Assessment Information – Trimester 3, 2015
3 Trimester 2015 – ASSIGNMENT
Page 2 of 4
QUESTION 1 (3 x 10 marks each = 30 marks)
Consider the following independent situations:
A. Laura Prebble, the owner-manager of a small business, had carefully monitored her cash position
over the past financial year, and was pleased to note at the end of the year that the cash position was
strong, and had shown a healthy 50% increase over the year. When presented with the income
statement for the year, she was dismayed to note that the profit earned in the last year had deteriorated
significantly and had become a loss for the current period. In her anger, she accuses you of having
made errors in the accounting since ‘such a silly situation could not possibly exist’.
REQUIRED: Draft a response to Laura.
B. Wayne Deng is reviewing the statement of cash flows for his technology business. The statement
has been provided by his accountant. He is dismayed that the statement shows net cash outflows for
REQUIRED: Discuss if Wayne should be concerned by this.
C. After calculating the current ratio for an entity and finding that the ratio’s value was 5:1, a student
analyst decided that the company was in a sound position for paying its liquid liabilities.
REQUIRED: Discuss the shortcomings of making such a conclusion.
BUS 103 Accounting for Managers
3 Trimester 2015 – ASSIGNMENT
Page 3 of 4
QUESTION 2 (15 + 10 = 25 marks)
The financial statements for the business of Trinh’s Nail Supplies for the past two years are presented
TRINH’S NAIL SUPPLIES
Comparative Income Statements: for the year ended 30 June
Sales $ 400 000 $ 500 000
Cost of sales 350 000 458 000
Gross profit 50 000 42 000
Interest income 1 000 2 000
Loss on sale of fixtures — 800
51 000 43 200
Office supplies used 10 000 11 000
Other expenses 29 000 29 000
39 000 42 000
Profit $ 12 000 $ 3 200
TRINH’S NAIL SUPPLIES
Comparative Statements of Financial Position as at 30 June
Cash at bank $ 4 400 —
Accounts receivable 42 000 $ 60 000
Inventory 80 000 40 000
Office supplies 2 000 5 000
Freehold property 60 000 80 000
Fixtures 40 000 46 000
Accumulated depreciation – fixtures (16 000) (20 200)
Investments 6 000 16 000
$ 218 400 $ 226 800
LIABILITIES AND EQUITY
Bank overdraft — $ 4 000
Accounts payable $ 26 000 40 000
Trinh, Capital 192 400 182 800
$ 218 400 $ 226 800
I. All purchases and sales of inventories are on credit. All purchases of office supplies are for cash.
II. The bank overdraft is considered to be part of the entity’s cash management function.
III. During the year ended 30 June 2017, the owner, Trinh, withdrew $12 800 in cash for personal use.
IV. The entity sold some fixtures for $1200 cash during the current year. These fixtures initially cost
$4200 and had been written down to a carrying amount at the date of sale of $2000.
V. Depreciation of fixtures has been included in ‘other expenses’ for the year ended 30 June 2017. All
remaining other expenses were paid in cash.
A. Prepare the statement of cash flows for Trinh’s Nail Supplies for the year ended 30 June 2017,
using the direct method.
B. Comment on the cash flow position of the entity as shown in the statement of cash flows.
BUS 103 Accounting for Managers
3 Trimester 2015 – ASSIGNMENT
Page 4 of 4
QUESTION 3 (18 + 4 + 3 = 25 marks)
The following information relates to the business of Chef One. The owner is concerned about the
profitability and financial structure of his business at 30 June 2017, especially since the bank is
requiring repayment of the business’s overdraft.
30 June 2017 30 June 2016
Revenue (sales on credit)
Cost of sales
Cash and cash equivalents
Trade accounts receivable (net)
Non-current assets (net)
Trade accounts payable
K. Pastry, Capital
Inventory at 1 July 2016 was $22 500.
A. Calculate the following ratios for 2016 and 2017:
i. profit margin
ii. return on capital
iii. current ratio
iv. quick ratio
v. equity ratio
vi. inventory turnover
B. Write a short report to the owner in relation to the profitability and financial stability of the
C. Identify the cash flow ratios that would be useful to calculate to assist the owner to more fully
understand the financial health of the business.
Role and Functions of Law in Business
Resource: Case Brief Cipollone v. Liggett Group, Inc., et al. in Ch. 2, “Commerce Powers,” of the text.
*** This reference that I have provided in the attachment and Chapter two must be used by the writer as one of the sources (***Melvin, S. P. (2011). The legal environment of business: A managerial approach: Theory to practice. New York, NY: McGraw-Hill/Irwin***).
***the other source that the writer selects must be peer-to-peer review and I must have access to it for reviewing the content of my paper***.
Write a 700- to 1,050-word paper in which you define the functions and role of law in business and society. Discuss the functions and role of law in your past or present job or industry.
STRUCTURE AND NATURE OF THE CONSTITUTION:
The United States uses a federal system in which a national government coexists with the
government of each state. An important concept underlying the federal system is that the
federal government has only limited powers to regulate individuals and businesses. States
are thought of as having more inherent powers to protect the general welfare of their citizenry
with only general constitutional authorization.1 In contrast, the federal government’s
power to regulate must be specifically granted by the U.S. Constitution. For example, the
Constitution grants Congress the explicit power to collect taxes and to control the issuance
of patents and copyrights.
