Legal Issues in Business: A Case Study Analysis, Thesis of Financial Accounting

Download Legal Issues in Business: A Case Study Analysis and more Thesis Financial Accounting in PDF only on Docsity! BUS 206 Business Law I Southern New Hampshire University Final Project Submission: Case Study Analyses Case Study One Chris, Matt, and Ian, who live in California, have decided to start a business selling an aftershave lotion called Funny Face over the internet. They contract with Novelty Now Inc., a company based in Florida, to manufacture and distribute the product. Chris frequently meets with a representative from Novelty Now to design the product and to plan marketing and distribution strategies. In fact, to increase the profit margin, Chris directs Novelty Now to substitute PYR (a lowcost chemical emulsifier) for the compound in Novelty Now’s original formula. PYR is not FDA approved. Funny Face is marketed nationally on the radio and in newspapers, as well as on the web and Facebook. Donald Margolin, a successful CEO and public speaker, buys one bottle of Funny Face over the internet. After he uses it once, his face turns a permanent shade of blue. Donald Margolin and his company, Donald Margolin Empire Inc., file suit in the state of New York against Novelty Now Inc. and Chris, Matt, and Ian, alleging negligence and seeking medical costs and compensation for the damage to his face and business reputation. It is discovered that PYR caused Margolin’s skin discoloration. The website for Funny Face states that anyone buying their product cannot take Chris, Matt, and Ian to court. Novelty Now’s contract with the three men states that all disputes must be brought in the state of Florida. Introduction: In this first case study, we see where a chemical in a product was substituted for something else that may have been cheaper, and the chemical turned a customer’s face blue. Chris, Matt and Ian live in California and are selling the aftershave lotion, called Funny Face, online, which is manufactured and distributed by Novelty Now Inc., who is based out of Florida. The customer wanted to sue Chris, Matt and Ian as well as Novelty Now Inc. in his home state of New York, without the four of them possibly having any legal jurisdiction in doing so. When it comes to legal battles, it is important to know right from wrong and also what can be considered a crime, and who can be tried where, based on business proceedings. In this report, we will look into some of the facts, go over jurisdictions, alternative dispute resolutions, any criminal liability and the ethical decision-making process. Rules of Jurisdiction: There are a few different types of jurisdiction that could be handled in this case between Donald Margolin and Donald Margolin Empire Inc. vs. Novelty Now Inc. and Chris, Matt, and Ian. The first type of jurisdiction is Personal Jurisdiction, and this is when the judge has the power or authority to make decisions that affect a person (2019). The next type of jurisdiction is Subject Matter Jurisdiction, and this determines whether not each court has the authority or power over certain types of legal disagreements. The minimum contacts concept is a term used in the United States law of civil procedure to determine when it is appropriate for a court in one state to assert personal jurisdiction over a defendant from another state. With the personal jurisdiction, since the company’s product did make Mr. Donald’s face blue, a judge should have the right to make the decision on whether not to find Novelty Now Inc., Chris, Matt and Ian guilty for negligence and medical costs since Chris, Matt and Ian decided they wanted to make a larger profit by substituting PYR for the compound used in the intended to literally hurt anyone, and they can come to a mutual resolution, and then Chris, Matt and Ian can then fix the problem moving forward (Newman, 2020). Criminal Liability: Corporations and Corporate officers can be held liable for criminal acts, as they can sue or be sued as well as they are able to commit crimes. If an employee of a corporation commits a crime against another company, the corporation that the employee belongs to, as well as the employee, can be held accountable (Jezierski). It is not often that just one party gets held accountable when it comes to businesses, as the company being the victim may want to pursue legal action against both sides. If a corporate office acted on its own, and if there was money laundering or if they didn’t pay taxes, or even if the product they sold to someone killed somebody, the corporation would be held liable and could be seen in court. Fraud can be looked at as a criminal act and is defined as ‘wrongful or criminal deception intended to result in financial or personal gain’ (Chen, 2020). Fraud consists of elements such as: A representation of