Chapter Sixteen | Corporations and Hybrid Forms Of Organization


Corporations have existed throughout history for over 1,000 years. The corporation is the most important type of business organization in the United States. It has existed in its current form for over 100 years. In the United States, a corporation is the creation of statutory law. It is an artificial person and operates as an entity separate from the person or persons who own it. A corporation is created under state law. It issues shares of stock to investors who are the true owners of the corporation. However, some public corporations can be created under special provisions of federal law. Individual state corporate laws are not uniform. A codification of modern corporate law exists — the Model Business Corporation Act (MBCA) and the Revised Model Corporate Business Act (RMBCA)—neither of which has been adopted in their entirety by any state.


A corporation has several advantages which may be reflected in its important characteristics. These characteristics include the fact that a corporation has unlimited duration or perpetual succession. A corporation may continue as an entity “forever” or for a specific period of time, no matter how often ownership of its stock changes. It is characterized by free transferability of interest, limited liability, continuity, and centralized management. In the eyes of the law, a corporation is considered a legal person and can hold title to property in its own name.

Corporate Name

A corporation’s name identifies it. The RMBCA requires that the corporate name contains the word “corporation,” “incorporated,” “company,” “limited,” or an abbreviation of one of these terms. The name cannot be the same as that of another corporation, nor can it be so similar to another’s name so as to deceive the public. Each state keeps a registry of available corporate names. The corporation may sue or be sued in the corporate name, and is taxed as a separate entity—all activities attributable to natural persons.

Constitutional Rights

Because a corporation is recognized under law as a person, it can take advantage of many of the same rights and privileges that U.S. citizens enjoy. The Bill of Rights guarantees certain protections to persons and a corporation is included within its meaning for purposes of “equal protection” under the Fourteenth Amendment. A corporation has full access to the courts and it is entitled to due process before being denied life, liberty, or property. A corporation is also protected from unreasonable search, seizure, and from double jeopardy, as are “other persons.”

The First Amendment likewise applies to a corporation. A corporation is entitled to freedom of speech and other constitutional protections. However, the Fifth Amendment protection against self-incrimination does not apply to a corporation; it applies to the corporation’s individual officers and employees. The privileges and immunities clause of the U.S. Constitution, requiring each state to treat citizens of other states equally with respect to access to courts, travel rights, etc., does not apply to a corporation.

One difficulty existing with respect to the corporate form has to do with criminal acts committed by a corporation. Obviously, a corporation itself cannot be imprisoned, even though it is a “person.” Instead, most courts will levy a fine against a corporation that has violated a criminal statute. In recent years, criminal conduct that is attributable to a corporation’s officers or agents may subject those individuals to possible imprisonment. Violation of the Foreign Corrupt Practices Act or one of the environmental statutes such as CERCLA, for example, may subject an individual corporate officer to criminal liability.

Types of Corporations

Corporations may be categorized in terms of their relationship to the public, the nature of their activities, and the source of their authority. A corporation may be broadly described as for profit, not-for-profit (nonprofit) or public or private. For profit corporations are organized to make a profit, whereas nonprofit corporations are organized for charitable (eleemosynary), scientific, cultural, educational, or other benevolent purposes. They are usually private and may be used in conjunction with a regular corporation in order to facilitate making contracts with the government. Examples include hospitals, nursing homes, universities, sports associations, churches, charities, and fraternal organizations. Many not-for-profit corporations receive tax-deductible donations from third parties. Many are tax-exempt under state law. In some states or localities, some not-for-profit corporations do not pay real estate taxes or may pay such taxes at a reduced rate.

Corporations are considered domestic, foreign or alien depending upon where the corporation was incorporated and where it is doing business. A corporation is domestic with respect to the state under whose laws it is incorporated and foreign in all other states. A foreign corporation cannot automatically do business in another state. It must obtain a certificate of authority in the states in which it plans to operate. An alien corporation is one that is incorporated in a foreign country.

Corporations may be characterized as closely held, publicly held, multinational, Subchapter S (or S corporation), limited liability, or professional. In a closely held corporation (also called a close, closed, family, or privately held corporation), the shares of the corporation are held by one or a few shareholders. In many cases, the shareholders are members of a single family who retain complete control over all corporate-related matters. The stock issued by a closely held corporation is not publicly traded, that is, it is not bought and sold on any national stock exchange, for example, the New York Stock Exchange or NASDAQ. Hobby Lobby is an example of a closely held corporation.

Conversely, the stock of a publicly held corporation is traded on one or more U.S. stock exchanges. The operation of a publicly held corporation is vastly different from that of a closely held corporation. It is subject to national securities laws, the Securities Exchange Commission, and laws of the state in which it is incorporated, does business, or has its headquarters. Although shareholders own a publicly held corporation, effective control lies with the corporation’s directors, officers, and managers. Of all the forms of business discussed, the publicly-held corporation has the largest effect on the public at large, and is subject to many types of government regulation.

A multinational corporation, also called a transnational corporation, is a publicly held corporation that exports, imports, and distributes products or services and often seeks resource necessary to manufacture its product in a number of countries. Its stock may be traded on one or more foreign stock exchanges in addition to an exchange in the United States and its officers and directors may be citizens of several nations. Multinational corporations may have a far larger impact on society than publicly held corporations that “reside” in one country only.

A Subchapter S (or S corporation) is a form of business referred to by the subchapter designation of the Internal Revenue Code which governs its establishment. Shareholders of a corporation who meet the requirements of the IRC may elect Subchapter S status. A Subchapter S corporation is a combination of the features of corporate and partnership entities. S corporations operate as a corporation for liability purposes, but are taxed like a partnership. This allows shareholders to be treated as partners for tax purposes, while retaining the benefit of limited liability provided by the corporate form. An S corporation currently may not have more than 100 shareholders. All shareholders must be U.S. citizens or permanent residents of the United States. The corporation may only issue one class of stock and all shareholders must “elect” the Subchapter S form. Not all domestic general business corporations are eligible for Subchapter S status.

The professional corporation is a corporate entity usually formed by individuals such as doctors, accountants, lawyers, and other professionals. Benefits include tax advantages for deductions such as health benefits and pension plans. However, individuals who incorporate professionally are not protected against personal liability for negligent performance of their professional acts, such as malpractice, which is a form of professional negligence.

Classifications of Corporations

Public, Private, and Quasi-Public Corporations

A public corporation is one established for governmental purposes or for the administration of public affairs. A city is an example of a public or municipal corporation, acting under authority granted to it by the state. A private corporation, on the other hand, is organized for charitable and benevolent purposes or for purposes of finance, industry, and commerce. It is owned by private individuals rather than by the government. A quasi-public corporation, also called a public service corporation or public utility, is a private corporation furnishing services upon which the public is especially dependent, such as providing water, natural gas, or electricity.

Public authorities are created by the government as a service provider. The government can render services directly or through a separate corporation or authority. The Port Authority of New York and New Jersey, The New Jersey Sports and Exhibition Authority, and the Tennessee Valley Authority are examples of public authorities. Municipal parking authorities, sports and recreation facilities, and low-cost public housing projects may operate as public authorities.

Special Service Corporations are created to perform a particular service—transportation, savings and loan operations, insurance, banking and similar specialized purposes—are subject to special statutes with respect their organization. Federal and state laws and administrative agencies also regulate how these businesses are organized and conducted.

Benefit Corporations emerged in the U.S. due to calls for increased corporate awareness of their impact on society. These corporations are known as socially conscious corporations, social purpose corporations (SPC) (Washington), public benefit corporations (Delaware), benefit corporations or B corporations. Presently these types of organizations are authorized in 30 U.S. states and the District of Columbia. According to the comments to the Model Benefit Corporation Legislation (2016), benefit corporations are:

“a form of business corporation that offers entrepreneurs and investors the option to build, and invest in, a business that operates with a corporate purpose broader than maximizing shareholder value and that consciously undertakes a responsibility to maximize the benefits of its operations for all stakeholders, not just shareholders. Enforcement of that purpose and responsibility comes not from governmental oversight, but rather from new provisions on transparency and accountability…”

Benefit corporations may be either for-profit or not-for-profit. Well known U.S. benefit corporations include Patagonia, Kickstarter, Etsy and Seventh Generation. The purpose of a benefit corporation is to create a general or a specific public benefit. Public benefits are determined by considering the interests of various stakeholders or constituencies of the corporation such as shareholders, employees, customers, the community, society, the environment, global concerns, and the short and long-term goals of the corporation. The approach of the socially conscious corporation is recognition of what has been called the triple bottom line: people, planet, profit. These corporations seek to make a difference socially while, at the same time, making a profit.

The organization may have a director (known as the benefit director) or an officer (known as the benefit officer) to oversee the benefit purpose of the corporation. The benefit director/officer prepares the annual benefit report which analyzes the public benefit purpose of the corporation, identifies the benefit purpose standards of an independent third party, and articulates how the actions of the corporation within the past year fulfilled that purpose. Annual reports are filed with the Secretary of State and are provided to all shareholders. Independent third party audits are required in some states, while other states have created their own criteria. Benefit corporations that are certified by the world’s largest third party certifier, B Lab, are called B corporations or certified B corporations.

Socially conscious corporations are gaining popularity around the globe, and in late 2015, Italy became the first country outside of the U.S. to recognize this legal status. In spring 2016, five Italian companies organized as benefit corporations and three of those entities were B certified.

Formation Of A Corporation

As was previously noted, a corporation must be formed in compliance with state law. All fifty states have enacted their own laws to govern incorporation, as has the District of Columbia, Guam, and Puerto Rico. These statutes specify what must be included in the articles of incorporation. Generally, provisions will include identifying the corporation’s name, name and address of the registered agent, its general purpose, the class or classes of stock to be issued, the face value of stock, and the names and addresses of the incorporators of the business. Together with any required fees, this information is filed with the Secretary of State of the incorporating state. The secretary issues a certificate of incorporation (also called a charter) upon satisfaction of all statutory requirements.

Delaware has emerged as the major state of registration of corporations. The Supreme Court of Delaware is the most influential of all the state courts of this country with respect to the governance of corporations. More than half of all publicly traded companies in the U.S. are registered in Delaware and 64% of the nation’s 500 largest corporations are incorporated in Delaware, as are over 40% of the corporations listed on the New York Stock Exchange. Incorporation fees and corporate taxes are comparatively low, and laws are considered favorable to corporations, allowing corporations to operate with minimal state interference. Delaware also maintains a separate Chancery Court that, over time, has developed a staff of judges who have accumulated specialized knowledge in corporation law and who are attuned to their special needs and problems. Almost any conceivable issue involving corporate law has been presented in the Chancery Court. Therefore, corporate directors and managers and their attorneys can rely on the decisional law in planning corporate changes and legal strategies. This is especially true in cases involving corporate takeovers, acquisitions, and mergers.

A corporation is often formed through the use of promoters who arrange the initial plans for financing the corporation and who create the corporate charter or articles of incorporation. Promoters also sell stock subscriptions and obtain loans, materials, and supplies needed to start the corporation. Subscribers agree to invest in the original issue of stock in the proposed corporation. At this point, promoters are personally liable for the contracts executed because the corporation has not yet been “born.” Once the corporation is formed, it may adopt the promoters’ actions and agree to indemnify them for any such actions previously undertaken. Incorporators, who may or may not be the promoters, sign and file the articles of incorporation with the Secretary of State.

Upon successful filing of the articles of incorporation, the state will issue a charter/certificate of incorporation, and the corporation can begin to conduct business. The corporation calls its first board meeting. The board of directors is elected, stock certificates are issued, and a set of bylaws to govern the operation of the corporation is adopted. The board of directors convenes at the second meeting to elect corporate officers and address those issues necessary to begin business.


The rules and regulations enacted by a corporation to govern its business and its shareholders, directors, and officers are called bylaws. They are usually adopted by shareholders, but in some states they may be adopted by the directors. The state of incorporation is not required to approve bylaws or an amendment made to the corporate charter. They are generally private matters for the corporation.

Corporate bylaws are subordinate to the laws of the state of incorporation, the statute under which the corporation is formed, and the charter of the corporation. A bylaw that conflicts with one of these superior controls or that is judged to be unreasonable is invalid. Valid bylaws are binding on all shareholders, but not necessarily on third parties unless they have notice or knowledge of them.

Corporate Seal

A corporation may have its own distinctive seal. Its use is not required unless it is mandated by statute or unless a natural person is required to use it in transacting corporate business. The use of the seal authenticates the power of the officer to conduct business on behalf of the corporation, but is still largely ceremonial.

Improper Formation

Once the formation procedures are complete a de jure corporation results. Neither the state nor any party may question its existence. However, sometimes the incorporators, in making a “good faith effort” to comply with state incorporation laws, fail to do so. A court will then find that a de facto corporation exists. Although there has not been total compliance, the entity will be treated as a corporation for legal and other purposes. In this situation, only the state may challenge its existence. Shareholders in the de facto corporation maintain limited liability, to the extent of their capital contribution.

Sometimes an entity substantially deviates from the prescribed statutory procedure or has been judged not to have acted “in good faith.” In this case, the entity is neither a de jure nor a de facto corporation. As noted, states require a business to file its articles of incorporation before a corporation emerges. Nevertheless, states may still treat the business that has not filed its articles as a corporation by estoppel. A business that acts like a corporation, follows the tax and other laws applicable to corporations, and issues stock as a corporation will not be permitted to deny the existence of the corporate form for purposes of avoiding payment of dividends of its stock.

Piercing the Corporate Veil

There are instances in which individuals will attempt to create a corporation for illegal purposes or to hide the assets of stockholders, thereby shielding them from personal liability. The business acts like a corporation, but exists in name only. Such an entity is considered the alter ego of the shareholders. In such cases, the corporation usually does not hold shareholder meetings, board of director meetings, does not keep minutes of meetings, nor maintain financial books for the corporation. The sham operation attempts to protect the assets of the individuals from creditors. If a creditor sues the “corporation,” the court may be able to pierce the corporate veil and hold the shareholders personally liable for the “corporation’s” debts. A similar result would obtain where the shareholders commingle corporation and business assets or where corporate assets are used to pay the personal, private debt of a shareholder. The corporate form may also be pierced if the corporation fails to file required forms, informational documents, or fails to pay taxes- especially payroll taxes—as required. These actions are termed as a violation of the “corporate formalities” doctrine.

Financing the Corporation

The financial basis of a corporation is normally comprised of portions of both debt and equity. Loans made to the corporation are debt and the sale of interests in the corporation, i.e., ownership of stock, is equity.

Debt is created through the use of three general types of instruments or debt securities: notes (short-term loans), corporate bonds (generally long-term loans which are often secured by a lien or mortgage on corporate assets/collateral), and debentures (unsecured long-term loans). Generally, the corporation will make periodic interest payments on the loans. The corporation is the debtor and the security holder is the creditor. The interest paid on debt securities is tax deductible to the corporation. However, dividend payments to the owners of equity instruments in the corporation are not tax deductible. This makes debt financing an especially appealing means for a corporation in order to obtain financing. Risks are present as well. If a corporation is financed too heavily with debt, the IRS may consider it too thinly capitalized and loans made by shareholder may be characterized as capital contributions or subordinated to other creditors. This is an operation of the “excessive debt to equity” rule.

Equity is raised by corporations through the sale of stock. Stock represents an ownership interest in a corporation. Shareholders (sometimes called stockholders) are the corporation’s owners who possess rights to control the business by voting on numerous corporate matters, including the election of directors. Shareholders receive income through the distribution of dividends, and, if and when a corporation dissolves, share in its net assets, in proportion to the number of shares of stock in a corporation that each person owns. Shareholders enjoy free transferability of their shares of stock, with the possibility exception of shares in a close corporation.