From a broad perspective, the Constitution may be thought of as having three general
functions: (1) establishing a structure for the federal government (including qualifications
for certain government offices) and rules for amending the Constitution; (2) granting specific
powers for the different branches of government; and (3) providing procedural protections
for U.S. citizens from wrongful government actions.
Structure of the Constitution
The U.S. Constitution is composed of a preamble, seven articles,
and 27 amendments. The first three articles establish a
three-part system of government with three coequal branches:
the legislative branch, the executive branch, and the judicial
branch. The underlying rationale for this structure is that each
of the branches exercises its respective powers to ensure that
one branch does not exceed its authority under the Constitution.
Specifically, the Constitution begins with a preamble stating
the Constitution’s broad objectives (e.g., justice, liberty, tranquility,
common defense). The articles then set out structure,
powers, and procedures. From a business perspective, it is also
important to note that Congress’s powers to directly and exclusively
regulate bankruptcy, patents, and copyrights are set out
in Article I. Table 2.1 is a brief synopsis of the provisions in
In addition to the creation of federal courts, the Constitution
also establishes boundaries of jurisdiction. Jurisdiction is
the legal authority that a court must have before it can hear a
case. Both the U.S. Constitution and individual state constitutions
contain language that establishes jurisdiction for certain
matters to be heard by certain courts. The concept of jurisdiction
is discussed in detail in Chapter 3, “The American Judicial
System, Jurisdiction, and Venue.”
The Constitution has been amended (added to or changed)on several occasions since its ratification. These amendmentsare an important part of the Constitution’s function as a protectionof the citizenry from unlawful or repressive acts of thegovernment. The first ten amendments, called the Bill of Rights, were added in 1791. TheBill of Rights preserves the rights of the individual U.S. citizens, and in some cases U.S.–based businesses, from unlawful acts of government officials, freedom of speech and religion,prohibition on random searches, and others. In all, there have been 27 amendments tothe Constitution. The applicability of the Bill of Rights in the specific context of businessis discussed in detail later in this chapter.
OVERVIEW OF FEDERAL POWERS
Powers granted to the three branches of government in the Constitution are known as
enumerated powers and are typically limited in scope. This means that each act of federal
legislation or regulation must come from within one of the very specific, enumerated
powers. The primary authorization of Constitutional powers is given to Congress under
Article I. 2 Congress has enumerated powers in 18 different clauses. The powers that generally
impact business owners and managers include (1) the power to regulate commerce
(CommerceClause); (2) taxing the citizenry and commercial entities and spending government
funds (tax and spend provisions); (3) bankruptcy, patents, and copyrights; and
(4) a more general implied authority to make all laws necessary for carrying out its enumerated
powers (Necessary and Proper Clause).
Separation of Powers
Enumerated powers are also granted to the executive
and judicial branches. For example, the president
is granted the power to (1) carry out laws
made by Congress; (2) be the commander in chief of the armed forces; (3) enter into a treaty (subject to approval by the Senate) and to
carry out foreign policy; and (4) appoint federal officers and judges (also subject to
Senate approval). The judiciary is authorized to decide cases and controversies falling
within federal jurisdiction. In addition, the three branches also have powers that are part
of an overall scheme to provide a system to resolve conflicts among the branches and
ensure that no one branch exceeds its constitutional authority. This system of checks
and balances is called the separation of powers.
Table 2.2 sets out some of the various powers each branch has that acts as a check on
the other branches.
One of the central concepts in federal Constitutional law is the notion that federal courts
have the right to invalidate state or federal laws that are inconsistent with the U.S. Constitution
in some way. The U.S. Supreme Court is the ultimate judge of federal constitutional
law. This authority was established by the Court in the landmark case of Marbury v. Madison
in 1803. In Marbury, the Court explicitly ruled that (1) the Constitution was superior
to federal and state statutes, and (2) when there is a conflict between the Constitution and
state or federal law, the Court has the authority to strike down the law as unconstitutional.
The Court based these conclusions on the judiciary branch’s enumerated powers found in
Article III, § 2 which includes authority of matters arising under the Constitution or “laws
of the United States.” 3 Marbury, although decided over two hundred years ago, is still considered
valid precedent, and federal courts regularly cite the case as a source of authority
for the power to invalidate a law that is in conflict with the Constitution. Over the better
part of two centuries, the Court further defined its judicial review authority, including the
power of federal courts to review state court decisions to the extent that the decisions
involve federal law or federal constitutional issues.
Applying the Constitution: Standards of Review
The U.S. Supreme Court has established three standards of review for applying Constitutional
law. These standards appear in a broad range of constitutional law cases, and the
Court has fashioned these standards for use by lower courts in applying the provisions of
the Constitution as uniformly as possible. When reviewing a government action for constitutional
soundness (such as passage or enforcement of a federal or state law), the Court
classifies the action into one of three categories of scrutiny: (1) the rational basis category,
(2) intermediate-level scrutiny, or (3) strict scrutiny.
Rational Basis Government actions that are in this category are subject to the least amount
of scrutiny. In order for the court to uphold the action, the government need only show that
their action advanced a legitimate government objective (such as public welfare, health, or
safety) and the action was minimally related to the government’s objective. Government
actions that fall into this category include those that do not involve any fundamental constitutional
rights. Fundamental rights are generally limited to voting, access to criminal appeals,
and interstate travel. Therefore, almost every economic- and tax-related law is reviewed using
this undemanding threshold and ultimately the law is found to be constitutional. For example,
suppose that, in response to pressure by consumer advocacy groups to regulate Internet
access, pricing, and service, Congress passes a law requiring all Internet service providers
(ISPs) to be directly regulated by a new federal administrative agency. The law imposes a
tax on the ISPs to fund the agency. MegaSearch is an ISP subject to the law and files suit
contending the law is an unconstitutional exercise of congressional powers. Because the regulation
is purely economic, a court will likely rule against MegaSearch and uphold the law as
constitutional using the rational basis category so long as the government provides evidence
that the law advanced some legitimate government objective (such as consumer protection).