fact, Falsity, Materiality, Representer’s knowledge of its falsity, Representer’s intent, Injured parties’ ignorance of its falsity, Injured parties’ reliance on its truth. These elements of fraud are present in this case, as Ms. Margolin did trust the product and not expect to get hurt by it. Chris and Novelty Now Inc. are the parties responsible for this crime (since it does not say whether not Matt and Ian were involved in the decision making), as Chris chose to substitute an original ingredient for PYR, which is a cheaper chemical emulsifier that is not approved by the FDA. Though Matt and Ian were not directly involved, since they had a partnership, they are now held fully liable as well. Using a cheaper solution to gain more profit is not always the best way to go, especially if it a substance that needs to get approval to use. There is criminal liability in this case when Chris decided to substitute out the original compound and when Novelty Now Inc. agreed to it, knowing it has not been fully tested and there are unknown side effects. The fact that the cheaper, untested option gave Donald Margolin a blue face, puts not just him at risk for other issues down the road, it diminishes him as a person, and his company. Ethical Decision-Making: The ethical decision making in any process consists of three key elements and they are: Commitment, Consciousness and Competency. Commitment refers to doing the right thing no matter what it takes. Consciousness refers to having the awareness to act consistently and apply moral actions to everyday life. Competency refers to collecting and comprehending information, as well as to see potential risks and consequences (2016). These three concepts consist more of common-sense knowledge, as Chris and Novelty Now Inc. did not foresee possible consequences with using a cheaper, non-approved alternative in the formula. Ethical decision-making was not involved when they made this decision, only the profit profitability was on their minds, and in the end, it could cost them substantially. The ethical thinking would have been to ensure the product had been tested and approved, so there would be no unknown side effects and if they had known about them beforehand, they should have kept the compound as is with no changes. In conclusion, Chris and Novelty Now Inc. should be held accountable for their actions of using an untested item. The decision to alter the formula should have been held between the group of Chris, Matt and Ian prior to the one individual making the decision. Donald Margolin should win this case as the product would ruin part of his reputation. Novelty Now Inc., Chris, Matt, Ian and Funny Face should go to court for their wrong-doings and let a judge decide if they should shut the business down or change the formula back to its original build. Case Study Two Sam Stevens lives in an apartment building where he has been working on his new invention, a machine that plays the sound of a barking dog to scare off potential intruders. A national chain store that sells safety products wants to sell Sam’s product exclusively. Although Sam and the chain store never signed a contract, Sam verbally told a store manager several months ago that he would ship 1,000 units. Sam comes home from work one day and finds two letters in his mailbox. One is an eviction notice from his landlord, Quinn, telling him he has to be out of the apartment in 30 days because his barking device has been bothering the other tenants. It also states that Sam was not allowed to conduct a business from his apartment. Sam is angry because he specifically told Quinn that he was working on a new invention, and Quinn had wished him luck. The second letter is from the chain store, demanding that Sam deliver the promised 1,000 units immediately. Introduction: In this second case study, we analyze different critical elements in relation to Sam Stevens and the chain store as well as Quinn wanting to evict Sam from his apartment for running a business even though Quinn was told in advance about it and wished him luck. Contracts are always warranted when it comes to owing somebody something or when there is an agreement on whether not something can be done. Valid Contract? Sam Stevens verbally told a chain store manager that he would ship 1,000 units of his new invention, a machine that plays the sound of a barking dog to scare off any potential intruders, and one day came back home from work to a letter of eviction from Quinn, his landlord. This type of contract is a verbal contract and it is not set in stone by either of the parties, as it was by mouth and not via a written contract. There are six elements to have a legal and binding contract, and they consist of: 1.) An offer that specifically details exactly what will be provided, 2.) Acceptance, or the agreement by the other party to the offer