– Read Proctored Exam – Study Guide file to understand the assignment – 2 hours to complete – 60 multiple-choice questions – 13 main topics that the questions will address

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– Read Proctored Exam – Study Guide file to understand the assignment

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– 60 multiple-choice questions

– 13 main topics that the questions will address

– Read Proctored Exam – Study Guide file to understand the assignment – 2 hours to complete – 60 multiple-choice questions – 13 main topics that the questions will address
Customer Service A Practical Approach SIXTH EDITION Elaine K. Harris Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within the text Many of the designations by manufacturers and seller to distinguish their products are claimed as trademarks. Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps. Library of Congress Cataloging-in-Publication Data 10 9 8 7 6 5 4 3 2 1 ISBN 10: 0-13-274239-X ISBN 13: 978-0-13-274239-9 For John, Kendall, and Andrew—the most important customers in my life Copyright © 2013, 2010, 2007 by Pearson Education, Inc. All rights reserved. Printed in the United States of America. This publication is protected by Copyright and permission should be obtained from the publisher prior to any prohib- ited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458 or you may fax your request to 201-236-3290. Harris, Elaine K. Customer service : a practical approach / Elaine K. Harris.—6th ed. p. cm. Includes index. ISBN-13: 978-0-13-274239-9 (alk. paper) ISBN-10: 0-13-274239-X (alk. paper) 1. Customer services. I. Title. HF5415.5.H2897 2013 658.8’12—dc23 2011030926 Editorial Director: Vernon Anthony Executive Editor: Gary Bauer Editorial Project Manager: Linda Cupp Editorial Assistant: Tanika Henderson Director of Marketing: David Gesell Marketing Manager: Stacey Martinez Senior Marketing Coordinator: Alicia Wozniak Senior Marketing Assistant: Les Roberts Production Manager: Holly Shufeldt Senior Art Director: Jayne Conte Cover Designer: Suzanne Duda Cover Art: Fotolia Full-Service Project Management and Composition: Integra Software Services Text Printer/Bindery: Edwards Brothers Cover Printer: Lehigh-Phoenix Color Corp. iii Preface ix About the Author XV CHAPTER 1 What Is Customer Service? 1 CHAPTER 2 The Challenges of Customer Service 14 CHAPTER 3 Problem Solving 29 CHAPTER 4 Strategy for Formulating a Plan for Success 50 CHAPTER 5 Empowerment 62 CHAPTER 6 Communications in Customer Service 72 CHAPTER 7 Coping with Challenging Customers 89 CHAPTER 8 Motivation 106 CHAPTER 9 Leadership in Customer Service 120 CHAPTER 10 Customer Retention and Measurement of Satisfaction 136 CHAPTER 11 Technology and Customer Service 150 CHAPTER 12 Excellence in Customer Service 163 Glossary 170 Index 173 BRIEF CONTENTS Preface ix About the Author XV CHAPTER 1 What Is Customer Service? 1 Customer Service Is Important! 2 What Is Customer Service? 2 Examples of Customer Service 2 Understanding of Satisfaction 3 Why Is Excellent Customer Service So Rare? 3 Five Needs of Every Customer 5 External and Internal Customers 6 Customer Attributes 8 Cost of Losing a Customer 8 CHAPTER 2 The Challenges of Customer Service 14 Elements of Success 15 Barriers to Excellent Customer Service 15 Power of Perceptions 16 Understanding Expectations 16 Levels of Expectations 17 Scope of Influence 18 Reputation Management 19 Techniques for Exceeding Customers’ Expectations 20 Keys to Credibility 21 Importance of Values 22 Ethics in Customer Service 23 Current Status of Customer Service 23 New Trends in Customer Service 24 CHAPTER 3 Problem Solving 29 Role of Problem Solving in Customer Service 30 Creativity and Problem Solving 31 Problems as Opportunities 31 CONTENTS iv Contents v Confronting Conflict 31 Problem-Solving Process 32 Problem-Solving Strategies 35 Brainstorming 35 Diagramming 35 Developing Negotiation Skills 40 Professional Approaches to Apologizing and Conveying Bad News 44 Barriers to Problem Solving and Decision Making 44 Importance of Follow-Up in Problem Solving 45 CHAPTER 4 Strategy for Formulating a Plan for Success 50 Why a Strategy? 51 Planning 51 Importance of Infrastructure 51 Culture 52 Examples of Culture in Specific Industries 52 High-Touch and Low-Touch Customers 53 Examples of High Touch 53 Examples of Low Touch 54 Consumption Behavior 54 Segmentation of Your Market 56 Sample Customer Service Segments 56 Development of a Strategy 57 CHAPTER 5 Empowerment 62 What Is Empowerment? 63 Importance of a Mission and Purpose Statement 63 Empowerment = Opportunity 63 Examples of Empowerment 64 Steps to Empowering Customer Service Providers 64 Coproduction of Customer Service 65 Examples of Coproduction 65 Why Coproduction Works 66 Design of Systems 68 Guidelines for System Design 68 CHAPTER 6 Communications in Customer Service 72 What Is Communication? 73 Building Customer Intelligence 73 vi Contents Methods of Communication 74 Listening 74 Voice Inflection as a Customer Service Tool 76 Telephones and Customer Service 77 Words to Use/Words to Avoid 78 Power Phrases 79 Power of Eye Contact 80 Appeal to the Senses in Communication 80 Communication and Technology 80 Internet 81 Electronic Mail 81 Automated Phone Systems 82 Voice Mail 83 Fax Machines 83 Texting 84 CHAPTER 7 Coping with Challenging Customers 89 Who Are Challenging Customers? 90 Why Are Customers Challenging? 90 Are You Creating Challenging Customers? 91 Five Tips to Keep from Creating Challenging Customers 91 Characteristics of Challenging Customers 92 Respect: A Classic Idea that Still Works! 98 Understanding the Positive Power of Empathy 99 Responsibility Check 99 What to Do When You Are Wrong 100 Six Super Ways to Cope with Challenging Customers 100 Payoffs of Coping with Challenging Customers 101 CHAPTER 8 Motivation 106 What Is Motivation? 107 Needs and Wants 108 Motivating Factors 109 Understanding of Morale 110 Self-Concept and Motivation 111 Methods of Improving Self-Concept 112 Ten Tips for Improving Self-Concept 113 Power of Self-Motivation 115 Teamwork 116 Methods of Saying Thank You and Motivating Others 117 Contents vii CHAPTER 9 Leadership in Customer Service 120 Leadership Defined 121 Know Thyself 122 Formal and Informal Leaders 123 Coach or Counselor 124 Characteristics of Excellent Leaders 125 Leadership and Goals 126 Creation of a Customer Service Culture 127 Benefits of Job Aids 128 Leadership without Position 130 Your Boss Is Your Customer Too! 131 CHAPTER 10 Customer Retention and Measurement of Satisfaction 136 What Is Customer Retention? 137 Value of Existing Customers 137 Understanding Churn 139 How to Tell If You Need to Improve Your Customer-Retention Programs 139 Development of a Customer-Retention Program 140 Measurement of Satisfaction 141 Sources of Information 142 Benefits of Measuring Your Effectiveness 144 Tips for Realistically Determining Your Effectiveness 144 Why Surveys Do Not Always Reflect Reality 145 Ideas for Evaluating Your Own Performance 146 What Measurement of Satisfaction Means to Your Business 146 CHAPTER 11 Technology and Customer Service 150 Today’s Changing Marketplace 151 Understanding the Customer of the Twenty-First Century 152 Embracing New Technologies 153 Call Centers 154 Customer Service Over the Internet 155 Enhancing Service Experiences and Building Customer Loyalty 158 viii Contents CHAPTER 12 Excellence in Customer Service 163 Excellence Is the Goal 164 What’s Happening in the “Real World”? 164 Getting Started 169 Rewards of Providing Excellent Customer Service 169 Glossary 170 Index 173 ix PREFACE Customer service is an integral part of doing business today. Today’s cus- tomer service providers must have adequate preparation to interact effec- tively with today’s customers. This preparation does not magically appear. It is the result of a commitment to increased understanding of the customer service industry, the knowledge of current trends, the ability to interpret those trends, and the development of the fundamental skills necessary to achieve excellence.A new generation of customer service providers is emerging. This new generation is excited about what they can offer their customers and how they can help their organizations to accomplish goals. They eagerly accept the challenge of expanding their understanding of the business world. These customer service providers are well educated, open to new ideas, adaptable, and motivated; possess superior communication skills; and have an enlightened understanding of the multicultural marketplace in which business is conducted. Technology is an opportunity for greater efficiency and a tool to more effectively meet the ever-changing needs of customers. The desire for additional knowledge reflects a commitment to personal and professional growth. In response to the need for increased customer service and for quali- fied customer service professionals, Customer Service: A Practical Approach was created. Those with a desire to develop an increased knowledge of key concepts in customer service will benefit from the organized and concise layout. This publication is unique because it allows the reader to examine the dynamics of the customer service industry while also providing exercises to develop the skills necessary to compete. It transcends superficial eleme nts and focuses on the skills and strategies which lead to successful implementation of customer service. Customer Service: A Practical Approach will tackle the important issues facing customer service providers and customer service managers today. Individual success is contingent on how effectively fundamental skills are mastered and carried out. In addition to important content, special emphasis is placed on self-assessment and the mastery of those skills and abiliti es that are missing from the average employee’s resume. Today’s workforce must continue to improve upon the skills that provide tangible evidence of individual and corporate productivity. x Preface Text Organization Chapter 1 answers the question, “What is customer service?” The concept of satisfaction is explained and the reasons why excellent customer service is so rare are explored. Every customer has needs that they place a great deal of importance on. Providers must have the ability to assess customer needs and begin the process of need satisfaction. In Chapter 2, the barriers to customer service are explained. Some of the most obvious barriers to the provision of excellent customer service are within the control of the customer service provider. How do businesses begin to understand the expectations and perceptions that their customers bring into a customer–provider relationship? Reputation management describes the attempt to identify how a company is perceived and establishes an action plan to follow to maintain or enhance the reputation of the business. Customer service is such a common topic of discussion; however, it is shocking how little focused attention is directed at the actual accomplishment of customer satisfaction. Credibility is crucial as we interact with our inter- nal and external customers, but conveying credibility is not always easy. By following basic tips for conveying credibility, customer service providers can actively express believability and professionalism. Creative problem-solving skills assist those interacting with custom- ers to determine appropriate solutions to challenges. The role of problem solving in customer service is explored in Chapter 3. Problem solving is not an impossible activity if those facing the problem are equipped with an active understanding of how to work through the problem and to choose an effective solution. Chapter 4 defines what a strategy is and how a well-developed strat- egy can provide opportunities for customer service excellence. The role of infrastructure is explained and the reader is challenged to identify infrastructure requirements that are not being met. If an appropriate infrastructure is not in place, customer service goals will not be met, regardless of how much providers want to provide excellent service. Understanding the concept of creating a customer service culture can provide employees with a positive work environment that encourages the provision of excellent customer service. When developing a strategy, goals must be established, customers must be divided into serviceable groups, plans must be made, and a timetable for evaluation defined. We hear a considerable amount of talk about the importance of empow- erment; yet surprisingly, few managers really know what it means and know how to empower their employees. Chapter 5 explains how empowerment can positively impact a provider ’s ability to serve the customer. Customers can participate in providing their own customer service, and frequently want to be involved in the process. Systems must be designed so that customer service is allowed to happen. All too often, the very companies that are claiming to give the best service are in reality not providing it and could not provide it no Preface xi matter how hard they tried. Why? Because the system that they have in place does not encourage customer service. Chapter 6 defines what communication is and how effective commu- nication can enhance customer relations. Customer intelligence can assist organizations in recognizing how to best communicate with customers and how to develop a foundation of understanding of the business. Most customer service situations require superior listening skills. The proper voice inflection can enable individuals to convey messages in a more professional manner, and by using appropriate words the customer service provider ’s message can be both positive and professional. Technology has significantly impacted the world of communications. These new technological opportunities can enhance productivity and can result in increased accuracy. Everyone has at some time encountered an individual that they found challenging. Chapter 7 looks at who those challenging customers are. In a unique approach, 10 characteristics of challenging customers are explained. Helpful suggestions for positive interaction and techniques for challenge resolution are provided. Empathy and respect play an important role in relating to our challenging customers, but the ability to express empathy and show respect is not instinctive. Customer service can be a very rewarding profession, but frequently individuals must find their own motivation as they pursue the rewards. Self-esteem varies from one individual to another. Chapter 8 explains what motivation is and offers suggestions for self-motivation and techniques for motivating others. Some of the keys to increased moti- vation are to focus on past successes, to take care of ourselves, to prac- tice teamwork, and to spend time with positive people. Other keys to increased motivation reveal that the opportunities for motivation are largely within each individual’s control. The most recognizably outstanding companies are known for their excellent leadership. The leaders of an organization have the ability to create an interdependent culture that continually reminds employees that aspiring to success is a group activity. Chapter 9 profiles the charac- teristics of excellent leaders and stresses the benefits of goal setting. New generation leaders are designing new methods to reinforce training to benefit both employees and customers. The fact that it is much more costly to attract new customers than it is to maintain current customers has been recognized for many years. In spite of this knowledge, numerous organizations have had few formal programs in place to keep customers active. Chapter 10 explains the concepts of customer retention, churn, defection rate, and customer lifetime value along with how to tell if you need to improve your customer-retention program and how to establish a customer-retention program. The periodic measurement of customers’ satisfaction keeps customer-retention programs on target. Technology is enhancing the delivery of customer service. Customers are comfortable using technology to improve their lives and they expect the xii Preface businesses they