Week One: Introduction

Course Information

Administrative Items


The course first covers the "classic" (CPA exam-type) business law topics, particularly contracts and business entities (proprietors, agents, partners and corporations.) We then look at the regulation of securities markets, and the role of accountants in financial reporting by publicly traded companies. We conclude with the rules and standards that govern the profession itself, which are given increasing weight in current (year 2008) proposed changes to the CPA Exam.

Generally US law with a California emphasis and with some attention to international dealings.

First Class is an overview

What's "law"? Where does it come from? Where and how does one find it? How does the US system co-ordinate state laws, national laws, and the laws of other countries?


Cheeseman book 6th Edition. Online lookup to find full text of assigned cases/statutes. Online Securities laws. Class handouts.


Each session a mix of lectures and discussion, with students assigned particular cases (from the summaries at the end of each chapter) to prepare for discussion

  • the "confucian" method: learn by instruction
  • the "socratic" method: learn by Q and A.
  • the "case" method: learn by storytelling. Induce general rules from specific examples


Graduate grade spread is quite small

Midterms will be multi-choice

Final is free form paper, topics suggested / negotiated

Law and Accounting

Consider: what's the relationship? Why do accountants need to know anything about law (and vice versa)? What does accrual accounting measure? Is it true that: "the only thing more dangerous than an accountant with a lawbook is a lawyer with a calculator."

Business law, organizations, and professional responsibility together are about 1/6th of the CPA exam. Note major changes recently in the regulation of auditors -- a shift from self-regulation to bureaucratic process.

Chap. 1: Nature and Sources of Law

What is "law"?

"Rules that regulate the conduct of individuals, businesses and other organizations within society" (text, p.3)

Let's get Socratic. What's wrong with this definition?

Counterexamples? Religion? "Don't trust anybody"? If there is no rule, does that mean there is then no regulation of conduct? The law of gravity?

"to protect persons and property from unwanted interference" (text, p.3) Tax Law? Anti-drug laws?

Black's Law Dictionary: (text, p. 4) "rules prescribed by controlling authority and having binding legal force" which "must be obeyed subject to sanctions or legal consequences".

What's wrong with this definition?

Supreme Court Justice Holmes: "Law is a statement of the circumstances in which the power of society will be brought to bear on individuals through the courts."*

What is a "court"? What does a court look like? What does a judge look like? In what ways are judges in different countries similar in appearance? How does a court bring the power of society to bear on individuals?

Specialized social institutions for law making and law enforcement. "Legis"-latures, judges, police, prisons, sheriffs, baliffs and marshalls. Lawyers of various sorts as intermediaries between citizens and legal institutions

Theories of "jurisprudence"

Theories of law depend on cultural context

Eg. Chinese distinction between li and fa

"1. The Master said, "If the people be led by laws [fa zhi], and uniformity sought to be given them by punishments, they will try to avoid the punishment, but have no sense of shame.

2. "If they be led by virtue, and uniformity sought to be given them by the rules of propriety [li zhi], they will have the sense of shame, and moreover will become good." - Confucius, The Analects, Book 2 Ch. III

Contrast this with Socrates telling Crito that he will not flee from Athens, tho condemned to death, because of his respect for the Laws.

Underlying questions

What is the connection between law and the other factors that "influence the conduct of individuals, businesses and other organizations within society"?
What makes law change and evolve over time? Social forces, or an internal dynamic?
What is justice?

Natural law

Emphasis on the ethical/religious sources of rules of conduct. Strongly influenced by Roman and Judeo-Christian traditions.

The Institutes of the Emperor Justinian, @ 540 A.D.

"Justice is the set and constant purpose which gives to every man his due.

"Jurisprudence is the knowledge of things divine and human, the science of the just and the unjust....

"The precepts of the law are these: to live honestly, to injure no one, and to give every man his due.

"The study of law consists of two branches, law public, and law private. The former relates to the welfare of the Roman State; the latter to the advantage of the individual citizen. Of private law then we may say that it is of threefold origin, being collected from the precepts of nature, from those of the law of nations, or from those of the civil law of Rome."

Distinction between "natural law" and "positive law". Example: is "Thou shalt not steal" the same type of law as "drive on the right, not on the left"?


Law seen as something that has grown and evolved in an organic way, in parallel with the historical development of society.

