Understanding the Business Legal Landscape: Concepts and Consequences

Overview of Legal Environment of Business

Prudent business decision-making requires a competent understanding of the legal environment in which companies operate, grow and sustain themselves. Simply put, the legal environment is the sum of all legal rules (or body of law) and legal institutions that constrain enforceable business conduct. It includes the law that Congress or state legislatures enact to explicitly regulate rights and duties and also enacts rules to regulate how businesses interact with consumers (competition, advertisement, consumer protection, etc). This section of the paper will discuss these four types of laws, their importance to businesses, and then provide a brief analysis of each, using real-world case studies as examples.
Even for the largest and most complex organizations, a sound understanding of relevant laws is a vital part of making business decisions. For example, the failure to comply with laws that govern product safety can result in legal liability for a company, as in the Volkswagen emissions scandal. Even the most established and seemingly sophisticated business can be blind to the consequences of its actions.
Understanding the legal environment is not just about compliance. It affects the business strategy and revenue. Legal rules and its enforcement are "structural" forces governing the likelihood of a business’ success, namely in being able to attract sufficient investments and resources, successfully market its products, and compete with rivals for market share. Going beyond the law and considering factors of social justice and equity can sometimes lead to a company’s undoing, such as in the case of Wells Fargo, and its unauthorized account openings.
The law that regulates how businesses interact with consumers, including competition, advertisement, and consumer protection rules, have been an important dimension of the business legal environment for as long as the marketplace has existed. Such laws govern how businesses acquire new customers, how much the company can charge them, how often they interact with the company, and how transparent the company needs to be in its communications with its consumers. The laws regulate the scope of business’s proactive conducts (sales force, advertisements and pricing decisions), and reactive responds (how to treat customer complaints).
Competition laws promote economic efficiency by maximizing the use of current resources (Berger et al, 2016). Competition laws attempts to ensure that business management decisions are based on a market-driven process, rather than on collusive agreement between one or more actual or potential competitors. Courts can define antitrust prohibition very broadly or very narrowly based on various factors, including whether the agreement is actual or potential, whether it is interstate or intrastate, and whether it restrains trade or commerce among the individual states of commerce (Berger et al, 2016) .
For example, a Supreme Court oral argument reviewed the antitrust prohibition on the level of "interstate" or "intrastate." The court also considered whether there is a meaningful difference between an interstate restraint that is incidental to an intrastate restraint. The judicial definition of prohibition on "interstate" restraints or "intrastate" restraints has collective significance for categorization of restraint: at a national level the former is prohibited while at an intrastate level, it is permitted (Berger et al, 2016).
Whenever a company decides to deliver an advertisement to its consumers or the public, there are legal requirements and prohibitions that set a limit to its conduct. In the United States, the Federal Trade Commission (FTC) enforces laws against deceptive advertising practices. The enforcement action may be taken either informally or by legal action started by the FTC. The informal method relies on the FTC’s broad investigative powers, such as issuing "Civil investigative demands" significantly empowered by the administrative subpoena power of the FTC Act, Section 6(b); and by giving the notice and hearing requirements mandated by the Administrative Procedure Act (APA). The formal enforcement methods authorized by section 5 of the FTC Act include private suit, administrative complaints, and civil suit brought by the attorney general of the states (Berger et al, 2016).
In addition to generally regulating advertisements in a way that makes them more truthful and less misleading, the FTC regulates advertisements as a means of inducing particular acts or encouraging the purchase of particular products or services from specific sellers. Such advertisements include, but are not limited to, claims about prices, savings and value, discounts and terms of sale, and warranties, guarantees and after-sale services (Berger et al, 2016).
The FTC’s intervention allows businesses to better assess whether their advertisements are fraudulent or misleading, particularly when the statute’s language is vague or ambiguous (Berger et al, 2016). After the intervention, the business marketing scheme is incentivized to substitute a vague or ambiguous claim with a less misleading claim (Berger et al, 2016).
The rise social media and electronic devices has made companies more dependent on digital advertisements and more exposed to advertising liability. Businesses are now more likely to be exposed to lawsuits under the law of information disclosure and redress than through traditional competition law (Berger et al, 2016). Furthermore, digital advertisements are likely to be more successful due to precisely targeted campaigns using individual behavioral data. Thus, the scope of advertising law extends beyond the FTC’s regulation, although for public companies those disclosures are mandated by the Securities Exchange Commission (SEC) (Berger et al, 2016).