choose to do business with to offer the kinds of technological opportunities that they are seeking. Chapter 11 examines technology and customer service. New technologies are emerging and customers are using them to enhance the ease with which they conduct their daily lives. This raises the expectation of how the customer service industry will respond to customers. The growth of call centers, the Internet, online bill paying, buying and selling goods and services over the Internet, online tutorials, webinars, technical assistance, Facebook, Twitter, YouTube, texting, and e-mail all indicate that customers desire to use these growing innovations and that they desire to be served through them also. Chapter 12 wraps all of this together and challenges the reader to continue the process of seeking excellence in customer service. An additional feature of the sixth edition is the profile of customer-focused companies and what they are doing to promote excellent customer service. Chapter Elements Include Chapter opening quote and chapter objectives Job Links and Team Time application activities within the chapter discussion Key Terms defined in the margin Expanded end-of-chapter material • Key Terms with definitions • Quick Quizzes • Opportunities for Critical Thinking • Skill Building exercises • Ethics in Action • Challenge projects that require students to practice multiple skills and provide them with experiences that are immediately transfer- able to their own work environment. New to this Edition: Customer Service: A Practical Approach goes beyond providing reasons why customer service is important by defining proven methods for creating an environment that achieves excellence in customer service. Customer Service: A Practical Approach, the industry leader in customer service text- books, continues to deliver in this new and improved revision. The topics introduced in this edition include the following: Achieving customer satisfaction in an increasingly online business environment. Overcoming the challenges of maintaining ethical practices in a highly competitive business environment. Preface xiii The unique importance of the expression of appreciation. Examination of the trend toward customer self-sufficiency Collecting customer intelligence through reward programs, newsletters, blogs, etc. The increasing trend toward social networking and its unique impact on the way customer service is delivered. The challenge and opportunity of YouTube. “Ethics in Action” activity at the end of each chapter. This activity allows the reader to consider real-world situations that are ethically challenging and to explore how they can positively resolve them. Instructor Resources For the convenience of instructors, the following ancillary materials are provided: Instructor ’s Manual—The instructor ’s manual includes chapter out- lines, answers to questions in the text, and a test bank with answers. PowerPoint Lecture Presentation—The PowerPoint Lecture Presentation package provides screens outlining key concepts discussed in each chapter. Pearson MyTest Electronic Testing Program—Pearson MyTest is a powerful assessment generation program that helps instructors to easily create and print quizzes and exams. Questions and tests can be authored online, allowing instructors ultimate flexibility and the ability to efficiently manage assessments anytime, anywhere. Educator access to MyTest is already included in Pearson’s Instructor Resource Center (IRC) Educator suite. Simply go to www.pearsonmytest.com and log in with your existing IRC login name and password. To access supplementary materials online, instructors need to request an instructor access code. Go to www.prenhall.com, click the Instructor Resource Center link, and then click Register Today for an instructor access code. Within 48 hours after registering, you will receive a confirming e-mail including an instructor access code. Once you have received your code, go to the site and log on for full instructions on downloading the materials you wish to use. xiv A big thank you to Christi Roberts, Dr. Joe Harris, Kristy Ventimiglia, Chris Moock, Laura Sims, and Anne McFerron. These wonderful businesspeo- ple shared their customer experiences and the day-to-day realities of their professional lives. Many of the illustrations included in this text can be attributed to them or their customers. Additionally, the insights of Bar- bara Jeffery, Lorie Hicks, and Paula Gower have been an ongoing source of inspiration as to the realities of serving customers on a daily basis. Cus- tomer service giants are all around each of us. We can learn so much from them if we remember to ask great questions! Special Thanks to the Reviewers of this Text:Richard L. Williams, Fox Valley Technical College Diane Smith, Henry Ford Community College Robin Adams, Henry Ford Community College I would also like to acknowledge the reviewers of the previous edition: Cheryl Bernier, Albuquerque TVI Community College, New Mexico Gary M. Corona, Florida Community College, Florida Dr. Scottie Putnam, Lansing Community College, Michigan Pat. D. Tadlock, Horry-Georgetown Technical and Community College, South Carolina Barbara Van Syckle, Jackson Community College, Michigan Elaine K. Harris ACKNOWLEDGMENTS xv Elaine K. Harris grew up in Bartlesville, Oklahoma, and graduated from the University of Oklahoma with a Bachelor of Science in Arts and Sciences, majoring in Fashion Merchandising. The following year, she graduated from the University of Central Oklahoma with her Master of Education degree in Adult and Second- ary Education, majoring in Marketing Education. Elaine has extensive experience in retail and retail management and began her teach- ing experience Oklahoma Junior College in Tulsa, Oklahoma. In 1988 she began teach- ing Marketing and Fashion Merchandising at Tulsa Junior College (now known as Tulsa Community College) in Tulsa, Oklahoma. The Tulsa marketplace began to attract jobs in the area of customer service and saw numerous call centers open for business. Elaine researched and created, with industry support, the Customer Service Program at Tulsa Community College. This program has assisted in the training of hundreds of customer-focused employees in the Tulsa metropolitan area. Elaine has served on several city and regional task forces to identify the training needs and to develop appropriate training to meet the growing customer service industry employee needs. Currently residing in Edmond, Oklahoma, she serves as a consultant and is a frequent guest speaker and trainer in the areas of customer service and marketing throughout the region. When she is not occupied with writing or consulting, Elaine stays busy with her two teenage children. She is also an encourager to her husband, a telecommunications industry executive. ABOUT THE AUTHOR This page intentionally left blank 1 CHAPTER OBJECTIVES What Is Customer Service? Remember ThisA customer is the most important visitor on our premises. He is not depe ndent on us; we are dependent on him. He is not an interruption in our work; he is th e purpose of it. He is not an outsider in our business; he is part of it. We are not doin g him a favor by serving him; he is doing us a favor by giving us an opportunity to do so . Mahatma Gandhi In this chapter, you will learn how to Define customer service. Recognize the difference between customer expectations and customer perceptions. List examples of customer service. Identify the five needs of every customer. Explain the difference between external and internal customers. Distinguish customer attributes. Understand the high cost of losing a customer. CHAPTER ONE 2 Chapter One Customer Service Is Important! One of the most effective and least expensive ways to market a business is through excellent customer service. Customers are an obvious requirement for doing business. The importance of customer service is at an all-time high. Businesses are realizing that providing a product or service alone is not enough in today’s competitive economic environment. Today, customers are much more sophisticated than they were even five years ago. They are informed about how products should perform and know that if they are dissatisfied with the service they receive, someone else probably sells it and will provide greater service. They may also expect that if they express their unhappiness with a situation, a positive result will occur. Customer service is in style! People are talking about its importance and go into the marketplace expecting to receive it. The provision of customer service is an important component of the business cycle. In many cases, customer service is the positive element that keeps current business coming back. The customer service provider is frequently the one who “saves the day” and the account. When a person goes out of his or her way to provide excellent customer service, work is more fun and more fulfilling; as a result, positive relationships with others develop. What Is Customer Service? Shockingly, the average customer service provider does not know what customer service is! Customer service is anything we do for the customer that enhances the customer experience. Customers have varying ideas of what they expect from customer interaction. The customer service provider must get to know his or her customers and strive to provide them with excellent customer service. No matter how accurately we see our definition of customer service, we still have to live up to what our customer thinks that customer service is. The customer’s satisfaction is the goal to attain. Examples of Customer Service 1. Receipt lookup or “return by” date on store receipts 2. Calling the customer by name 3. Easy return policy 4. Updated map of the area or Global Positioning System (GPS) in rental cars 5. A doctor calling you back to see how you are feeling after a profes- sional visit customer service Anything we do for the customer that enhances the customer experience. What Is Customer Service? 3 6. On-time delivery 7. Easy-to-use and functional web site 8. Owner’s manuals and frequently asked questions online 9. Showing the customer that you care and illustrating courtesy and enthusiasm 10. Excellent follow-up 11. Empathy in handling customer complaints and questions 12. Well-explained instructions 13. Illustrations of encouragement 14. Suggesting a less expensive option 15. Accessibility when and where the customer wants it Understanding of Satisfaction Customer satisfaction is the customer’s overall feeling of contentment with a customer interaction. Customer satisfaction recognizes the difference between customer expectations and customer perceptions. Satisfaction may develop quickly or may be cultivated over a period of time. Customers have many concerns; our job is to reduce as much of the customers’ stress as possible and to create a pleasant customer experience, while also providing current information and helping to solve customers’ problems. Satisfaction may be a customer’s afterthought. The  customer may think back on the experience and realize how pleasant or unpleasant it was. Why Is Excellent Customer Service So Rare? Customer service is rare because it requires two things that the average person and organization are unwilling to commit to: spending money and taking action. In business, everyone talks about how important customer service is, but most people do not really know how to provide outstanding customer service. Customer service is much more than having a great attitude or being a people person. To prepare to provide excellent customer service, one must develop the skills to be successful. In addition to developing skills, organizations must assess their current level of customer service and determine if it appropriately meets their current customers’ needs. Customers are changing all the time. In  addition to the change in people, the circumstances that customers and organizations are required to operate in may change. If customer policies were established a number of years ago or if the customer base has changed, current procedures for operation may no longer be effective. Companies must develop strategies that meet today’s customers’ needs and do all that they can to retain those customers. Employees must be empowered to make decisions to benefit their customers. They must have managers who carefully hire the right people customer satisfaction The customer’s overall feeling of contentment with a customer interaction. “The absolute fundamental aim is to make money out of satisfying customers.” Sir John Egan 4 Chapter One for the jobs and employees who are adequately trained to anticipate the challenges that may arise daily. While customer service is more than having a great attitude, it does require having the right attitude. Some people become so involved in trying to provide excellent customer service that they lose sight of the little things that the customer would appreciate. The use of technology and current information greatly facilitates the provision of excellent customer service. We live in an age of technology in which a new and improved model is on the market almost before a new system is installed. Technology and information must work together to enhance customer service. Many up-to-date computer systems, e-mail, fax machines, printers, and messaging centers have remained unused because the information needed for their use was not developed and distributed to the appropriate customer service personnel. Customers use technology to enhance their own lives, and they expect the businesses that they work with to use it also. Sometimes the challenge is having too much information or information that is difficult to understand. Management must determine its relative importance in the total scheme of what the business is trying to accomplish. If we determine what our customer’s concerns are but we do not know how to include the customer’s home address, e-mail address, or other contact information in our database effectively, we may conclude that we do not have the most important information that the customer has given us. The challenge of providing excellent customer service never ends. Individuals must periodically examine their performance to ensure that they are continuing to practice the positive skills that make providing customer service enjoyable and efficient. It is easy to slip into old behaviors when we are busy or have additional stress in our lives. Management must periodically measure customer satisfaction. Just because an organization thinks that its customers are pleased with what the organization is doing for them does not mean that this is true. The customer must be asked questions concerning what is being done well and what could be improved. Those opportunities to express opinions must be offered in a way in which customers will actually respond to. Customers have many concerns in their lives; just because they have not complained to us does not mean that they do not have complaints or suggestions. It may mean that we have not taken the trouble to ask. One of the best ways to become a better customer service provider is to become a better customer. As we exercise our rights as customers, we become more sensitive to and aware of what it takes to become an excellent customer service provider. What bothers each of us probably bothers our customers. Exercise your rights as a customer. Write compliment and complaint letters or e-mails to share your experiences and opinions. Fill   out comment cards, and truthfully answer when someone asks how your experience was. Do not expect more of others What Is Customer Service? 5 than you do of yourself. You may learn more from your opinions than the people you are sharing them with. Five Needs of Every Customer Every customer comes into the customer situation with differing wants. While wants are frequently hard to identify and may occasionally be unrealistic, all customers have the following five basic needs: 1. Service: Customers expect the service that they think is appropriate for the level of purchase that they are making. A small, spontaneous purchase may have a smaller service need than a larger purchase that has been carefully planned and researched. 