roll over.

One of the children, Jesse Branham, was thrown from

the vehicle, was severely injured, and sued Ford Motor

Company and Hale. At trial, Branham did not seriously

pursue the claim against Hale. The case against

Ford was based on two product liability claims, one

for failing to test the seatbelt sleeve, and the other a

design defect claim related to the vehicle’s tendency to

rollover. Both of these claims were pursued in negligence

and strict liability. The jury found both Ford and

Hale responsible and awarded Branham $16 million

in actual damages. Only Ford appeals.

KITTREDGE, J.: . . . Branham alleged Ford was negligent

“in selling the Bronco II with a defective rear

occupant restraint system.” At trial, Branham claimed

Ford was negligent and also strictly liable in failing to

adequately test the seatbelt sleeve. The trial court dismissed

the strict liability claim on the ground that the

seatbelt sleeve was not as a matter of law in a defective

condition unreasonably dangerous to the user at the

time of manufacture. Based on this premise, Ford contends

the companion negligence claim must fail, for

all products liability actions, regardless of the stated

theory, have common elements. “In a products liability

action the plaintiff must establish three things, regardless

of the theory on which he seeks recovery: (1) that

he was injured by the product; (2) that the product, at

the time of the accident, was in essentially the same

condition as when it left the hands of the defendant;

and (3) that the injury occurred because the product

was in a defective condition unreasonably dangerous

to the user.” Ford, therefore, concludes that the negligence

claim (which required Branham to prove that

the seatbelt sleeve was in a defective condition unreasonably

dangerous to the user) should have been dismissed.

We agree.

The trial court determined as a matter of law that

the seatbelt sleeve was not in a defective condition

unreasonably dangerous to the user. Consequently,

the absence of this common, shared element required

the dismissal of the strict liability claim and the companion

negligence claim. The trial court erred in failing

to direct a verdict as to the negligent seatbelt

sleeve claim.

We next consider the “handling and stability”

design defect claim in strict liability and negligence. We

address Ford’s two-fold argument that: (1) Branham

failed to prove a reasonable alternative design pursuant

to the risk-utility test; and (2) South Carolina

law requires a risk-utility test in design defect cases to

the exclusion of the consumer expectations test. For a

plaintiff to successfully advance a design defect claim,

he must show that the design of the product caused

it to be “unreasonably dangerous.” In South Carolina,

we have traditionally employed two tests to determine

whether a product was unreasonably dangerous as a

result of a design defect: (1) the consumer expectations

test and (2) the risk-utility test.

In Claytor v. General Motors Corp., this Court

phrased the consumer expectations test as follows:

“The test of whether a product is or is not defective

is whether the product is unreasonably dangerous to

the consumer or user given the conditions and circumstances

that foreseeably attend use of the product.”

The Claytor Court articulated the risk-utility test in

the following manner: “[N]umerous factors must be

considered when determining whether a product is

unreasonably dangerous, including the usefulness

and desirability of the product, the cost involved for

added safety, the likelihood and potential seriousness

of injury, and the obviousness of danger.” In Bragg

v. Hi-Ranger, Inc., our court of appeals phrased the

risk-utility test as follows: “[A] product is unreasonably

dangerous and defective if the danger associated

with the use of the product outweighs the utility of the

product.”

Ford contends Branham failed to present evidence

of a feasible alternative design. Implicit in Ford’s

argument is the contention that a product may only

be shown to be defective and unreasonably dangerous

by way of a risk-utility test, for by its very nature,

the risk-utility test requires a showing of a reasonable

alternative design. Branham counters, arguing that

under Claytor he may prove a design defect by resort

to the consumer expectations test or the risk-utility

test. Branham also argues that regardless of which test

is required, he has met both, including evidence of a

feasible alternative design. We agree with Branham’s

312

contention that he produced evidence of a feasible

alternative design. Branham additionally points out

that the jury was charged on the consumer expectations

test and the risk-utility test.

As discussed above, Branham challenged the design

of the Ford Bronco II by pointing to the MacPherson

suspension as a reasonable alternative design. A former

Ford vice president, Thomas Feaheny, testified

that the MacPherson suspension system would have

significantly increased the handling and stability of the

Bronco II, making it less prone to rollovers. Branham’s

expert, Dr. Richardson, also noted that the MacPherson

suspension system would have enhanced vehicle stability

by lowering the vehicle center of gravity. There was

further evidence that the desired sport utility features

of the Bronco II would not have been compromised by

using the MacPherson suspension. Moreover, there is

evidence that use of the MacPherson suspension would

not have increased costs. Whether this evidence satisfies

the risk-utility test is ultimately a jury question. But it

is evidence of a feasible alternative design, sufficient to

survive a directed verdict motion.