The Impact of Regulation and Compliance

Regulatory compliance involves following the rules and standards set by these organizations, which are essential for maintaining lawful operations. Various levels of government exercise this regulatory authority, affecting many aspects of business, from the environment to international trade, including taxation practices and intellectual property requirements. In many cases, regulations require companies to submit reports, complete training, and/or comply with certain procedures.
Common regulations
State Level: The federal government isn’t the only level of government that regulates business activities; state governments do, too. These regulations vary by state and can include laws regarding sales tax, certain business licenses and permits, and zoning ordinances.
Foreign Businesses: Businesses based in a foreign country that are doing business in the U.S. must abide by U.S. regulations, including obtaining the appropriate permits and licenses, and pricing their products and services according to both U.S. and foreign regulations. The Organization of Economic Cooperation & Development (OECD) includes 37 countries, such as Australia, Canada and Japan, with which the U.S. works to reduce trade barriers and foster global economic growth and stability.
IRS & the Internal Revenue Code: The IRS develops tax laws for both individuals and businesses. Small business owners are obligated to file an annual IRS return and pay any owed income tax. The IRS provides tax guidance to help business owners question the tax treatment of certain expenditures to determine whether those expenditures qualify as deductible business expenses or can otherwise be accounted for in a manner that minimizes income tax liability.
SEC & the Securities Act of 1934: The Securities and Exchange Commission (SEC) is a government agency that regulates U.S. securities markets. Public companies must register their securities with the SEC and provide detailed information about their financial performance. Non-public companies that exceed certain thresholds have to comply with some of the SEC’s rules as well. For example, if a non-public company reaches a threshold of $10 million in assets and 500 shareholders, it is required to register a class of its equity securities with the SEC, which will require it to provide certain disclosures and be subject to regular reporting requirements.
CFTC & the Commodity Exchange Act: The Commodity Futures Trading Commission (CFTC) monitors and regulates futures contracts and options contracts on commodities and certain financial assets. Among other tasks, the CFTC combats fraud and manipulation in markets, acting against market participants and/or institutions.

How Contracts Shape Business Operations

Contracts are integral in facilitating business transactions among various stakeholders, and the legal system plays an important role in establishing the terms of those contracts and determining when they have been breached. These legal agreements can take many forms and can be very complex, but they essentially function as a way for all involved parties to protect their interests and ensure that their obligations will be fulfilled.
The first step to executing a contract is for both parties to agree on the terms they want to establish in connection with the transaction. Both sides should be diligent in reviewing those terms to ensure they are satisfactory before signing, as the execution of a contract satisfies all formal requirements for those terms to become binding. From that point forward, the agreement is legally enforceable and should a party breach any terms of the contract, the other party has the right to seek damages.
A contract does not have to be formal to be legally binding. Informal, verbal agreements can be legally enforceable as long as they have the essential components of an agreement: intention, capacity, consent and consideration. No matter what type of contract it is, however, both sides have to be in agreement on its terms. For this reason, it is best to avoid non-intentional or unintentional contracts by having another party act as witness to the execution of the contract.
Contracts do not have to be designed like production contracts to be legally binding. Non-production contracts are equally legally binding. Agricultural production contracts are agreements between two or more parties where at least one of them must be an agricultural producer (partner or owner) who contributes or receives something of value from the business. Non-production contracts are agreements wherein the other party is not linked to the agricultural sector. The consequences of breaching a contract can come in the form of monetary damages — including compensatory, consequential and punitive damages — or by specific performance, which is when the court compels the parties to do what they promised to do in the contract.