A corporation must authorize the number of shares of stock in its articles of incorporation. However, not all shares will be issued or sold. The Revised Model Business Corporations Act (RMBCA) requires that the articles of incorporation authorize one or more classes of stock entitling owners to unlimited voting rights and one or more classes of stock entitling owners to share the net assets of the corporation upon its dissolution. One class of stock may contain both of these provisions.

Classes Of Stock

Common stock generally gives owners the right to vote on corporate matters, receive income through dividend distribution, and receive compensation upon the sale of stock. No preferential benefits attach to ownership, so shareholders of common stock bear the greater risk of financial downturns or a complete loss of their investment in case a corporation is forced to file bankruptcy or can not pay its debts.

Preferred stock contains some form of dividend payment or asset distribution rights not given to shares of common stock. For example, preferred stock shareholders may receive dividends before common stock shareholders at a specific rate of return expressed in the articles of incorporation. Preferred stock can be issued in different classes or series. Differences or preferences involve dividend, liquidation, and voting rights. Preferred stock is limited in its voting rights and a corporation usually has the right to redeem or exchange it for a previously established or determined amount of money.

A cumulative preferred stockholder will not lose the right to receive dividends in a year when holders of other classes of stock in a corporation do not receive any dividends at all. If they do not receive the dividend in that year, the dividend is postponed (accumulated) to a year in which dividends are distributed. Additionally, holders of cumulative preferred stock will receive all past and current dividends due before holders of common stock receive any dividends.

Participating preferred stock occurs where owners receive dividends first and at a rate higher than the common stock shareholders do. Any remaining income is shared by both classes of shareholders based on the number of shares owned. If there is a corporate liquidation, preferred stock holders may be paid at par (face) value or a previously specified amount first. Then common stock holders may be paid based on the assets remaining in the corporation. Convertible preferred stock may be exchanged for common stock at an established price ratio.

The irrelevance of these classifications may increase as more states adopt the RMBCA. The act states that the articles of incorporation of a company must express the classes of stock and number of shares in each class, but does not refer to specific classes of stock as common or preferred. Thus, under the RMBCA, if only one class of stock is created in the articles of incorporation, the stock carries with it voting rights and participation rights in corporate assets. If more than one class of stock is created, the board of directors of the corporation must authorize or designate the distinguishing elements of each class.

A corporation may issue the right to purchase a specific number of shares of stock at a specific price for a specific period of time in an instrument called a stock warrant. A stock warrant may be traded as is the stock itself. If an employee receives such rights as employment compensation, it is called a stock option. The employee may not trade these rights, however, under current law. It is important to consult with a tax professional as to issues relating to the taxability of any exercised stock warrant or a stock option.

Management Of A Corporation

The management of a corporation is in the hands of shareholders, the board of directors, and corporate officers and managers. To what extent each group has power over the other varies within each corporation and may depend on a corporation’s articles of incorporation or bylaws.


Shareholders own the corporation, yet they have no direct control as one would expect an owner to possess. Shareholders have no agency relationship with a corporation. Shareholders may exercise their right to vote for members of the board of directors. Shareholders’ meetings are usually held annually at a time provided in the corporate bylaws. The board of directors may also call special shareholders’ meetings upon proper notice being given.

Shareholders are not required to attend shareholder meetings in order to cast their votes. They may delegate their power to vote through a proxy, which is a written authorization to cast votes. The SEC has established proxy rules, which provide for the use of a ballot form to solicit proxies. The form must state that the shareholder’s wishes will be carried out with respect to his or her voting instructions. Alternatively, a shareholder may give the proxy committee the power to vote his or her shares as they see fit. The proxy committee sends each shareholder a list of candidates and short biographies of each person up for election. They also send a statement of any resolutions upon which shareholders are expected to vote.

Because most shareholders do not attend annual meetings, power ostensibly rests with the corporation’s management. An individual shareholder of a large corporation normally does not have the power to have a director of his or her choosing placed on a ballot and actually win election. The management team actually selects those individuals it wants to serve on the board. Shareholders provide either tacit approval by voting for them or not. As the proxy committee has access to corporate funds and a shareholder may only resort to personal funds, it is not hard to see who holds the true power in electing a board of directors.

The Board Of Directors and Corporate Officers

Most boards of publicly held corporations do not actually manage a corporation in the true sense of the word. They are more likely to act as overseers and set a corporation’s overall policy. It is in this role that the board authorizes a dividend payment, alters a corporations’ capital structure, selects and removes corporate officers and executive personnel, decides on the amount of compensation payable to executives, approves of executives’ pension plans, and approves changes a corporation’s bylaws. Often, however, the board simply approves the plans put forth by the corporation’s officers and management team. In 2002, in response to several corporate scandals, the Sarbanes-Oxley Act was passed adding additional governance standards for directors.

The power to control a corporation usually lies in the corporate officers and management team. These individuals act on behalf of the corporation as its agents and are directly responsible for day-to-day business operations. As a matter of tradition and business practice, a corporation will have a president (CEO), vice-president, and treasurer, but the RMBCA does not express any particular requirements as to corporate officers.

Corporations – especially very large ones – tend to operate on a more impersonal level than smaller entities such as partnerships or S corporations. However, the law requires that corporate management bear certain responsibilities. Officers and directors of the corporation are fiduciaries. As such, they have a legally enforceable fiduciary obligation to shareholders. The RMBCA sections 8.30 and 8.42 state these duties expressly. Directors’ duties include the duty of care, the duty to become informed, the duty of inquiry, the duty of informed judgment, the duty of attention, the duty of disclosure, the duty of loyalty, and the duty of fair dealing. Officers and directors must exercise their obligations “in good faith,” with the care an ordinarily prudent person in a like position would exercise under similar circumstances and in a manner he or she reasonably believes to be in the best interests of the corporation.

Under the corporate opportunity doctrine, a corporate officer or director may breach his or her fiduciary duty if he or she takes advantage of an opportunity that should belong to the corporation and benefits personally from that action. In such a case, a court might impose a constructive trust on any profits made in breach of this fiduciary duty.


Case Study

Haseotes v. Cumberland Farms, Inc.

284 F.3d 216 (1st Cir. 2002)

Procedural Posture

Appellee, a corporation, filed a Chapter 11 petition for reorganization and appellant, a director, filed claims for pre-petition indebtedness. The bankruptcy court approved the corporation’s set-off claim on the grounds that the director had breached a duty of loyalty. The United States District Court for the District of Massachusetts affirmed. The director appealed the judgment.


In 1992, Cumberland Farms, Inc. (“Cumberland”), a close corporation owned by the six siblings of the Haseotes family, filed a petition for reorganization under Chapter 11 of the Bankruptcy Act. Demetrios B. Haseotes – one of Cumberland’s directors and the appellant here filed claims against the corporation for roughly $3 million of pre-petition indebtedness owed on certain promissory notes. In response, Cumberland asserted a set-off claim of approximately $5.75 million, arguing that Haseotes breached his duty of loyalty when he caused his wholly-owned company to pay down a debt owed to him, while ignoring a much larger debt owed to Cumberland.

The bankruptcy court found that the director had breached a duty of loyalty when he caused his wholly-owned company to pay down a debt owed to him, while ignoring a much large debt owed to the corporation. **** The bankruptcy court correctly found that the disputed repayments fell within the contours of the corporate opportunity doctrine because any funds that became available in the director’s wholly owned corporation provided an opportunity to pay down the large debt owed to the corporation. Moreover, the director had not disclosed the opportunity to the corporation given evidence that the other corporate directors were not aware of the payments. Thus, the bankruptcy court did not err in finding that the director breached his duty of loyalty to the corporation. ****
As a member of Cumberland’s board of directors, Haseotes owed the corporation a fiduciary duty of loyalty and fair dealing. As the bankruptcy court observed, the principles governing a director’s duty of loyalty are “broad and pervasive.” *** Corporate directors must “act with absolute fidelity to the corporation] and must place their duties to the corporation above every other financial or business obligation.” **** The fiduciary duty is “especially exacting where the corporation is closely held.” **** In a close corporation like Cumberland, “the relationship among the stockholders must be one of trust, confidence and absolute loyalty if the enterprise is to succeed…. All participants rely on the fidelity and abilities of those stockholders who hold office. Disloyalty and self-seeking conduct on the part of any stockholder will engender bickering, corporate stalemates, and perhaps, efforts to achieve dissolution.” ****

In an attempt to give substance to the general duty of loyalty, courts have recognized several more specific obligations. We focus here on a particular variant known as the corporate opportunity doctrine, which prohibits a director “from taking, for personal benefit, an opportunity or advantage that belongs to the corporation.” ***

In sum, we conclude that the bankruptcy court did not err in finding that Haseotes breached his duty of loyalty to Cumberland when, without informing Cumberland’s board of directors that money had become available in CCP, he caused CCP to apply the money toward it debt to Haseotes’s shipping operation, rather than its larger debt to Cumberland.


The judgment of the district court was affirmed.

Issues relating to real or apparent conflicts of interest present numerous present possible avenues for litigation. A conflict may arise when an officer or director of a corporation becomes involved in a transaction with the corporation. Under the RMBCA, a transaction in which a conflict of interest exists will not be deemed to be improper under three basic circumstances:

  1. If the material facts of the transaction and those of the director’s or officer’s interest were disclosed or otherwise known to the board or one of its committees and it authorized or otherwise approved the transaction;
  2. If the material facts of the transaction and the director’s or officer’s interest were known to the shareholders entitled to vote and they approved the transaction; and
  3. If the transaction was “fair” to the corporation.

This last component has proven to be problematic in its application. For example, the payment of huge sums of money to board members under a “golden parachute” arrangement or the payment of commissions or “finder’s fees” to a board member which are authorized by the board of directors often raise questions of a conflict of interest.

The Business Judgment Rule

Officers and directors are obligated to control, manage, and invest the corporation’s assets for the benefit of the corporation. They owe both the stockholders and the corporation a duty to act honestly and with due diligence. These are legal duties. The duty of honesty explicitly forbids individuals acting as fiduciaries from personally profiting at the corporation’s expense. As agents of the corporation, they must maintain loyalty to it; they are forbidden from subsuming its interest to their own. Due diligence means that fiduciaries must exercise reasonable care in managing the corporation’s affairs. They may be held personally liable for acting negligently in running the corporation and making irrational or careless decisions on its behalf. However, in performing responsibilities to the corporation with reasonable care, a director will be protected by the business judgment rule.

Officers and directors are legally obligated to perform their duties as they would reasonably believe to be in the corporation’s best interests. They will not be held liable for making an “honest mistake.” If a director or officer makes a business decision in good faith and without consideration of personal gain, courts will refrain from questioning the virtue of the decision and will not impose personal liability on an officer or director.

Guidance is also provided in the RMBCA. A director is entitled to rely on reports and other information obtained from officers or employees of the corporation whom the director reasonably believes are reliable and competent. A director also may rely on the advice of legal advisors or accountants on matters within their respective scopes of expertise or upon a committee of directors (but not a committee upon which the director serves) if the director reasonably believes the committee deserves his or her confidence.

Review Brehm carefully.

Case Study

Brehm v. Eisner

906 A.2d 27 (Del. 2006)

Procedural Posture:

Appellant shareholders brought derivative actions on behalf of appellee corporation against appellees, the corporation’s former president and directors who served at the time of the events complained of. The Court of Chancery of the State of Delaware, in and for New Castle County, ruled in favor of appellees, finding that the director defendants did not breach their fiduciary duties or commit waste. Appellants challenged that judgment.


In August 1995, Michael Ovitz (“Ovitz”) and The Walt Disney Company (“Disney” or the “Company”) entered into an employment agreement under which Ovitz would serve as President of Disney for five years. In December 1996, only fourteen months after he commenced employment, Ovitz was terminated without cause, resulting in a severance payout to Ovitz valued at approximately $130 million. In January 1997, several Disney shareholders brought derivative actions in the Court of Chancery, on behalf of Disney, against Ovitz and the directors of Disney who served at the time of the events complained of (the “Disney defendants”). The plaintiffs claimed that the $130 million severance payout was the product of fiduciary duty and contractual breaches by Ovitz, and breaches of fiduciary duty by the Disney defendants, and a waste of assets. After the disposition of several pretrial motions and an appeal to this Court, the case was tried before the Chancellor over 37 days between October 20, 2004 and January 19, 2005. In August 2005, the Chancellor handed down a well-crafted 174 page Opinion and Order, determining that “the director defendants did not breach their fiduciary duties or commit waste.” The Court entered judgment in favor of all defendants on all claims alleged in the amended complaint. The plaintiffs appealed from that judgment, claiming that the Court of Chancery committed multitudinous errors.

The shareholders claimed that a decision to approve the president’s employment agreement and a decision to terminate him on a non-fault basis resulted from various breaches of fiduciary duty by the president and the corporate directors. The supreme court disagreed. No reasonably prudent fiduciary in the president’s position would have unilaterally called a board meeting to force the corporation’s chief executive officer to reconsider his termination and the terms thereof, with that reconsideration for the benefit of shareholders and potentially to the president’s detriment. The decisions to approve the president’s employment agreement, to hire him as president, and then to terminate him on a no-fault basis were protected business judgments, made without any violations of fiduciary duty. Having so concluded, it was unnecessary to reach the shareholders’ contention that the directors were required to prove that the payment of severance was entirely fair. Because the shareholders failed to show that the approval of the no-fault termination terms of the employment agreement was not a rational business decision, their corporate waste claim failed.


The judgment was affirmed.

Corporate Liability

Because a corporation is a distinct legal entity, it can execute its own contracts. Those individuals working for the corporation – agents, officers, directors, managers, and shareholders – are not personally liable for a breach of the corporation’s contracts. However, if any of these persons personally guaranteed performance of a corporation’s contract, he or she may be held liable if the corporation fails to perform. Frequently, officers or stockholders in small corporations having limited capital resources will be required to make personal guarantees on the corporation’s contracts. If this occurs, the individual is personally liable for the contract so guaranteed, but not for any other corporate debts or contracts. Naturally, an agent acting without the required authorization may be held liable to third parties damaged by the unauthorized acts of the agent.

Torts committed against a third party by a corporate agent or employee will result in personal liability by the tortfeasor (the person who committed the tort) to the third party for any damages suffered. If a tort is committed within the scope of an agent’s or employee’s duties, the corporation is liable for damages under the doctrine of respondeat superior, discussed in detail in the Chapter on Agency. Generally, a court will award punitive damages if an intentional tort is committed by or approved by an employee at the management level. Others within the corporate structure – shareholders, directors, managers, officers, agents, employees – are not personally liable for a tort they did not personally commit or approve. The actual tortfeasor and the corporation itself are liable.

The obligations of majority shareholders to minority shareholders are more difficult to define. Some courts hold that the majority has a fiduciary duty to the minority, but this duty is not absolute. Obviously, all stockholders have the right to vote their shares in their own best interest and as they see fit. If the result is disadvantageous to the minority, not much can be done. This is the premise of majority rule in a corporation.

Nevertheless, some limitations do apply. Where the majority’s decision results in an abuse of the minority shareholders rights or deprives them of a previously agreed upon benefit, a court may intervene. This typically occurs in small, closely-held corporations where an individual shareholder may sue the corporation because of a disagreement with an action taken by the majority. This suit is termed as a derivative suit. However, if damages are awarded as a result of a derivative suit, they are normally paid to the corporation and not to any individual shareholder who has suffered damages.


