The Institutional Preconditions of Capitalism

1. The Institutional Preconditions of Capitalism • Respect for private property and a willingness to abide by agreements • A system of a laws reflecting those norms • Orderly and impartial enforcement of those laws

2. HOW THESE PRINCIPLES ARE MANIFESTED IN U.S. Self-Executing Regulation State Enforced Regulation Administratively Executed/State Enforced Regulation

3. Self-Executed Regulation • Defendant violates a duty harming Plaintiff • Plaintiff brings civil action (takes the offender to court) • Seeks damages and/or a court order • Court (judge & jury) decides on the basis of adversarial process, court’s decision enforced by state

4. Examples • Contract • Misrepresentation • Product Liability

5. State Enforced Regulation • Defendant violates duty laid out in statute • State brings case (civil and/or criminal) against Defendant • Seeks penalties (fines, jail, corporal punishment) and/or a court order • Court (judge & jury) decides on the basis of adversarial process, court’s decision enforced by state

6. Examples • Sherman Act • Fraud

7. Administratively Executed/Federally Enforced Regulation • An administrative agency requires permit to carry out particular activity • It grants the permit if (and only if) holder agrees to abide by specified terms • Prevents those lacking permit from performing activity and enforces compliance with terms of permits • It sanctions violators -- imposes fines or, in extreme cases, withdraws permit

8. Examples • Wheeler Lea Act • FDAct

9. CONTRACT I • The basis of contract is free exchange of property rights • Ownership implies the right to buy and sell • The law doesn’t generally interfere with or constrain those rights • People are expected to abide by their agreements -- to be trustworthy

10. CONTRACT II • Paramount Job of Courts: Enforcing compliance with terms of voluntary agreements • Courts rarely question the adequacy of consideration • Seller responsible for making terms of contract clear • If ambiguity nevertheless exists, construe against drafter

11. CONTRACT III • Except where contract stipulates otherwise, usual remedy is termination of contract and return of consideration • Buyer is expected to make special arrangements where failure on part of seller would be especially costly • Seller responsible for making terms of contract clear • If ambiguity nevertheless exists, the courts will usually decide against drafter’s interpretation

12. PRODUCT LIABILITY I • Manufacturers and retailers owe customers a product that is effective for its stated purpose and safe when properly used • Product must be properly designed, manufactured, and marketed to the consumer • basis of the bargain damages -- i.e., the product or service is not as represented and does not perform as promised • consequential damages -- use of the good in question gives rise to damages

13. PRODUCT LIABILITY II • Personal injury • Anyone injured from use of product can sue • Anyone in supply chain can be sued • Often the one with the deepest pockets will be targeted, but liability is often joint and several • Plaintiff picks jurisdiction • Can seek recovery for ‘actual’ damages, pain & suffering, and punitive damages

14. PRODUCT LIABILITY III • Main personal injury theories • Strict liability: failure to warn of a defective design (something that could be corrected -- i.e., exploding dryer) or defective condition (ladder; hockey puck?); • Negligence: failure to: manufacture or handle the good properly, adequately inspect the good, comply with federal, state, or industry product standards. (Violating law is usually proof of negligence per se)

15. PRODUCT LIABILITY IV • Defenses • Abnormal use • Contributory negligence • Assumption of risk • To avoid LIABILITY under a strict liability standard, the defendant must show that the plaintiff "voluntarily and unreasonably proceeded to encounter a known danger."

16. FRAUD I 1. Misrepresentation (either by commission or omission) 2. of a material fact 3. Knowledge of the misrepresentation 4. Intent to deceive 5. Reliance on the part of the victim 6. Damage to the victim

17. FRAUD II • Puffing ≠ fraud • tampering with a used car's odometer is fraud; • claiming that it is in great shape is not. • Innocent misrepresentation is not a crime -- • misrepresentation involves all the elements of fraud but the middle two (except where the US government is the customer) • remedy for exchanges involving innocent misrepresentation is rescission of the contract and restitution of consideration.

18. Sherman Act: Section 1 Per se violations: Agreements among potential competitors at the same level (Horizontal arrangements) • to fix prices--explicit or implicit • to divide markets • group boycotts

19. Sherman Act: Section 1 (cont.) • Rule of reason offenses: Vertical arrangements) • Resale price maintenance agreements • Tying arrangements (may also violate Clayton Act) • Exclusive dealing arrangements (ditto) • Requirements Contracts (ditto)

20. Sherman Act: Section 2 Anti-monopoly Section (involves one legal person and requires evidence of intent to monopolize <anticompetitive acts> and success <dominant market share> • Drive competitors out of business • Market definition

21. Clayton Act Enforced by DOJ and Federal Trade Commission • Prohibits price discrimination • Sale of goods of like grade and quality in same market at different price that injures competition • Defenses include: Cost justified, Meeting competitors' price, Perishable goods, Unlike grade or quality

22. Clayton Act (cont.) Section 7 prohibits mergers likely to injure competition (HSR = not competitors = consumer welfare/efficiency) • Defenses • Failing company • No substantial lessening of competition • DOJ rules--horizontal mergers/market share, HHI = sum of squared |shares| • Prior approval, waiting period

23. The Federal Trade Commission • Created in 1914 by FTC Act to protect the consumer against “unfair methods of competition" • FTC Act amended by Wheeler-Lea Act "to cover unfair or deceptive acts or practices” Gave FTC broad latitude to define its responsibilities and the power to regulate advertising to prevent 'false and misleading claims' • FTC also enforces Magnuson-Moss Warranty Act, Truth in lending, Fair Credit Reporting, and Fair Packaging and Labeling Acts