Chapter Ten

The Legal
Environment
 Learning Objectives

• Discuss laws and regulations that affect

small business
• List the types of bankruptcy
• Describe the elements of a contract
• Explain how to protect intellectual
property

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 Small Business and the Law

• Laws ensure:
– Fair competition between businesses
– Protect the rights of consumers and
employees
– Protect property
– Enforce contracts and agreements
– Permit bankruptcy when things go bad
– Tax laws to collect the money needed for
government to provide these protections

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Get Off
Our Backs

Source: National Federation of

Independent Business/Wells
Fargo & Co.

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 Laws to Promote Fair Business
Competition
• Antitrust Laws – legislation that prohibits firms
from combining in a way that would stifle
competition within that industry
– Sherman Antitrust Act (1890)
– Clayton Act (1914)
• Under antitrust laws, any agreements or
contracts that restrain trade are illegal and
unenforceable

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 Laws to Protect Consumers

• In order to protect consumers, laws

have largely abandoned the rule of
caveat emptor – “Let the buyer beware”

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 Common Government Practices to
Protect Consumers
• Extension of credit
• Deceptive trade practices
• Unsafe products
• Unfair pricing
• Business, finance, economic, and
consumer protection laws

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 Major Federal Legislation
Protecting Consumers Since 1960
Federal Hazardous Warning labels on toxic household
Substances Labeling Act chemicals
(1960)
Kefauver-Harris Drug Drug testing and labeling for both
Amendments (1962) generic and trade names
Cigarette Labeling Act Warning labels on packages and ads
(1965)
Fair Packaging and Labels on products sold across states
Labeling Act (1966) must include net wt, ingredients, and
mfg name/address
Motor Vehicle Safety Act Standards for safer cars
(1966)
Wholesome Meat Act Meat inspection within states
(1967)

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 Major Federal Legislation
Protecting Consumers Since 1960
(continued)
Flammable Fabrics Act Flammability standards for children’s
(1967) sleepwear
Truth in Lending Act Finance charge disclosure in both
(1968) dollars and annual percentage rates
Child Protection and Toys with mechanical or electrical
Toy Act (1969) defects banned from interstate
commerce
Credit Card Liability Card holder liability limited to $50 per
Act (1970) card; unsolicited cards stopped
Fair Credit Reporting Consumers can get credit reports and
Act (1971) correct errors
Consumer Product Established Consumer Product Safety
Safety Commission Act Commission
(1972)
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 Major Federal Legislation
Protecting Consumers Since 1960
(continued)
Trade Regulation Rule Cooling off period for door-to-door sales
(1972)
Fair Credit Billing Act Consumer can challenge billing errors
(1974)
Equal Credit Opportunity Equal credit opportunities for males/females
Act (1974) and single/married people
Magnuson-Moss Minimum standards for written consumer
Warranty-Federal Trade warranties for products over $15
Commission Act
Amendments to Equal Discrimination prohibited when granting credit
Credit Opportunity Act
(1976, 1994)
Fair Debt Collection Abusive collection practices by third parties
Practices Act (1977) outlawed
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 Major Federal Legislation
Protecting Consumers Since 1960
(continued)
Drug Price Competition Abbreviated procedure for registering generic
and Patent Restoration drugs
Act (1984)
Orphan Drug Act (1985) Tax incentives encourage drugs for rare
diseases
Nutrition Labeling and FDA review of food labeling and packaging
Education Act (1990)
Telephone Consumer Automated dialing and prerecorded-voice
Protection Act (1991) calling prohibited
Consumer Credit Credit issuers are responsible for accurate
Reporting Reform Act credit data
(1997)
Children’s Online Privacy Parents control info collected from kids under
Protection Act (2000) 13; websites must protect child info
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 Laws to Protect People in
the Workplace
• Fair Labor Standards Act - 1938
• Civil Rights Act - 1964
• Immigration Reform and Control Act -
1986
• Americans with Disabilities Act - 1990
• Civil Rights Act - 1991

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 Laws to Protect People in
the Workplace (continued)
• Workers’ Compensation
• Unemployment Compensation
• Occupational Safety and Health
Administration (OSHA) – 1970

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 Licenses, Restrictions, and Permits

• At the federal level, a small business owner

needs to obtain an employer identification
number for federal tax and social security
withholdings.
• At the state level, professionals (lawyers,
dentists, architects) need a state license. Special
licenses are needed for a few types of business
(liquor, food, gasoline, firearms). A small
business owner needs to register for a state tax
number with the state Department of Revenue.

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 Licenses, Restrictions, and Permits
(continued)

• At the regional level, a small business owner

needs to check with regional agencies that
oversee environmental regulations and water
usage
• At the local level, permits and licenses vary
widely from place to place. Contact local city
or county clerk and other sources to secure
the information that students need in your
local area

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 Zoning Laws
Typically used to Control

Waste Disposal Building Colors

Parking Sign Sizes &

Placement

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 Bankruptcy Laws

• Bankruptcy can accomplish two

different objectives:
– Liquidation, after which the business
ceases to exist
– Reorganization which allows the business
owner to file a plan with the court that
offers protection from creditors until the
debt is satisfied

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 Bankruptcy Laws

Chapter 7 Chapter 11

Chapter 13

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 Bankruptcy Laws
Chapter 7 Bankruptcy
• Assets of a business are liquidated by a
trustee appointed by the bankruptcy
court, and the proceeds are divided
among the creditors
• Chapter 7 accounts for 75 percent of
bankruptcy filings

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 Bankruptcy Laws
Chapter 11 Bankruptcy
• Chapter 11 provides a second chance for a
business that is in financial trouble, but still
has potential for success.
• Chapter 11 can be either voluntary or
involuntary.
• Once you file for Chapter 11 protection, you
file a reorganization plan with the bankruptcy
court. If the plan is accepted, the business
continues to operate under court direction.

