There are 4 essay questions; each question is worth 25 points. Each question and any subparts of the question must be answered. The midterm should be 6-8 pages, double spaced. The answer may exceed the page limitations. This is not a group project. Each student should work alone. READ THE QUESTIONS CAREFULLY BEFORE ANSWERING.
In order to do well on this test you must refer to materials in the chapters, including cases, and you may also refer to the handouts and in-class case studies and discussions. Make sure to use the legal and business terms that you have learned in the course and apply them to the facts of the questions. When you use a legal term, provide an explanation of its meaning and/or any legal test that explains how it is applied to any factual situation. If there is a case that supports your argument, make sure to explain the reasons.
- Do the legal rules (i.e., fiduciary duties of care and loyalty, the business judgment rule, safe harbors, etc.) and the SEC self-regulatory oversight philosophy, both of which define corporate self-regulation in a free enterprise market economy, provide enough protection to stakeholders to prevent corporate misconduct? Should there be more regulation or less regulation of business? EXPLAIN your answer.
- Beginning in 2006, Spike Clothing was besieged with a series of allegations that it was mistreating and underpaying workers at foreign facilities. Spike responded to these charges in numerous ways, such as by sending out press releases and writing letters to the editors of various newspapers around the country. In addition, in 2004, Spike commissioned a report by former Ambassador to the United Nations Andrew Young on the labor conditions at Spike production facilities. After visiting 12 factories, “Young issued a report that commented favorably on working conditions in the factories and found no evidence of widespread abuse or mistreatment of workers.”
In 2008, Spike was sued by the Consumer Fraud Office of the State Attorney General for unfair and deceptive practices under the State’s Unfair Competition Law and False Advertising Law. The Attorney General asserted that “in order to maintain and/or increase its sales,” Spike made a number of “false statements and/or material omissions of fact” concerning the working conditions under which Spike products are manufactured.
Spike filed a motion to dismiss arguing that the Attorney General’s suit was absolutely barred by the First Amendment prohibition against broad regulation of commercial
speech. Spike argued that its statements “form[ed] part of a public dialogue on a matter of public concern within the core area of expression protected by the First Amendment.”
The trial court denied Spike’s motion and held that “[b]ecause the messages in question were directed by a commercial speaker to a commercial audience, and because they made representations of fact about the speaker’s own business operations for the purpose of promoting sales of its products, . . . [the] messages are commercial speech.” However, the court emphasized that the suit “is still at a preliminary stage, and that whether any false representations were made is a disputed issue that has yet to be resolved.”
The case is now on appeal. The Appellate Court must decide whether a corporation participating in a public debate may “be subjected to liability for factual inaccuracies on the theory that its statements are ‘commercial speech’ because they might affect consumers’ opinions about the business as a good corporate citizen and thereby affect their purchasing decisions.
This case presents novel First Amendment questions because the speech at issue represents a blending of commercial speech, noncommercial speech and debate on an issue of public importance. On the one hand, if the allegations of the complaint are true, direct communications with customers and potential customers that were intended to generate sales–and possibly to maintain or enhance the market value of Spike’s stock– contained significant factual misstatements. The regulatory interest in protecting market participants from being misled by such misstatements is of the highest order. “There is no constitutional value in false statements of fact.” On the other hand, the communications were part of an ongoing discussion and debate about important public issues that was concerned not only with Spike’s labor practices, but with similar practices used by other multinational corporations. Knowledgeable persons should be free to