Publicly traded corporations, also called C Corporations, are separate legal entities and are taxed as such at the state and federal level. The taxation of a corporation results in what is often referred to as “double taxation,” where one might hear the phrase, “corporations are taxed twice.” In essence what this means is that first, the corporation pays a tax on its profits and then second, shareholders will pay a tax on any dividends received from the corporation. The income the corporation earned is taxed twice, once at the corporate level and then again at the shareholder level.

Corporations can elect to be taxed as Sub-S corporations, with the benefit of pass-through taxation, but are subject to restrictions on the number of and type of shareholders.

Powers of Corporations

A corporation becomes a recognized entity upon the filing of its articles of incorporation with the Secretary of State, as long as these articles conform to the state statute governing incorporation. Generally, the statute declares that every corporation formed under the state’s law will have certain powers unless the articles of incorporation expressly exclude some of the listed powers. The statute then lists every possible power necessary to run a business. Some states make a blanket grant of all powers that a natural person running the business would possess. As a result, the modern corporation possesses a broad range of powers, including the power to:

  • Issue Stock: A corporation may issue certificates of stock representing a fractional interest in the ownership of the property possessed by the corporation. Shareholders do not own or hold an interest in any specific property of the corporation.
  • Repurchase Stock: A corporation may repurchase its own stock if it is solvent at the time of purchase and it does not impair capital assets. When repurchased, this type of stock is then typically called treasury stock. Such shares can be then sold by the corporation at a price determined by the corporation. They can be sold at less than par value, unlike original shares, which cannot. The RMBCA has eliminated the concept of par value and the technical differences between original shares and treasury shares.
  • Execute Contracts: A corporation may execute contracts in its own name.
  • Borrow Money: A corporation has the implied power to borrow money for an authorized business purpose. A corporation may issue bonds as a means for borrowing money.
  • Execute Commercial Paper: Corporations are empowered to issue or indorse commercial paper and to accept drafts.
  • Acquire Real and Personal Property: In order for a corporation to carry out its express powers, corporate property may be acquired, leased, assigned for the benefit of creditors, or even sold. A number of states require that a solvent corporation may not transfer all of its property without obtaining the consent of all or a substantial majority of the stockholders. A corporation with the power to incur debts may mortgage or pledge its property as security or collateral for those debts. Franchises or public service companies, such as a public transportation system or a public utility company, cannot mortgage or pledge their property without the approval of state and federal regulatory authorities.
  • Conduct Business in a “Foreign State”: A corporation has the express authority to engage in business in other states. It must adhere to the laws of all foreign states in which it does business.
  • Participate in Other Businesses: A corporation, like a natural person, may participate in joint ventures and partnerships. The RMBCA permits a corporation to be “a promoter, partner, member, associate, or manager of any partnership, joint venture, trust, or other entity.”
  • Provide Employee Benefits: The RMBCA grants a corporation the power “to pay pensions and establish pension plans, pension trusts, profit-sharing plans, share bonus plans, share option plans, and benefit or incentive plans for any or all of its current or former directors, officers, employees, and agents.” The ERISA law may apply in such circumstances.
  • Make Charitable and Political Contributions: The RMBCA authorizes a corporation “to make donations for the public welfare or for charitable, scientific, or educational purposes.” No limit is placed on the amount that may be donated; however, some states through tax provisions may limit the amount that can be deducted from income as a business expense for charitable purposes.

Corporations were generally prohibited from making political contributions to individual candidates for public office, but not to political action committees (PACs). This changed as a result of the 2010 Supreme Court decision in the Citizens United case. In Citizens United v. FEC, the U.S. Supreme Court rejected the notion that political speech protections rest on the identity and wealth of the speaker, and found that First Amendment protections applied to corporations and other associations which contribute to political discussion and debate. The Court held that “the government may regulate corporate speech through disclaimer and disclosure requirements, but it may not suppress that speech altogether.” More specifically, the Court held “the ban imposed … on corporate independent expenditures violated the First Amendment because the Government could not suppress political speech on the basis of the speaker’s identity as a nonprofit or for-profit corporation. Austin v. Michigan Chamber of Commerce, which permitted such restrictions, and the portion of McConnell v. Federal Election Comm’n, that had upheld § 414b were overruled in Citizens United.

The implications of this decision upon corporations and unions and on the American political process are yet to be fully realized and are the subject of sharp differences of opinion and political debate.

Ultra Vires Acts

A corporation acting in excess of or beyond the scope of the powers granted by its charter and the statute under which it was organized is said to be acting ultra vires, which literally means “beyond its powers.” The RMBC and some state statutes provide for such a broad range of corporate powers that it is almost impossible to find an action this is ultra vires, unless the act was specifically excluded.

Not-for-profit corporations are more restricted as to the range of powers granted to them. Certain actions not authorized by the charters of nonprofit corporations may be determined to be ultra vires on their face.

A claim that a corporation has acted ultra vires cannot be raised to attack the validity of any act, contract, or transfer of property unless such act, contract, or transfer of property is extreme. For example, if a garbage removal corporation suddenly began a movie production company, it could be argued that the act was ultra vires. Some states have adopted an extreme position and have determined that an ultra vires contract has no effect because it was not authorized and, as such, went beyond the power of the corporation.

If an ultra vires contract has been completely performed, most states will not allow either party to claim the act was ultra vires in an attempt to rescind the contract. However, if neither party to the ultra vires contract has performed, some courts will not enforce the contract or hold either party liable for its breach.

Every state permits shareholders to obtain an injunction or to file a derivative suit to stop a corporation’s board of directors or other persons involved from entering into an ultra vires transaction. A corporation or a shareholder acting on its behalf may sue those individuals who made or approved a contract in order to recover damages for the loss incurred by the corporation resulting from the ultra vires act. Finally, a state attorney general may bring an action to revoke a corporation’s charter if it repeatedly acts ultra vires. Individual state laws should be consulted relating to the legal effects of a purported ultra vires act.

Government Regulation

Corporations are created by law and regulated at the state and federal levels. State laws govern the creation, organization, and management of this business entity. States also have their own statutes regulating sales of stock and securities within their state, called “Blue Sky” laws. Federal securities laws, for example, the Securities Act of 1933 and the Securities Exchange Act of 1934, regulate the initial issuance and secondary sales of corporate securities, along with such issues as insider trading and whistleblowing. The Sarbanes-Oxley Act created rules regarding accounting and corporate governance that corporations must follow. In addition, and depending upon the service or product offered by the corporation, the entity will have to deal with a host of state and federal administrative agencies. On the international level, corporations must first comply with domestic law that regulates business activities outside the U.S., such as import and export regulations and the Foreign Corrupt Practices Act of 1978, a statute which addresses accounting issues and makes bribery illegal.


Theoretically, a corporation can function in perpetuity. However, corporations will terminate or dissolve under certain circumstances that can be either voluntary or involuntary. Voluntary dissolution occurs when the corporation files a certificate of dissolution with the Secretary of State. The board of directors and shareholders usually must approve the dissolution. This form of dissolution may occur when a company ceases to make a profit or if it is attempting to fend off a hostile takeover.

Involuntary dissolution may result from an administrative or judicial procedure – usually when a corporation fails to comply with administrative requirements, such as paying taxes, failing to maintain a statutory agent, or failing to file required forms. A shareholder also may sue to dissolve a corporation based on an allegation of gross mismanagement or unfair treatment of stockholders.

Once the corporation is dissolved, the board of directors or a court-appointed trustee must wind up its affairs, including liquidating all corporate assets and distributing any proceeds. The proceeds are distributed to creditors first and then to shareholders. In certain cases, debts to shareholders may be subordinated to the debts of other creditors. In other cases, the debt to a shareholder who has acted improperly may be converted to shareholder equity.

Students will learn much more about the nature and function of corporations in their classes in accounting, corporate finance, and individual (personal) and entity taxation.

Hybrid Organizations

Limited Liability Company

A limited liability company (LLC) is a hybrid form of business organization that blends elements of partnership and corporate structures, previously discussed. An LLC shares with a corporation the characteristic of limited liability, and it shares with a partnership is pass-through income taxation and its management structure. LLCs are the creation of state law that must be consulted concerning the particulars of tax treatment. The LLC is considered as a more flexible business vehicle than a corporation, and it is a well-suited business association form for companies with a single owner. However, some states require more than one person to create an LLC.

Much like a corporation, LLCs are created by filing a certificate of organization with the Secretary of State. The owners of the LLC are called members. Once the articles of organization are filed, the members create the operating agreement, which is similar to a partnership agreement. The Revised Uniform Limited Company Act (RULLCA 2006) provides for default provisions for LLCs. LLCs can be member-managed or manager-managed unless specified in the operating agreement to be manager-managed. Members of an LLC owe a fiduciary duty of loyalty and due care to the LLC and to the other members including the obligation to provide an accounting, refraining from self-dealing and competition. In addition, members of the LLC may inspect the business record and must provide information to other members pertaining to the business. In exercising the duty of due care, the member will ordinarily be protected by the Business Judgment Rule and must act with the care that a person in a like position would reasonably exercise under similar circumstances and in a manner the member reasonably believes to be in the best interests of the company.


For purposes of the federal income tax purposes, LLCs are treated as a “pass-through” vehicle or entity. If there is only one member in the company, the owner of the LLC would report the income of the LLC on his or her individual tax return. For those LLCs with multiple members, the LLC is treated as a partnership and will file the IRS Form 1065. The members of the LLC are treated in the same manner as partners and each would receive a K-1 reporting the share of the LLC’s income or loss to be reported on that member’s individual tax return. As an option, LLCs may also elect to be taxed as a corporation by filing IRS Form 8832. As such, an LLC can elect to be treated as a regular C Corporation or as an S Corporation.


Similar to a partnership, members can voluntarily withdraw from an LLC or transfer their interest, or involuntarily disassociate upon death, expulsion, bankruptcy or other judicial decree. Disassociation and dissolution will trigger the termination of the LLC and the winding up of the affairs of the business. Upon completion of winding up, the LLC must file a certificate of dissolution with the Secretary of State.

Advantages and Disadvantages of the LLC

The greatest potential advantage of the LLC is that of limited liability. Owners of the LLC are protected from some or all liability for acts and debts of the LLC depending on state laws. However, the creation of an LLC does not automatically guarantee that owners will be fully protected from personal liabilities. As in the case of some “S Corporations” or closely held corporations, courts may “pierce the corporate veil” of an LLC – especially if there has been some type of fraud or misrepresentation, failure to observe corporate formalities, commingling of assets, or under-capitalization involved.

The LLC is fairly simple to create and once created, requires much less paperwork and record keeping than a corporation. Similar to ownership corporate stock, the owner’s interest in an LLC is considered personal property and is freely transferrable. However, the owner/member does not have any interest in the specific property or assets of the LLC.

On the other hand, while in most states there is no statutory requirement for creating an operating agreement, members of the LLC who operate without an operating agreement may face many potential organizational difficulties. Unlike well-developed state laws regarding corporations that issue stock which provide for detailed rules for the functioning of the corporation or for the protection of shareholder rights, most states do not require detailed governance and protective provisions for the members of a limited liability company. For example, the management structure of an LLC may be unfamiliar to many. Unlike a corporation, an LLC is not required to have a board of directors or corporate officers. The principals or owners of an LLC use many different titles – e.g., member, manager, managing member, managing director, president, chief executive officer (CEO), and even partner. Because of this lack of uniformity, it may be difficult to determine who actually has the authority to enter into a contract on behalf of the LLC.

On the financial side, issues of “risk and return” may be paramount. It may be more difficult to raise capital for an LLC. Investors may be more at ease investing funds in one of the traditional corporate forms with a view toward the eventual launch of an Initial Public Offering (IPO) of stock through a national stock exchange. In addition, many states may level a “franchise tax” or “capital values tax” on an LLC, which is a fee that the LLC pays the state for the benefit of limited liability.

If an LLC decides to “go public” and offer stock ownership for sale, the entity will lose its preferred tax status and will be taxed as a corporation.

Variations of the LLC exist. A “Professional Limited Liability Company” (PLLC or P.L.) is a type of limited liability company organized for the purpose of providing professional services, such as those provided by doctors, chiropractors, lawyers, accountants, architects, or professional engineers. Exact requirements of a PLLC will vary from state to state. Typically, the members of a PLLC must all be licenses professionals practicing the same profession. Based on state law, the limitation of personal liability of LLC members does not generally extend to professional malpractice or professional negligence claims raised against any individual member.

Limited Liability Partnership

A limited liability partnership (LLP) is a hybrid business organization that exhibits characteristics of both a partnership and a corporation. This type of partnership is similar to a corporation as some or all partners (depending on the jurisdiction) have limited liability. In a standard LLP, one partner is not responsible or liable for another partner’s misconduct or negligence. Unlike corporate shareholders or limited partners, LLP partners have the right to manage the business directly. An LLP is generally managed and taxed as a pass-through entity under rules established for partnerships—thus avoiding double taxation. The LLP is well suited for businesses when all investors are professionals and wish to take an active role in management.

LLPs are created by filing articles of limited liability partnership with the Secretary of State. The name of the partnership must include “limited liability partnership” or LLP. Much like corporations, the LLP is domestic to the state where it organized and foreign to all other states in which it does business. The RUPA is the default for matters not addressed in the LLP partnership agreement.

Special Forms Of Conducting Business

Once the form of a business organization has been chosen, entities can conduct business using joint ventures, licenses, or as a franchise. These forms of conducting business are not types of business organizations, but rather, they are ways or methods used to carry out the business of the entity. Many business organizations in the United States use these methods in order to achieve special goals or objectives of their organizations. Organizers must understand the differences among these methods and how they can be used to benefit their organization.

Joint Ventures

Joint ventures are not a separate form of business organization. A joint venture is a method used to conduct business based upon a contractual agreement. In a joint venture, existing businesses come together to conduct business. A joint venture is essentially a partnership for some limited purpose or for a limited time-period. The parties share taxes, profits, and liabilities according to the terms of the agreement between the joint venture partners. Typically, businesses use joint ventures in international business in order to gain entry or to penetrate into a foreign market. Due to the complicated nature of international business and different laws found in various countries, organizers must carefully research the implications of using a joint venture to achieve organization goals. For example, China was initially penetrated through the vehicle of a joint venture, with the partner in China often a state-owned-enterprise or SOE.


A license is a contractual agreement between the owner (licensor) of real, personal, or intellectual property (patents, trademarks, copyrights, technology) and the licensee in which the licensee is granted the right to manufacture, produce, or sell, or use a trade name or brand name belonging to the licensor, usually in exchange for a fee called a royalty. The licensing agreement states the terms of the license, including conditions on use, length of term, royalties, dispute resolution, and all other conditions. License agreements can benefit businesses by coming to market with a name, product, or service already recognized by the public.