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 Bankruptcy Laws
Chapter 13 Bankruptcy
• Chapter 13 bankruptcy allows
individuals, including small business
owners, who owe less than $250,000 in
unsecured debts and secured debts of
less than $750,000, to pay back
creditors over a three-to-five-year period
• Chapter 13 provides a reorganization for
individuals, rather than businesses as in
Chapter 11.

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 Contract Law for Small Business

• Contracts do not have to be in writing to

be enforceable
• Contracts that must be in writing are
those that:
– Involve the sale of real estate
– Involve paying someone else’s debt
– Take longer than one year to perform
– Involve the sale of goods valued at $500 or
more

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 Contract Law for Small Business

Legality

Agreement

Four Basic Elements

of a Contract Consideration

Capacity

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 Contractual Obligations
Breach of Contract
• If one party involved in a contract does not
hold up his or her end of the agreement, a
breach of contract has occurred
– Remedy for breach includes compensatory
damages (money awarded) or specific
performance
• The intent of litigation is to try to put you
back to where you were before the
agreement was made

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 Contractual Obligations
Compensatory Damages
• Compensatory Damages – Money awarded by
the courts to a party of the contract who has
suffered a loss due to the actions of another
party
• Specific Performance – Non-monetary award
granted by the courts to a party of the contract
who has suffered a loss due to the actions of
another party
• Injunction – Court order that prohibits certain
activities

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 Laws to Protect Intellectual Property

• Intellectual property – broad term that refers

to the product of some type of unique human
thought. It is created through the mental
skills of a person
• Intellectual property can include symbols
and slogans that describe your business or
product and original expression, whether it
takes the form of a collection of words, an
artistic interpretation, or a computer program

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 Laws to Protect Intellectual Property

Patents Copyrights Trademarks

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 Protecting Intellectual Property –
Three Types of Patents
• Utility patents, for inventions that
provide a unique or new use or function
• Design patent protects unique or new
forms or shapes
• Plant patent for living plants

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 Protecting Intellectual Property
What Can Be Patented?
• Patent and Trademark Office (PTO)
reviews each patent application and
decides whether or not to grant one
based on four tests:
– Does the invention fit a statutory class?
– Is the invention useful?
– Is it novel?
– It is nonobvious?

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 Protecting Intellectual Property –
Patent Searches
• Before you file a patent application, you
should conduct a patent search
• You can conduct a patent search yourself,
or hire a patent agent or patent attorney
• You search for existing patents for
inventions that are or may be similar to
yours
• You can search through libraries or the
Internet

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 Protecting Intellectual Property –
Copyrights
• Copyright - is a form of protection for
intellectual property provided to the
creator of a literary, musical, or artistic
work for a period of the creator’s life plus
50 years
• If your cooperation is the owner of a
book’s copyright, it will continue as
owner for 75 years after the publication,
or 100 years after creation

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 Protecting Intellectual Property –
Trademarks
• Brand – is a name, term, symbol, design, or
combination of these elements that clearly
identifies and differentiates your products
from those of your competitors
• Trademark – is a registered and protected
brand. All trademarks are brands, but not all
brands are trademarks. A trademark can
include a graphic as well as a brand name
– Example: The Coke name is protected, the style of
its script also makes it a trademark

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 Protecting Intellectual Property –
Trademarks (continued)
• Trademark rights continue as long as you
continue to use the trademark. This is an
advantage over patents or copyrights
• Trademarks are useful because they provide
brand recognition for your product and are a
good way to create an image in customer’s
minds
• Before your product is registered, use the
symbol ™, and after it is registered,use ®

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 Protecting Intellectual Property –
Global Protection
• Protecting intellectual property in other
countries is difficulty
• Patent, copyright, or trademark protection
in the U.S does not apply in most foreign
markets
• You need separate protection in each
country, so you must check regulations
and filing procedures for each market you
intend to enter

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Protecting Intellectual Property –
Global Protection (continued)
• A series of international treaties, almost
all nations – the former Soviet Union
countries and China are the major
exceptions – have agreed to give each
other’s citizens the same copyright
protection given to their own citizens

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 Protecting Intellectual Property –
Global Protection (continued)
• The two most important and overlapping
copyright treaties are:
– Berne Convention
– Universal Copyright Convention (UCC)

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 Protecting Intellectual Property –
Global Protection
• The newest challenges in the protection
of intellectual property concerns the
uncharted legal territories of cyberspace

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 Using the Internet

• “Our Mission: To Help U.S. Business

Succeed, Globally.” That’s the stated goal for
the International Trade Administration of the
U.S. Department of Commerce. The ITA
website has links to statistics, industry
analysis, trade laws, and answers to often-
asked trade questions.
http://www.ita.doc.gov

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