Intermediate-Level Scrutiny Some actions are categorized as subject to intermediatelevel
scrutiny. Courts will uphold government actions as constitutional so long as the government
can prove that their action advanced an important government objective (a higher
level than “legitimate” used in the rational basis test) and that the action is substantially
related (a higher level than “minimally”) to the government’s objective. A relatively small
number of cases fall into this category. For example, courts have used this category in cases
involving government action related to regulating time, place, and manner of a political
demonstration that is protected under the First Amendment. For example, suppose in the
MegaSearch case, above, that the management at MegaSearch organizes a protest against
the law and applies for permits to stage demonstrations opposing the law in several cities
across the country. One city, Silicone Village, rejects the permit application because Mega-
Search’s proposed demonstration would block a high-volume traffic area and endanger both
pedestrians and drivers. The village also points out that a public park located in the village
would be a more appropriate venue. If MegaSearch sues the village for denying them their
First Amendment right to protest, a court would likely find the village’s actions permissible
under the intermediate-level scrutiny standard because the government’s denial of the permit
is substantially related to an important government objective (protection of drivers and
Strict Scrutiny When the government action is related to a fundamental right or is based
on a “suspect” classification (i.e., race, national origin, or alienage) courts apply a strict
scrutiny standard when deciding whether to uphold the government action. Courts will
only uphold the law if (1) the government’s objective is compelling, (2) the means chosen
by the government to advance that objective is necessary to achieve that compelling end,
and (3) no less-restrictive alternatives existed. In the strict scrutiny category, the government
has the burden of persuasion. As a practical matter, when courts classify government actions as belonging in the strict scrutiny category, they are signaling that the government
action is likely to be ruled unconstitutional. For example, suppose that in the MegaSearch
case above, that the government passes a law that imposes a higher level of tax on ISPs
who catered to Latino users by assessing the tax based on the number of searches conducted
using words and phrases in Spanish. Such a law would be a clear example of the
government’s use of a suspect classification (national origin) and would clearly be struck
down under a strict scrutiny analysis.
The Supremacy Clause and Preemption
Because our federal system of government contemplates the coexistence of federal law with
the various laws of the states, there is sometimes a conflict between federal law and state law.
Article VI of the U.S. Constitution provides that valid federal laws (those made pursuant to
Congress’s constitutional authority and that are constitutionally sound) are always supreme
to any conflicting state law. This is known as the Supremacy Clause and it invalidates any
state law that is in direct conflict with federal law. The power granted by the supremacy
clause to override a state law is called preemption. In order for preemption to occur, the
federal law must be directly in conflict with the state law to the point where the two laws cannot
coexist. For example, in Geier v. American Honda Motor Company, the U.S. Supreme
Court held that a federal regulation giving auto manufacturers the choice between airbags
or alternative methods of passenger safety restraints preempted a claim by an injured party
against an auto manufacturer under a state common law doctrine based on failing to install
airbags. The Court ruled that, because the injured party’s case depended upon a claim that
auto manufacturers had a legal duty to install airbags and the violation of that duty resulted in
the injury, the state common law could not coexist with federal law that specifically allowed
auto manufacturers to opt not to install airbags in favor of another type of restraint system.
In Case 2.1, a famous dispute involving the early tobacco product liability litigation, the
U.S. Supreme Court applied the doctrine of preemption.
Congress’s broadest power is derived from the Commerce Clause whereby Congress is
given the power to “regulate Commerce among the several states.” Under the modern
trend, federal courts have been largely deferential to legislative decisions under Congress’s
commerce powers. Despite some limits placed by the U.S. Supreme Court in the
relatively recent past, Congress still exercises very broad powers to pass laws where the
activity being regulated affects interstate commerce in any way.
Application of Commerce Powers
Congress exercises its commerce powers in various forms. However, the direct and broad
power to regulate all persons and products related to the flow of interstate commerce is the
fundamental source of its authority.
Interstate versus Intrastate Commercial Activity Congress has the express constitutional
authority to regulate (1) channels of interstate commerce such as railways and highways,
(2) the instrumentalities of interstate commerce such as vehicles used in shipping, and
(3) the articles moving in interstate commerce. Even for commercial activity that is purely
intrastate (takes place within one state’s borders), Congress has the power to regulate the
activity so long as it has a substantial economic effecton interstate commerce. For example,
suppose that Congress passes the Whistleblower Act, a statute that prohibits any businessengaged in interstate commerce from firing their employees for reporting safety violations.
Steel Co., a West Virginia company, begins to engage in a pattern of firing all employees who
report safety violations. When a government agency files a civil lawsuit against Steel Co. to
enforce the Whistleblower Act, Steel Co. defends that the act is unconstitutional because the
activity of firing their employees is purely within the state of West Virginia and not related to
interstate commerce. A court would likely find that if Steel Co. had any commercial activity
at all (such as shipping, warehouses, equipment, advertising, or importing) that is outside
of West Virginia, Congress has the authority to regulate Steel Co.’s workplace policies. In
the dynamics of the modern-day commercial world, a large amount of seemingly intrastate
activity has some degree of economic effect on interstate commerce.