Franchises are a method of conducting business created by a contractual agreement between the franchisor and the franchisee. The franchisor grants the franchise and the franchisee is the recipient. Franchises are regulated at the state level and at the federal level by the Federal Trade Commission (FTC). The FTC seeks to prevent unfair and deceptive practices in the sale of franchises. The FTC defines a franchise as: “any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:

  • The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark;
  • The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and
  • As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate.” (16 C.F.R. 436)

The agreement controls the relationship between the franchisor and the franchisee. Prior to entering into an agreement, the FTC, through the Franchise Disclosure Document or FDD, requires the franchisor to disclose certain material facts to the franchisee in order to aid the franchisee in their decision to enter into the agreement, including the following:

  • The Franchisor and any Parents;
  • Predecessors, and Affiliates;
  • Business Experience;
  • Litigation;
  • Bankruptcy;
  • Initial Fees;
  • Other Fees;
  • Estimated Initial Investment;
  • Restrictions on Sources of Products and Services;
  • Franchisee’s Obligations;
  • Financing;
  • Franchisor’s Assistance, Advertising, Computer Systems, and Training;
  • Territory;
  • Trademarks;
  • Patents, Copyrights, and Proprietary Information;
  • Obligation to Participate in the Actual Operation of the Franchise Business;
  • Restrictions on What the Franchisee May Sell;
  • Renewal, Termination, Transfer, and Dispute Resolution;
  • Public Figures;
  • Financial Performance Representations;
  • Outlets and Franchisee Information;
  • Financial Statements;
  • Contracts; and
  • Receipts. §436.4 (16 C.F.R. 436.4)

There are three main types of franchises:

  1. Manufacturing: the franchisor grants the franchisee authorization to manufacture and sell trademarked products;
  2. Product: the franchisor’s products are sold to a franchisee who then resells to customers in a geographic area (for example, an automobile dealership);
  3. Business format: a type of franchise which includes the ability of a franchisee to use the franchisor’s trademark/trade name, licenses, containing provisions for the purchase of goods or supplies, method of operation, support, marketing, etc. (for example, fast food restaurants). The franchisor must exert “quality control” of the franchise operation as a part of its contractual obligation.

As noted above, the franchise agreement is required to include terms for renewal, termination, transfer, modifications, breach, and dispute resolution. Termination provisions generally include terms relating to early termination by mutual consent of the parties, termination “without cause,” termination “with cause,” and whether or not franchisee can “cure” any deficiencies. The agreement should also provide for assignment of rights, transfers to a third party, the insolvency, bankruptcy or death or disability of the franchisee.

Advantages and Disadvantages of Franchises

Advantages of franchises include the ability of the franchisee to start up a successful business in a relatively short period of time, with a publicly recognized product/service/format; the advantage of corporate support in the forms of management, training, research, development, advertising and marketing pursuant to the “Quality Control” obligation of the franchisor; protection from competition within a territory; reduced costs for purchasing products; and greater capitalization opportunities. Disadvantages may include the payment of large franchise fees (including start up fees), continued royalties, loss of independent control of the management of the business; lack of individualized decision-making; length of the agreement; ties to required suppliers (some of which may be illegal under antitrust law); and exposure to corporate problems.

Additional Business Opportunities

The FTC also regulates other business opportunities separately from franchises. A business opportunity is a commercial agreement in which:

  • A seller solicits a prospective purchaser to enter into a new business; and
  • The prospective purchaser makes a required payment; and
  • The seller, expressly or by implication, orally or in writing, represents that the seller or one or more designated persons will:
    • Provide locations for the use or operation of equipment, displays, vending machines, or similar devices, owned, leased, controlled, or paid for by the purchaser; or
    • Provide outlets, accounts, or customers, including, but not limited to, Internet outlets, accounts, or customers, for the purchaser’s goods or services; or
    • Buy back any or all of the goods or services that the purchaser makes, produces, fabricates, grows, breeds, modifies, or provides, including but not limited to providing payment for such services… (16 C.F.R. 437)

Types of business opportunities include: rack jobber (the buyer purchases a route from the company; the buyer then services the company’s clients by restocking the client with the company’s products (for example, vending machines); distributorship (the buyer purchases the rights to sell the company’s product within a territory and the buyer may or may not use the company’s name/logo in identifying the business); license (the buyer obtains the right to access to proprietary data or technology from which products or services can be offered to the public); work-at-home (for example, stuffing envelopes for a marketing company); and network marketing or multilevel marketing. Business opportunities differ from franchise agreements in that business opportunities offer greater flexibility, control, and lower start-up costs, but do not offer the long-term relationship or corporate support enjoyed by franchise owners. Business owners must also be careful to research business opportunities in order to avoid the potential of fraud.

As with any of the previously discussed business organizations and methods, prior to entering into a franchise agreement or a business opportunity, the business owner/franchisee should thoroughly research state and federal law, and consider the implications of start-up, costs, taxes, management and control, capitalization, and liability. Consulting an experienced business attorney would be prudent!

Ethical Considerations

Hybrids and Liability

Many “hybrid” forms of business organization are designed to limit the liability of owners for debt. Is this “fair” for creditors who have advanced a business money upon the premise that it would be repaid? Have courts or legislatures gone “too far” in creating business vehicles that permit parties to avoid their financial obligations?

Golden Parachutes

Should corporate directors be able to negotiate generous “severance” packages that obligate their corporations to pay hundreds of thousands of dollars in the form of a “golden parachute?” Should these agreements be subject to some sort of outside judicial review to assure their fairness?


  1. Why is the corporate form the most popular means for conducting a business?
  2. What constitutional benefits are conferred on a corporation?
  3. How is a corporation formed?
  4. What are the powers of a corporation?
  5. What is meant by “piercing the corporate veil”?
  6. When may a director of a corporation be held personally liable for wrongful act committed against a third party in the name of the corporation?
  7. Mark Stone signed articles of incorporation for the Lume-A-Star Corporation. The articles did not fully conform to the state’s laws of incorporation, and, therefore, the Secretary of State did not issue a certificate of incorporation. The Acme Earth-Moving Company leased equipment to Lume-A-Star Corporation, which then refused to pay for the equipment. May Acme sue Lume-A-Star Corp. for nonpayment of the rented equipment? Why or why not? May ACME sue Mark individually?
  8. What obligations do officers and directors of a corporation owe to the corporation and to its shareholders?
  9. What is meant by acting ultra vires?
  10. When may an involuntary dissolution of a corporation occur?
  11. What is the difference between a de jure and a de facto corporation?
  12. Discuss several ways the federal government regulates corporations in the U.S.
  13. What is the business judgment rule? What is it designed to accomplish?
  14. What is an LLP? An LLC?
  15. What is a joint venture? Licensing? A franchise?

Chapter One | The Legal System

Sources of American Law

To a large part, the roots of our legal heritage can be traced to England, although the American legal system also has roots in Spanish and Dutch law. Once a British colony ruled by King George III through his appointed governors, the United States adopted the greatest share of our laws and legal traditions from the English. For all intents, English law began with the Norman invasion of England in 1066. William the Conqueror and his successors established the king’s court (Curia Regis) to help create a unified nation. Before the Norman Conquest, disputes were settled according to local tribal customs. The king’s court began to develop a common or uniform set of customs applica­ble to the whole population. This evolved into what became known as the common law, so named because it was intended to be common to the entire British kingdom.

As the number of courts and disputes increased, the more important rulings made each year were compiled into Year Books. Judges referred to these Year Books as a source of guidance in settling cases similar to those already decided. If a dispute was unique (called a case of first impression), judges had to create new law, but they attempted to base their decisions on previously established legal principles as much as possible. Today we still rely on this body of judge-made law developed over the centuries. It is called common law or case law in the United States.

The common law was carried to the colonies by the first English settlers and used by courts during the pre-Revolutionary War period. Common law continued to be applied after the Revolution and during the writing of the U.S. Constitution. It is still a valuable source of law, especially in tort, contract, and agency law. States have also codified some parts of the common law, such as the penal code in criminal law, the probate code in estate law, or the Uniform Commercial Code (UCC), which codifies much of the common law relating to the sale of goods.

The Doctrine of Stare Decisis

In cases governed by the common law, courts follow the doctrine of stare decisis. Stare decisis literally means, “to adhere to decided cases” and holds that similar cases should be decided in a similar manner and should yield a similar result. Precedent is the legal decision or holdings from a prior case that courts use to determine the outcome of a similar case or a similar question of law. If a court determines that the facts in the precedent case are not the same as those in the case before it and, therefore, should not control the ruling, the court may distinguish the current case from the precedent. Courts also can, but rarely do, overrule their prior decisions. Courts strive to avoid overruling earlier cases because it upsets the principle of stare decisis and the reliance people place on settled law in planning business and personal affairs.

Constitutional Law

The United States Constitution is the seminal legal document in this country. A state’s constitution holds similar importance within its borders. A constitution establishes the structure of government for the political unit (federal or state) by providing for the branches, subdivisions, and functions of government and by conferring and denying powers to each part. The U.S. Constitution created three branches of government: legislative, executive, and judicial. The Constitution provides each with unique powers that theoretically make each branch equal to the other two.  The doctrine of separation of powers provides a system of checks and balances so that one branch may not trammel over the rights and prerogatives of the others. Thus, the Constitution establishes a Congress to make laws, a president to enforce the laws, and a judiciary to interpret them. It also delegates to the states certain powers and casts a basic relationship between the states and the federal government. The relationship created is by definition a federal form of government. Each state possesses a limited amount of sovereignty, but the law of the federal government is supreme and applicable to all of the states.

The U.S. Constitution
Articles I to VII

Article I — Creates in the legislature [the Congress] the authority to enact laws. Article I defines the functions, powers, and role of Congress. Section 8 relates directly to matters affecting business in the United States: the power to lay and collect taxes; to regulate commerce with foreign nations and the states; to promulgate uniform bankruptcy laws; and to establish courts inferior to the U.S. Supreme Court. Section 9 also affects business affairs, states may not impose a tax on exports to a foreign country and they may not give preference to one state over another by regulating commerce.

Article II — The subject of this article is the executive power. The President has the duty to enforce all federal laws. It establishes the President’s term of office, the requirements to become President, and sets forth the presidential election process. It identifies the President as Commander in Chief of the Armed Forces, confers in the President the power to make treaties with the advice and consent of the Senate, and permits the President to make executive agreements with other nations without the advice and consent of the Senate. At the root of this power is the President’s authority to speak and act on behalf of the country in matters of foreign relations.

Article III — Article III establishes the judicial branch of the government. Article III authorizes the establishment of the U.S. Supreme Court and other federal courts. It confers the power to interpret laws and adjudicate certain disputes to the courts. Article III also provides for trials by jury for crimes and contains a definition of treason. The power of the courts was affirmed in the precedent case of Marbury v. Madison.

Article IV — Concerns the relationships between the states. Each state is bound to recognize the public acts and proceedings of the other states through the “full faith and credit” clause. The power to extradite a criminal from one state to another is also found here.

Article V — Lays out the means by which the U.S. Constitution may be amended.

Article VI — Confers supremacy of the U.S. Constitution, federal laws, and treaties over all other laws. All officials – federal and state – are sworn under oath to uphold the U.S. Constitution.

Article VII — Includes original acceptance of the U.S. Constitution by the states.

Constitutional Amendments

The Bill of Rights is the collective name of the first ten amendments to the U.S. Constitution. The Bill of Rights contains the freedoms of speech, press, religion, and assembly; the requirement that law enforcement authorities must possess a warrant in order to perform a search and seizure; provisions for protection from self-incrimination; the establishment of a grand jury for capital offenses; requirements for just compensation in eminent domain cases; a prohibition against double jeopardy; and, important provisions for “due process of law.”

The Fourteenth Amendment — While each amendment to the U.S. Constitution is intrinsically and equally important, the Fourteenth Amendment may be considered the “first among equals” in that it makes most of the fundamental guarantees of the Bill of Rights applicable to the states.

Supremacy of the U.S. Constitution

Since the 1930s and the presidency of Franklin D. Roosevelt, the U.S. Constitution has been interpreted to allow the federal government to become involved in the conduct of many areas of our daily lives. The regulation of some activities may also be relegated or delegated to the states. In this situation, any federal law that conflicts with a state law on the same subject matter takes precedence over and preempts the state law, unless, of course the federal action is ruled unconstitutional. Should Congress determine that federal law takes priority, its decision generally will be accepted. If Congress is silent on the matter, a court of competent jurisdiction would apply the following analysis to the federal law to determine whether it takes precedence over a state enactment:

  • Does the U.S. Constitution permit the federal government to regulate the area of law in which this particular law resides? If yes, the federal law will likely prevail.
  • Does the federal law violate a right guaranteed by the U.S. Constitution, for example, the right to a speedy trial? If yes, the federal law is preempted by the U.S. Constitution.
  • If not, does a state law address the same subject mater? If so, is there an inconsistency between the two laws? If one exists, the federal law prevails.

If both the federal and state laws are not contradictory, and Congress has not specifically preempted state action, the state law is said to be concurrent with federal law and may be applied.

State Constitutions

Powers not delegated to the federal government are retained by the states unless prohibited in the states’ own constitutions. Therefore, laws on the same subject matter can differ from one state to another in many ways. Businesses need to be aware of these distinctions, including differences between federal and state authority. Conflicting perceptions may appear with respect to the point at which federal power ends and so-called “state rights” begin.

Statutory Law

Statutes are written laws enacted by Congress or a state legislature for the purpose of declaring, ordering, or prohibiting something. Counties, cities, and towns may enact laws, as well. These “local laws” are generally called ordinances. Neither statutes nor ordinances can violate the U.S. Constitution or the applicable state constitution.

State statutory law varies throughout the country, partly because of cultural and geographical differences, and partly because of diverging needs. For example, eight western states enacted marital property statutes, called community property laws, originally derived from the Spanish legal system that originated in Mexico. Louisiana has laws that originated under the Napoleonic Code, because the French initially settled that area and brought with them their system of law. New York has adopted aspects of Dutch property law as it relates to condominium and co-op ownership.

Throughout the text, you will encounter various state and federal statutes. As you read these statutes, you will begin to understand the difficulty in interpreting and applying them. A large portion of the work that modern courts do consists of interpreting what the legislators meant when they passed a law and applying that understanding or meaning to the current circumstances. In this task, a court may be guided by consulting the legislative history of any law, in order to ascertain the intention of the writers of any statute.


Equity is that body of law that carries out justice when the law itself fails to provide a fair or adequate remedy or no remedy at all. Equity originated in medieval England. During this period, the existing common law rules were highly technical and rigid. The remedies available in the common law courts were scarce. As a result, a prevailing party might not be able to obtain adequate relief in many courts. To rectify this problem, the chancellor, the king’s highest-ranking advisor, heard cases that could not be settled satisfactorily. The Court of Chancery, an offshoot of the Curia Regis, was the court of the king’s chancellor. The most famous chancellor in British history was perhaps Sir Thomas More.

The American colonies adopted the principles of equity along with the common law. Eventually, law and equity became merged, so that today, the majority of states have eliminated separate equity (chancery) and law courts. The same court handles both types of claims. Further, courts may award both monetary damages (“a remedy in law”) and an equitable remedy in specific cases.

Actions at law and suits in equity resolve issues using different procedures. In actions at law, disputes are generally resolved by the application of statutes and previously decided cases. Suits in equity are decided by principles of fairness and equity.

Examples of equitable principles include the doctrines of laches and the “Clean Hands” doctrine. Laches is the product of the maxim that “equity aids the vigilant and not those that slumber on their rights.” This means that if one neglects or omits to do what one should do in a timely fashion it is presumed that he has abandoned his right or claim. The “Clean Hands” doctrine means that the court will not provide an equitable remedy to one who has violated conscience or good faith or other equitable principles. Simply stated, it means that “he who seeks equity must do equity.”

Equitable decisions are called decrees. Unlike legal relief, which involves awards of money or something else of value, equity decrees order a party to do or refrain from doing something. For example, the remedy may come in the form of an injunction—either temporary or permanent—prohibiting one party from doing an act or commanding a party to perform an act. Another type of equitable relief is that of specific performance, where the losing party is ordered to perform the contractual promise he or she made. It is imposed when monetary damages are inadequate. For example, Ross offers to buy Joan’s building for his motorcycle shop and Joan accepts. Joan later changes her mind and decides to keep the property. Since real estate is considered to be unique, and there is no other piece of property or building exactly like Joan’s, a court may order specific performance on the contract. Joan would be compelled to go through with the sale.