2. Price: The cost of everything we purchase is becoming more and more important. People and businesses want to use their financial resources as efficiently as possible. Many products previously considered unique are now considered commodities. This means that while a consumer previously had to travel to the local hamburger restaurant to purchase a hamburger, now one can be acquired at many other locations. This makes the component of price even more important to the customer. 3. Quality: Americans are less likely today to think of their purchases as throwaway items. Customers want the products that they purchase to be durable and functional until customers decide to replace them. This  requirement of quality mandates that manufacturers and distributors produce products that live up to the customers’ expectations of durability. Customers are much less likely to question price if they are doing business with a company that has a reputation for producing a high-quality product. 4. Action: Customers need action when a problem or question arises. Many companies offer toll-free customer assistance telephone lines, flexible return policies, and customer carryout services in response to the need for action. Customers are human beings and like to think that they are an important priority and that when a need or question arises someone will be ready and waiting to help them. 5. Appreciation: Customers need to know that we appreciate their business. Customer service providers can convey this appreciation in many appropriate ways. Saying “thank you” to the customer through our words and actions is a good starting point. Preferred customer mailing lists, informational newsletters, special discounts, courtesy, and name recognition are good beginnings to showing our customers our appreciation. Additionally, letting them know that we are glad that they have chosen to do business with us conveys a positive message. A fast-food restaurant has a sign in its drive-through lane that says, “We know that you could eat somewhere else; thank you for allowing us to serve you.” “It is impossible to satisfy your external customers over any length of time unless you also listen to and satisfy your internal customers.” John Adel Jr. 6 Chapter One Sit down with your team (coworkers) and create your own list of five ways in which you will serve your customers. Consult the five needs of every customer as a starting point. Come up with one idea for each of the five needs. Price is the only one of the five needs that you may not have any influence over. Most of the other categories are needs that you can address. Be as creative as possible. After you and your team have made your list, make copies and set a time line during which everyone on your team will make their best effort to serve your customers according to the guidelines you have developed. At the end of your time line, meet again to determine if you have done a better job of serving your customers. If you have, way to go! If not, refine your list, set a new time line, and try it again! You will always learn from the results! TEAM TIME External and Internal Customers It is important to recognize the importance of both external and internal customers because both contribute to the customer service of our organization. External customers are the customers we do business with outside our organization. External customers are the customers we most commonly think of when we consider whom we serve. They are the people with whom we interact and share our knowledge and positive attitude. External customers have the power to enhance our reputation and to bring us new business, but they are not the only customers that we serve. Every day we interact with a special group of customers who frequently go unrecognized. These customers are our internal customers. Our internal customers are the people we work with throughout our organization. They are important to our success in providing our external customers with what they need. If internal customers do not see the importance of completing work promptly and of treating others with respect, it becomes very difficult for the organization to provide outstanding customer service to external customers. Internal customers were previously referred to as “coworkers,” but this title does not elicit the respect deserved by the people within any organization who contribute to the overall success of the organization. Your customers may get a paycheck from the same company that you do. The idea that all of us have customers does not appeal to those employees who want to think that because they do not interact with external customers they do not have a responsibility in the customer process. Our  internal customers should be as important to us as our external customers. external customers The customers we do business with outside our organization. internal customers The people we work with throughout our organization. What Is Customer Service? 7 By developing positive relationships with our internal customers, we are showing them that we value their importance in the overall organization. We can apply a slightly modified version of the Golden Rule to our internal customers, “Do unto our internal customers as we would do unto ourselves.” This rule suggests that as customer service providers we will strive to determine what our internal customers’ needs and expectations are and place the same level of importance on their needs as we would place on our own. We must stop and ask them what we can do to make their jobs easier, and they have to ask us the same thing. Working with our internal customers is not a form of manipulation but, instead, a positive approach to being part of a team. All of the team members are working together to win, but not all are making the same type of contribution. Management has an important role in creating an environment that recognizes the importance of internal customers. By providing opportunities for internal customers to experience the challenges of each other’s responsibilities, an increased respect can develop. It also helps everyone involved to see the big picture. It is a natural human tendency to assume that someone else has an easier job and an easier life than we have. Obviously, this is not necessarily the case. By beginning to understand our coworkers’ challenges, we can work to minimize them. Systems may be redesigned, paperwork may be reduced, and a team approach may emerge. By satisfying our internal customers, we create an excellent foundation on which to begin meeting our external customers’ needs. Fewer apologies have to be made, work gets done more efficiently, and an overall positive atmosphere develops. If you cannot quite decide who your internal customers are, think of it this way, “Whose out-box do you work from and whose in-box do you feed into?” In addition, consider who cleans the building, who does your typing, who maintains your security, who makes the sales, and who works on the computers. These are your internal customers. A team with the goal of providing excellent customer service to all customers may make a common vision of customer service a reality with real opportunities. Write down the names of two key external customers and two key internal customers. For one week, call each by name when you interact with them and do all that you can to serve them completely. At the end of the week, assess your relationship with each of them. Do they perceive (in your opin- ion) that they have received a higher level of service from you? How do you feel about them? Job Link 8 Chapter One Customer Attributes Each customer is, of course, unique. Identifying customer attributes may allow an organization to better understand “who” its customers are. Customer attributes are characteristics that allow customers to be categorized according to demographic, psychographic, or firmographic information. Businesses frequently attempt to group their customers to enable the business to serve customers more appropriately. Demographic information includes characteristics like age, income, marital status, education, stage in the family life cycle, home ownership, sex, ZIP code, occupation, household size, mobility patterns, ethnic background, and religion. Demographic information is a straightforward and basic method of identifying customers. Psychographic information focuses on lifestyles, modes of living, needs, motives, attitudes, reference groups, culture, social class, family influences, hobbies, political affiliation, and so on. Psychographic information can provide a more thorough picture of the customer. Not all individuals who earn the same income choose to spend it in the same way. Just because people live next door to you does not mean that they choose to maintain their home like yours or that they share your hobbies. Firmographic information includes characteristics about a company such as how many employees they have; the kind of business they are in; whether they are retail, wholesale, or a service provider; their hours of operation; and so on. Since so many customer service providers serve the business-to-business environment, it has become increasingly important to understand companies themselves as entities rather than just the individuals served as the ultimate (or end-of-the-line) consumers. Individuals take their personal experiences with them as they make business decisions and vice versa. Cost of Losing a Customer Because of the increased expectations of customers and the competitiveness of the marketplace, customer service providers are recognizing the high cost of losing customers. It takes little effort to lose a customer. When service providers neglect their concerns, treat them disrespectfully, and fail to follow through with results, customers will be tempted to make their exit. When customers cease to do business with us and begin to do business with our competition, several unfortunate situations occur. A first situation is where we lose the current dollars that our business relationship created. This loss may seem insignificant to begin with, but over a period of time it can prove to be quite damaging. customer attributes Characteristics that allow customers to be categorized according to demographic, psychographic, or firmographic information. psychographic information Lifestyles, modes of living, needs, motives, attitudes, reference groups, culture, social class, family influences, hobbies, political affiliation, and so on. demographic information Characteristics like age, income, marital status, education, stage in the family life cycle, home ownership, sex, ZIP code, occupation, household size, mobility patterns, ethnic background, and religion. firmographic information Characteristics about a company such as how many employees they have; the kind of business they are in; whether they are retail, wholesale, or a service provider; their hours of operation; and so on. What Is Customer Service? 9 A second situation is that we lose the jobs that our client or clients provide. If business goes elsewhere, we do not need to employ the people who were working on the account or accounts. An advertising agency lost a major advertising account because of a lack of courtesy and follow-through on the agency’s part. This loss of business resulted in the closing of the office, with over 50 people suddenly out of work. A third situation that may occur is the loss of reputation. Word travels fast in our information-based society. Our clients will possibly share their experiences with their clients and friends. This loss may result in the immediate departure of other business or simply in a lack of trust among our current clients and any potential customers. A final challenge is the loss of future business. This is an intangible variable because it is difficult to assess the long-term effects of what might have happened in the future. Nevertheless, whether it is one dollar or a million, its importance is worth recognizing. customer attributes customer satisfaction customer servicedemographic information external customers firmographic informationinternal customers psychographic information KEY TERMS QUICK QUIZ 1. Customer service is anything we do for the customer that enhances the customer’s experience. T or F 2. Customer service and satisfaction are easy to measure. T or F 3. Customer service requires nothing more than a positive attitude. T or F 4. Compliment letters can help to reinforce excellence in customer service. T or F 5. Technology can be used to enhance the provision of customer service. T or F 6. Service, price, quality, action, and appre- ciation are referred to as the five needs of every customer. T or F 7. The people we work with outside our organization are called internal customers. T or F 8. Customer attributes are characteristics that  allow customers to be categorized. T or F 9. Information that focuses on lifestyles, modes of living, needs, motives, attitudes, and so on are referred to as demographic information. T or F 10. The losses of dollars, jobs, reputation, and future business are consequences of losing customers. T or F 10 Chapter One OPPORTUNITIES FOR CRITICAL THINKING 1. What is the definition of customer service? 2. List five examples of customer service. 3. What are the five needs that every customer has? 4. Explain why it is necessary for customer service providers to maintain a positive relationship with both internal and external customers. 5. How is technology enhancing the provision of excellent customer service? 6. Relate customers’ expectations about price to their expectations of service. 7. Is the loss of current dollars the only concern when a customer is lost? 8. List ways in which you can become a better customer. 9. Write your own philosophy and definition of customer service. 10. Define contentment. SKILL BUILDING My Customer Excellent customer service providers are continually assessing their own performance and the needs of their customers. The benefits of knowing our customers include enhanced service opportunities and an awareness of service weaknesses. Individually, or in a small group, answer the following questions: My customer is satisfied when … My customer would like for me and my organization to improve our service by … I anticipate my customer’s needs by … The most basic customer service action that I can take for my customer is … The greatest demands on me and my time are … Ethics in Action A group of your coworkers goes to lunch several times a week. Although the time together usually starts out positive it frequently disintegrates into a trash talk session with your boss as the center of the conversation. You like your boss, although he can be quirky, and really like your job. What do you do? CHALLENGE Writing Compliment and Complaint Letters (or e-mails) There are many ways of beginning the process necessary to become a better customer. An effective method for exercising your rights as a customer is to write compliment and complaint letters. Many customer concerns are not effectively addressed when they occur, and the customer continues to feel anger or frustration over the situation. By taking the initiative to express customer concerns or satisfaction, a customer may feel closure in a given situation and has shared critical information with the organization. When writing a complimentary letter, it is important to include as many facts as possible. Unfortunately, most customers are much more interested in expressing their dissatisfaction than their satisfaction. By writing a complimentary letter, you are giving an employee, department, or company a pat on the back that affirms for them that they are doing an effective job of meeting their customers’ What Is Customer Service? 