The U.S. Supreme Court has even deferred to congressional regulation of a product
that is cultivated for noncommercial purposes solely in one state as sufficiently related to interstate commerce. In Gonzalez v. Raich, 7 the Court ruled that Congress had the power
to criminalize the possession of marijuana even if it was noncommercially cultivated and
consumed by medical prescription all in the same state. The case involved a challenge by
two California residents to the enforcement by federal officials of the federal Controlled
Substances Act after California passed a state law via voter ballot proposition to exempt
anyone involved in the cultivating, prescribing, and consuming marijuana for medical purposes
from prosecution. The plaintiffs were each arrested by federal officials for possession
of marijuana that had been grown at home. Each had a prescription from a licensed
physician. In refusing to invalidate the Controlled Substances Act, the Court noted that
Congress could have rationally believed that the noncommercially grown marijuana would
be drawn into the interstate market and, therefore, the banning of the substance was sufficiently
related to interstate commercial activity.
Cipollone v. Liggett Group, Inc., et al., 505 U.S. 504 (1992), et al., 505 U.S. 504 (1992)
CASE 2.1 Cipollone v. Liggett Group, Inc., et al., 505 U.S. 504 (1992)
FACT SUMMARY Cipollone brought suit againstLiggett for violation of several New Jersey consumer
protection statutes alleging that Liggett (and othercigarette manufacturers) were liable for his mother’s
death because they engaged in a course of conductincluding false advertising, fraudulently misrepresenting
the hazards of smoking, and conspiracy to deprivethe public of medical and scientific information about
smoking. Liggett urged the court to dismiss the statelaw claims contending that the claims related to the
manufacturer’s advertising and promotional activitieswere preempted by two federal laws: (1) the Federal
Cigarette Labeling and Advertising Act of 1965, and(2) the Public Health Cigarette Smoking Act of 1969.
SYNOPSIS OF DECISION AND OPINION TheU.S. Supreme Court ruled against Cipollone, holding
that his claims relying on state law were preempted byfederal law. The Court cited both the text of the statute
and the legislative history in concluding that Congress’sintent in enactment of the laws was to preempt
state laws regulating the advertising and promotion oftobacco products. Because Congress chose specifically
to regulate a certain type of advertising (tobacco), federallaw is supreme to any state law that attempts to
regulate that same category of advertising.
WORDS OF THE COURT: Preemption “Article VI ofthe Constitution provides that the laws of the United
States shall be the supreme Law of the Land. Thus,[. . .] it has been settled that state law that conflicts
with federal law is ‘without effect.’ [. . .] Accordingly,‘the purpose of Congress is the ultimate touchstone’
of pre-emption analysis. Congress’s intent may be‘explicitly stated in the statute’s language or implicitly
contained in its structure and purpose.’ In the absenceof an express congressional command, state law is
preempted if that law actually conflicts with federallaw, [. . .], or if federal law so thoroughly occupies a
legislative field ‘as to make reasonable the inferencethat Congress left no room for the States to supplement
it.’ [. . .] [Cipollone’s] claims are preempted tothe extent that they rely on a state-law ‘requirement
or prohibition . . . with respect to . . . advertising orpromotion.’”
Civil Rights Legislation A key use of the federal commerce power has been in the
area of civil rights legislation. Indeed, the Supreme Court’s level of deference for use of
congressional commerce powers reached its peak during and directly after the civil rights
era. In the 1964 Civil Rights Act, Congress used its commerce power to ban discrimination
in places of public accommodation such as restaurants and hotels. In two important
civil rights cases decided by the U.S. Supreme Court, the Court ruled that the Civil Rights
Act was a permissible application of Congress’s commerce powers. In Heart of Atlanta
Motel v. U.S., 8 the Court made clear that a federal ban on racial discrimination was a constitutionally
permitted use of congressional commerce powers because the hotel was open tointerstate travelers. Additionally, the Court deferred to a congressional finding of fact
that racial discrimination in accommodations discouraged travel by limiting a substantial
portion of the black community’s ability to find suitable lodging. In a companion case, 9
Katzenbach v. McClung, the Court held that a local restaurant that was located far from
any interstate highway, and with no appreciable business from interstate travelers, was
nevertheless, subject to the reach of the federal statute because the restaurant purchased
some food and paper supplies from out-of-state vendors. Since these purchases were of
items that had moved in commerce, Congress could properly exercise their power to regulate
a restaurant whose business interests were primarily local.
Noncommercial Activity In 1995, the U.S. Supreme Court signaled that some limits
on Congress’s commerce power still exist. In cases where the activity is purely noncommercial
(such as when Congress passes a criminal statute that is seemingly unrelated to
commerce), the Court has used increased levels of scrutiny to be
sure that the activity that Congress seeks to regulate has a sufficient
nexus (connection) to some legitimate economic interest. In U.S.
v. Lopez, the Court invalidated a federal statute on the basis that
it was beyond Congress’s commerce powers. In Lopez, the Court
struck down the Gun-Free School Zones Act of 1990, which made
it a federal crime to possess a gun within a certain distance from
a school. The Court rejected the government’s argument that gun
possession in schools affected economic productivity (by making it more difficult for students
to obtain an education) and thus was within the purview of congressional commerce
power. The Court held that such a broad interpretation of the commerce power would mean
that congressional power was virtually unlimited, and that such an expansive authority was
directly contrary to the express limits imposed by the Constitution. The court reasoned that
the banning of firearms in local schools was a government police power and, therefore,
more appropriately handled by the state government. Five years later, in U.S. v. Morrison,
the Court invalidated another statute on the same grounds. In that case, the Court struck
down the Violence Against Women Act, which gave victims of gender-motivated violence
the right to sue their attacker for money damages in a federal court. In light of the Lopez
decision, Congress made exhaustive findings of fact that detailed the cumulative economic
affect of gender-motivated crimes. Nonetheless, the Court held that the congressional findings
were too broad to justify use of the commerce power and that virtually any local crime
could become a federal offense under a similar justification. As a general rule, the further
that Congress strays from regulating commercial activity, the more likely the Court will be
to give the law intense constitutional scrutiny.