Additional equitable remedies include rescission (canceling a contract, thereby putting the parties to the contract in the same position they were in before the contract was formed), restitution (returning property or money to a party), and reformation (where the court of equity will rewrite all or part of a contract to reflect the parties’ actual intentions).

Administrative Law

Congress or a state legislature will oftentimes enact a statute using general language leaving it up to the appropriate administrative agency to create more detailed rules.  Federal and state regulatory agencies (for example, the Environmental Protection Agency and the Federal Trade Commission) promulgate their own “rules and regulations” to implement the statutes enacted by the legislatures.  These regulations generally have the same impact as a statute, and therefore are often termed administrative laws.    

Administrative Agencies

As the United States became industrialized in the latter half of the 19th century, the need arose to create divisions of government that could handle the ever-complex situations that evolved. Congress and state legislatures began to establish administrative agencies. The duties that Congress could not perform in regulating certain activities because of the lack of time and specialized knowledge were delegated to these agencies.

To date, Congress and the executive branch have created over 100 administrative agencies to make, interpret, and enforce laws. These agencies provide a forum where complex issues and disputes can be adjudicated with efficiency, expertise, and fairness. Administrative agencies are authorities in their particular areas of law. Their expertise is critical given the complexities of the law and the complexities of the areas of business the laws seek to regulate.

Administrative agencies exist at every level of the government and they derive their power from the particular branch of the government that created them. For example, Congress creates federal agencies, state legislatures create state agencies, and city councils create their cities’ administrative agencies. An example of a federal agency is the Securities and Exchange Commission (SEC), which is authorized to enforce the federal securities laws that apply to issuers and persons who trade in securities. The New Jersey Department of Environmental Protection is an example of a state agency. It regulates air and water quality, wetlands, solid and hazardous waste management, parks and forestry, fish and wildlife. An example of local agency is the Business Integrity Commission of New York City. This agency regulates the trade waste industry, shipboard gambling industry, Fulton Fish Market distribution area and other seafood distribution areas, and public wholesale markets.

Legislative supervision over agencies may be minimal; however, administrative agencies are subject to the Administrative Procedure Act (APA) which requires agencies to follow uniform procedures in making rules and establishes basic notice and hearing requirements, which are collectively known as “due process” rights.

While the vast majority of administrative actions are processed informally, certain administrative agencies have been assigned quasi-judicial authority to adjudicate cases through an administrative proceeding. These proceedings are not identical to court trials; however, the agency must comply with the Due Process Clause of the U.S. Constitution. In other words, the individual or business must be given adequate notice and a meaningful opportunity to be heard, and fair trial procedures must be utilized in making administrative determinations. Administrative actions may also be challenged by claiming that an agency has acted ultra vires, that is, beyond the scope of their own power and authority.

Administrative law judges (ALJs) preside over administrative proceedings. There is no jury. Counsel may represent the administrative agency and the respondent and may call witnesses and introduce evidence. Upon hearing the case, the ALJ will render a decision in the form of an order that will state “the findings of fact and the conclusions of law” upon which the decision is based. The order becomes final if it is not appealed. If either party is dissatisfied with the decision, it may seek an appeal that consists of a review by the agency or perhaps by a court. In some cases, a successful appeal will result in a completely new or “de novo” hearing on the merits of the case. In other cases, the scope of appellate review is limited. A court will defer to the findings of the ALJ and only decide whether those findings could reasonably have been reached on sufficient or substantial credible evidence present in the record.


According to the U.S. Constitution, a treaty is made by the President with the head of a foreign country. It must be ratified by two-thirds of the Senate. It then becomes “the supreme law of the land.” A conflict of law between a treaty and a state or federal law causes that law to become invalid.

Basis of Commercial Law

The area of law pertaining to commercial dealings is called commercial or business law. It includes aspects of contract law, sales, corporations, agency, partnerships, and other subjects included in this text.

Uniform Laws

Since each state is a sovereign, with a different set of laws, the differences created issues for commerce between the states. Beginning in the late 18th century, a group of legal scholars formed the National Conference of Commissioners on Uniform State Laws (NCCUSL) and began meeting to draft uniform statutes. State legislatures were encouraged to adopt the uniform law. In addition to the NCCUSL the American Law Institute [ALI], founded in 1923, has also developed a number of comprehensive codes of law. Each state may adopt all or part (or none, for that matter) of a uniform law. Therefore, the law on any particular subject is not “uniform” throughout the country.    

Examples of uniform laws include the Model Business Corporation Act, the Uniform Gifts to Minors Act, the Uniform Arbitration Act, and the Uniform Federal Lien Registration Act. A number of other uniform laws have been written as well. Students of business law become familiar with the Uniform Commercial Code or “UCC,” one of the most important legal codes.

The Uniform Commercial Code

The UCC is a unified body of statutes governing nearly all commercial transactions. Nevertheless, the interpretations of the UCC are found in case law, or the reported decisions of the courts. By providing uniformity and stability among the states, the UCC encourages the advancement of business and assures businesspeople that their legal contracts will be carried out and enforced by the courts.

The UCC did not result in drastic changes in the basic principles of commercial law. There are, however, important differences from the common law. While the common law was guided, to a large extent, by the principle of caveat emptor or “let the buyer beware,” the UCC envisions a different role of a merchant in commercial transactions. Merchants are held to a very high standard of performance and must act to act in good faith within the commercial sphere.  UCC § 2-103 defines good faith as “honesty in fact” and the “observance of reasonable commercial standards of fair dealing in the trade.” This is a far cry from caveat emptor!

The UCC defines and explains important and sometimes commonly misunderstood legal and business terms, thus assisting parties in the drafting of contracts and aiding courts in their interpretation and enforcement. For example, courts may rule that certain contracts or terms within a contract are unconscionable and therefore unenforceable. The case law governing contracts in one state has persuasive value in courts of other states because adoption of the UCC results in “uniformity.”

All fifty states have adopted the UCC, as well as, the District of Columbia, the Virgin Islands, and Guam. Louisiana was the last state to adopt the UCC. Why do you think Louisiana was so late in adopting the UCC?

Classification of Law

Laws may be classified into three different groupings. They are: (1) criminal law and civil law; (2) substantive law and procedural law; and (3) public law and private law.

Criminal and Civil Law

Philosophically, a crime may be considered a wrong committed against society. Federal and state prosecutors who bring the case against the defendant, or the person committing the wrongdoing, represent society. The respective criminal law applies in these cases. In certain instances, a city or municipality may initiate a criminal action, such as charging a person with theft, assault, public disorderliness, or some other criminal offense. The formal charge is made in the name of the state in which the alleged violation took place. In some cases, “persons” may include corporations and other types of business entities. Crimes are punishable by imprisonment and/or fines, and in some cases, the making of restitution to the victim of a crime.

In general terms, civil law is applied when an injured party, or a plaintiff, brings an action against another party, a defendant, because the defendant did not meet or breached a legal duty owed to the plaintiff. Anyone may be a party to a civil suit—individuals, business entities, and government entities. If the defendant loses a civil case, the plaintiff is usually awarded some form of damages (money, property) or some form of equitable relief.

At times, the same behavior may violate both criminal and civil laws. For example, a car thief may be charged for violating a criminal statute and may also be sued in a civil court by the owner of the car for money damages.

Substantive and Procedural Law

Laws that prescribe the rights and obligations of people in their everyday lives are called substantive laws. A statute that makes theft illegal is a substantive law.

Procedural laws establish the means and rules by which substantive laws are applied. For example, in federal civil suits all individuals involved (judge, defendant, jury, plaintiff, etc.) act in compliance with the rules set down in the Federal Rules of Civil Procedure. By way of example, one such rule sets forth time limits for the filing of law suits in federal courts.

Public and Private Law

Public law is law enacted by an authorized government body. Examples include the U.S. Constitution, state constitutions, federal aviation laws, state laws of incorporation, municipal parking ordinances, and zoning laws.

Private law develops from a relationship between parties and creates a framework of rules to establish rights and obligations of the parties. For example, an employment contract creates a legal relationship between the employer and employee. The terms of the contract are a type of private law to be obeyed by the parties. The requirements for executing the contract and the means for enforcing the contract are a matter of public law; however, the terms for performance are private law created by the parties to the employment contract.

Primary and Secondary Sources of Law

Primary sources of law, or binding authority, are those sources of law a court must follow when deciding cases. Primary sources include, constitutions, statutes, regulations, and case law. Secondary sources of law, or persuasive authority, include case law from other jurisdictions, legal dictionaries, law review articles, and treatises.  Secondary sources of law are not binding on the court but may help guide the court in deciding a case.

Schools of Jurisprudential Thought

The Natural Law School

The natural law school is one of the oldest legal philosophies, at least dating back the days of Aristotle.  He noted the natural law applies to all humankind.  There is a higher and universal law transcending all creation, and the human law, or civil law, aspires to embody these general, universal principles.  Every human being has an inclination to discern good from bad, right from wrong.  The notion of “natural rights” comes from the natural law.

The Positivist School

The adherents to the legal positivist school do not believe natural rights come from a higher form of law.  Instead, laws are created by societies.  Whether there are good laws or bad laws does not matter.  Under their philosophy, all laws must be obeyed until they are changed.

The Historical School

Followers of the historical school look to history, tradition, or customs.  They look to what legal doctrines have withstood the passage of time—what works and what does not work.  Adherents to the historical school will look to past cases for guidance and follow those decisions.

Legal Realism

Legal realists will look outside the statutory framework, as they believe the law cannot always be applied with total uniformity.  Judges are permitted to bring in their own psychological, economic, and political predispositions into their decisions.  They believe that law is not a scientific enterprise in which deductive reasoning can be applied consistently to reach an outcome in every case.  Instead, judges must resolve cases by balancing the interests of the parties with that of society.



    1. How did the common law develop?
    2. What is a “case of first impression”?
    3. Explain the principle of “stare decisis.”
    4. Why is the U.S. Constitution so important in this country?
    5. What are the various rights protected in the Bill of Rights?
    6. Explain the federal powers conferred in Articles I, II, and III. What is the doctrine of separation of powers?
    7. Differentiate between courts of equity and law. Why are each needed?
    8. What is preemption and when is a state law preempted by a federal law?
    9. What role do administrative agencies play in government? Name a federal agency and a state agency.
    10. What is the difference between a state constitution and the federal constitution?
    11. How would a secondary source of law guide a court?
    12. Explain what a treaty is and when the courts have to follow it.
    13. What is the difference between statutory law and constitutional law?
    14. What is the difference between public and private law? Give examples.
    15. Give an example of substantive law. How does the procedural law compliment the substantive law?
    16. Who brings the charges against the accused in a criminal matter?
    17. Why are uniform laws important? What is the UCC?
    18. What is the definition of “good faith” under the UCC?
    19. What is the difference between civil law and criminal law?
    20. What are the differences between the various schools of jurisprudential thought? Which is more convincing?

Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin

Chapter Eighteen | Employment Discrimination


Title VII of the Civil Rights Act of 1964 (Title VII) (and amendments) applies to employers with 15 or more employees involved in interstate commerce. Title VII prohibits employers from discriminating against prospective and current employees in the workplace in hiring, upgrading, compensating, firing, promoting, training, transferring, appraising; and in relation to “other terms and conditions of employment” based on race, sex, color, religion, and national origin. Title VII also applies to employment agencies and to employers in charge of training or apprenticeship programs.

The Civil Rights Act Of 1964

Title VII

Specifically Title VIII of the act provides:
“It shall be an unlawful employment practice for an employer —
  • to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin; or
  • to limit, segregate, or classify his employees or applicants for employment in any way which would deprive or tend to deprive any individual of employment opportunities or otherwise adversely affect his status as an employee, because of such individual’s race, color, religion, sex, or national origin.”
Title VII does not apply to every employer but rather, it is limited to the following:
  • Employers with at least 15 employees for each working day in each of twenty or more calendar weeks in the current or preceding calendar year
  • Labor Unions with at least 15 employees;
  • State and local government entities;
  • Employment agencies who provide workers to companies covered by Title VII; and
  • US citizens employed in foreign countries by a US employer or a US controlled employer.
Certain employment situations are not subject to Title VII, including employment of aliens outside the U.S., religious entities (including educational institutions) when employing individuals of a particular religion to perform work connected with carrying on of the entity’s activities, the Congress of the United States, and elected state representatives.
Even though Title VII has a minimum threshold requirement on the number of employees, employers who fall below the 15 employee requirement are generally not free from employment regulation in the area of discrimination. Many states have passed laws prohibiting discrimination in employment for employers with less than fifteen employees. State anti-discrimination statutes may afford employees additional protections beyond Title VII, but may not reduce the protections of the Act. For example, the New Jersey Law Against Discrimination (LAD) (N.J.S.A. 10:5-1 et seq.) prohibits discrimination against the protected classes in Title VII relating to race, sex, color, religion and national origin without respect to minimum employer numbers and in fact offers additional protections extending to sexual orientation and gender identity.
In 1991, Title VII was amended to protect U.S. citizens employed in foreign countries by a U.S. employer or a U.S. “controlled” employer.
Employers are prohibited from retaliating against employees who bring charges of discrimination, testify, assist, or participate in enforcement proceedings. 42 U.S. Code § 2000e-3(a)

Title VII Enforcement 

The Equal Employment Opportunity Commission (EEOC), created pursuant to the Equal Employment Opportunity Act of 1972, and the Department of Justice enforce the provisions of the Civil Rights Act. Members of the EEOC are appointed by the President, by and with the advice and consent of the Senate, for a term of five years. The Department of Justice enforces Civil Rights actions against state and local governments upon referral from the EEOC.
In seeking redress under the law, an individual alleging violation of Title VII must file a complaint with the local office of the EEOC within 180 days of any adverse job action.
In actions instituted at the state level, the EEOC works with, and generally defers to, state Equal Employment Opportunity (EEO) agencies for up to 60 days at the end of which the EEOC will commence a preliminary investigation. During and immediately after the investigation, the EEOC is required by statute to engage in conciliation negotiations in an attempt to settle the case. If efforts at conciliation fail, the EEOC may choose to file suit in U.S. District Court against the employer on the employee’s behalf, or may decide not to take any action at all. After 180 days have passed from the time of the complaint, the employee may demand that the EEOC issue a “right to sue letter,” entitling the employee to file a lawsuit in U.S. District Court.

Title VII Damages and Remedies

Depending on the nature of the complaint, and whether it involves intentional or unintentional discrimination, employees claiming discrimination under Title VII may seek monetary damages and equitable remedies. All claimants under Title VII can seek court costs, expert’s fees, and attorney fees.
Monetary damages can include both compensatory and punitive damages. Compensatory damages include back pay — lost wages and benefits; front pay, if it is unreasonable for the employee to continue to work for the employer — including costs associated with job searches; reputational harm; emotional distress; pain and suffering; and medical expenses. Compensatory damages are capped as follows based upon the number of employees in the previous year:
  • 15 to 100 employees — $50,000.00
  • 101 to 200 employees — $100,000.00
  • 201 to 500 employees — $200,000.00
  • 501 or more employees — $300,000.00
Punitive damages may be awarded if the employer “engaged in a discriminatory practice or discriminatory practices with malice or with reckless indifference to the federally protected rights of an aggrieved individual.” (42 U.S. Code § 1981a(b)). The award of punitive damages is not automatic. The courts will look to several factors including the intent of the employer; whether the employer was aware of the discrimination; the policies of the employer; and whether the employer disregarded its own policies.
Equitable remedies seek to put the employee in the economic position he/she would have been had the discrimination not occurred. Equitable remedies include hiring, reinstatement, promotion, and a possible injunction — enjoining the alleged discriminatory employment practice(s) and any future conduct of the employer.
The awarding of damages and remedies are dependent upon the type of discrimination claim. Disparate treatment (intentional discrimination) claims include requests for monetary damages and equitable remedies discussed above. In disparate treatment or mixed motives discrimination claims, the damages and remedies of the plaintiff may be limited. If the employer can prove that it acted with mixed motives and that it would have made the same employment decision in any case, the employee may receive declaratory relief, injunctive relief, attorney’s fees and costs, but may not receive monetary damages (compensatory or punitive) or the equitable remedies of reinstatement, hiring, promotion, or payment. In disparate impact discrimination claims, remedies include equitable relief and attorney’s fees, but no compensatory or punitive damages. The different types of discrimination claims are discussed in the following sections.