11 needs. Verify the accuracy of the address or e-mail address that you are using for your communication. A compliment or complaint letter or e-mail accomplishes nothing if it doesn’t go to the proper place or person. (Your address) (Your city, state, ZIP code) (Date) (Name of contact person) (Title) (Company name) (Street address) (City, state, ZIP code) Dear (contact person): I would like to express to you how pleased I was with my recent interaction with your company. On (date), I called your customer service department to request assistance with my account. I was connected with (name). After patiently listening to my problem, she (he) explained very clearly what had transpired and that I had, in fact, been billed properly. (Name’s) professional approach and excellent communication skills allowed me to become better informed as to how your company works and went a long way in confirming my loyalty to your organization. Thank you for providing me with such a positive customer experience. Sincerely, (Your name) (Office and home phone numbers with area code) (Your account number) Sample Compliment Letter What to Include in a Complimentary Letter Your name, address, home and work telephone numbers, e-mail address, and account number, if appropriate. Make the letter brief and to the point. Share specific facts about the situation, including the name of the individual(s) that assisted you, the date of the interaction, and what pleased you. Type your letter if possible; it will look more professional and will be easier to read. Always keep a copy of any correspondence that you send. You may want it for future reference or to use as a sample for another complimentary letter in the future. If your compliment is sent in e-mail form, always send yourself a copy. This way you know that the communication went through and it will be saved on your computer in an additional form. Following is a guide to writing an effective compliment letter. As with a complimentary letter, when writing a complaint letter, it is important to include specific facts. Complaint letters should be to the point and nonemotional. Complaint letters provide the writer with the opportunity to express concerns, doc- ument grievances, and to request specific or nonspecific resolutions to the situation. 12 Chapter One What to Include in a Complaint Letter Your name, address, home and work telephone numbers, and account number, if appropriate. Make your letter brief and to the point. Detail specific facts about the situation. Include the date and place of the purchase and information about the product or service. State exactly how you would like to see the situation resolved and when you expect to see the resolution in effect. Type your letter if possible and include copies of all pertinent documents. Do not send originals; retain them along with a copy of your correspondence for future reference. Remember, if you are expressing your complaint via e-mail, send yourself a copy. The following sample complaint letter provides a guide to writing an effective complaint letter. Sample Complaint Letter (Your address) (Your city, state, ZIP code) (Date) (Name of contact person) (Title) (Company name) (Street address) (City, state, ZIP code) Dear (contact person): On (date), I bought (or had repaired) a (name of product with serial or model number or service performed). I made this purchase at (location, date, and other important details of the transaction). Unfortunately, your product (or service) has not performed well (or the service was inadequate) because (state the problem). Therefore, to resolve the problem, I would appreciate you (state the specification you want). Enclosed are copies (copies—not originals) of my records (receipts, guarantees, warranties, canceled checks, contracts, model and serial numbers, and any other documents). I look forward to your reply and a resolution to my problem and will wait (set time limit) before seeking third-party assistance. Please contact me at the above address or by phone at the numbers shown below. Sincerely, (Your name) (Office and home phone numbers with area code) (Your account number) Enclosures Source: Southwestern Bell Telephone Book, 1992–1993. What Is Customer Service? 13 1. To demonstrate the ability to express both a positive and negative customer service experience in print. 2. To explore the possibility of a corporate response to written communication. 3. To refine individual business communication skills. Compose two letters explaining two separate customer service experiences that you have had or someone close to you has had. One letter should explain a positive experience and should show appreciation for those who offered the positive treatment. The second letter should express your dissatisfaction over a poor customer service experience. Try to include as many details as you can, including specific names, dates, and so on. You may wish to ask for some type of follow-up if you feel that it would be appropriate in the situation. You are the judge as to whether the situation is worthy of your correspondence. All professional business correspondence should be typed on a computer. Follow the guidelines for writing a compliment/complaint letter. Always remember to include your full name and address so that the business will know whom to send a response to. Be specific when describing what you would like to see happen in response to your letter. Always keep a copy of anything that you mail or e-mail. You will have it to refer to in the future and can use it as an example when writing your next compliment/complaint letter. Most important, mail your letters! Record on your calendar when the letters were sent and watch the mail for a reply. Happy writing! Helpful hint: Many word-processing programs have letter wizards to assist you in writing professional letters. If you have limited experience with writing business letters, you may want to give one a try. Challenge Objectives Assignment Presentation 1. T 2. F 3. F 4. T 5. T 6. T 7. F 8. T 9. F 10. T ANSWERS TO QUICK QUIZ 14 The Challenges of Customer Service CHAPTER TWO Remember This A reputation once broken may possibly be repaired, but the world will al ways keep its eyes on the spot where the crack was. Joseph Hall In this chapter, you will learn how to Identify common barriers to customer service. Recognize and manage customer perceptions. Assess primary and secondary expectations. Define scope of influence and determine ways to use it to maximize the perception of customer service. Explain tips for cultivating credibility. List and interpret the ethics checklist. CHAPTER OBJECTIVES The Challenges of Customer Service 15 Elements of Success Customer service is such a valuable concept that it seems it would be simple to provide it. Unfortunately, this is not necessarily the case. After assessing their own strengths and weaknesses, customer service providers must begin to understand the customers that they are serving. After doing this, they may begin to be prepared to provide those customers with excellent customer service. By becoming familiar with the various barriers to customer service, recognizing the power of perceptions, understanding expectations, and maintaining their own credibility and sense of values, customer service providers are equipping themselves to fully serve their customers. Barriers to Excellent Customer Service Numerous obstacles stand in the way of the delivery of excellent customer service. Some of the common barriers include management philosophy, difficulty for customers with a problem to contact a company or the person who can really help, unreliable equipment, restrictive company policies, difficult-to-understand warranties or owners’ manuals, out- of-date procedures, and a lack of understanding of the value of service. These barriers are, in most cases, beyond the control of the customer service provider and, unfortunately, a common part of doing the job. Some barriers to excellent customer service are within the control of the customer service provider. These challenges can be overcome through diligent effort, allowing the customer service provider to do the best possible job. Some of the most common barriers to excellent customer service are 1. Laziness 2. Poor communication skills 3. Poor time management 4. Attitude 5. Moodiness 6. Lack of adequate training 7. Inability to handle stress 8. Insufficient authority 9. Serving customers on autopilot 10. Inadequate staffing Customer service providers must perform periodic self-evaluations to assess their effectiveness and to identify areas that need improvement. When that assessment is made, the individuals must take the initiative to make changes and must monitor themselves so that they do not slip into their old habits. “The function of the customer service department is to be an advocate for the customer.” Jonathon P. Harris 16 Chapter Two Power of Perceptions When we interact with others, we must be aware of their perceptions of situations, experiences, and people. A perception is the way that we see something based on our experience. Everyone’s perception of a situation will be, at least slightly, different. The question persists, “Is the glass half full or is it half empty?” Perceptions are frequently developed over a period of time and reflect the ways that we have been treated, our values, priorities, prejudices, and sensitivity to others. Two people can share the same experience and then describe it differently. Unfortunately, perceptions are not necessarily based on rational ideas and may be influenced by momentary frustration and anger. Because perceptions are so full of mystery, it is important for the customer service provider to anticipate customer resistance based on the customers’ prior interactions and always to work at providing the customers with excellent service so that their most current perception is a positive one. Customers may not remember every detail of an experience, but they will retain an overall feeling about it. That “feeling,” in combination with other experiences, will create their perception of your company and you. Whenever possible, try to deal with your customers as individual human beings. Respect their time, circumstances, and priorities. Always convey to customers that you appreciate the time it takes them to do business with your company. Ask the customers if there is anything else that you can do for them. Periodically, ask the customers how you are doing. The feedback that they give you will provide insights as to how they perceive your organization. Remember that you may not be able to erase customers’ negative perceptions that are based on their prior interactions. What you can do is to show them, through your actions, that their perceptions are not accurate. Understanding Expectations Every customer walks into a known or unknown situation with a set of expectations. Expectations are our personal vision of the result that will come from our experience. Expectations may be positive or negative. How many times have you practiced your response to an anticipated objection only to find out that you did not have to use it? Expectations are usually based, at least partially, on our perceptions. If your last experience with a company was negative, you may approach a new situation with the expectation that you will again be dissatisfied. Because of this, you may approach the interaction “armed and ready” for battle. Sometimes companies or individuals wrongly assume that they cannot live up to their customers’ expectations. This assumption frequently stems from a misconception of what the customers expect. perception The way that we see something based on our experience. expectations Our personal vision of the result that will come from our experience. The Challenges of Customer Service 17 At an educational institution, school representatives and students were informally surveyed to determine the students’ expectations of the institution. The results showed a broad disparity between what the students expected and what the school representatives thought the students expected. The representatives of the school ranked the students’ top five expectations of the school as follows: 1. Grades with no effort 2. Extra assistance with enrollment 3. Short classes 4. No reading assignments 5. More parking The students ranked their own expectations this way: 1. Positive environment that encouraged learning 2. Transferable classes 3. Instructors who cared and knew the students’ names 4. Safety in the parking lot and building 5. More parking It is easy to identify the differences between the two lists. It would be incorrect to assume that all students shared the surveyed students’ expectations. It would also be incorrect to assume that there were not some students who did have the expectations that the school representatives perceived that they had. What is important to learn from this comparison is that what our customers expect is frequently much easier and less costly to provide than we may think. What the students expected cost relatively little or nothing to provide; but, because the school did not understand the students’ expectations, they were not being consistently fulfilled. Levels of Expectations Customer service providers must recognize that customers have different levels of expectations. Expectations can be divided into two distinct categories: primary expectations and secondary expectations. Primary expectations are the customers’ most basic requirements of an interaction. When dining at a restaurant, our primary expectations are to satisfy our hunger, to let someone else do the cooking, and to pay a reasonable price. Secondary expectations are expectations based on our previous expe- riences that are enhancements to our primary expectations. When dining at a restaurant, our secondary expectations are to have good service; to be treated with courtesy; and to receive good, tasty food. secondary expectations Expectations based on our previous experiences that are enhancements to our primary expectations. primary expectations The customers’ most basic requirements of an interaction. 18 Chapter Two A customer’s expectations change constantly, and each customer will have his or her own unique set of expectations. While this is a challenging reality, it provides a unique opportunity for us to strive consistently to be what the customers want us to be. Scope of Influence It is important for businesses to recognize the influence that their customers have on other customers and potential customers. This is called scope of influence. Scope of influence is our ability to influence others based on our perceptions or experiences. Each person’s “scope” is different. On average, our opinions influence between seven and fifteen people. Some people have a larger scope because they interact with a larger number of people or because they have outgoing, open personalities. Scope of influence plays no favorites and is usually not objective. Thus, it is extremely important to do all we can to make our customers happy and to keep their business. Studies have shown that it costs about five times as much to attract new customers as it costs to keep our current customers. Research has also shown that customers are more likely to share a negative experience with their superiors. These superiors are frequently the people with more decision-making power, income, and influence. Unfortunately, customers are likely to share a positive experi- ence with the people closest to them and with no one else. Additionally, with the growth of digital cameras, camera phones, and the Internet as communication tools, a negative message can be easily shared with the masses with minimal effort. The overwhelming popularity of Facebook has impacted the reality of scope of influence in an enormous way. Good or bad information is shared with the click of a button. Rarely is negative or inaccurate information retracted to the degree that it would undo damage to an individual or business’s reputation. On the other hand, Facebook can be used as an effective means to get a message out quickly and to a large number of people. At the close of a recent semester, students at the University of Oklahoma announced via Facebook that a “Silent Rave” would be held at a designated time at the campus library. Although the information was shared only for a day, several hundred students showed up and participated in the activity. Organizers considered it a success and were amazed that Facebook was so effective in getting the word out so quickly and to