While the consumer expectations test fits well in

manufacturing defect cases, we do agree with Ford

that the test is ill-suited in design defect cases. We hold

today that the exclusive test in a products liability

design case is the risk-utility test with its requirement

of showing a feasible alternative design. Some form

of a risk-utility test is employed by an overwhelming

majority of the jurisdictions in this country. States

that exclusively employ the consumer expectations

test are a decided minority. By our count 35 of the

46 states that recognize strict products liability use

some form of risk-utility analysis in their approach

to determine whether a product is to effectively

design. Four states do not recognize strict liability at

all. Those four states are Delaware, Massachusetts,

North Carolina, and Virginia.

We believe that in design defect cases the riskutility

test provides the best means for analyzing

whether a product is designed defectively. Unlike the

consumer expectations test, the focus of a risk-utility

test centers upon the alleged defectively designed

product. The risk-utility test provides objective factors

for a trier of fact to analyze when presented with a

challenge to a manufacturer’s design. Conversely, we

find the consumer expectations test and its focus on

the consumer ill-suited to determine whether a product’s

design is unreasonably dangerous.

Most any product can be made more safe. Automobiles

would be safer with disc brakes and steelbelted

radial tires than with ordinary brakes and

ordinary tires, but this does not mean that an automobile

dealer would be held to have sold a defective

product merely because the most safe equipment is not

installed. By a like token, a bicycle is safer if equipped

with lights and a bell, but the fact that one is not so

equipped does not create the inference that the bicycle

is defective and unreasonably dangerous. There is, of

course, some danger incident to the use of any product.

In a product liability design defect action, the

plaintiff must present evidence of a reasonable alternative

design. The plaintiff will be required to point

to a design flaw in the product and show how his

alternative design would have prevented the product

from being unreasonably dangerous. This presentation

of an alternative design must include consideration of

the costs, safety and functionality associated with the

alternative design. On retrial, Branham’s design defect

claim will proceed under to the risk-utility test and not

the consumer expectations test.

[ Reversed and remanded ]

>> CASE QUESTIONS

1. Since the injured plaintiff was not wearing a seatbelt, why is Ford being sued for failing

to test the seatbelt sleeve?

2. It is often said that product liability causes of action, especially negligence and

strict liability, are coming together or merging. Discuss this idea in light of the

South Carolina Supreme Court’s decision.

3. Is the consumer expectations test or the risk utility test more favorable to manufacturers?

Explain.

4. Can Branham still win this case? Explain.

[continued]

CHAPTER 10 Torts Affecting Business 313

16. ULTRAHAZARDOUS ACTIVITY

In most states, the courts impose strict liability in tort for types of activities

they call ultrahazardous . Transporting and using explosives and poisons fall

under this category, as does keeping dangerous wild animals. Injuries caused

from artificial storage of large quantities of liquid can also bring strict liability

on the one who stores. For an example of the unusual dangers of ultrahazardous

activity, see Sidebar 10.11 .

Some states have

analyzed fireworksrelated

explosions that

cause accidental injury

by the standard of

ultrahazardous activity.

The Purity Distilling Co. had filled the enormous

steel tank on the Boston hillside with two million

gallons of molasses to be turned into rum. Unusually

warm weather caused the molasses to expand.

On January 15, 1919, with sounds like gunfire as

the restraining bolts sheared, the tank exploded.

A wave of hot molasses 30-feet high raced down

the street toward Boston Harbor, faster than people

could run, engulfing entire buildings. Before it

subsided, 150 people were injured and 21 drowned.

“The dead,” reported the Boston Herald, “were like

candy statues.”

It took months to clean up the harbor. It took six

years to resolve the 125 lawsuits that followed. The

artificial storage of large quantities of liquid can be a

sticky matter indeed.

Source: Anthony V. Riccio, Portrait of an Italian-American Neighborhood

(1998).

>> sidebar 10.11

The Great Molasses Flood

17. OTHER STRICT LIABILITY TORTS

The majority of states impose strict liability upon tavern owners for injuries

to third parties caused by their intoxicated patrons. The acts imposing this

liability are called dram shop acts. Because of the public attention given in

recent years to intoxicated drivers, there has been a tremendous increase in

dram shop act cases.

Common carriers, transportation companies licensed to serve the public,

are also strictly liable for damage to goods being transported by them. Common

carriers, however, can limit their liability in certain instances through

contractual agreement, and they are not liable for (1) acts of God, such as

natural catastrophes; (2) action of an alien enemy; (3) order of public authority,

such as authorities of one state barring potentially diseased fruit shipments

from another state from entering their state; (4) the inherent nature of

the goods, such as perishable vegetables; and (5) misconduct of the shipper,

such as improper packaging.