Title VII Discrimination Theories 

There are three primary theories for proving discrimination under Title VII: (1) disparate treatment, (2) mixed motives discrimination, and (3) disparate impact discrimination.

Disparate Treatment Discrimination

Considered as overt or intentional discrimination, disparate treatment discrimination occurs when an employee can show that he/she was treated differently because of race, color, sex, religion, or national origin. Disparate treatment discrimination applies to hiring, firing, promotions, post-employment references, transfers, or any term or condition of employment.
In McDonnell Douglas Corp. v. Green, 421 U.S. 792 (1973), the Supreme Court heard the case of an African-American mechanic who had been laid off during a workforce reduction and was not rehired. Green claimed that he was not rehired because he protested alleged racial inequality at the plant. The Supreme Court established the following elements necessary to prove disparate treatment discrimination:
First, the plaintiff-employee must prove a “prima facie” case of discrimination by establishing the following four steps: (1) Plaintiff belongs to a racial minority (or some protected class); (2) Plaintiff applied for and was qualified for the position; (3) Plaintiff, despite his/her job qualifications, was rejected for employment; (4) After plaintiff’s rejection, someone else was hired for the position.
Second, once these four elements are satisfied, the burden of proof shifts to the employer-defendant. The employer must present evidence that its decision was based upon a legitimate, non-discriminatory reason. These reasons may include educational requirements, merit, productivity, the presence of a valid seniority system, or a number of other non-discriminatory reasons used to reach a hiring decision. Employers may also raise affirmative defenses such as a bona fide occupational qualification (BFOQ) and business necessity. These defenses are more fully discussed in the next section.
Third, the burden of proof then shifts back to the employee to show that the employer illegally discriminated against him/her and to show that the employer’s reasons were a mere pretext for discrimination. (McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973)).

Mixed Motives Discrimination

Title VII was amended after the 1989 decision in Price Waterhouse v. Hopkins, 490 U.S. 222 (1989), in order to recognize that in some employment discrimination cases, the employer will mix permissible and impermissible reasons for a otherwise discriminatory employment decision or practice. Title VII specifically provides:
“an unlawful employment practice is established when the complaining party demonstrates that race, color, religion, sex, or national origin was a motivating factor for any employment practice, even though other factors also motivated the practice.” (42 U.S. Code § 2000e– 2(m)).

Case Study

Price Waterhouse v. Hopkins

490 U.S. 228 (1989)

Procedural Posture

Defendant employer appealed from the decision of the United States Court of Appeals for the District of Columbia Circuit, which affirmed the lower court’s ruling in favor of plaintiff employee in her sex discrimination claim under Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e et seq.


Defendant employer appealed a judgment in favor of plaintiff employee in her action under Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e et seq. The courts below held that an employer who had allowed a discriminatory impulse to play a motivating part in an employment decision could avoid liability by showing by clear and convincing evidence that it would have made the same decision in the absence of discrimination. Title VII of the Civil Rights Act of 1964 forbids an employer to fail or refuse to hire or to discharge any individual, or otherwise to discriminate with respect to his compensation, terms, conditions, or privileges of employment, or to limit, segregate, or classify his employees or applicants for employment in any way which would deprive or tend to deprive any individual of employment opportunities or otherwise adversely affect his status as an employee, because of such individual’s sex. **** Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e et seq., condemns employment decisions based on a mixture of legitimate and illegitimate considerations. Therefore, when an employer considers both gender and legitimate factors at the time of making a decision, that decision was “because of” sex and the other, legitimate considerations. **** After a plaintiff has made out a prima facie case of discrimination under Title VII of the Civil Right Act of 1964, 42 U.S.C.S. § 2000e et seq., the burden of persuasion does not shift to the employer to show that its stated legitimate reason for the employment decision was the true reason. The plaintiff retains the burden of persuasion on the issue whether gender played a part in the employment decision. **** If an employer allows gender to affect its decision-making process, then it must carry the burden of justifying its ultimate decision. **** In the specific context of sex stereotyping, an employer who acts on the basis of a belief that a woman cannot be aggressive, or that she must not be, has acted on the basis of gender. **** Remarks at work that are based on sex stereotypes do not inevitably prove that gender played a part in a particular employment decision. The plaintiff must show that the employer actually relied on her gender in making its decision. In making this showing, stereotyped remarks can certainly be evidence that gender played a part. **** As to the employer’s proof in sex discrimination suits, in most cases, the employer should be able to present some objective evidence as to its probable decision in the absence of an impermissible motive. Moreover, proving that the same decision would have been justified is not the same as proving that the same decision would have been made. An employer may not, in other words, prevail in a mixed-motives case by offering a legitimate and sufficient reason for its decision if that reason did not motivate it at the time of the decision. Finally, an employer may not meet its burden in such a case by merely showing that at the time of the decision it was motivated only in part by a legitimate reason. **** An employer who had allowed a discriminatory impulse to play a motivating part in an employment decision must prove by a preponderance of the evidence that it would have made the same decision in the absence of discrimination. **** When a plaintiff in a Title VII, 42 U.S.C.S. § 2000e et seq., case proves that her gender played a motivating part in an employment decision, the defendant may avoid a finding of liability only by proving by a preponderance of the evidence that it would have made the same decision even if it had not taken the plaintiff’s gender into account.


The Court reversed and remanded the case to the lower court, holding that defendant employer had to prove by a preponderance of the evidence that its employment decision relating to plaintiff employee was not motivated by a discriminatory purpose.

Disparate Impact Discrimination

Disparate impact discrimination occurs when an employer uses an employment practice, rule, or policy that appears to be non-discriminatory, or facially neutral, but, when applied, has a different and negative impact on a protected class. (For example: “House person wanted; must be six-feet-three or better and have a moustache; all sexes may apply.”)
Similar to disparate treatment discrimination, disparate impact discrimination is proven in three steps.
  • The plaintiff-employee must make out a prima facie case by pointing to an employment practice, and showing that the practice excludes a disproportionate number of people in a protected class;
  • The defendant-employer must then respond to the plaintiff’s allegations by either disproving the plaintiffs showing of a disparate exclusion of a protected group or showing that the practice in question is job related and necessary for the business, that is, proving the existence of a bona fide occupational qualification or BFOQ.
  • The plaintiff must then prove that the employer’s reason was a mere pretext or that other employment practices would achieve the same results without discrimination.

Discrimination Based on Race, Color, and National Origin

Title VII prohibits discrimination on the basis of an applicant’s or employee’s race, color, or national origin. Recent court cases have included challenges to employers’ policies on interracial association, “English Only” workplace requirements, and other employment policies. Interestingly, the EEOC has stated that “English Only” rules in the workplace violate federal discrimination laws unless the employer can justify the rule as a business necessity. The Monsanto case, 770 F.2d 719 (1985), deals with the requirement that an employment rule must be uniformly applied to all employees regardless of their race.
Case Study

Smith v. Monsanto Chemical Co.

770 F.2d 719 (8th Cir. 1985)
Procedural Posture
Appellant employer sought review of the order of the District Court for the Eastern District of Missouri, which entered judgment in favor of appellee employee in his racially-based employment discrimination action alleging violations of Title VII, 42 U.S.C.S. § 2000e(5), and 42 U.S.C.S. § 1981.
After the employee took three rag towels from the employer’s plant and locked them in the trunk of his car, the employee was terminated for the theft of company property. The employee filed a complaint with the Equal Employment Opportunity Commission (EEOC), alleging his termination was racially motivated. The EEOC disagreed, but provided the employee a Notice of Right to Sue. The employee filed an action in the district court, and a jury returned a verdict in favor of the employee on the §1981 claim and the district court found in favor of the employee on the Title VII claim. The employer appealed, and the court reversed the judgment of the district court. The employer had a policy that all employees who had less than five years seniority would be discharged for stealing, without consideration of other factors, which was uniformly applied. In connection with the 42 U.S.C.S. § 1981 claim, the court concluded that no reasonable jury could find that the employer disciplined white employees more leniently than the employee. In regard to the Title VII claim, the district court’s finding that the employee’s termination was motivated by racial discrimination was clearly erroneous.
The court reversed the order of the district court, which had entered judgment in favor of the employee.

Discrimination Based on Religion

Discrimination based on religion is prohibited in the workplace under Title VII. Religion is defined in Title VII as including “…all aspects of religious observance and practice, as well as belief, unless an employer demonstrates that he is unable to reasonably accommodate to an employee’s or prospective employee’s religious observance or practice without undue hardship on the conduct of the employer’s business.” Title VII requires that employers must make reasonable accommodations to permit employees to observe their religious practices. These may include giving employees time off without pay to observe religious holidays, permitting workers “early release” in order to attend services, and permitting employees to dress according to the dictates of the religion. The burden of proof is on the employer to show that such an accommodation would create an “undue hardship” for the employer.
Recent cases involving religious discrimination in the workplace requiring employers to provide contraceptive care under the Affordable Care Act, and employer rules on body art and piercings.
Case Study

EEOC v. Abercrombie & Fitch Stores, Inc.

135 S. Ct. 2028 (2015)
Procedural Posture
Whether an employer was entitled to summary judgment on a claim that it violated Title VII of the Civil Rights Act of 1964 by refusing to hire a practicing Muslim applicant on the ground that the headscarf she wore would violate the employer’s dress policy. 
Respondent (Abercrombie) refused to hire Samantha Elauf, a practicing Muslim, because the headscarf that she wore pursuant to her religious obligations conflicted with Abercrombie’s employee dress policy. The Equal Employment Opportunity Commission (EEOC) filed suit on Elauf’s behalf, alleging a violation of Title VII of the Civil Rights Act of 1964, which, inter alia, prohibits a prospective employer from refusing to hire an applicant because of the applicant’s religious practice when the practice could be accommodated without undue hardship. The EEOC prevailed in the District Court, but the Tenth Circuit reversed, awarding Abercrombie summary judgment on the ground that failure-to-accommodate liability attaches only when the applicant provides the employer with actual knowledge of his need for an accommodation.
It was not necessary to show that the employer had actual knowledge of the applicant’s need for an accommodation in order to establish disparate treatment under 42 U.S.C.S. § 2000e-2(a)(1). Instead, it was only necessary to show that the applicant’s need for an accommodation was a motivating factor in the employer’s decision; [2]-A claim based on failure to accommodate a religious practice did not have to be raised as a disparate impact claim rather than a disparate treatment claim, as religious practice was a protected characteristic that could not be accorded disparate treatment.****
The rule for disparate-treatment claims based on a failure to accommodate a religious practice is straightforward: An employer may not make an applicant’s religious practice, confirmed or otherwise, a factor in employment decisions.**** Title VII of the Civil Rights Act of 1964 does not limit disparate-treatment claims to only those employer policies that treat religious practices less favorably than similar secular practices. Title VII does not demand mere neutrality with regard to religious practices—that they be treated no worse than other practices. Rather, it gives them favored treatment, affirmatively obligating employers not to fail or refuse to hire or discharge any individual because of such individual’s religious observance and practice. An employer is surely entitled to have, for example, a no-headwear policy as an ordinary matter. But when an applicant requires an accommodation as an aspect of religious practice, it is no response that the subsequent failure to hire was due to an otherwise-neutral policy. Title VII requires otherwise-neutral policies to give way to the need for an accommodation.
Judgment reversed; case remanded.
In Cloutier v. Costco, 390 F.3d 126 (1st Cir. 2004), the employee, who wore an eyebrow ring, claimed that her employer’s dress code ban on any visible facial or tongue jewelry and failure to accommodate her request to do so was religious discrimination due to her religious practice as a member of the Church of Body Modification. The District Court held that the employer had accommodated the employee by offering to reinstate her if she covered the piercing with a band-aid or replaced it with a clear retainer (as per the company policy). The Court held the employee’s request for a complete waiver of the policy would place an undue burden on the employer, precluding it from exercising its managerial discretion and presenting a professional public image to the public.
A different outcome was found in EEOC v. Red Robin Gourmet Burgers, Inc., 2005 U.S. Dist. LEXIS 36219 (W.D. Wash. Aug. 29, 2005), in which the Federal District Court found that the employer had failed to provide sufficient evidence of undue hardship in accommodating the employee’s religious beliefs. The employee had two tattoos on his wrists in connection with his Kemetecism (ancient Egyptian) religion. The employee worked for six months for the employer before he was asked to cover the tattoos; when he refused, his employment was terminated. The employer did not have a dress code or grooming policy, had never received any customer complaints regarding the employee’s tattoos, and did not provide any other evidence that accommodating the employee would be an undue hardship.

Sex Discrimination

Title VII of the Civil Rights Act specifically prohibits discrimination in employment decisions and practices on the basis of sex. The Civil Rights Act of 1964 act was amended in 1978 by the Pregnancy Discrimination Act to include prohibitions on discrimination related to pregnancy, childbirth, and related medical conditions. Why would an employer discriminate based on sex? Some argue sex discrimination is grounded in historical perceptions of the sexes, misuse of power, the economics of women in the workforce, a form of workplace control, or in response to threats to previously male-dominated workplaces. In Ellison v. Brady, the 9th Circuit held that Title VII was designed by Congress “to prevent the perpetuation of stereotypes and a sense of degradation which serve to close or discourage employment opportunities for women.”
There is one major problem: The Civil Rights Act does not explicitly define “sex” and recent social developments have led to a debate as to what the term “sex” means or should mean in the Act. Does “sex” mean gender (i.e., male and female), or does the term include sexual preference, gender identity, etc.? [The World Health Organization defines “sex” as “the biological and physiological characteristics that define men and women” whereas “gender” “refers to the socially constructed roles, behaviors, activities, and attributes that a given society considers appropriate for men and women.”] The EEOC, as the agency that interprets and enforces the Act, has stated that the meaning of “sex” includes gender identity and sexual orientation. As such, the agency has provided protections for lesbian, gay, bisexual, and transgender (LGBT) applicants and employees, regardless of state or local laws to the contrary. In Oncale v. Sundowner Offshore Services., 523 U.S. 75 (1998) the U.S. Supreme Court recognized same-sex sexual harassment as sex discrimination under Title VII. Despite the views of the EEOC, there may be need for Congress to clarify these issues.
Other issues related to sex discrimination include fetal protection policies (where the policy seeks to protect a fetus from workplace hazards), discrimination based on “family responsibility,” and issues relating to Title IX of the Education Amendments of 1972 [20 U.S.C. 1681 et seq.] which prohibits discrimination on the basis of sex in any federally funded education program or activity. In Int’l Union v. Johnson Controls, 499 U.S. 187 (1991), the U.S. Supreme Court held a fetal protection policy restricting all fertile females from certain jobs was too restrictive because the female employee did not have any choice and there was no BFOQ asserted as to safety. In Asad v. Cont’l Airlines, Inc., 328 F. Supp. 2d 772 (N.D. Ohio 2004), the District Court held that the Pregnancy Protection Act did not prevent an employer from transferring a pregnant employee at her request. In Childers v. Trustees of the University of Pennsylvania, No. 14-2439, 2016 U.S. Dist. LEXIS 35827 (E.D. Pa. Mar. 21, 2016), the District Court found that improper comments related to plaintiff’s family responsibilities created a prima facie case of discrimination.
Issues in the workplace that can potentially create liability for employers include employer policies relating to office romances, dress codes, displays of sexually explicit or suggestive pictures or calendars, jokes, email, information posted on social media platforms, and sexual innuendoes.