so many people. Marketing professionals have long recognized the power of word- of-mouth advertising. This is basically what scope of influence is. We must ask, remind, and entice our customers to share their positive experiences with others. By doing so, we are showing our current customers how much we appreciate them and we are also creating an opportunity for new customers to come to us expecting a positive experience. A happy customer can attract new customers at virtually no cost. scope of influence Our ability to influence others based on our perceptions or experiences. The Challenges of Customer Service 19 Reputation Management One way that some companies are trying to differentiate themselves from the competition is through reputation management. Reputation management is the process of identifying how a company is perceived and establishing an action plan to correct, maintain, or enhance the company’s reputation. As more and more products and services become commodities, customers may be attracted to a company more because of its reputation than because of any other single factor. Reputation management moves away from how a company would like to be perceived and identifies and responds to how it really is perceived. A good reputation is cultivated over time through a company, department, or individual’s performance, good or bad, in a variety of situations. A company seeking to begin to manage its reputation must survey its customers and the community at large to assess what its reputation really is. A company’s reputation is different from its image. A company could have a positive image but not a positive reputation. A company may be recognized as a positive and likable member of the community, but customers may still consistently decide to do business elsewhere. A company with a good reputation Is trustworthy Demonstrates excellence in its management at all levels Is law abiding Is responsive Follows through on promises and commitments Is ethically responsible Is a positive public citizen Has accurate and strong financials Communicates effectively Shows ongoing positive social responsibility reputation management The process of identifying how a company is perceived and establishing an action plan to correct, maintain, or enhance the company’s reputation. Write down the names of four people on whom you have a lot or a little influence. Now write down the names of as many people as you can think of on whom each of them has an influence. Remember, family, friends, coworkers, neighbors, and so on are all in our scope of influence. You probably have a long list of names. Think of the opportunity for influence that the names on that list have (and all of the names you forgot) the next time that you are serving a customer. Job Link 20 Chapter Two By effectively managing its reputation, a company can maintain an informed and realistic understanding of how customers and the community perceive it, which can help it to anticipate and plan for challenges in the future. Techniques for Exceeding Customers’ Expectations To begin attempting to exceed customers’ expectations, try the following: 1. Become familiar with your customers: Get to know who they are and why they do business with you. Find out their likes and dislikes. 2. Ask your customers what their expectations are: Find out what they see as the benefit of doing business with you. What would they like for you to do that you are not already doing? 3. Tell your customers what they can expect: Convey to your customers your commitment to them. 4. Live up to their expectations: Follow through by accomplishing what you have said that you would do. 5. Maintain consistency: Do not promise what you cannot deliver, but always deliver a consistent service. Customers like to know that they  will have the same positive experience every time they interact with you. 6. Communicate with customers using the method they want to use: If customers prefer face-to-face communication, provide that; if they prefer online ordering or assistance, provide that; etc. One important key to exceeding customers’ expectations is to remember that expectations are always changing. What was previously in excess of our customers’ expectations may suddenly be no different from what all of our competition is doing. If we fail to stay current with our competition, we may fail to live up to our customers’ current expectations. The American auto industry was for many years the world standard for excellence in automobiles. With many loyal customers, its position in the marketplace seemed secure. It had set the standard of excellence. At  the same time, foreign automakers were watching and observing what customers appeared to like and to dislike. The Americans paid little attention to this potential competition; after all, they had set the standard. Suddenly, seemingly out of nowhere, a new group of competitors had entered the marketplace. These new competitors knew what customers liked and disliked about American cars. The American auto industry was shocked; how could “The reputation of a thousand years may be determined by the conduct of one hour.” Japanese proverb The Challenges of Customer Service 21 its customers turn their backs and purchase automobiles from non- American manufacturers? Unfortunately, what the American automakers failed to remember is that once a standard is set, it represents an opportunity for the competition to attempt to surpass it. No industry has ever continued to maintain a loyal customer base without continuously recognizing what the competition is doing and continuing to meet the customers’ ever-changing needs and wants and practicing continuous improvement. Fortunately, the American auto industry has recognized what the competition is doing and has regained many of the customers that it had lost. The American automotive industry is continuing to face new challenges, but understanding their customers will be a positive part of their recovery. Keys to Credibility In all aspects of our lives, we are confronted with the challenge of being believable to those around us. How believable we are, in combination with how reliable we are, translates into how credible we are to others. Credibility is made up of the combination of our current knowledge, reputation, and professionalism. Credibility encourages trust. If we are to work successfully with our customers, they must trust us. Our personal credibility can be the one characteristic that determines our success as people and as customer service providers. Try these tips for cultivating credibility: 1. Practice consistency: Approach similar situations in the same manner, always striving for fairness. Demonstrate your emotional stability. Be positive, professional, and warm at all times. 2. Keep your word: Follow through with the commitments that you make. Any call you receive expresses the implication that you will respond with answers. People will not have faith in you if you break your promises. 3. Develop your expertise: Become very knowledgeable about your products, your company, and the overall industry. Strive for continuous improvement. 4. Become a teammate with your coworkers: Working successfully with others shows that you have common goals and can benefit from each individual’s specific skills. 5. Show your dedication to customers: Tell customers what you will do for them, take every request seriously, and follow up. 6. Treat all of your customers and coworkers with the same high level of respect: By showing that you respect others, you create an credibility Made up of the combination of our current knowledge, reputation, and professionalism. 22 Chapter Two environment that allows others to respect you. Be sensitive to your effect on customers. 7. Apologize if you are wrong: Your honesty will impress others and they will respect you for who you are, not who you pretend to be. 8. Remember that credibility is much harder to regain than it is to keep. Importance of Values For excellent customer service to exist, the successful joining of corporate values and employee values has to occur. Values are a combination of our beliefs, perceptions, and ideas about the appropriate response to a situation. Both individuals and companies have their own specific sets of values. Companies must effectively communicate to their employees what the company’s values are. Stated corporate values are most commonly con- veyed to employees through written information in employee manuals or policy statements. Real corporate values can also be conveyed through the actions of the management in an organization. Employees must recognize their own values and beliefs and attempt to identify organizations that have similar priorities. Individual values are very personal. No other person has had the same set of circumstances that have allowed you to develop the values that you possess. In the customer service industry, some organizations have a very distinct set of dos and don’ts. Other organizations may be more vague in expressing corporate priorities to employees. In either instance, the customer service providers must recognize that they are both representatives of their company and individuals. Their behaviors and philosophies illustrate the people they are. Sit down with your team and discuss the concept of credibility. Remember, credibility is made up of the combination of our current knowledge, reputation, and professionalism. Each member of your team should evaluate the credibility of your group and his or her own credibility. Choose one of the tips for cultivating credibility and create an action plan to increase the credibility of the group. Independently create your own action plan to increase your personal credibility. Set a time line to evaluate your progress as you work toward increasing the credibility of your team. As you work toward achieving your goal, do not forget that credibility is much harder to regain than it is to keep. TEAM TIME values A com- bination of our beliefs, perceptions, and ideas about the appropriate response to a situation. The Challenges of Customer Service 23 Ethics in Customer Service Most individuals are periodically faced with ethically challenging situations. What exactly are ethics and why do they matter in our professional and personal lives? Ethics are a set of principles that govern the conduct of an individual or group. Sometimes ethical decisions are easy to recognize and are perceived as popular choices of behavior by the people around us. At other times, the spectrum of potential choices falls into gray areas in which the “right” or “wrong” course of action is difficult or nearly impossible to identify. The challenge of ethical decision making becomes even harder when it is not just an individual’s personal judgment that is involved but also carrying out the instructions of a supervisor; request of a customer; policy of the organization; or some other situation in which a threat, real or perceived, is involved. There are really no shortcuts when it comes to telling the truth and determining an appropriate course of action. Individuals in business must be seen by those around them as honest or they will not succeed for long. The bottom line in decision making is that individuals must face the consequences of their decisions—good or bad. When faced with an ethically challenging situation, ask yourself the following questions: Is it legal? Is it fair? How do I feel about it? Would the court of public opinion find my behavior incorrect? Am I fearful of what those I trust would say about my actions? These questions can be quite revealing when attempting to choose an ethical course of action. This is not to suggest that ethically challenging situations are easily resolved, but analyzing a situation may make the appropriate decision easier to identify. One final consideration regarding ethical behavior is that it is not always popular to “do the right thing,” but maintaining individual integrity and an organization’s reputation will allow all involved to know that they examined all possibilities and chose the most appropriate course of action. Current Status of Customer Service Although everyone talks about how important customer service is, they often do very little to improve it. This can be attributed to several causes. 1. It is frequently difficult to measure the financial benefits of customer service. It may be challenging to convince some financial managers of the long-term payoffs. ethics A set of principles that govern the conduct of an individual or group. 24 Chapter Two 2. Customers have high expectations of what they hope to gain from the people with whom they do business, but frequently customer service providers do not know what those expectations are. 3. Customers have grown accustomed to expecting improved levels of customer service and considerable latitude when it comes to receiving customer service, but the resulting cost is becoming prohibitive for many businesses. Frequently, the customers who take advantage of customer-friendly policies are abusing the opportunity and represent minimal percentages of the overall business. Businesses now have to retrain customers about appropriate and realistic expectations. 4. Technology provides the opportunity for faster responses to customer questions, but it also creates the requirement that customer service providers have additional training to become proficient in using new systems. 5. Customer service is an opportunity that no professional can afford to ignore. It is frequently the distinguishing difference between two or more companies that offer the same product or service. New Trends in Customer Service Several new trends are emerging in the customer service industry. These  trends reflect the ways in which customers approach a business interaction and the ways that businesses are preparing to respond to them. The trends include accessibility for the customer, immediacy of response, feedback from customer to customer service provider, out- sourcing of all or part of customer service functions, increasing use of technology to provide all levels of service, and nontraditional examples of customer service. Customers today have more access to information about their account status, billing, delivery, and product availability than ever before. This  accessibility has, in many cases, reduced the questions that customer service providers must respond to, leaving them to respond to more unique requests. An example of this accessibility is found in customer information hot lines that can be reached from a touch-tone telephone using personal identification numbers; a second example is computer software that tracks where a shipment is, whether the shipment has been received, and by whom, finally any online means of customer contact. This includes customers serving themselves or requesting information or follow-up from a customer service provider. Customers appreciate the control that this accessibility allows them, and it reduces the number of routine questions that customer service providers must answer. It is also a wonderful illustration of technology at work. Immediacy of response is another trend in customer service. Again, with technology, customers can have questions or problems resolved “The next mile is the only one a person really has to make.” Danish proverb The Challenges of Customer Service 25 almost immediately. Customer service providers are also more fully empowered to make decisions in response to customer inquiries that previously would have been taken to a higher level supervisor. Feedback is important to all businesses and can provide opportunities for growth in the customer service department. Customer suggestions are now frequently requested and encouraged. Independent research departments or companies to survey customer responses may con- tact customers. Numerous reward or preferred customer programs track customer purchases and customer preferences and can customize the customer’s service experience from the swipe of a barcode that the customer provides. Customer service providers are also beginning to keep logs of customer suggestions and requests so that improvements can be made