Intellectual Property in the Business World

A significant concern for modern business owners is the ownership and protection of intellectual property, which consists of intangible assets such as business models, product designs, company names and logos, and brand images. Like a physical asset such as a factory or warehouse, intellectual property is an asset that must be protected. Depending on the nature of the property, certain legal protections may be available. Familiarity with these protections is important for a business to preserve its rights and interests in intangible assets.
Patents, trademarks, and copyrights are the primary sources for protecting intellectual property. However, businesses must take affirmative steps to secure these protections. If you do not take steps to protect your intellectual property, you can lose it. If you and your employees create intellectual property while working for your company and you did not take steps to protect that intellectual property, typically the creation belongs to your employee. Intellectual property that is not registered also may be considered public domain or improperly acquired and thus subject to infringements.
Patents prevent others from making or using the patented invention, which means they basically exclude others from making, using, selling, or importing the invention during the lifetime of the patent. To be patentable, an invention must be novel, useful, and nonobvious. When a patent expires, anyone can make or use the patent, but until it expires or is successfully challenged, a patent cannot be lawfully copied or imitated without infringing on the patent holder’s rights.
Trademarks are distinctive identifiers that businesses display to the public to differentiate their products or services from those of others. Identifiers can be any name, symbol, letter, word, or combination of words and numerals, as long as it is unique. Copyrights protect the creator’s exclusive rights to art, literature, performance, or music; it does not protect ideas themselves.

The Basics of Employment Law

Employment law is essential for every business, no matter how large or small. Employment laws govern how businesses must treat their employees, and they ensure that employees enjoy a certain level of rights and that they can turn to the courts if their rights are violated. Employers have many obligations to their employees under employment law. The first obligation is to prepare a contract that outlines the work that will be performed and the compensation provided. The contract should also include a non-disclosure clause if the job includes confidential information. An employment contract protects both the employer and the employee, and it is essential to create one at the start of the employment.
Termination of employment is another area black and white area of employment law. When an employer terminates an employee, was it termination without notice (also known as termination for cause)? In which case the employer does not owe the employee anything. Or, was it just a case of downsizing or the company failing? In which case the employee has the right to reasonable notice prior to dismissal. If the company must let an employee go, the employer must give the employee his minimum statutory notice. This notice period is determined by the number of years worked for the employer and is provided in the BC Employment Standards Act. For example, after a employee has worked for a company for 15 year, he is entitled a minimum of 18 weeks’ notice.
Workplace safety laws also impact businesses, and employers are required to provide a safe workplace for their employees. Similarly, anti-discrimination laws have changed over the years, and employers are now required to make reasonable accommodations for employees with disabilities. Laws also exist against sexual and workplace harassment. Employees with employment security cannot be discriminated against, meaning that an employer may not make reasonable judgment against an employee who must take maternity leave or sick leave for a disability.
Wages and overtime compensation are also dictated by employment law. Low wage earnings are not permitted, as employers must pay at least minimum wages, and employees have the right to ask for overtime compensation. The WorkSafeBC regulates workers’ compensation payments, so the employer may not argue against workers’ compensation. Of course, employees have the legal right to join unions.
If the above-mentioned laws and rights are violated, the employee may file a claim with the appropriate labour relations tribunal. In British Columbia, the Labour Relations Board handles claims regarding labour relations and unfair practices, and the Employment Standards Tribunal handles claims regarding minimum standards and statutory violations.

Liability and Risk in Business

In addition to complying with relevant laws and regulations, businesses must also understand and plan for the ways they can be held liable for their actions. Civil liability may involve either contract law or tort law violations, the latter concerning injuries executed against a person. Liability exposures also extend to employees who work in business organizations, as well as the property and assets companies own.
A company’s assets can be threatened by government fines and penalties for non-compliance with tax, safety, environmental or other laws and regulations. The official name for this type of exposure is government liability. These liabilities are generally covered by law, unlike those described below, which are subject to the fact-specific language of specific policies.
Civil liability can arise from all types of legal contracts. When a company fails to execute its contractually-mandated responsibilities , it can be found in breach of the agreement. This situation could lead to an action by either an investor or a creditor. Breach of contract also protects business entities from actually benefiting from contractual promises that they do not fulfill. For example, if a business does develop a new product within a certain time frame, the buyer cannot then sue to enforce the bargain.
Commercial general liability insurance (CGL) is considered the "backbone" of business insurance coverage because of its ability to protect against liability risks. CGL is designed to protect business entities against a wide spectrum of claims and indeed covers many, but not all, of the risks to which companies are exposed.
The U.S. Environmental Protection Agency (EPA) created an environmental liability and risk management program known as Enviu. Corporations can purchase third-party liability coverage under general liability policies as a way to transfer some of their risks to insurers.