Wage Discrimination

The Civil Rights Act prohibits employer decisions and practices related to wages and benefits that discriminate on the basis of sex (42 U.S. Code Sec. 2000e-5(e)(3)(A).
The Lilly Ledbetter Fair Pay Act of 2009 was passed in response to the U.S. Supreme Court’s decision in Ledbetter v. Goodyear Tire & Rubber Co., Inc., 550 U.S. 618 (2007). In this case, Ledbetter discovered that she was paid less than men in substantially same positions. The Court held in favor of the employer based upon the 180-day statute of limitations in the CRA, which required claims to be filed from the original date of the pay decision or first pay date. The Lilly Ledbetter Fair Pay Act amends Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act of 1967, and modifies the operation of the Americans with Disabilities Act of 1990 and the Rehabilitation Act of 1973, “to clarify that a discriminatory compensation decision or other practice that is unlawful under such Acts occurs each time compensation is paid pursuant to the discriminatory compensation decision or other practice, and for other purposes.” The Act includes a retroactivity provision that provides the employee may “obtain relief as provided in subsection (g)(1), including recovery of back pay for up to two years preceding the filing of the charge, where the unlawful employment practices that have occurred during the charge filing period are similar or related to unlawful employment practices with regard to discrimination in compensation that occurred outside the time for filing a charge.”

Sexual Harassment

Sexual harassment is prohibited under Title VII because it is considered a form of sex discrimination. Sexual harassment is the perpetration of unwelcome sexual advances, requests for favors, or other physical or verbal conduct of a sexual nature conducted in the workplace. Two types of sexual harassment exist in the workplace: “quid pro quo” and hostile environment.
Quid pro quo (meaning “something for something”; in Latin: “this for that”) sexual harassment is harassment tied to job performance. This type of harassment occurs when any aspect of a job or employment decision is conditioned upon receiving sexual favors or engaging in sexual activity. Classic examples include when a boss tells his employee, “sleep with me or you are fired” or “if you don’t date me, your chances of promotion are poor.” The quid pro quo offer must be unwelcome.
Until 1986, only “quid pro quo” was considered a violation of Title VII. Then, in Vinson v. Meritor Savings Bank, the United States Supreme Court ruled that if the harassment is sufficiently pervasive or severe to create a hostile work environment, it is a violation of Title VII even if the unwelcome conduct is not linked to concrete employment benefits. Hostile environment sexual harassment is far more common, but may be harder to eradicate from the workplace. Hostile environment sexual harassment can occur when sexual talk and innuendo is so pervasive in the workplace that it interferes with employees’ ability to work. Conduct that could lead to a hostile environment includes, but is not limited to, sexual advances; requests for sexual favors; verbal statements or physical actions of a sexual nature; offensive jokes; comments about body parts or clothes; emails of a sexual nature; pornography; non-sexual gender based verbal or physical conduct; inflammatory and patently offensive epithets, slurs, or demeaning comments relating to gender; touching of intimate body parts; pictures; staring; work rules relating to dress codes) sexually suggestive e-mail; and perceived favoritism based on sex.
The standard for determining a hostile work environment is based on the persona of a “reasonable victim” (female or male) wherein the court reviews the particular plaintiff’s perceptions as to whether the situation is sufficiently severe or pervasive so as to alter the conditions of employment and create an abusive working environment. (Ellison v. Brady, 924 F.2d 872 (9th Cir. 1991).
The employee must show conduct that is verbal, physical, frequent, hostile and patently offensive:
  1. that is gender based;
  2. that effects the terms/conditions of employment;
  3. that is unwelcome (a subjective test); and
  4. that is severe/pervasive so as to alter the conditions of the employee’s work environment and create a hostile environment.

The conduct can be that of a coworker, supervisor, client, a customer, or a supplier. In a hostile work environment case, it is the effect of the behavior, not the intent of the person acting that will be judged.

When is an employer responsible for the sexual harassment perpetrated by its employees? Under the legal doctrine of respondeat superior employers are liable for the sexual harassment of their employees if they knew or had reason to know of the sexually offensive atmosphere and they provided no reasonably available means of bringing complaints and seeking redress. Courts have also determined that an employer bears an absolute liability for acts committed by a supervisory employee.
In Ellison, the Ninth Circuit held:
“Employers should impose sufficient penalties on employees to assure a workplace free from sexual harassment. In essence, the reasonableness of an employer’s remedy will depend on its ability to stop harassment by the person who engaged in harassment. In evaluating the adequacy of the remedy, the court may also take into account the remedy’s ability to persuade potential harassers to refrain from unlawful conduct. Indeed, meting out punishments that do not take into account the need to maintain a harassment-free working environment may subject the employer to suit by the Equal Employment Opportunity Commission.” 
In Burlington Indus. v. Ellerth, 524 U.S. 742 (1998), and Faragher v. Boca Raton, 524 U.S. 775 (1998),the Supreme Court defined the conditions necessary for employer liability:
  1. The victimized employee must have suffered a “tangible employment action” (Ellereth defined this as termination of employment, a demotion evidenced by a decrease in wage or salary, a less distinguished title, a material loss of benefits, or significantly diminished material responsibilities); or
  2. If the victimized employee has not suffered a tangible negative employment action (under Ellereth “usually economic harm”), the employer can shield itself from liability by showing that:
    • the employer took reasonable care to prevent and correct sexual harassment in its workplace, and
    • the employee unreasonably failed to take advantage of complaint and resolution procedures available to the employee provided by the company as found in Faragher.
Case Study

Faragher v. City of Boca Raton

524 U.S. 775 (1998)
Procedural Posture
Petitioner lifeguard, who worked for respondent city, sought a writ of certiorari to review the judgment of the United States Court of Appeals for the Eleventh Circuit, which reversed a judgment entered in favor of petitioner in an action against respondent under Title VII of the Civil Rights Act of 1964 (Title VII), 42 U.S.C.S. § 2000e et seq., for a sexually hostile work environment created by her supervisors.

Petitioner worked as a lifeguard for respondent city. Petitioner lifeguard brought an action against respondent and her two immediate supervisors, asserting a claim under Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e et seq. The complaint alleged that the two supervisors had created a sexually hostile atmosphere at the beach by repeatedly subjecting petitioner and other female lifeguards to uninvited and offensive touching and lewd remarks. Petitioner asserted that the supervisors were agents of respondent and that their conduct amounted to discrimination in the terms, conditions, and privileges of her employment. The judgment of the trial court, which entered judgment in favor of petitioner and held respondent liable, was reversed by the court below. The judgment of the court below was reversed and remanded for reinstatement of the trial court’s judgment. The court’s judgment was based on an application of its holding that an employer may be held vicariously liable for actionable discrimination caused by a supervisor, but subject to an affirmative defense looking to the reasonableness of the employer’s conduct as well as that of a plaintiff victim.
In order to be actionable under Title VII of the Civil Rights Act of 1964, 42 UY.S.C.S. § 2000e et seq., a sexually objectionable environment must be both objectively and subjectively offensive, one that a reasonable person would find hostile or abusive, and one that the victim in fact did perceive to be so. Courts are directed to determine whether an environment is sufficiently hostile or abusive by looking at all the circumstances, including the frequency of the discriminatory conduct; its severity; whether it is physically threatening or humiliating, or a mere offensive utterance; and whether it unreasonably interferes with an employee’s work performance.*** Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e et seq., does not prohibit genuine but innocuous differences in the ways men and women routinely interact with members of the same sex and of the opposite sex. Simple teasing, offhand comments, and isolated incidents, unless extremely serious, will not amount to discriminatory changes in the terms and conditions of employment.***
The requirement to show that the employee has failed in a coordinate duty to avoid or mitigate harm reflects an equally obvious policy imported from the general theory of damages, that a victim has a duty to use such means as are reasonable under the circumstances to avoid or minimize the damages that result from violations of the statute. An employer may, for example, have provided a proven, effective mechanism for reporting and resolving complaints of sexual harassment, available to the employee without undue risk or expense. If the plaintiff unreasonably failed to avail herself of the employer’s preventive or remedial apparatus, she should not recover damages that could have been avoided if she had done so. If the victim could have avoided harm, no liability should be found against the employer who had taken reasonable care, and if damages could reasonably have been mitigated no award against a liable employer should reward a plaintiff for what her own efforts could have avoided.*** the general rule that an employer is subject to vicarious liability, under Title VII of Civil Rights Act of 1964, 42 USCS 2000e et seq., for a supervisor’s actionable sexual harassment, but may raise an affirmative defense looking to reasonableness of the conduct of the employer and the victim…***

Reversed and remanded for reinstatement of the original judgment after the court held that employers may be held liable for actionable discrimination, subject to a defense based on reasonableness of the employer’s conduct.
Employees who are unsuccessful in bringing federal or state claims under the Title VII or under state anti-discrimination statutes may bring a common law tort action or a criminal or civil complaint for assault and battery, rape, intentional infliction of emotional distress, defamation, contractual interference with an employment contract, intrusion of privacy, and wrongful discharge.
What can an employer do to satisfy the requirement that it take reasonable care to correct and prevent sexual harassment? First, employers should provide regular and thorough training for all of its employees regarding discrimination and sexual harassment. Second, employers should have a clearly communicated and visible policy regarding the prohibition of discrimination based on sex and the prohibition of sexual harassment. Third, a viable complaint procedure should be in place to handle any complaints, such as a designated employee as a contact for handling sexual harassment complaints, or an anonymous 1-800 complaint telephone line. Fourth, a company should take annual surveys of its employees to ensure that its sexual harassment policy is understood in order to learn whether the current workplace is free of sexual harassment. Last, employers should regularly review policies for compliance with federal, state, and local laws, changing social trends, and developing case law.

Title VII Defenses 

Employers charged with Title VII violations have a limited number of affirmative defenses including business necessity, bona fide occupational qualification, seniority and merit systems, and after-acquired evidence of actions of the employee.

Business Necessity

In order to assert the affirmative defense of business necessity to a claim of disparate impact, the employer must demonstrate that the practice or requirement is related to successful job performance and is necessary for the job. The employer may still face liability if the employee shows “an alternative employment practice and the respondent refuses to adopt such alternative employment practices.” (42 U.S. Code § 2000e–2(k)(1)(i)(ii)). Business necessity is a defense to a claim of disparate impact, but is not a defense against a claim of intentional discrimination. (42 U.S. Code § 2000e–2 (k) (2)). If the employer can show that the employment practice does not cause a disparate impact, the employer does not need to prove a business necessity.

Bona fide Occupational Qualifications (BFOQs)

A second affirmative defense that an employer can raise against a claim of disparate treatment discrimination is the existence of a bona fide occupational qualification (or BFOQ). An employer may discriminate in the workplace based on national origin, religion or sex, but not race or color, where the employer is able to argue affirmatively that national origin, religion, or sex is a bona fide occupational qualification (BFOQ) under 42 U.S. Code § 2000e–2. The burden of proof is on the employer to prove that the subject classification is reasonably necessary for the normal operation of the business—that is, it is “directly related to successful job performance.”
Instances where discrimination may be permissible include employment positions where privacy is a critical consideration in hiring (ex: rest room attendants; nursing home attendants); actor/actress or modeling roles which are gender specific; and certain faculty at religious institutions. Mere customer preference for a particular gender, i.e. airline passengers preferring female airline attendants, is never sufficient to establish a BFOQ defense.
In the area of job tests (involving paper and paper tests, minimum height requirements, etc.), any testing that is administered or any criteria applied must likewise be related to “successful job performance.”
Case Study

Griggs v. Duke Power Co.

401 U.S. 424, (1971)
Procedural Posture
Petitioner employees sought certiorari to review a decision of the United States Court of Appeals for the Fourth Circuit, which held that respondent employer’s requirement of a high school education or the passing of an intelligence test as a condition of employment did not violate Title VII of the Civil Rights Act, 42 U.S.C.S. § 2000e-2, because there was no showing of a discriminatory purpose in the adoption of the requirements.
The employees sought review of the lower court’s decision, which concluded that the requirements of a high school education or the passing of a general intelligence test as a condition of employment in or transfer to jobs did not violate Title VII. The Court reversed on the basis that practices, procedures, or tests that were neutral on their face could not be maintained if they operated to freeze the status quo of prior discriminatory employment practices. The Court found that it was significant that the requirements were not shown to bear a demonstrable relationship to the successful performance of the jobs for which the standards were used and that the requirements operated to disqualify black applicants at a substantially higher rate than white applicants for jobs that were formerly filled only by white employees. The employer’s lack of discriminatory intent was not controlling because courts were required to look to the consequences of the employment practices, not simply the motivation. Tests could be used to measure job performance if they measured the person for the job and not the person in the abstract.
Under Civil Rights Act of 1964, 42 U.S.C.S. § 2000e, practices, procedures, or tests neutral on their face, and even neutral in terms of intent, cannot be maintained if they operate to “freeze” the status quo of prior discriminatory employment practices.**** Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e, proscribes not only overt discrimination but also practices that are fair in form, but discriminatory in operation. The touchstone is business necessity.**** If an employment practice that operates to exclude members of one racial group cannot be shown to be related to job performance, the practice is prohibited by Title VII of the Civil Rights Act of 1964,.**** Good intent or absence of discriminatory intent does not redeem employment procedures or testing mechanisms that operate as “built-in headwinds” for minority groups and are unrelated to measuring job capability.**** Section 703(h) of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e-2, authorizes the use of any professionally developed ability test that is not designed, intended, or used to discriminate because of race.
The Court reversed the lower court’s judgment in favor of the employer.

Seniority and Merit Systems

A third defense available to employers against a claim of discrimination applies to a bona fide seniority system or merit system (one based on quality or quantity of production), provided these criteria are not intended, designed, or used to discriminate on the basis of race, color, religion, sex, or national origin. (SEC. 2000e-2(h) and (l)).

After-Acquired Evidence of Employee Actions

Evidence of employee misconduct that is discovered during preparations of the employer’s defense to a claim of discrimination is an affirmative defense used to limit the employer’s liability for a claim of employment discrimination. In order to use the “after acquired evidence” to show nondiscriminatory intent in an employee’s termination, the employer must show that the wrongdoing occurred; the employer was previously unaware of the misconduct; and the employer would have terminated the employee for the wrongdoing in any event having now learned about the employee’s misconduct. (See McKennon v. Nashville Banner Publ’g Co., 513 U.S. 352 (1995)).
Case Study

Ricci v. DeStefano 

557 U.S. 557 (2009)
Procedural Posture
Petitioners, white and Hispanic firefighters, brought actions against respondent city alleging that the city’s refusal to certify promotion examination results based on disparate racial impact of the examination deprived the firefighters of promotions on the basis of their race. Upon grants of writs of certiorari, the firefighters appealed the judgment of the U.S. Court of Appeals for the Second Circuit which upheld the city’s action.
On the basis of the examination results, no black candidates were eligible for immediate promotion, and the city determined not to certify the examination results to avoid potential liability for discrimination based on a disparate impact against the black candidates. The white and Hispanic firefighters contended that they were subjected to disparate treatment in the denial of promotions on the basis of their races in violation of Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e et seq. The U.S. Supreme Court held that the city improperly discarded the examination to achieve a more desirable racial distribution of promotion-eligible candidates, since there was no strong basis in evidence that the examination was deficient and that discarding the examination was necessary to avoid disparate impact. The threshold showing of statistical disparity in the examination results was insufficient by itself to constitute a strong basis in evidence of unlawful disparate impact, the extensively analyzed examinations were job-related and consistent with business necessity, and there was no strong basis in evidence of an equally valid, less-discriminatory testing alternative.
The judgment upholding the city’s refusal to certify the examination results was reversed, and the cases were remanded for further proceedings.