Emphasis on precedent and continuty, thru adapting old rules and decisions to current issues. The English/American "common law" tradition. (@ 1890)


Legal decisions as the product of logical reasoning from given premises. Associated with European civil law tradition of "formal rationality" and the "classic" (@ 1920's) law of business dealings


Law as a certain set of observed social institutions. The UCC approach to sales between merchants dealing in good faith. (@ 1950)


Law as a tool for shaping behavior, as social engineering implementing the "substantive rationality" of chosen social policies. (@ 1970)

If extended, becomes the law of economic "command and control". Characterized soviet-style command economies.

Critical legal studies

Law viewed as an instrumentality of power, a tool of oppression and the maintainance of a ruling class.

A "post-marxist" approach, influenced by M. Focault and the "deconstructionist" approach to literature. (@ 1985)

Law and Economics

Legal rules should facilitate, or be surrogate for, efficiency-maximizing market transactions. These theories have had an important recent (@ 1980 - present) influence on contract law, product liability and methods of regulating business (taxes vs. commands).

My own view?

I like to mix the approaches. You get a better idea what something is like after you've seen it from two points of view. Law & Economics and Critical Legal Studies together set up a particularly strong dialectic from opposite sides of the political spectrum.

Historical influences on US law

A pluralistic society

The US as a "nation of immigrants" from many different countries and with many different religions. A "nation of strangers" with social and geographic mobility. Result is increased importance of law as a guide to conduct, in place of shared traditions, values or experiences.

The English common law tradition: slow evolution through the accumulation of specific case decisions

England in the year 1188 at the beginning of "common" law. (Meaning "generally applied" to all England, not "ordinary".)

A wretchedly poor society by our standards: land and cattle the basis of wealth and power. No real cities. Maybe 1 person in 20 could read and write. Life expectancy about 30 years. Social roles were inherited and rigidly fixed. A "feudal" society, poor but socially complex, with three languages, and multiple sources of rules for conduct: traditional "law" courts, church courts, merchant courts, petitions to the king for relief.

In the traditional courts, judges decide cases, with the factfinding aid of juries. Judges announce /write down the facts and their decisions. Common law evolves, characterized by:

  • Reliance on precedent: the tradition that similar facts should produce similar decisions.
  • Case by case decisions, with few "statutes" (generally applied rules enacted by parliament).
  • Avoiding generalizations: "crossing the river by feeling the stones". A decision means only: on these facts, we reach this result. (This allows judges in later cases "wiggle room" to reach different results if the facts differ. How does a lawyer decide which facts are "legally relevant" and which are not - Caesarini case example.)

"Commentators" arise, who summarize and instruct in the law. They and the law professors, not the judges, discern the broad principles. But commentary is not precedent

The English Tradition: Multiple Sources of Law

Law is found both in general rules made by legislatures and in the written decisions of specific cases.

Parliamentary Law

Law by general legislative enactments Examples: Royal decrees, statutes voted by British parliament or US Congress or US State legislatures, administrative regulations

Statutes/codes are statements of law, but case law interprets statutes and provides rules of decision even in the absence of statute.

Multiple Court systems

Chancery court. Originated in petitions to King when the law court remedies (money damages) were inadequate. Delegated to Chancellor, and then to Chancellor's judges. Had power to force or restrain acts (injunction), and to consider fairness as well as legality.

Also church courts (inheritance of personalty, family law) and merchant courts

The US Federal Constitution

Orig. negotiated in 1787-89 among 13 states with origins in English colonial governments. Owes a lot to 18th century political philosophy: Madison & Hamilton Federalist Papers

Fear of centralized power and belief in the primacy of the individual and Adam Smith's "invisible hand". Rational self-interest and free bargains favored over command and control. (Note, tho, that the post-WWII growth of "big government" layers a fair amount of "command and control" on top of the original model.)

Deliberate de-centralization, separate institutions sharing powers, making it difficult for anyone to get much control

About 28 Amendments -- it's deliberately difficult to amend.

Chapters 2 and 3: Cases, Courts and Lawsuits

How to read a case

The five elements:

  • Facts
  • Procedural History
  • Issue
  • Holding / Ruling
  • Analysis (and possibly a critique)

The central significance of the facts

The common law tradition of creating law one case/one pattern of facts at a time. A decision really means: given a certain pattern of 'legally relevant' facts, here's the result -- that's the "Holding". It is a precedent only to the extent the patterns of fact in later cases are similar enough.