efficiently. Customers appreciate the chance to share their ideas and to see changes being made. As businesses seek new strategies to improve performance, save money, and effectively address increasingly technical requests, outsourcing may be an effective alternative. Competition has forced many industries to begin outsourcing such functions as payroll, data processing, billing, maintenance, marketing, accounts receivable, and many more. The  specialized customer service needs of many businesses are also being outsourced. Outsourcing can provide cost savings in rent, benefits, equipment, and short-term employee expense, and it can also allow organizations of all sizes to better serve their customers. Most organizations receive customer questions, complaints, and comments via 800 numbers, e-mail, and through customer surveys. While this allows closer interaction with customers, it has also decreased the expected response time. The necessary equipment to receive and respond to these contacts is costly; when added to the cost of hiring and training effec- tive customer service representatives, some organizations may find that they cannot afford to provide this service. By hiring a carefully chosen outside company to handle specialized technical questions, customer concerns, and product inquiries, companies can decrease customer response time and share the cost of providing the service among participating companies. The most positive potential benefit is increas- ing customer retention—keeping current customers actively involved in doing business because their needs are met and they are never tempted to look elsewhere for better service. Customer service is an important part of the overall marketing strategy; this has encouraged the development of some nontraditional approaches. One example of a nontraditional approach to customer service is offering informational newsletters to customers. Informational newsletters sent periodically (by e-mail or traditional mail) or handed out are nonthreatening to customers because they share information, new product or service offerings, new systems, or service hours; they also remind customers that the company is available and ready to serve them again. Newsletters have the luxury of being seen by customers 26 Chapter Two QUICK QUIZ 1. Laziness, poor communications skills, moodiness, inability to handle stress, and inadequate staff are all enhancements to customer service. T or F 2. The way we see something based on our experience is our perception. T or F 3. Expectations are always negative. T or F 4. Expectations are always based on our perceptions. T or F 5. The average scope of influence that an individual has is between seven and fifteen people. T or F 6. The reputation of a company really is not important to prospective customers. T or F 7. Our personal credibility can be the one characteristic that determines our success as people and as customer service providers. T or F 8. Once credibility is lost, it is easy to regain. T or F 9. Ethics are a set of principles that govern the conduct of an individual or group. T or F 10. It is always popular to do the right thing and to have high ethical standards. T or F OPPORTUNITIES FOR CRITICAL THINKING 1. Why is it important to convey credibility to your customer? 2. Explain the five techniques for exceeding customers’ expectations. 3. Why do many people talk about customer service and yet do little to improve its quality? 4. Why should we consider our customers’ perceptions? 5. What are some common barriers to customer service? 6. How relevant is the reality that some customers may perceive your service inaccurately? 7. How do primary expectations differ from secondary expectations? 8. Describe an example of a situation where scope of influence hurt or helped your business. 9. What are some techniques for conveying credibility to others? 10. What role do values play in an individual’s approach to providing customer service? credibility ethics expectationsperception primary expectations reputation managementscope of influence secondary expectations values KEY TERMS as informational pieces that are not trying to sell something. They are really selling the company, but the approach is subtler; therefore, it is less threatening. The Challenges of Customer Service 27 SKILL BUILDING Understanding Expectations All customers have their own unique sets of expectations. Expectations may be positive or negative. Organizations must periodically attempt to determine what their customers expect from their customer experience. Individually or in small groups of three or four, list the top four expectations that customers would have of the following organizations: Prestige hotel Electric company Nationally recognized fast-food chain Auto service department or garage Car rental company Local community college Credit card company Your own organization or departmentAfter determining the top four expecta- tions of each of the preceding organizations, rank the expectations from easiest to provide to most difficult. Attempt to draw conclusions from your rankings. A common observation when customer expectations are evaluated is that many of the expectations that customers have are easy and inexpensive to provide. Attempting to understand customers’ expectations gives organizations the opportunity to consistently strive to be what customers want them to be. Ethics in Action The local news has been reporting that your company is going to be announcing a big layoff. In case you are one of the unlucky ones that is laid off should you create and print your resume at work? What if everyone else is doing it? CHALLENGE Personal Purpose Statement The concept that each of us has a purpose is not a new one, but it is one that we are hearing a lot about today. Although there are numerous ways of interpreting our individual “purpose” (see Chapter 5 for more information on a mission and purpose statement), in this activity we concentrate on your individual, personal purpose. As each of us goes through our daily lives and routines, it is helpful to focus on our purpose or the reason we exist. This is a question that can have a variety of answers that will likely change at different times in our lives. The  defining of our personal purpose can help to keep us focused on goals, sustain us during difficult times, reward us with a sense of accomplishment, and remind us to always strive to be the best that we can be. 1. To demonstrate an understanding of how to define an individual’s personal purpose 2. To identify the combination of unique individual characteristics, talents, goals, and requirements that work together to define “why we exist” 3. To present in written form an individualized, personal purpose statement Challenge Objectives Assignment As you work toward determining your personal purpose statement, you may want to ask yourself some of the following questions: What do I enjoy doing? When am I the happiest? 28 Chapter Two What could I do better? What do I believe is important? What do I see myself doing in five years? What am I good at? What is my proudest accomplishment? Do I enjoy being/working with others or prefer to be/work alone? How do I want others to think of me? How do I want others to remember me? You may want to create additional questions that are appropriate for you. Asking yourself these questions will give you a lot of information to work with, but it will also allow you to detect a pattern of priorities that you might not have recognized before. Present in written form your personal purpose statement. Your statement should be professionally written in a concise manner. Individual paragraphs may address different areas of your life; or one complete paragraph is acceptable. Submit to your instructor two copies of your purpose statement. One copy is for grading purposes to be returned to you; the second copy should be submitted in a self- addressed, stamped envelope. Your instructor will mail this envelope to you later in your class term. It is easy to be motivated as you are establishing goals and defining your purpose, but as time goes by it is easy to get caught up in your busy life and to forget “why” you exist. Your personal purpose statement will arrive via mail, and you can be reminded as to “why you exist.” Presentation 1. F 2. T 3. F 4. F 5. T 6. F 7. T 8. F 9. T 10. F ANSWERS TO QUICK QUIZ 29 CHAPTER OBJECTIVES Problem Solving Remember ThisWe are continually faced by great opportunities brilliantly disguised as insoluble problems. In this chapter, you will learn how to Define problem solving. Explain the problem-solving process. Describe the use of brainstorming and diagramming as problem-solving strategies. Illustrate mind mapping. Develop negotiation skills. Use follow-up to problem solving as a customer service tool. CHAPTER THREE 30 Chapter Three Role of Problem Solving in Customer Service Most individuals encounter the need to solve problems frequently. In many instances, problems are challenges that we would prefer to avoid; but, in most cases, this is not a possibility. One of the most important activities in which most customer service providers participate is helping to solve customers’ problems. Problem solving is an active resolution to a challenging situation. Many individuals dread problem solving. It can add considerable stress to an otherwise peaceful work environment. One of the main reasons problem solving is perceived as being unpleasant is because the average business professional has not worked to develop the skills necessary to accomplish it effectively and efficiently. The only training that some people have is their observations of their own families dealing with problems as they were growing up. This example is frequently not transferable to a business environment. Most individuals in an organization are aware of the repercussions that can result from an incorrect resolution to problems. Because of this, they may be reluctant to take the responsibility that accompanies problem solving. To actively confront the challenge of problem solving, organizations must prepare employees with training. They must create a safe environment that encourages employees to develop solutions that are positive for both the customer and the company. Problem solving and decision making are individualized processes. Every individual may have his or her own method of determining an appropriate course of action. What is important is the end result, not the process of determining the solution. As long as the solution is timely, the process is less important. One significant challenge to problem solving when interacting with customers is the speed with which decisions must be made. When a customer calls with a question or problem, the customer service provider may only have a few seconds or minutes to provide an answer. Unfortunately, this does not allow for much time to examine possible solutions. Customer service providers must become highly proficient in listening to a customer’s explanation of a situation or problem, in asking pertinent questions to clarify the information, and in providing the customer with an appropriate solution. The solution must be one that they are willing to share regardless of the possible repercussions. Customer service providers can effectively equip themselves to make decisions and to solve problems by learning problem-solving strategies, developing negotiation skills, learning how to deal effectively with conflict, and recognizing the importance of follow-up. problem solving An active resolution to a challenging situation. Problem Solving 31 Creativity and Problem Solving When individuals incorporate creativity into the process of problem solving, positive challenges result. Creative problem solving suggests that through an open approach to finding solutions, an appropriate and innovative result may be discovered. Creative problem solving requires that employees work in a culture that allows new ideas to flow freely and to be considered realistically. When the same problems consistently arise and are resolved in the same established manner, the opportunity for new and more creative resolutions may exist. Customers appreciate creativity. Creativity requires effort and commitment to creating a new idea or solution. The individuals in an organization who are the closest to the pulse of the customers are those indi- viduals who interact with them on an ongoing basis. In many organizations, these individuals are the customer service providers. By offering suggestions to customers and to management about innovative ways of solving chal- lenges, customer service providers can share their creativity with others. Problems as Opportunities Criticism provides an opportunity to obtain information. When customers express problems or frustrations, it is easy to become defensive. A productive method of response to criticism is to consider the criticism as productive input to the creation of a problem-solving environment. A customer complaint is really a request for action. Customers frequently have ideas about how a problem may be avoided in the future. Offering them the opportunity to share their ideas gives customers the opportunity to participate in the process of improving a situation or system that has disappointed them. This allows a team effort that creates unity between provider and customer. Confronting Conflict Conflict is a reality of most approaches to problem solving. Problem solving and decision making involve the consideration of possible alternatives and the selection of the alternative that is viewed by the decision maker as the most appropriate. This does not mean that all of the parties involved will agree that the chosen course of action is the best. This may create conflict in some situations. Conflict is a hostile encounter that occurs as a result of opposing needs, wishes, or ideas. Conflict can occur in even the most conflict A hostile encounter that occurs as a result of opposing needs, wishes, or ideas. 32 Chapter Three cohesive employee team or with our most faithful customers. When faced with conflict and disagreement, it is important to proceed with caution! Many words have been spoken in anger, creating difficult-to-correct damage. The goal in any problem-solving environment, even when anger is present, is not to win an argument but to resolve a conflict. When encountering conflict, remember the following suggestions: 1. Listen to the other viewpoints that are being presented. 2. Do not bring up old problems from the past or assign blame. 3. Use tact as you respond to others. 4. Do not repress your own anger; instead, use it productively. Take advantage of the opportunity to share other related concerns in a positive manner. 5. Focus on finding the best solution to the conflict. Problem-Solving Process Numerous approaches may be taken when attempting to solve problems. After determining that a problem exists, it is helpful to respond to the following guidelines. The guidelines are represented as they occur in the problem-solving model shown in Figure 3.1. 1. Identify the problem: Attempt to recognize and understand what the real problem is. Sometimes the true problem will be difficult to iden- tify because of other variables that are more recognizable but that do not represent the problem that requires solving. 2. Understand the problem’s unique characteristics and the possible outcomes: The problems that must be solved by customer service providers are frequently confounded by unique characteristics. These unique characteristics may have no bearing on the eventual solution, but they must be considered while a solution is being developed. 3. Define the requirements of a possible solution considering the company policies currently in place: Frequent requests may have resulted in policies being developed to promote consistency in solutions. The requirements of the solution must be determined and the policies considered. Policies that are flexible should be considered as opportunities. 4. Identify possible solutions: Frequently, the success of a problem’s solution has to do with the generation of more than one possible solution and the selection of the best solution. As possible solutions are considered, they should reflect an array of alternatives and the individuals who will be affected. 