Age Discrimination In Employment Act (ADEA) Of 1967

The ADEA prevents employers from making employment decisions based upon the age of job applicants or employees if those job applicants or employees are over the age of 40. The original legisla­tion had an age cap of 65 that was subsequently raised to age 70. Today, pursuant to an amendment offered by Representative Claude Pepper (who had been in Congress when the original Social Security Act was adopted), unless otherwise provided for, an employer may not require an employee to retire at any age. Exceptions apply relating to certain government employees, judges, police, employees such as airline pilots and others where age may be a BFOQ, and certain “top-level executives” who may be forced to retire at a certain age. The ADEA covers all employers with 20 or more employees. State laws prohibiting age discrimination may also apply.
The elements of proof in an age discrimination claim are the same as those used to judge a claim brought under Title VII. Plaintiff must make out a prima facie case; defendant responds with a legitimate, non-discriminatory reason; and plaintiff then shows that the defendant’s reason was merely a pretext for discrimination. The EEOC enforces the provisions of the ADEA.

Americans With Disabilities Act (ADA) of 1990 

The Americans With Disabilities Act (ADA) prohibits discrimination in employment decisions and employment practices on the basis of disability. The ADA is divided into five titles: Title I covers employment matters; and Titles II-IV address access to public walkways, streets, buildings and transportation. The ADA applies to all companies with 15 or more employees. The EEOC enforces the provisions of the ADA.
The ADA provides that employers cannot discriminate in any decision, practice, term or condition of employment based on a physical or mental disability. The ADA defines disability as:
“ a physical or mental impairment that substantially limits one or more major life activities; a record of such impairment; or being regarded as having such an impairment. Examples of major life activities include caring for oneself, performing manual tasks, seeing, hearing, eating, sleeping, walking, standing, lifting, bending, speaking, breathing, operation of a major bodily function, learning, reading, concentrating, thinking, communicating, and working.”
Conditions such as kleptomania, pyromania, current use of illegal drugs, and sexual disorders are not included as disabilities.
Like Title VII and the ADEA, proving disparate treatment discrimination under the ADA uses the three-step proof mechanism articulated McDonnell Douglas v. Green. However, the ADA imposes an additional requirement upon employers. Employers must make reasonable accommodations in order to make it possible for disabled individuals to perform the “essential functions” of their job. Reasonable accommodations include providing facilities that are accessible to the disabled, job restructuring, offering part-time work, effecting modifications of equipment, and providing readers or interpreters for those employees who are visually or hearing impaired. However, there are limits. Employers do not have to grant a request for an accommodation if such request would place an undue hardship on the company in order to provide for the accommodation. Whether or not an employer would suffer an undue hardship from a requested accommodation is based on four factors:
  1. The nature and cost of the accommodation;
  2. The size, workforce, and resources of the specific facility involved;
  3. The size, workforce, and resources of the covered entity, and
  4. The nature of the covered entity’s entire operation.
In addition, employers do not have to accommodate individuals who pose a direct threat to themselves and others in the workplace or who cannot perform necessary job functions with an accommodation being made.

The Rehabilitation Act of 1973

Employment discrimination protections are afforded to those with disabilities under the Rehabilitation Act of 1973 which prohibits discrimination on the basis of disability in programs run by federal agencies, programs receiving federal financial assistance, in federal employment, and in the employment practices of federal contractors. The Department of Labor enforces this act.

Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA)

Employees who take positions in the U.S. military service are afforded employment protections under the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA). This statute provides job and wage protection (including promotions and benefits) for U.S. military personnel returning to their employment in the private sector. Employers are required to rehire military service personnel and are prohibited from treating employees differently upon rehire. The Department of Labor enforces this act.

Financial Discrimination: Background, Credit and Social Media Checks

Financial discrimination in the workplace involves employment decisions or practices based on the financial situation of the applicant or employee. Employers often use background checks, credit reports, and review social media when determining whether to hire a job applicant or promote an employee. Information contained in these sources could give rise to claim that an employer discriminated against an applicant or employee. Employers who conduct these checks must comply with all federal, state, and local anti-discrimination and privacy laws. In addition, employers must comply with the requirements of the Fair Credit Reporting Act. The Federal Trade Commission enforces the provisions of the FCRA.

Affirmative Action and Diversity Programs

Affirmative action programs set employer’s goals and policies regarding the recruitment, hiring, and retention of employees in a protected class under Title VII, including minorities, disabled individuals, and veterans. Affirmative action programs seek to remedy past employment discrimination or to assure a diverse work environment. The EEOC defines diversity programs as “a business management concept under which employers voluntarily promote an inclusive workplace. Employers that value diversity create a culture of respect for individual differences in order to “draw talent and ideas from all segments of the population” and thereby potentially gain a “competitive advantage in the increasingly global economy.” Affirmative action and diversity programs may be based on effecting social policies, ethics, principles of fairness, and surprisingly, two contradictory provisions found in Section 703 of the Civil Rights Act of 1964.
Title VII Section 703(a)(1) of the Civil Right Act of 1964 is called the “equal treatment” section. Under Section 703(a)(1), it is unlawful to discriminate against any individual because the individual belongs to a protected class. Section 703(a)(1) calls for employers to be “class blind” when making employment decisions.
However, Section 703(a)(2) is called the “equal opportunity” section. Section 703(a)(2) makes it unlawful to limit or classify employees or applicants in any way that would deprive or tend to deprive them of employment opportunities or otherwise adversely affect the person’s status because of the individual’s membership in a protected class. Section 703(a)(2) calls for employers to consider membership in a protected class in order to determine if an employment practices or policies have resulted in disparate impact on a protected class.. It may be difficult to reconcile the concepts of “equal treatment” and “equal opportunity” at the same time, especially if the latter calls for “affirmative action.” Questions regarding the imposition of employment quotas are often raised in regard to affirmative action.
Affirmative action programs may be adopted voluntarily by employers, imposed on an employer by a court as a part of a settlement, or as a remedy when finding that an employer acted as part of a pattern of discrimination against employees. An affirmative action program may also be implemented in cases of government contracting.
On the federal level, affirmative action programs began with Executive Order 11246 in 1965, which was issued by President Lyndon Johnson. Executive Order 11246 prohibits federal contractors from discriminating against employees. At the same time, it mandated the creation and implementation of affirmative action plans which would apply to private employers as a condition of being awarded a contract with the federal government. Affirmative action requirements for federal contractors are administered by the U.S. Department of Labor, Office of Federal Contract Compliance Programs (OFCCP). Affirmative action and diversity programs are subject to strict scrutiny, i.e., they must be narrowly tailored in order to further a compelling governmental interest. These programs are also subject to judicial review for compliance with the Equal Protection Clause of the Fourteenth Amendment and the Civil Rights Act of 1964 and 42 U.S.C. Sec 1982.
In 1979, the U.S. Supreme Court upheld the legality of affirmative action programs in United Steel Workers of America v. Weber, 443 U.S. 193 (1973). The Court held that Title VII of the Civil Rights Act did not condemn all private, voluntary, race conscious affirmative action plans; and held that private sector employers and unions could lawfully implement voluntary affirmative action plans to remedy past discrimination. The EEOC enforces federal laws in connection with private sector affirmative action plans.
The EEOC compliance manual (2006), citing the Weber decision, states that:
“in examining whether such a voluntary affirmative action plan is legal under Title VII, courts consider whether the affirmative action plan involves a quota or inflexible goal, whether the plan is flexible enough so that each candidate competes against all other qualified candidates, whether the plan unnecessarily trammels the interests of third parties, and whether the action is temporary, e.g., not designed to continue after the plan’s goal has been met. “
Affirmative action programs enacted by public sector employers, public universities, and other public entities are often contested in courts throughout the United States. In Taxman v. Bd. of Educ., 91 F.3d 1547 (3d Cir. 1996), the Third Circuit Court of Appeals considered whether a school district’s affirmative action program which resulted in the school board’s termination of a teacher in order to achieve diversity in the workplace and not to remedy any past discrimination violated Title VII.
Although not a part of the employer-employee relationship, recently-decided cases may provide an insight into the views of the Supreme Court in future affirmative action cases. In Grutter v. Bollinger, 539 U.S. 306 (2003), the U.S. Supreme Court upheld a “holistic” admissions policy in which an applicant’s race was one of several factors to be considered, whereas in the same term, in Gratz v. Bollinger, 539 U.S. 244 (2003), the Court held an admissions policy that instituted a “point system” and assigned 20 automatic points to every member of an underrepresented minority, violated the equal protection clause of the Federal Constitution’s Fourteenth Amendment, because the point program was not narrowly tailored to achieve the interest in educational diversity that the university claimed justified the program.
Case Study

Taxman v. Board of Education

91 F.3d 1547 (3d Cir. 1996)
Procedural Posture
Defendant school board challenged a United States District Court for the District of New Jersey order granting partial summary judgment on liability to plaintiff teacher in a race-based employment discrimination action filed pursuant to Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e-2. The teacher challenged the dismissal of her claim for punitive damages.
Plaintiff teacher intervened in an action initiated by the government against defendant school board, asserting race-based employment discrimination claims under Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. § 2000e-2. The trial court granted plaintiff partial summary judgment on liability and, after a damages trial, awarded her full back pay. Both sides appealed; defendant claimed error in the grant of partial summary judgment and plaintiff challenged the dismissal of her punitive damages claim. The court affirmed, ruling that defendant violated Title VII when it used its affirmative action plan to grant a non-remedial work force preference, by laying off plaintiff, in order to promote “racial diversity.” Applying a two-prong test, the court ruled that the affirmative action plan, which had no remedial purpose, could not be said to mirror the purposes of the statute because there was no congressional recognition of diversity as a Title VII objective requiring accommodation. In addition, the policy’s lack of definition and structure “unnecessarily trammeled” non-minority interests. The damage award was proper. There was no evidence to support a punitive damages claim.
The court affirmed the judgment awarding plaintiff teacher full back pay and granting her partial summary judgment on liability in an action against defendant school board for race-based employment discrimination. Defendant discriminated when it used its affirmative action plan to lay-off plaintiff in order to achieve “racial diversity.” The award of full back pay was proper. The punitive damages claim lacked evidentiary support.
Affirmative action and diversity programs have continued to be controversial and have continued to create claims by applicants, employees, and students of reverse discrimination. In June of 2016, the U.S. Supreme Court in Fisher v. Univ. of Texas, No. 14-981, 2016 U.S. LEXIS 4059 (June 23, 2016), upheld the constitutionality of the University of Texas at Austin’s affirmative action program. Stating that courts should give deference to a university to define educational goals that include the benefits of diversity in the student body, the Court held that universities must prove that the consideration of race is narrowly tailored to meet the permissible goals of achieving diversity in its student body and that “race-neutral alternatives” will not suffice to meet these goals. The Court applied three key criteria to its analysis:
  1. A university must show that it has a substantial interest in considering race as a factor in its admissions policy and that considering race is necessary to achieve this purpose;
  2. Courts should ordinarily defer to a university’s judgment that there are educational benefits that flow from diversity in the student body; and
  3. The university must prove that race-neutral alternatives will not achieve its goals of increasing diversity.
Specifically the court held:
“The compelling interest that justifies consideration of race in college admissions is not an interest in enrolling a certain number of minority students. Rather, a university may institute a race-conscious admissions program as a means of obtaining the educational benefits that flow from student body diversity. Enrolling a diverse student body promotes cross-racial understanding, helps to break down racial stereotypes, and enables students to better understand persons of different races. Equally important, student body diversity promotes learning outcomes, and better prepares students for an increasingly diverse workforce and society. Increasing minority enrollment may be instrumental to these educational benefits, but it is not a goal that can or should be reduced to pure numbers. On the other hand, asserting an interest in the educational benefits of diversity writ large is insufficient. A university’s goals cannot be illusory or amorphous — they must be sufficiently measurable to permit judicial scrutiny of the policies adopted to reach them.”
Fisher may provide an insight into the Court’s views on affirmative action in a more general sense.
Review the Grutter case carefully.
Case Study

Grutter v. Bollinger

539 U.S. 306 (2003)
Procedural Posture
Petitioner law school applicant sued respondents, a law school, university regents, and university officials, claiming race discrimination in the law school’s admission policy. The trial court concluded that the policy was unlawful and granted an injunction. Sitting en banc, the United States Court of Appeals for the Sixth Circuit reversed the judgment and vacated the injunction. The Supreme Court granted certiorari.
The law school had long been committed to racial and ethnic diversity, especially to the inclusion of students from groups that, historically, had been discriminated against. Rather than imposing quotas, the law school admissions program focused on academic ability and a flexible assessment of applicants’ talents, experiences, and potential to contribute to the learning of those around them. It did not define diversity solely in terms of race and ethnicity but considered these as “plus” factors affecting diversity. The Court found that the Equal Protection Clause did not prohibit this narrowly tailored use of race in admissions decisions to further the school’s compelling interest in obtaining the educational benefits that flow from diversity. The goal of attaining a “critical mass” of underrepresented minority students did not transform the program into a quota. Because the law school engaged in a highly individualized, holistic review of each applicant, giving serious consideration to all the ways the applicant might contribute to a diverse educational environment, it ensured that all factors that could contribute to diversity were meaningfully considered alongside race.
The Court affirmed the decision of the circuit court.

Ethical Considerations

Affirmative Action
It is often argued that “it is time to end affirmative action” for minorities and women. Has this time now come? On the other hand, some have argued that it is is important to “mend it, not end it.” In light of the reasons for the creation of affirmative action plans in the first place, have “affirmative action” plans become obsolete or unnecessary?
Why should the government have the power to override the hiring and firing decisions of an owner of a business even if those decisions might amount to discrimination? After all, it is the business owner and not the government who has risked his or her capital in creating the business.
Mandatory Retirement
Should university faculty be subject to mandatory retirement at a certain age?
Protected Disability
Is it fair to place the burden of accommodating workers’ identifiable and protected handicaps on employers rather than force employees to seek employment in jobs where their handicaps will not be a factor in their employment? Before you respond, take a look at the website of the EEOC to identify the various types of “impairments” recognized by this administrative agency.


  1. What classes of workers are protected by Title VII?
  2. What are the three theories of discrimination under Title VII?
  3. Who enforces and what damages and remedies are available under Title VII?
  4. What are the prima facie case elements of a sexual harassment suit?
  5. How is wage discrimination addressed in the U.S.?
  6. What does it mean at law that an employer must accommodate an applicant or employee’s religion?
  7. What defenses can an employer raise to avoid or limit liability under Title VII and other discrimination statutes?
  8. How have recent technology innovations complimented the goals of the Americans With Disabilities Act?
  9. What is meant by financial discrimination?
  10. Has the Civil Rights Act of 1964 (as amended) worked a reverse discrimination on certain groups considered to be in the “majority” of the work force? Explain how you reached your conclusion.