>> Damages

One legal scholar concludes that “the crucial controversy in personal injury

torts today” is in the area of damages. For dramatic examples of the size of

recent awards, refer to Sidebar 10.12 . Juries determine the size of damage

LO 10-4

314 PART 3 Legal Foundations for Business

>> sidebar 10.12

Highest Jury Tort Awards of 2010

EVENT CAUSING INJURY JURY AWARD IN MILLIONS OF DOLLARS

1. Pharmaceutical products liability causing hepatitis

C outbreak.

$505.1

2. Products liability for secondhand asbestos exposure

to worker’s laundry.

$208.8

3. Verdict against a cigarette company for providing

deceased woman free cigarettes when she was a child.

$152

4. Products liability for design defect in a Ford Bronco

rollover accident.

$132.5

5. Negligence verdict against a bus company to seven

passengers injured or killed while riding in an

unlicensed commercial van.

$124.5

6. Verdict against the world’s largest law firm involving

malpractice and intentional interference with business

(contractual) relationships.

$103

7. Products liability against a cigarette company involving

lung cancer death.

$ 90.8

8. Products liability for production defect of a carburetor

in an airplane crash.

$ 89

9. Negligence in a natural gas explosion causing death

at a plant.

$ 82.5

10. Cigarette products liability for lung cancer death. $ 80

Note: Although virtually ignored in news media headlines, the damages in almost all of these large jury verdicts were reduced significantly. In some

instances the judge reduced the damages as a matter of law. In other cases, appeals courts reduced damages or reversed the trial court. In many cases,

however, the parties simply negotiated a reduced settlement to avoid the risk of an appeal that upheld or reversed the damages entirely. In reading

about large jury verdicts, this final outcome is an important point for you to remember.

awards in most cases, but judges also play a role in damages, especially in

damage instructions to the jury and in deciding whether to approve substantial

damage awards.

18. COMPENSATORY DAMAGES

Most damages awarded in tort cases compensate the plaintiff for injuries suffered.

The purpose of damages is to make the plaintiff whole again, at least

financially. There are three major types of loss that potentially follow tort

injury and are called compensatory damages. They are:

• Past and future medical expenses.

• Past and future economic loss (including property damage and loss of

earning power).

• Past and future pain and suffering.

CHAPTER 10 Torts Affecting Business 315

Compensatory damages may also be awarded for loss of limb, loss of

consortium (the marriage relationship), and mental distress.

Calculation of damage awards creates significant problems. Juries frequently

use state-adopted life expectancy tables and present-value discount

tables to help them determine the amount of damages to award. But uncertainty

about the life expectancy of injured plaintiffs and the impact of inflation

often makes these tables misleading. Also, awarding damages for pain

and suffering is an art rather than a science. These awards measure jury sympathy

as much as they calculate compensation for any financial loss. The

recent dramatic increases in the size of damage awards helps underline the

problems in their calculation. One result is that many individuals and businesses

are underinsured for major tort liability.

Currently, compensatory damage awards for pain and suffering are very

controversial. How do you compensate injured plaintiffs for something like

pain which has no market value? Many plaintiffs suffer lifelong pain or the

permanent loss of vision, hearing, or mobility. No amount of damages seems

large enough to compensate them, yet no amount of damages, however high,

will cause their pain and suffering to stop. In 2003, President Bush called for

the limitation of tort damages for pain and suffering in a case to $250,000

per person. Do you agree or disagree?

19. PUNITIVE DAMAGES

Compensatory damages are not the only kind of damages. There are also

punitive damages. By awarding punitive damages, courts or juries punish

defendants for committing intentional torts and for negligent behavior considered

“gross” or “willful and wanton.” The key to the award of punitive damages

is the defendant’s motive. Usually the motive must be “malicious,” “fraudulent,”

or “evil.” Increasingly, punitive damages are also awarded for dangerously

negligent conduct that shows a conscious disregard for the interests of others.

These damages punish those who commit aggravated torts and act to deter

future wrongdoing. Because they make an example out of the defendant, punitive

damages are sometimes called exemplary damages.

Presently, there is much controversy about how appropriate it is to award

punitive damages against corporations for their economic activities. Especially

when companies fail to warn of known danger created by their activities,

or when cost-benefit decisions are made at the risk of substantial human

injury, courts are upholding substantial punitive damage awards against companies.