5. Select the best solution: Selecting the best solution may be the most challenging aspect of the problem-solving process. The positive and negative results must be considered from both the company’s and the customer’s perspective. “A professional is someone who can do his best work when he doesn’t feel like it.” Alistair Cooke Problem Solving 33 6. Implement the solution, informing the customer of the details and how the customer will be affected: Putting the solution into place is an integral part of the problem-solving process. From the customer’s viewpoint, nothing has been done until the solution is implemented. The most creative solution has little value if it is not put into action. Communication is important at this time. Everyone who will be affected by the solution must be informed of its implementation and of any responsibility that they may have in contributing to its success. 7. Observe and evaluate the solution’s impact: After a solution has been implemented, it should be observed and evaluated to determine whether it was successful. Observation can occur on an ongoing basis, but a for- mal evaluation should be scheduled to take place at a designated time. Select the best solutionIdentify possible solutionsDefine solution requirements, considering the company policies in place Understand the problem’s unique characteristics and possible outcomes Identify the (new) problems(s) Observe and evaluate the solution’s impact Implement the solution FIGURE 3.1 The Problem-Solving Model 34 Chapter Three The problem-solving process should follow the guidelines included in the model. If steps are skipped or overlooked, serious errors may occur in the solutions. For example, a courier company’s delivery people did not have time to read their mail. Important information was not reaching the appropriate people because of the problem. Members of the management team called a meeting to attempt to resolve the situation. After hearing a brief explanation of the problem, members of the group began sharing their solutions. Some of the ideas were to begin forwarding all the employees’ mail to their homes so that they would have more time to read it, to purchase laptop computers for all of the couriers so that they could receive e-mail, and to reprimand the employees for their oversight. The most popular solution was to forward the mail to the employees’ homes. At this time, the management team began discussing how to print address labels and what type of envelopes to use. One of the managers believed that the solution of mailing materials twice was premature. She suggested that although mailing material twice would guarantee that the employees received their mail, it would not guarantee that they would actually read it. She suggested finding out why the employees were not reading their mail. This provoked a more focused approach to problem solving. The group began to follow the problem-solving process as they attempted to understand and to solve the mail problem. Upon further analysis, it was determined that employees received as many as 100 documents daily. Every memorandum circulated in the company was sent to every employee, even when it did not directly affect him or her. A courier’s main function is delivering materials; it was difficult for couriers to read mail and to drive, especially when much of the mail was useless to them. The managers began to see that the problem was not just with the employees; the management team shared the responsibility. A solution to the problem was developed to meet the needs of all involved. If the manager had not voiced her concerns about the original solution to what was perceived as the problem, the company would have been spending a lot of money on postage to send mail to employees who did not need to read it. Sit down with your team and identify a recurring problem within your department/ group. Referring to the problem-solving model, specifically identify the problem and follow the steps for problem solving detailed in the model. Be sure to encourage and accept all group members’ input. Be as creative as company policies and circumstances will allow. Establish a time line to review the solution to evaluate how well it is working. Upon evaluation, celebrate your success or make modifications for future success. The more you use the problem-solving model, the easier it will be to determine the positive results! TEAM TIME Problem Solving 35 Problem-Solving Strategies When approaching the challenge of determining a solution for a problem, individual strategies or a combination of strategies may be used. To effectively determine solutions, it may be helpful to follow methods that have been proven to create positive results. The two common strategies of problem solving are brainstorming and diagramming. Brainstorming Brainstorming is a problem-solving strategy that can be used by groups of two or more. The premise behind brainstorming is that the more ideas that are shared in an open and accepting environment, the more creativity will result. As ideas are shared, other ideas may develop. A group approach like brainstorming to problem solving can create a unique and creative opportunity to generate solutions. To begin a brainstorming exercise, a group gathers willing to share ideas. A specific problem is identified. One individual is designated as the recorder; he or she is responsible for recording the ideas shared. The next step is for someone to share the first idea. Other ideas should follow. The more ideas shared, the better, as ideas frequently stimulate other ideas. It is mandatory for the leaders facilitating the exercise to create an accepting environment in which the participants can operate. If individuals are afraid that their ideas will be rejected or that they will be ridiculed for their suggestions, they will be less likely to participate. When several ideas have been generated, a master list is prepared. It can be displayed immediately on a flipchart or whiteboard. The master list can also be compiled and distributed to group members for later discussion. The members can review the ideas and make additions. A second meeting should be held to recommend the most appropriate solutions. Allowing group mem- bers to review all the ideas that were shared makes it easier to determine which ideas are possible solutions to the problem. Implementation of the chosen solutions can begin, and the problem is on its way to being resolved. Diagramming Diagramming is a strategy for problem solving that provides a visual representation of the problem and the facts related to it. Visual representations are easy to work with because they allow visual examination as well as discussion. There are four main methods of diagramming problems in search of appropriate solutions: pro/con sheets, flowcharts, organizational charts, and mind mapping. 1. Pro/con sheets: A simple approach to diagramming a problem is the use of pro/con sheets (Figure 3.2). Pro/con sheets are best when used to choose a specific course of action as the resolution to a problem. To create a pro/con sheet, write the problem and the possible solution on brainstorming A problem-solving strategy that can be used by groups of two or more. diagramming A strategy for problem solving that provides a visual representation of the problem and the facts related to it. pro/con sheets A simple approach to diagramming a problem that involves recording the arguments for and against a solution. 36 Chapter Three a sheet of paper. Then draw a line down the center and write the word pro on one side and con on the other side. Write all the positive reasons that the solution would work on the pro side of the line. List all the reasons why the solution would not be appropriate on the con side. When all the reasons for and against a possible solution are listed, it can be determined whether the solution is appropriate or not. Pro/con sheets are simple, which is one reason that they can work well in choosing a solution. 2. Flowcharts: When using flowcharts in the problem-solving process, it is helpful to diagram what the process or flow of a problem is (Figure 3.3). Sometimes just listing how a situation is processed and who must be involved is enough to identify why a problem is occurring. To create a flowchart, include in a box on the top of a sheet of paper the point where a process begins. An example may be: Who has to authorize an extension on a payment for a customer? If the beginning of the process starts with the customer making the request, this goes in the first box. The person whom the customer calls goes in the second box. The third box is for the person whom the employee must ask to gain approval for the pay- ment extension. If the customer’s records must be retrieved from another department, this goes in the next box. The process continues from there. Diagramming the current system for responding to the customer’s request makes it easier to understand why the process takes longer than may be considered appropriate. Flowcharts are helpful in identifying unnecessary steps in a process. They can also assist in identifying who would be affected by a change in the method of processing information. flowcharts A diagramming approach to problem solving that charts each step of a process to assist in determining why a problem is occurring. Pro (Arguments for)Con (Arguments against) FIGURE 3.2 Pro/Con Sheet Problem Solving 37 Customer requests payment extension Customer payment history is reviewed Customer is informed that request is denied Customer is informed that request is approved Customer Service Provider collects information from customer Ye s N oPositive payment history? FIGURE 3.3 Flowchart 38 Chapter Three 3. Organizational charts: A commonly used method of illustrating the hierarchy of a company is with organizational charts (Figure 3.4). An organizational chart is a diagram of who reports to whom within an organization or department. While organizational charts will not assist in solving specific problems, they can provide a visual illustration of areas of employee overload and can reveal possible snags in a system’s success. If someone is required to give authorization to a new project but is involved in managing another area of the business, he or she may not have the knowledge to make the most effective decisions. In addi- tion, if the person is not involved in the same part of the process, he or she may not be aware of the day-to-day challenges encountered by employees. 4. Mind mapping: An extremely creative approach to diagram- ming a problem is mind mapping (Figure 3.5). The concept of mind organizational charts A method of illustrating the hierarchy of a company by illustrating who reports to whom. mind mapping A creative approach to diagramming a problem in which a problem is recorded on paper and possible solutions branch out from the original problem. Marketing Manager Customer Service Manager Customer Service Supervisor Customer Service Supervisor Customer Service Supervisor Customer Service Provider Team A Jeffery East Robertson Howard Customer Service Provider Team B Thompson Barnes Hill Kelly Customer Service Provider Team C Myers Rathert Seizinger Appel FIGURE 3.4 Organizational Chart Problem Solving 39 mapping was developed in the 1970s and is still popular today. Mind mapping involves the practical aspects of traditional problem solving while incorporating the opportunity to freely approach new ways of thinking. To begin a mind map, place the problem or decision in an oval in the center of a large piece of paper. The center placement symbolizes that the problem or decision is the core of your map. After creating the center, place lines going out of the center in different directions. On the lines, write important words or phrases that pertain to finding a solution to the challenge. Add additional branches coming off the important words or phrases. These branches should list ideas or thoughts that relate to the solution of the problem. Try to come up with ideas as quickly as possible; the more outlandish and creative the ideas are, the better. Quality is not important at this point in the process. If visual images can illustrate ideas, it is appropriate to use them. Record as many ideas as possible. Review the ideas and make additions if any are suggested. Try putting aside your mind map for an hour or even a day, and then review what you have written. Make any additions that you can. Then begin drawing conclusions from your “map.” What solutions have been diagrammed that could possibly be implemented? Share your ideas with others and seek their feedback. Reliable Reputation HardworkingEye contactGood speaker Communications skillsWell preparedTrustworthy ValuesHonesty Positive feedback from customers Past performance Consistent treatment of customers Knowledge level Product knowledgeAttends additional training Credibility FIGURE 3.5 Mind Mapping 40 Chapter Three When mind mapping, it is important to approach the exercise with an open mind and a willingness to think creatively. Mind mapping is not meant to be neat and orderly or even consistently realistic. It is meant to stimulate ideas and to help individuals consider what may be possible. Many people write speeches and plan meetings by creating mind maps. Developing Negotiation Skills There may be no easy solutions to problems in a professional environment. Customer complaints, requests, and problems must be resolved in an efficient manner. A constructive method of problem solving is to ask the customer what will resolve the situation. While this places responsibility on the customer to share what he or she sees as a satisfactory resolution, it also places a significant responsibility on the individual whose job it is to decide what an appropriate resolution would be. At this time, the art of successful negotiation is necessary. Negotiation is the evaluation of the possible solutions to a challenge and the selection of the solution that is mutually beneficial. Negotiation requires discussion between the two parties involved. It suggests that a resolution can be reached that everyone involved considers fair and rea- sonable. Negotiation must allow for give and take on both sides of an issue. To improve negotiation skills as a customer service provider, remember the following suggestions: 1. Know your customer: Anyone involved in solving a problem must know the parties involved. Past relationships can shed valuable light on how a customer may approach a current situation. New customers have unique qualities that we have yet to discover. The more familiar we can become with our customers, the more likely we will be to recognize what their real problems or concerns are. Some customers may make outrageous requests initially and then lessen their demands. If this tendency has been noticed previously, it is helpful to recall it at the beginning of the negotiation process. Job Link Create a pro/con sheet for a decision that you need to make. It can be as simple as where to go for lunch or as complex as whether or not you should make a job change. Make your list as quickly as you can and then review the results. Sometimes a pro/con sheet is the most effective (and easiest) way to work toward a decision. Give it a try! negotiation The evaluation of the possible solutions to a challenge and the selection of the solu- tion that is mutually beneficial. Problem Solving 41 Customers are unique individuals with their own sets of needs, motivations, and fears. The greater our awareness of their needs, motivations, and fears, the more effectively we can begin to solve their problems. Customers want to know that they are important to us and to our business. They also want to know that we remember them from one interaction to another. Any details that we can draw on about specific customers can help us to solve their problems appropriately. 