International Business and The Legal Landscape

International laws can have a significant impact on the operation of global businesses. Organizations are challenged by the legal and compliance requirements associated with their business, in the face of many countries having different laws. Businesses must be aware of these complications when expanding operations in new regions. The complexity becomes even more pronounced as an organization attempts to inter-operate with multiple entities that all work under various laws in a number of different regions.
One of the methods that has been used to reduce the legal complications is through international trade agreements, which are legal arrangements between countries that allow for the free movement of goods and sometimes services between parties in those countries. However, in practice, the process involved in registering for and adhering to such agreements can vary for each case, and may create additional difficulties for companies wishing to act globally.
In addition to international trade agreements, multinational corporations are subject to many of the same laws that affect domestic companies, which can complicate their operations across jurisdictions.

Ethical Issues and Corporate Responsibility

Business lawyers understand how the interplay of ethical responsibility and corporate governance is a useful lens to examine the law. Ethics influences how the law develops, and in turn, the law of corporations and business organizations provides a set of rules that in some cases encourage more ethical conduct. The assumptions that underlie this interplay include that businesses have duties to more than their shareholders, and that legal decisions should incorporate notions of fairness and discretion.
A corporation’s duty to its shareholders has long been understood to mean that the directors of the corporation owe a fiduciary duty to maximize shareholder value. Some academics and commentators believe the law and the business community are moving away from the notion that a corporation’s primary duty to is its shareholder. Such people argue that businesses have a duty to their employees, customers and suppliers, and to society at large.
Corporate governance influences the scope of the corporation’s duties. The corporation gets to define its duties – its corporate purpose. Generally speaking, when setting out its purpose, which well may include something beyond maximizing shareholder value, a corporation is relying on the good sense of its directors to act in the corporation’s interests.
Even though it is the directors’ responsibility to act with good sense and care to manage the corporation’s affairs, members of a company may still be concerned that their directors do not take their duty seriously. In recent years, directors have had to balance what shareowners want from the company (profitability) with increasing social concerns (the effect of the corporation’s activities on the environment, on jobs in the community, on the lives of employees and their families).
Many corporations have constituted formal boards to oversee their activities. Boards of directors composed of the principal shareholders of the corporation served to monitor the corporate officers managing the business. As corporations grew, they became widely held by many investors and professional managers took over the job for which participants were previously physically present. Today, firms such as Enron and WorldCom had boards that, if they met, did not meet regularly or in a substantive way. Other directors failed to act when their information concerning the firm’s practice of hiding liabilities was inadequate to allow the board to form a reasonable business judgment.
When directors no longer know their companies’ day-to-day businesses, it becomes difficult to exercise oversight of officers. Directors need full, accurate and timely information from well-functioning corporate officers. Without those, essential judgment cannot be made about business proposals and operations.
The corporate response to the perception of directors’ failure to fulfill their oversight duties to their corporations and their shareholders has meant an increase in formal internal compliance programs, more lawyers on corporate staff, and a greater prevalence and integration of ethics officers into corporate staff, who answer not to general counsel or the general manager, but to the board itself.

Wrap-Up: The Legal Environment

In the ever-evolving landscape of business, the legal environment remains a cornerstone of operations and risk management. This environment, with its myriad of laws, regulations, and legal precedents, forms the foundation of a fair and efficient market, ensuring that all stakeholders play by established rules. We have explored various facets of this environment, including the importance of intellectual property rights, the balance between competition and regulation in the form of antitrust laws, international trade laws that govern cross-border transactions, and the significance of consumer safety and protection laws for maintaining trust in market exchanges.
Each of these areas presents unique challenges and opportunities for businesses. With the global marketplace growing more interconnected by the day, the ability to navigate these legal waters is critical. For businesses to thrive, they must be proactive rather than reactive , staying ahead of the risks and obligations posed by the legal environment of business.
Legal compliance is not a one-time action; it requires a commitment to continual learning and a willingness to adapt. Regular training, consultation with legal experts, and monitoring changes in the legal landscape are essential components of effective business practices. Additionally, businesses that engage in corporate social responsibility and ethical practices often find themselves at an advantage in a competitive environment. Thus, the legal environment of business is not just about avoiding penalties and litigation; it can also present a pathway for strategic growth and market leadership.
In summary, the legal environment of business is complex and multifaceted, but mastering its principles is essential for success. By understanding the laws that govern daily operations, from hiring practices to consumer agreements, businesses are better equipped to handle risks, innovate freely, and foster trust with customers and stakeholders alike.