Constitutional Restrictions on State Regulation of Commerce
The U.S. Supreme Court has ruled that the mere existence of congressional commerce
powers restricts the states from discriminating against or unduly burdening interstate commerce.
States often wish to regulate commerce thatcrosses into their state borders. States are free to
regulate commerce so long as (1) it does not imposea discriminatory law (such as a tax) on out-of-state
businesses, and (2) the state law is a legitimate effortto regulate health, safety, and welfare. For example,
suppose that in order to protect its own economic interests, the Idaho state legislature imposes an inspection requirement and fee on all non-Idaho grown potatoes sold within Idaho state borders. The state legislature justifies thisprocess and fee on the basis that it is protecting its citizens from rotten potatoes. A court
would likely strike down the law because it discriminates against out-of-state producers,
and its explanation could be seen as a pretext (not the actual reason) since the law presumes
that in-state potatoes are safe. Moreover, the inspection fee and the inspection process
itself could be viewed as unreasonably burdening interstate commerce.
TAX AND SPEND POWER 12
Congress has a far-reaching power to tax the citizenry and to spend the federal government’s
money in any way that promotes the common defense and general welfare. The
power to tax is an independent source of federal authority. That is, Congress may tax activities
or property that it might not be authorized to regulate directly under any of the enumerated
regulatory powers. The power to spend is linked to the power to tax in that the money
may be raised by taxation and then spent on the general welfare of the United States. The
U.S. Supreme Court has been highly deferential to Congress in terms of what constitutes
general welfare and under what circumstances Congress may exercise its authority to tax
its citizenry and its decision-making power on how to allocate government money.
Necessary and Proper Clause
Congress may also place conditions on the use of federal money in order to achieve some
public policy objective. Congress generally cites the Necessary and Proper Clause as
authorization to set conditions on the spending. This ability to set conditions on the use
of federal money has been a somewhat controversial method of congressional regulation
because it falls outside the areas of traditional regulation. However, the U.S. Supreme
Court has upheld federal spending conditions that are tied to individual states passing certain
laws that carry out a congressionally set ambition. State legislatures have objected to
this type of regulation, characterizing it as a backdoor method for imposing laws on states
that are outside Congress’s enumerated powers.
In South Dakota v. Dole, 13 the Court deferred to Congress’s right to attach certain spending
conditions related to the legal drinking age (a state law issue) 14 on federal funds distributed
to the states for use in repairing and building highways. Unless a state passed a law
to raise the legal drinking age to 21 by a certain date, they would lose a certain percentage
of their allotted highway funding from the federal government. South Dakota and other
states challenged the law as an unconstitutional intrusion by Congress into state affairs and
an overreaching use of its spending power to regulate. The Court sided with Congress and
ruled the drinking-age condition is constitutionally permissible under Congress’s spending
authority so long as the condition itself is not a violation of individual constitutional rights.
This case signaled an important victory for Congress and it now regularly uses spending
conditions as a form of regulation for individuals and businesses.
CONCEPT SUMMARY Structure and Nature of the Constitution: Federal Powers
¦ Under the federal system used by the United States, the federal government has only
limited powers to regulate individuals and businesses.
¦ These powers are specifically enumerated in the Constitution and are limited in scope.
¦ The limited powers of the legislative branch, which are specifically enumerated in the
Constitution, include (1) the power to regulate commerce; (2) the power to tax and
spend; (3) the power to regulate bankruptcy, patents, and copyrights; and (4) a general
implied authority to make all laws necessary for carrying out its enumerated powers.
Similarly, the president is granted the power to (1) carry out laws made by Congress;
(2) be the commander in chief of the armed forces; (3) enter into a treaty and carry
out foreign policy; and (4) appoint federal officers and judges. Finally, the judiciary is
authorized to decide cases and controversies falling within federal jurisdiction.
¦ Congress’s broadest power is derived from the Commerce Clause.
¦ Under the Commerce Clause, Congress has the authority to regulate (1) channels of
interstate commerce such as railways and highways; (2) the instrumentalities of interstate
commerce such as vehicles used in shipping; (3) the articles moving in interstate
commerce; and (4) any activity that has substantial economic effect on interstate commerce,
including activities that are not commercial in nature.
¦ The U.S. Constitution is composed of a preamble, seven articles, and 27 amendments,
the first ten of which are called the Bill of Rights.
¦ The first three articles of the Constitution establish a three-part system of government
with three coequal branches: the legislative branch, the executive branch, and the judicial
¦ This structure is designed so that each of the branches exercises its respective powers to
ensure that one branch does not exceed its authority under the Constitution (referred to
as a separation of powers or checks and balances).
¦ Under the Supremacy Clause, federal laws preempt (override) any conflicting state
¦ Congress has the power to tax the citizenry and to spend the federal government’s
money in any way that promotes the common defense and general welfare.
