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The Institutional Preconditions of Capitalism

Respect for private property and a willingness to abide by agreements

A system of a laws reflecting those norms

Orderly and impartial enforcement of those laws

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HOW THESE PRINCIPLES ARE HOW THESE PRINCIPLES ARE MANIFESTED IN U.S.MANIFESTED IN U.S.

Self-Executing Regulation

State Enforced Regulation

Administratively Executed/State Enforced Regulation

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Self-Executed RegulationSelf-Executed Regulation

Defendant violates a duty harming Plaintiff Plaintiff brings civil action (takes the

offender to court) Seeks damages and/or a court order Court (judge & jury) decides on the basis

of adversarial process, court’s decision enforced by state

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Examples

Contract Misrepresentation Product Liability

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State Enforced RegulationState Enforced Regulation

Defendant violates duty laid out in statute State brings case (civil and/or criminal)

against Defendant Seeks penalties (fines, jail, corporal

punishment) and/or a court order Court (judge & jury) decides on the basis

of adversarial process, court’s decision enforced by state

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Examples

Sherman Act Fraud

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Administratively Executed/Federally Administratively Executed/Federally Enforced RegulationEnforced Regulation

An administrative agency requires permit to carry An administrative agency requires permit to carry out particular activityout particular activity

It grants the permit if (and only if) holder agrees It grants the permit if (and only if) holder agrees to abide by specified termsto abide by specified terms

Prevents those lacking permit from performing Prevents those lacking permit from performing activity and enforces compliance with terms of activity and enforces compliance with terms of permitspermits

It sanctions violators -- imposes fines or, in It sanctions violators -- imposes fines or, in extreme cases, withdraws permitextreme cases, withdraws permit

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Examples

Wheeler Lea Act FDAct

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CONTRACT I

The basis of contract is free exchange of property rights

Ownership implies the right to buy and sell The law doesn’t generally interfere with or

constrain those rights People are expected to abide by their

agreements -- to be trustworthy

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CONTRACT II

Paramount Job of Courts: Enforcing compliance with terms of voluntary agreements

Courts rarely question the adequacy of consideration

Seller responsible for making terms of contract clear

If ambiguity nevertheless exists, construe against drafter

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CONTRACT III Except where contract stipulates otherwise,

usual remedy is termination of contract and return of consideration

Buyer is expected to make special arrangements where failure on part of seller would be especially costly

Seller responsible for making terms of contract clear

If ambiguity nevertheless exists, the courts will usually decide against drafter’s interpretation

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PRODUCT LIABILITY I Manufacturers and retailers owe customers a

product that is effective for its stated purpose and safe when properly used

Product must be properly designed, manufactured, and marketed to the consumer– basis of the bargain damages -- i.e., the product or

service is not as represented and does not perform as promised

– consequential damages -- use of the good in question gives rise to damages

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PRODUCT LIABILITY II Personal injury

– Anyone injured from use of product can sue– Anyone in supply chain can be sued– Often the one with the deepest pockets will be

targeted, but liability is often joint and several– Plaintiff picks jurisdiction– Can seek recovery for ‘actual’ damages, pain &

suffering, and punitive damages

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PRODUCT LIABILITY III Main personal injury theories

– Strict liability: failure to warn of a defective design (something that could be corrected -- i.e., exploding dryer) or defective condition (ladder; hockey puck?);

– Negligence: failure to: manufacture or handle the good properly, adequately inspect the good, comply with federal, state, or industry product standards. (Violating law is usually proof of negligence per se)

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PRODUCT LIABILITY IV

Defenses– Abnormal use – Contributory negligence – Assumption of risk

To avoid LIABILITY under a strict liability standard, the defendant must show that the plaintiff "voluntarily and unreasonably proceeded to encounter a known danger."

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FRAUD I

1. Misrepresentation (either by commission or omission)

2. of a material fact

3. Knowledge of the misrepresentation

4. Intent to deceive

5. Reliance on the part of the victim

6. Damage to the victim

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FRAUD II Puffing ≠ fraud

– tampering with a used car's odometer is fraud;– claiming that it is in great shape is not.

Innocent misrepresentation is not a crime -- – misrepresentation involves all the elements of fraud but the

middle two (except where the US government is the customer)

– remedy for exchanges involving innocent misrepresentation is rescission of the contract and restitution of consideration.

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Sherman Act: Sherman Act: Section 1Per se violations: Agreements among potential competitors at the same level

(Horizontal arrangements) to fix prices--explicit or implicit to divide markets group boycotts

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Sherman Act: Sherman Act: Section 1 (cont.)

Rule of reason offenses: Vertical arrangements)

Resale price maintenance agreements Tying arrangements (may also violate

Clayton Act) Exclusive dealing arrangements (ditto) Requirements Contracts (ditto)

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Sherman Act: Sherman Act: Section 2

Anti-monopoly Section (involves one legal person and requires evidence of intent to monopolize <anticompetitive acts> and

success <dominant market share> Drive competitors out of business Market definition

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Clayton ActClayton ActEnforced by DOJ and Federal Trade CommissionEnforced by DOJ and Federal Trade Commission

Prohibits price discrimination Sale of goods of like grade and quality in same

market at different price that injures competition

Defenses include: Cost justified, Meeting competitors' price, Perishable goods, Unlike grade or quality

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Clayton Act (cont.)Clayton Act (cont.)Section 7 prohibits mergers likely to injure competition

(HSR = not competitors = consumer welfare/efficiency) Defenses– Failing company– No substantial lessening of competition

DOJ rules--horizontal mergers/market share, HHI = sum of squared |shares|– Prior approval, waiting period

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The Federal Trade Commission Created in 1914 by FTC Act to protect the

consumer against “unfair methods of competition" FTC Act amended by Wheeler-Lea Act "to cover

unfair or deceptive acts or practices” Gave FTC broad latitude to define its responsibilities and the power to regulate advertising to prevent 'false and false and misleading claimsmisleading claims'

FTC also enforces Magnuson-Moss Warranty Act, Truth in lending, Fair Credit Reporting, and Fair Packaging and Labeling Acts

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