Yet consider that these damages are a windfall to the injured plaintiff

who has already received compensatory damages. And instead of punishing

guilty management for wrongdoing, punitive damages may end up punishing

innocent shareholders by reducing their dividends.

Many court decisions also overlook a very important consideration

about punitive damages. Most companies carry liability insurance policies

that reimburse them for “all sums which the insured might become legally

obligated to pay.” This includes reimbursement for punitive damages. Instead

of punishing guilty companies, punitive damages may punish other companies,

which have to pay increased insurance premiums, and may punish

consumers, who ultimately pay higher prices. As a matter of public policy,

several states prohibit insurance from covering punitive damages, but the

Punitive or

exemplary damages

arise from intentional

torts or extreme

“willful and wanton”

negligence.

“If you were to talk

to foreign businesses

about what scares

them the most about

the U.S. judicial process,

they would say

class actions and

punitive damages.”

–Carter G. Phillips ,

Sidney Austin Brown

& Wood (law firm)

316 PART 3 Legal Foundations for Business

In 2003 the Supreme Court determined that $145

million in punitive damages in a case was unconstitutional.

In State Farm v. Campbell, the Court decided

that the large difference between punitive and compensatory

damages violated due process. The Court

suggested that a single-digit ratio of punitive to compensatory

damages (9/1 or less) would be more constitutionally

appropriate than a 145/1 ratio.

State Farm v. Campbell also reaffirmed general

punitive damage guidelines from an earlier case. The

Court stated, in evaluating the appropriateness of

punitive damages, that courts should consider:

• “the responsibility of the defendant’s conduct

(how bad it was),

• the ratio of punitive to actual damages

• how the punitive damages compare with criminal

or civil penalties for the same conduct.”

Note that juries award punitive damages in only about

2% of litigated cases.

>> sidebar 10.13

Punitive Damage Guidelines

>> Key Terms

Assault 291

Assumption-of-the-risk 308

Battery 291

Cause in fact 306

Comparative

responsibility 307

Compensatory damages 314

Contributory negligence 307

Conversion 295

Defamation 295

Design defect 309

Dram shop act 313

Duty 301

False imprisonment 294

Fraud 297

Infliction of mental

distress 292

Injurious falsehood 300

Intent 290

Intentional interference with

contractual relations 300

great majority of states permit such coverage. This fact severely undermines

arguments for awarding punitive damages against companies for their economic

activities.

Consider also that an award of punitive damages greatly resembles a

criminal fine. Yet the defendant who is subject to these criminal-type damages

lacks the right to be indicted by a grand jury and cannot assert the right

against self-incrimination. In addition, the defendant is subject to a lower

standard of proof than in a criminal case. However, defendants in tort suits

have challenged awards of punitive damages on a constitutional basis. See

Sidebar 10.13 .

Finally, note that almost no other country in the world except the United

States permits civil juries to award punitive damages. For instance, in 2007 an

Italian court refused to enforce a $1 million award against an Italian helmet

maker whose defective helmet had caused the death of a 15-year-old motorcyclist

in Alabama because the award contained punitive damages. However,

a few courts in other countries have enforced U.S. punitive damage awards

even though courts in their own countries cannot award them.

317

>> Review Questions and Problems

Intentional Torts

1. Assault and Battery

Under what theory can an employee sue her employer for merely touching her? Explain.

2. Intentional Infliction of Mental Distress

In business the intentional infliction of mental distress tort has most often involved what type

of situation?

3. Invasion of Privacy

Explain the three principal invasions of personal interest that make up invasion of privacy.

4. False Imprisonment and Malicious Prosecution

Explain the difference between false imprisonment and malicious prosecution. In what business

situation does false imprisonment most frequently arise?

5. Trespass

In recent months, homeowners downwind from International Cement Company have had clouds

of cement dust settle on their property. Trees, shrubbery, and flowers have all been killed. The paint

on houses has also been affected. Explain what tort cause of action these homeowners might pursue

against International.

6. Conversion

Bartley signs a storage contract with Universal Warehouses. The contract specifies that Bartley’s

household goods will be stored at Universal’s midtown storage facility while he is out of the

country on business. Later, without contacting Bartley, Universal transfers his goods to a suburban

warehouse. Two days after the move, a freak flood wipes out the suburban warehouse and

Bartley’s goods. Is Universal liable to Bartley? Explain.

7. Defamation

Acme Airlines attempts to get control of Free Fall Airways by making a public offer to buy its

stock from shareholders. Free Fall’s president, Joan, advises the shareholders in a letter that

Acme’s president, Richard, is “little better than a crook” and “can’t even control his own

company.” Analyze the potential liability of Free Fall’s president for these remarks.