¦ Under the Necessary and Proper Clause, Congress may also place conditions on the use
of federal money in order to achieve some public policy objective.
In addition to the Constitution prescribing the structure of government and granting the government
certain powers, it also provides protection for the citizenry from unlawful or repressive
acts by the government. These protections are contained primarily in the Bill of Rights
(the first ten amendments) and in other amendments that guarantee the right of due process.
From a business perspective, however, it is important to note that corporations and other business
entities do not always receive the same level of constitutional protections as individuals.
The Bill of Rights and Business
The Bill of Rights contains many of the rights common in the American vernacular. Among
them are freedom of speech, the press, religion, and expression (First Amendment); freedom
from government-conducted searches without cause or warrant (Fourth Amendment);
rights against self-incrimination and to a speedy jury trial by our peers (Fifth and Sixth
Amendments); and freedom from cruel and unusual punishments (Eighth Amendment).While each amendment carries it own significance in a historical and public policy context,
the coverage of this textbook is primarily concerned with the Bill of Rights provisions that
relate directly to business and management issues.
The First Amendment contains the important introductory phrase “Congress shall make
no law” and then articulates several specific protections against government encroachment
in the areas of religion, press, speech, assembly, and petition of grievances. The introductory
phrase demonstrates that the framers intended the Constitution to function as a limit
on government actions. Although certain First Amendment rights for individuals do not
extend to business owners, courts have increasingly broadened protections for business
owners in the area of free speech.
Limits on Free Speech Although the U.S. Supreme Court has given broad protections
to speech that involves political expression, the First Amendment is by no means absolute.
Justice Oliver Wendell Holmes famously wrote that the First Amendment was not without
limits by giving an example that the Constitution did not protect one that falsely yells
“fire” in a crowded theatre. Courts have ruled that the government may place reasonable
restrictions related to time and place of political expression in cases, for example, where
public safety may be threatened.
Commercial Speech The most common form of commercial speech (ways in which
business entities communicate with the public) is advertising through print, television,
radio, and Web-based sources. Traditionally, advertising had little or no First Amendment
protection, but the Supreme Court has gradually increased the constitutional protections
related to advertising. In Virginia State Board of Pharmacy v. Virginia Citizens Consumer
Council, the Supreme Court held that purely commercial speech (speech with no political
implications whatsoever) was entitled to partial First Amendment protection so long
as the speech was truthful and concerned a lawful activity. In the Virginia case, the Court
struck down Virginia state laws that prohibited a pharmacist from advertising prices for
prescription drugs. The Court rejected the state’s contention that it has a substantial interest
in ensuring that cut-rate prices that may be created by competition among pharmacies
doesn’t result in substandard service. Given that the information banned by the statute was
limiting the free flow of information to consumers, the Court held that such regulation
violated the First Amendment.
Four years after the Virginia case, the Court expanded the analytical framework for deciding
whether certain regulations were constitutional in Central Hudson Gas v. Public Service
Commission. The Central Hudson case created a framework for a four-part test that subjects
government restrictions on commercial speech to a form of intermediate-level scrutiny.
¦ Part One. So long as the commercial speech concerns lawful activities and is not misleading,
the speech qualifies for protection under the First Amendment. If the speech is
entitled to protection, then the government’s regulation must pass the final three parts
of the Central Hudson test in order for the restriction to be constitutionally sound.
¦ Part Two. A substantial government interest in regulating the speech must exist.
¦ Part Three. The government must demonstrate that the restriction directly advances the
claimed government interest.
¦ Part Four. The government’s restriction must be not more extensive than necessary (not
too broad) to achieve the government’s asserted interest.
Advertising and Obscenity Regulation Sometimes commercial speech runs afoul of
government’s attempt to ban or regulate materials it deems obscene. However, obscenity
regulation of commercial speech is subject to the same scrutiny as any other government
regulation of commercial speech. For example, a federal appellate court has ruled that a
state agency’s decision to effectively prohibit a corporation’s use of a certain label on its
beer products, which the agency deemed offensive, violated the business owner’s right under
commercial speech protections. In that case, Bad Frog Brewery, Inc. v. N.Y. State Liquor
Authority, 17 the U.S. Court of Appeals for the Second Circuit held that labels on the company’s
beer products, which depicted a frog with his unwebbed “fingers” extended in a manner
evocative of a well-known human gesture of insult, were protected commercial speech
under the First Amendment. The court ruled that when the New York State Liquor Authority
denied Bad Frog’s application to use the labels in New York on the basis that the labels were
offensive, the state agency failed to show that their ruling achieved their asserted interest of protecting children from vulgarity. Because the labels were not misleading and did notconcern an unlawful activity, the labels were a protected form of commercial speech andany government regulation must conform with the
requirements set out in the Central Hudson case. Rulingin favor of Bad Frog, the court remarked that a
state must demonstrate that its commercial speechlimitation is part of a substantial effort to advance a valid state interest, “not merely theremoval of a few grains of offensive sand from the beach of vulgarity.”
Political Speech by Corporations Another form of commercial speech, broadly
speaking, is when corporations and other business entities fund political speech or engage
in corporate advocacy of a particular candidate or political issue. May the government
regulate such commercial speech under the same standards as the Central Hudson case?
Generally, the answer depends of the specific form and content of the speech—but typically
political speech by corporations is fully protected by the First Amendment.