presented, 3.) Consideration, or the money or something of interest being exchanged between the parties, 4.) Capacity of the parties The rights and obligations of the tenant in a standard lease agreement are that the tenant must pay rent in the timely manner that is agreed upon by the two parties, unless an additional agreement has been made on a month-to-month basis. The tenant may also make changes to the property to make it the way they would like, as long as these changes are not structural or damaging to the property. The tenant may not use the property for any illegal purposes, such as making whiskey, underground casino, etc. as this would allow for the landlord to evict the tenant whenever deemed necessary. Grounds to evict? Within a standard lease agreement, the landlord does have grounds to evict Sam Stevens from the apartment. The landlord does owe it to the other occupants a low noise level environment so they have no disruption of their everyday life. But, in some cases there should have initially been a warning letter to notify Sam that he is being too loud and therefore had time to correct himself and the noise of his machine appropriately at first. If the noise did not lower and the other neighbors were still being bothered, only then could it be deemed for eviction, since Sam is not conducting any illegal business within his apartment and is abiding to the rules. If Sam had been notified and given a warning, that would be one thing, but coming back from work one day and surprised to see an eviction notice in the mailbox is another after allegedly not being told beforehand. In a different instance where a lease agreement states that no business may be run from the apartment, then the landlord would be able to evict Sam Stevens without any second guessing as that would go against what Sam agreed upon. In some instances, zoning laws do not allow you to run a business out of a residence, as it could serve you a major fine or even shut you completely down. Many cities or counties that do allow for residential businesses to take place, require a license be applied for acknowledging you were given permission to run the business. There may be additional guidelines such as an hour of operations rule. Defenses? The defense that Sam Stevens has against the landlord is that he is a good civilian tenant, goes to work and then comes home to work on his invention. Also, that he has never until today heard of him being an annoyance to anyone of the neighbors. Sam tends to pay his rent on time and has not received any other warnings for any of his other doings. If Sam had informed his landlord and he was given permission to create this new invention, Sam should be able to proceed with doing so. Also, if Sam were to tell his landlord it is an invention and not a business since he has yet to have sold or given away any of the units, this may allow for the landlord to keep him. Sam could be having a new hobby where he was testing out to see which barking noise would have people stay away from his door the best. Case Study Three Jeb and Josh are lifelong friends. Jeb is a wealthy wind-power tycoon, and Josh is an active outdoor enthusiast. They have decided to open a sporting goods store, Arcadia Sports, using Jeb’s considerable financial resources and Josh’s extensive knowledge of all things outdoors. In addition to selling sporting goods, the store will provide whitewater rafting, rock-climbing, and camping excursions. Jeb will not participate in the day-to-day operations of the store or in the excursions. Both Jeb and Josh have agreed to split the profits down the middle. On the first whitewater rafting excursion, a customer named Jane falls off the raft and suffers a severe concussion and permanent damage to her spine. Meanwhile, Jeb’s wind farms are shut down by government regulators, and he goes bankrupt, leaving extensive personal creditors looking to collect. Business Entities: Choosing the correct business entity for your company is important in all different types of ways when it comes to legal and tax matters. When deciding about which entity you want to use, it is important to have a vision of your company for the long run and what it is you are trying to accomplish, rather than the short run. Some of the business entities that could be used in the case of Jeb and Josh are: Corporation, Limited Liability Company, Partnership, Sole Proprietorship, and Limited Partnerships and each of them have their own advantages, as well of disadvantages, as we will take a look at them and see. Corporations provide more personal liability protection, meaning that if a company were to get sued, its shareholders would not have any personal responsibility to corporate debt. Another significant advantage is business security, in where corporate ownership is based on percentage of stock ownership. Access