8. Fraud

Fraud can be used to void a contract and as a basis for intentional tort. What is the advantage

to a plaintiff of suing for the tort of fraud as opposed to using fraud merely as a contractual

defense?

9. Common Law Business Torts

You are concerned because several of your employees have recently broken their employment

contracts and left town. Investigation reveals that Sly and Company, your competitor in a

nearby city, has paid bonuses to your former employees to persuade them to break their

contracts. Discuss what legal steps you can take against Sly.

Negligence

10. Duty of Care

(a) Do you have a duty of care to warn a stranger on the street of the potential danger of

broken glass ahead?

Invasion of privacy 293

Libel 295

Malicious prosecution 294

Negligence 301

Production defect 309

Proximate cause 306

Punitive damages 315

Slander 295

State-of-the-art 310

Statute of repose 310

Strict liability 308

Strict products liability 309

Tort 289

Trespass 294

Willful and wanton

negligence 305

318

(b) Do you have a duty to warn an employee of similar danger at a place of employment?

Explain.

11. Unreasonable Behavior—Breach of Duty

In litigation who usually determines if the defendant’s behavior is unreasonable?

12. Causation in Fact

(a) What does it mean to say that “chains of causation stretch out endlessly”?

(b) What is the standard used by the judge in instructing the jury about causation?

13. Proximate Causation

Explain the difference between proximate causation and causation in fact.

14. Defenses to Negligence

A jury finds Lee, the defendant, liable in a tort case. It determines that José, the plaintiff, has

suffered $200,000 in damages. The jury also finds that José’s own fault contributed 25% to

his injuries. Under a comparative negligence instruction, what amount of damages will the jury

award the plaintiff?

Strict Liability in Tort

15. Strict Products Liability

While driving under the influence of alcohol, Joe runs off the road and wrecks his car. As the

car turns over, the protruding door latch hits the ground and the door flies open. Joe, who is

not wearing his seat belt, is thrown from the car and badly hurt. Joe sues the car manufacturer,

asserting that the door latch was defectively designed. Discuss the legal issues raised by these

facts.

16. Ultrahazardous Activity

Through no one’s fault, a sludge dam of the Phillips Phosphate Company breaks. Millions of

gallons of sludge run off into a nearby river that empties into Pico Bay. The fishing industry in

the bay area is ruined. Is Phillips Phosphate liable to the fishing industry? Explain.

17. Other Strict Liability Torts

Explain when common carriers are not strictly liable for damage to transported goods.

Damages

18. Compensatory Damages

Explain the three types of loss that give rise to compensatory damages.

19. Punitive Damages

During a business lunch, Bob eats salad dressing that contains almond extract. He is very allergic

to nuts and suffers a severe allergic reaction. There are complications and Bob becomes

almost totally paralyzed. Because Bob had instructed the restaurant waiter and the chef that he

might die if he ate any nuts, he sues the restaurant for negligence. Discuss the types of damages

Bob may recover.

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1. You own University Heights Apartments, a business that rents primarily to students.

One evening, your tenant Sharon is attacked by an intruder who forces the

lock on the sliding glass door of her ground-floor apartment. Sharon’s screams

attract the attention of Darryl, your resident manager, who comes to Sharon’s aid.

Together, he and Sharon drive the intruder off, but not before they both are badly

cut by the intruder.

Is the intruder liable for what he has done?

Do you have legal responsibilities to Sharon and Darryl?

What should you consider doing at your apartments?

2. You manufacture trunk locks and your major account is a large car company.

When an important piece of your equipment unexpectedly breaks, you contact

Mayfair, Inc., the only manufacturer of such equipment, and contract to replace it.

The Mayfair sales representative assures you orally and in writing that the prepaid

equipment will arrive by October 1, in time for you to complete your production for

the car company. Instead, there is a union strike in the Mayfair trucking division,

and the equipment does not arrive until December 1.

By December 1 the car company has made an agreement with another lock

manufacturer. You threaten to sue Mayfair for their failure to deliver on time, but

Mayfair reminds you of a contract term that relieves them of contractual liability

because of “labor difficulties.” Then you learn from a former secretary to the Mayfair

sales representative that Mayfair knew that its trucking division was likely to

strike. In fact the sales representative and the sales vice president had discussed

whether or not to tell you of this fact and decided not to out of concern that you

would not place your order.

Has Mayfair done anything legally wrong?

Is your legal remedy against Mayfair limited to breach of contract?

Will you be able to get damages from Mayfair other than a refund of your prepayment?

Explain.

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