In First National Bank of Boston v. Bellotti, the Supreme Court created a new level
of First Amendment protection for corporations engaged in politically oriented speech
when it struck down a Massachusetts state statute that prohibited corporations from using
corporate assets to fund expenditures related to “influencing or affecting the vote on any
question submitted to the voters” (known as a ballot proposition). In Bellotti, the Court
held that that while some constitutional rights are not afforded to corporations, freedom
of corporate political speech is fully protected. As such, any attempt to regulate politically
oriented speech by corporations is subject to strict scrutiny. The Court also held that a
corporation’s freedom of speech is not limited to matters materially affecting its business.
Rather, a business has a constitutionally protected right to communicate about any political
matter that is consistent with the goal of the First Amendment: societal interest in the free
flow of information and debate. For the first time, the Court recognized that speech that
otherwise would be within the protection of the First Amendment does not lose protection
simply because its source is a corporation.
Political Spending and Corporations
In a 2010 case that attracted significant media attention, the U.S. Supreme Court ruled that
the government may not ban all political spending by corporations in candidate elections.
In Citizens United v. Federal Election Commission, the Court held that the provisions of the Bipartisan
Campaign Reform Act of 2002 (commonly referred toas the McCain-Feingold Act), which prohibited corporations
and labor unions from using general fundsto sponsor “electioneering communications,” wereunconstitutional. It is important to note that the rulingdid not involve a challenge to limits imposed by the lawon campaign contributions, or with the prohibition ofcorporate contributions to a candidate. These limits remain intact. Rather, the Supreme
Court’s ruling applies only to independent expenditures on speech. Independent expenditures
mean speech (such as advertisements) engaged in by an organization on its ownbehalf, and not with coordination with any candidate.The case originated when Citizens United, a conservative nonprofit corporation, produced
a 90-minute documentary called “Hillary: The Movie” which criticized then-Senator Hillary Clinton and questioned her fitness for office. The group planned to release it during the 2008Democratic presidential primaries. Fearful that uncertainties in the law would result in enforcementaction by the government upon release of the movie, Citizens United filed suit against theFederal Elections Commission (FEC) in federal court challenging the act. After they lost thatcase, Citizens United scrapped its plans to release the movie, but continued to appeal the trialcourt’s decision. The U.S. Supreme Court ruled in favor of Citizens United, striking down theprovisions of the law that banned Citizens United from releasing the movie. Justice AnthonyKennedy wrote the majority opinion:
In addition to the First Amendment, certain other protectionsafforded by the Constitution may be important to
business owners and managers. The Fourth Amendmentprotects individual citizens’ rights to be secure in their
“persons, houses, papers and effects.” The U.S. SupremeCourt has systematically applied a reasonableness test
to define the limits of when the government may searchwithout a warrant based on probable cause that criminal
activity is afoot. From a business perspective, it is importantto understand that the law recognizes two basic types
of searches. First, when the government wishes to obtaina warrant to search particular premises while investigating
a criminal offense, they must demonstrate that theyhave sufficient information, called probable cause, that
justifies the issuance of a search warrant by a court. Second, the government also investigates noncriminal
administrative violation s. The standard for the issuanceof a warrant for a search in an administrative violation
investigation is lower than for investigating a criminaloffense. Administrative warrants may be used by government
regulatory agencies (such as the EnvironmentalProtection Agency) to gain access to worksites for compliance
inspections. Administrative agencies and administrativewarrants are discussed in detail in Chapter 17,
“Administrative Law.”The Fifth Amendment provides that no person“shall be compelled in any criminal case to be a witnessagainst himself.” Simply put, this amendment guaranteesindividuals the right to remain silent both during theinvestigation and during any subsequent judicial proceedings.Although it is clear that this amendment does
not apply to corporate entities when the government isseeking certain business records, individual corporate
officers and employees are entitled to Fifth Amendmentprotection when facing a criminal investigation by the police, or more commonly in a business context, administrative agencies investigating apossible criminal offense (e.g., the Internal Revenue Service investigating tax fraud). Thisright is a central and fundamental part of the Supreme Court’s famous decision in Mirandav. Arizona. The Miranda case set out specific procedures to be used by the governmentwhen interrogating possible suspects of criminal wrongdoings. The Miranda case is covered
in detail in Chapter 22, “Criminal Law and Procedure in a Business Context.”
DUE PROCESS PROTECTIONS
In addition to protection afforded by the Bill of Rights, the law provides protections to
individuals and businesses from government overreaching through constitutional guarantees
contained in the Due Process Clause of the Fifth and Fourteenth Amendments. These
clauses protect individuals from being deprived of “life, liberty, or property” without due
process of law. Fundamentally, due process rights require the government to provide
some type of hearing and procedure whenever the government has taken some action that
deprives an individual or business of some liberty or property interest.
Perhaps the most important role of the Fourteenth Amendment is that it makes the Bill
of Rights applicable to the states. Note, for example, that the First Amendment begins
with the explicit restriction that “Congress shall make no law . . .” Originally, the framers
intended the Bill of Rights to be a protection against certain acts of the federal government,
and therefore states were not bound by the Bill of Rights. However, in the post-Civil
War reconstruction period (mid-1860s), the Fourteenth Amendment was passed, which
effectively expanded the protections under the Bill of Rights to include restrictions and
actions by state governments.
The Due Process Clause has two primary functions. First, it imposes certain procedural
requirements on federal and state governments when they impair life, liberty, or property.