to additional capital, since most corporations are run through a publicly traded stock, they can sell shares in order to get more money. Corporations also have tax benefits, and this is where S Corporation types can split the income between business and shareholders, allowing it to therefore be taxed at a different rate. Some disadvantages of a corporation can include the application process is very lengthy. There is a complex structure and protocols that must be followed when running a corporation such as maintain a board of directors, have annual meetings, annual reports, etc. And you get taxed double, which means that not only the entity gets taxed, but so do the shareholders as well. Limited Liability Companies advantages include having less meetings than corporations, therefore having less annual paperwork. There are no limitations on how many stockholders an LLC can have. Members that are active participants can deduct losses against ever have to give back to pay off any debt. And this would leave Josh as the General partner, therefore making him responsible to pay back anything that is outstanding. But he would make the majority of the profit when it came down to money earned in the store and from the excursions that are offered. Damages: Jane suffered a severe concussion and permanent damage to her spine while on the first whitewater rafting excursion Arcadia Sports has done. A general partnership would make Jeb and Josh personally liable to Jane for damages she encountered while on the excursion. The reason this type of business entity would be the entity of choice that would take care of damages is because a general partnership has unlimited liability, whether it comes to business debts or when it comes to customers (Nykiel, 2020). Seize Assets: Under the General Partnership and a Sole Proprietorship types of business entities, Jeb’s assets would be able to be seized by his personal creditors as he would owe more than what he initially placed into the business. These types of business entities state that the amount owed back in debt is unlimited and can be taken via money or personal assets in which the owner owes until the amount satisfies the collectors. These types of entities are pretty straight forward and not something that should be rushed into when trying to decide which type of entity should be chosen as much would be at stake if something were to happen and collectors came after you. Resource s Camarneiro, A. (2019, September 25). The elements of a valid contract. Retrieved February 03, 2021, from https://www.lawdepot.com/blog/the-elements-of-a-valid- contract/ Chen, J. (2020, October 15). Fraud Definition. Retrieved January 19, 2021, from https://www.investopedia.com/terms/f/fraud.asp Jezierski, C. (n.d.). Corporate Liability in United States. Retrieved January 19, 2021, from https://globalcompliancenews.com/white-collar-crime/corporate-liability-united- states/Making Ethical Decisions: Process. (2016, May 14). Retrieved January 20, 2021, from https://blink.ucsd.edu/finance/accountability/ethics/process.html Newman, M. (2020, October 21). Types of ADR - Alternative Dispute Resolution: Miller Law Firm. Retrieved January 20, 2021, from https://millerlawpc.com/alternative- dispute- resolution/#Mediation Nykiel, T. (2020, September 30). General partnership: Easy to form but lots of liability. Retrieved February 15, 2021, from https://www.nerdwallet.com/article/small- business/general-partnerships Prakash, P. (2020, December 16). Business entity types and how to choose the right one. Retrieved February 15, 2021, from https://www.justbusiness.com/legal/business- entity#:~:text=There%20are%20various%20types%20of,how%20that%20company %20is %20taxed. Promissory estoppel - definition, types, and practical examples. (2020, May 07). Retrieved February 04, 2021, from https://corporatefinanceinstitute.com/resources/knowledge /other/promissory-estoppel/ Rights and duties of landlords and tenants. (n.d.). Retrieved February 04, 2021, from https://saylordotorg.github.io/text_introduction-to-the-law-of-property-estate- planning- and-insurance/s16-02-rights-and-duties-of-landlords.html#:~:text=Both %20landlords %20and%20tenants%20have,in%20a%20safe%2C%20livable %20condition.&text=The %20tenant%20has%20duties%20as,property%20for%20an%20illegal %20purpose. Team, C. (2018, October 29). Quasi contract - definition, examples, meaning, and cases. Retrieved February 03, 2021, from https://legaldictionary.net/quasi-contract/What is personal jurisdiction? Why is it important? (2019, March 15). Retrieved January 19, 2021, from https://www.womenslaw.org/laws/preparing-court-yourself/court-system- basics/personal-jurisdiction/basic-info-and-definitions-1 When will a promise or statement be considered a binding contract? (2018, February 20). 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