The explanation is "dicta" ("stuff said"), but the essence of the precedent is the holding.

The Federal and State "judicial pyramids"

1 National and 50 State Governments

50 state governments and a national government. System w/ not many parallels elsewhere: Canada, Australia, Switz. Results in two sets of issues:

What matters are federal, what are state, what allow overlap?

How coordinate multiple states?

Much of US Constitution is concerned with answers to these Q's

  • Supremacy clause (Art. VI)
  • Commerce clause (Art. I Sec. 8)
  • Full faith and credit (Art. IV Sec. 1)

The judicial pyramid: Fed and States similar

At the base: trial courts, which decide lawsuits based on the argument and evidence presented. Frequently no written opinions for those at state level.

There may be specialized trial courts, such as those for small claims, or traffic cases at state level and those for patent or tax matters at federal level. The general trial courts are the "Superior Courts" (county-by county) in California, and the Federal District Courts.

Link to California Judicial Council home page

A dissatisfied litigant may appeal to a reviewing court (CA Court of Appeals; Federal Circuit Courts). Here there are multiple judge panels. Appeals are decided on the printed record (they don't hear the parties; evidence is at one remove.) Facts found in trial court stand unless "clearly erroneous". Opinions are written (sometimes "not citeable").

At top of each system a "Supreme Court". Discretionary review.

The concept of "jurisdiction"

"The power to speak the law".

Subject matter jurisdiction: the power to decide this kind of case. Can be q. of state or federal law

Jurisdiction over the parties: the power to enforce a result as to a party -- eg. defendant in another state or country. Depends on valid service of process and on Def.'s contacts w/ the state. "Service of process" means to somehow "tag" the defendant, directly or indirectly, with the legal paper

Jurisdiction "in rem" - "as to the thing" example: cases involving ownership of real estate

The life history of a civil lawsuit

Note heavy procedural element: definitions mostly from the FRCP (see Rules 3, 7 and 8). A number of devices for screening out claims. Consider whether they are justified by "efficiency", or some other goal.


Lawsuit is commenced by filing a "complaint" with the court

"A short and plain statement of the claim showing entitlement to relief"

Parties described as "Plaintiff" and "Defendant"

Consider in advance issues of jurisdiction and proper "venue": place of hearing

Defendant may try to dismiss. A "motion" made to judge.

No jurisdiction over subject matter, or over me, or "the complaint, even if true, does not state a claim on which relief may be granted" [FRCP Rule 12(b)(6)]

Def. then answers

Admits or denies various statements in complaint. Idea is to sort out points of agreement and dispute. Can raise affirmative defenses, counter claims or 3rd party cross claims.

Pleadings need not be consistent: the "Bart Simpson" defense. "I didn't do it, and besides, it was already broken."

Pleadings then closed. Depending on location, court may take active or passive role in moving case along to trial

Discovery: getting the facts

  • Interrogatories: written questions. Now limited in number
  • Requests for admissions
  • Production of documents (esp. important in business litigation)
  • Depositions: formal recorded interview under oath

Pretrial Motions and negotiations

Motions: summary judgment, or orders from court to move the case along. Formal settlement negotiations. Possibly mediation or arbitration


(Maybe 2% of all lawsuits get this far)

Will there be a jury? Constitution, 7th Amend: criminal cases and a $20 civil threshhold -- but depends whether it was traditionally a law-type case. This is a legacy of the old English law vs equity/chancery distinction

Presentation of argument and witnesses. Cross-examination

Jury determines the facts, as instructed by judge in the law


Preparation of the record and appellate briefs

The written case law is generally by appellate judges who did not hear or see the trial and have only a printed transcript record

The written decisions are for the close cases -- they couldn't be negotiated away, and are close enough to justify an appeal by the loser

Courts tend to write as tho result is clear. It's often closer than it seems

Finding the law: citations and indexes

A very structured format. Usu. "plaintiff v. defendant", vol. number, name of court or name of printed series reporting decisions, page number, court name if not implied by name of printed series, date.

Format under pressure now from move to electronic citations and written "unpublished" decisions.

notes (c) 2001-08 Robert H. Daniels

*AMERICAN BANANA COMPANY v. UNITED FRUIT COMPANY, 213 U.S. 347, 356 (1909) (originally: "Law is a statement of the circumstances in which the public force will be brought to bear upon men through the courts. ")