The U.S. Supreme Court has held that procedural due process requires the government to
give appropriate notice, a neutral hearing, and an opportunity to present evidence before
any government action may be taken that would affect the life, liberty, or property of an
individual. The Due Process Clause also limits the substantive power of the states to regulate
certain areas related to individual liberty. These substantive due process rights require
that laws passed by the government be published for public inspection and to be specific
enough so that a reasonable person would understand how the law applies. Laws that are
vague or overly broad are unconstitutional under the substantive due process doctrine.
In Case 2.4, the U.S. Supreme Court applied the Due Process Clause in the context of a
state statute that regulated certain jury awards.
Equal Protection The Equal Protection Clause is the part of the Fourteenth Amendment
that prohibits the government from denying citizens’ equal protection of the laws. 23
Fundamentally, the clause guarantees that the government will treat people who are similarly
situated equally. Recall from our discussion earlier in this chapter that courts use a
variety of levels of review when applying constitutional law. This is especially important
in equal protection cases where courts apply one of the three categories of review that are
classified by their level of scrutiny (strict, intermediate-level, or rational basis).
When a government action (such as passage of a statute or enforcing a law or regulation)
is based on a suspect classification, or if the action impairs a fundamental right, the
strict scrutiny standard is applied. Courts have held that any government action based on race, national origin, and alienage are automatically suspect classifications. The Court has
held that government actions related to the right to vote, to have access to the courts, and
the right to migrate from state to state are subject to strict scrutiny standards as well.
Note also that semi-suspect (also called quasi-suspect) classifications trigger intermediate level
scrutiny. Courts have used this standard of review when government actions were
based on gender or illegitimacy. Recall from earlier in this chapter that economic or tax
regulations are judged under the rational basis category.
CONCEPT SUMMARY Constitutional Protections
¦ The Bill of Rights contains protection for citizens from unlawful or repressive acts by
¦ Corporations and other business entities do not always receive the same level of constitutional
protections as individuals.
¦ Traditionally, advertising had little or no First Amendment protection, but the Supreme
Court has gradually increased the constitutional protections related to advertising allowing
purely commercial speech to have partial First Amendment protection so long as it
is truthful. Commercial political speech has full First Amendment protection.
¦ The Due Process Clause of the Fifth and Fourteenth Amendments protect individuals
from being deprived of “life, liberty, or property” without due process of law.
¦ The Fourteenth Amendment makes the Bill of Rights applicable to the states.
¦ The Due Process Clause serves two purposes. First, it imposes procedural requirements
on federal and state governments. Second, it limits the substantive power of the states to
regulate certain areas affecting individual liberties.
Although not explicitly mentioned in the Constitution, privacy rights play a central role in
constitutional law. The U.S. Supreme Court struggled with the notions of individual rights
of privacy during the early 1900s, but did not formally recognize the right to privacy until
1965 in the landmark case of Griswold v. Connecticut. The case involved a challenge
to a Connecticut statute that criminalized (1) the use of contraceptives, and (2) aiding or
counseling others in their use. Griswold and others were convicted under the statute for
counseling married couples in the use of contraceptives at a local Planned Parenthood
office. The U.S. Supreme Court struck down the statute as unconstitutional. They held
that the right of privacy was implied by language in the First, Third, Fourth, Fifth, and
Ninth Amendments, which created a constitutionally protected zone of privacy. The right
of privacy recognized in Griswold was extended to abortion rights in Roe v. Wade, one
of the most famous U.S. Supreme Court decisions in American history. The Roe Court
struck down a state statute, which banned all abortions under any circumstances, as unconstitutional.
The Court recognized that a woman’s right to privacy is fundamental under
the Fourteenth Amendment. Thus, the government has only a limited right to regulate,
and could not completely outlaw, abortion procedures and providers. Although the existence
of a constitutional right of privacy has generated intense and emotional debate, the U.S. Supreme Court has reaffirmed the central tenants of the privacy rights recognized in
Griswold andRoe over several decades and it has become settled law.
In addition to privacy rights afforded by the Constitution, Congress has legislated specific
privacy rights such as the Health Insurance Portability and Accountability Act (HIPPA), 27
which regulates health-care providers, plans, and plan administrators in gathering, storing,
and disclosing medical information about individuals. The law requires specific policies
and record-keeping practices to be used in order to assure privacy of any medical information
such as diagnosis, tests, medications, and so forth. Congress has also sought to assure
certain privacy protections by mandating that government agencies allow appropriate public
and media access to agency records and reports under the Freedom of Information Act.
One of the more controversial federal statutes that deal with modern privacy issues
was the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act (called the USA Patriot Act). The USA Patriot Act
was passed immediately after the terrorist attacks of September 11, 2001, and provides
increased authority for government officials to surreptitiously access and/or monitor individual
and corporate financial records, e-mail, telephone conversations, and Internet activity
when investigating possible terrorism-related activity. Although the law does create an
infrastructure that is designed to prevent government overreaching and protect individual
privacy (e.g., the government must provide evidence that the investigation is related to terrorism
and not being used for investigating other matters), critics have derided the law as
lacking appropriate safeguards to prevent invasion of privacy.
Most privacy rights afforded by the U.S. Constitution do not extend to the workplace. Nonetheless,
privacy rights have become increasingly important to business owners and managers
as Congress and state legislatures seek to clarify workplace privacy rights by statute in areas
such as employee drug testing, searches of employee areas (such as lockers or desks) by
employers, and electronic monitoring of e-mail and Internet usage. Statutes that regulate the
workplace are covered in detail in Chapter 11, “Employment Regulation and Labor Law.”
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