2. Ask questions and listen to the spoken and unspoken messages: By asking questions of our customers and actively listening to their responses, we can develop an informed understanding of the situation at hand. The more information that can be collected, the more accurately we can help to solve the customers’ problems. Customers are not always eager to share all the details of a situation. Effective questioning requires that the customer service provider continue to ask questions until he or she believes that all of the pertinent information has been collected. Once questions have been answered, it is helpful for customer service providers to clarify their understanding by reviewing their interpretation of what the customer has shared. Customers may have unspoken messages that they are unwilling to share with others without some type of encouragement. Customers who are unable to pay their bills because of sudden changes in their lives may not feel comfortable sharing their problems with someone else. In this situation, the customer service provider must “listen” to what the customer is not saying. This can be done by listening to the hesitation that a customer may have in responding to a question, by attempting to detect anxiety in their voice, or by asking nonthreatening questions that convey to the customer that meeting their current needs is of utmost importance. Although customers who are having cash flow problems may be reluctant to share the details of their situations, they will be pleased to learn about a company’s special payment opportunities or other possible alternatives. Sometimes asking a customer questions creates tension in a conversation. Customers may not want to share more information than they think is necessary. By asking well-presented questions, the customer service provider can create an environment in which the customer may be more willing to share the details that can lead to problem resolution. Questions must be asked with a tone of empathy. Customers need to know that they are important and that their best interest is the company’s concern. 3. Know the policies of your organization and in which areas flexibility is allowed: When attempting to negotiate with customers, it is especially important to be very familiar with your company’s policies. It is hard to coordinate a resolution to a situation if you are uninformed about what will be allowed. Not knowing company policies may make customer service providers appear unprepared or as though they have little or no authority. No customer wants to hear that the reason that his or 42 Chapter Three her requests cannot be granted is because it is against “company policy,” but in many cases this is the only response that is accurate. Knowing what is not allowed is not enough. Customer service providers can go into a negotiation situation ready to negotiate if they also know what the policies allow. Unfortunately, all too often human beings focus on what cannot be done rather than what can be done. Most policies have been developed to establish a consistent method of responding to a common situation. In this respect, policies are a positive measure that a company has taken so that it is not accused of showing favoritism among its customers. Customers may not always think of the existence of policies in this way. Customer service providers should know where and when flexibility is allowed with regard to policies. If customer service providers are trained and empowered, they will comprehend the amount of flexibility that they can exercise on behalf of their customers. 4. Demonstrate the willingness to be flexible: The ability to react to situations as they occur is important in demonstrating flexibility. It is not enough to want to grant the customer’s request; customer service providers must be able to convey that desire to their customers. By asking customers how they would suggest that a situation be resolved, an opening for their input has been suggested. If their suggestions can be entirely or even partially implemented, the customers may feel as though they have created a positive solution that the company was flexible enough to agree to. Flexibility can also be expressed through the words used in interacting with customers. Encouraging words that express appreciation for the customers’ ideas are always a plus. Whenever possible, allow customers to participate in the problem-solving and negotiation process. Their ideas may be inspired because of their involvement in the overall situation. Their approach to the problem resolution may even be more conservative than the one that the company might have offered. 5. Learn to handle your anger and your customer’s anger appro- priately: In a situation in which negotiation is taking place, anger is always a possibility. Something has taken the situation to the point of requiring negotiation. When anger is revealed, it is best to defuse it as subtly as possible. Anger may express frustration, anxiety, or unmet expectations. It may also be a result of circumstances totally unrelated to the situation being discussed. To defuse a customer’s anger, try to anticipate the cause and to confront it carefully. Anger that is defused quickly is less likely to build in intensity. The customer service provider can acknowledge that a change in the situation could occur and could offer some type of compensation. A customer who is annoyed because he or she has been waiting in line at a drive-up window at a fast-food restaurant may angrily ask the manager what the holdup is. The manager may respond by saying that several employees called in sick and that they are understaffed. This response alone may make the customer even angrier, but when the manager offers free food or drinks to compensate for the customer’s inconvenience, the anger may begin to diminish. By offering the apology and the free items, Problem Solving 43 the manager is acknowledging that his company is in error, but he is minimizing the effect of the error. Whenever possible, shift responsibility for the customer’s anger back to the customer. This must be done with care, but it can have positive results. A customer may call his or her lawn care company, ready to cancel the contract because of recurring weeds. When the company owner hears that the customer is concerned about the weed problem, he or she can respond immediately by saying that if the customer will call in the future, the company will provide an additional application at no cost. Although the owner does not say it, he is reminding the customer that it would be impossible for the lawn care company to recheck all of the customers’ lawns to determine the effectiveness of each application. By encouraging the customer to share in the responsibility, anger may be defused and the business relationship may continue. This approach would not be effective if frequently repeated; however, if used periodically, it could be effective. When customer service providers find that they are becoming angry, they should consider the role that they are playing as representatives of their company. Every individual must take responsibility for his or her own anger. A company’s reputation will not be enhanced if the employees allow their anger to be shown to customers. When you feel yourself becoming angry, move quickly to resolve the challenging situation. 6. Consider what the customer may lose in the negotiation process: The nature of negotiation involves give and take. Customers may feel that they are doing all of the giving and that the company is doing all of the taking. Try to understand what the customer will see as a compromise. A customer who is delinquent in bill payment may be seeking to be relieved of some of the financial responsibility. Although this may be an unrealistic solution from the company’s viewpoint, the customer may not see it that way. A modified payment schedule may be the solution to the situation, but the customer still must pay. When negotiating with customers, stress that the goal is a positive resolution for all. 7. Determine mutually beneficial solutions to challenging problems and situations: When completing a negotiation with a customer, seek solutions that will benefit both the company and the customer. No one gains if the customer leaves the interaction angry, vowing never to do business with the company again. By creating a win–win situation that both sides can live with, potential future business relationships can be a possibility. Even if it has been determined that a company no longer wishes to do business with a customer, it must be remembered that possible business contacts with others who are acquainted with the difficult customer are probably desired. Explain to the customer exactly how the agreed-upon solution will work. Seek feedback from the customer so that additional information can be provided if necessary. Stress that the solution allowed both sides to compromise, but the result will have a positive benefit for all. 44 Chapter Three Professional Approaches to Apologizing and Conveying Bad News As customer service providers attempt to assist their customers in problem solving, they may become aware of errors or oversights that were made by their own company, by coworkers, or by themselves. Effective problem solving acknowledges the fact that the customers may have legitimate concerns and that the customer was treated inappropriately. At this time, an apology is due to the customer. Apologies are not signs of weakness, but instead they are productive methods of continuing the opportunity to communicate. Apologizing to customers is a reality of professional life. While customer service providers should not apologize without justification, they should be prepared to do so when appropriate. When apologizing to customers, consider the following suggestions: 1. Acknowledge customers’ feelings: By indicating to customers that we recognize their feelings and emotions, we send the message that we care. 2. Express to the customer that you share the responsibility for the problem: Even if you and your company were only loosely associ- ated with the problem, you are a part of its diagnosis and resolution. 3. Convey sincerity: When apologizing to customers, it is important to convey care and concern. If we say that we regret that an error was made, the manner in which we say it should demonstrate our regret. 4. Ask for the opportunity to correct the problem: Just apologizing for a problem has little impact if we do not offer to correct the error or to make changes in the future. Saying “May we correct the error for you?” expresses the desire to continue doing business with the customer. 5. Request the opportunity to continue doing business in the future: By asking the customer if we can still consider him or her an active customer, we suggest to the customer that we are willing to correct the error and would like to go forward in a positive business relationship. This request also gives the customer the opportunity to share other concerns that might keep him or her from doing business with us. Barriers to Problem Solving and Decision Making A number of barriers may exist that affect the actuality of problem solving and decision making. Decision makers may not be aware that barriers are detracting from the decision-making process. Some of the most common barriers to problem solving and decision making are as follows: Resistance to change: People are often reluctant to change from the time-honored way of doing things. Resistance to change can prevent people from taking chances and from considering new possibilities. Habits: Habits limit our vision of what can be accomplished and may stand in the way of solving a problem. Habits may go undetected Success is how high you bounce when you hit bottom. General George Patton Problem Solving 45 by an individual and may be a tremendous deterrent to correcting a problem. For example, a receptionist who is having difficulty completing his or her work may be unaware that the habit of taking personal calls is taking the bulk of his or her work time. Individual insecurity: Individual insecurity may deter individuals from taking risks or from pursuing behavior that may require them to take a stand. Individual insecurity may come from past experiences or from an overall lack of self-confidence. Past history: Knowing what has happened before and what worked and did not work can inhibit an individual’s desire to try new methods of problem solving or decision making. Past history is frequently an excuse for not making changes. The individual who may not wish to approach a situation in a new way may remind others that a similar idea failed in the past. Fear of success or failure: At some time, everyone experiences some type of fear. The fear of success or failure may be viewed as unreasonable, but it can greatly deter the confrontation of problems. The unknown can be a frightening thing. When a new way of doing something is attempted, the possibility exists that it may work well or not at all. In either instance, changes may result. While some people thrive on recognition, others shy away from it. These fears may cause people to avoid the possibility of success or failure altogether. Jumping to conclusions: When problems must be solved and decisions made, it is easy to jump to conclusions. When someone jumps to conclusions, assumptions are made about what may or may not work or the possible results; assumptions may frequently take on negative perspectives. Perceptions: As we have stated, perceptions are the ways that we see things based on our experiences. We may be unable to see something from another perspective because we are so blinded by our own perception. By developing an awareness of some of the barriers to problem solving and decision making, customer service providers can attempt to overcome the obstacles before they occur. Importance of Follow-Up in Problem Solving Once a problem or problems have been solved or decisions have been made, it is vitally important to follow up. Follow-up is checking back to determine whether or not a situation is operating according to the initial plan. Effective follow-up requires that the original problem solver or deci- sion maker check back with the customer to determine whether or not the original plan of action actually took place. The most effective approach to problem solving has little value if the solution was never fully implemented or if it has run into some type of difficulty. Customers remember the end of their interaction, not the beginning or the middle. A customer may have follow-up Checking back to determine whether or not a situation is operating according to the initial plan. 46 Chapter Three been treated in a friendly manner, had questions answered quickly, and been highly satisfied with a solution that was created to correct his or her problem; however, if for some reason the solution never took place, the customer will not remember the friendly treatment. The customer will remember that he or she still has a problem that needs to be resolved. Anytime a solution to a problem requires the involvement of someone other than the person making the commitment, follow-up should occur. Keeping customers informed about the status of their order or problem even when there is no news to report can be an excellent public relations tool. A periodic call just to let customers know that you have not forgotten them or their concern can be a refreshing change from the treatment that the customers may be accustomed to receiving. Their response may be, “I cannot believe that you called me back! Your company really does provide excellent customer service.” Follow-up is a safeguard to ensure that customers continue to be satisfied with a company and its ability to meet the needs of its customers. Through effective preparation, the reality of problem solving and decision making in customer service can become an active opportunity to con- vey to customers how valuable they are to the success of a business and that satisfying their needs is a part of the accomplishment of a company’s goals. KEY TERMS brainstorming conflict diagramming flowchartsfollow-up mind mapping negotiation organizational chartsproblem solving pro/con sheets QUICK QUIZ 1. Problem solving is an active resolution to a challenging situation. T or F 2. Customers overwhelmingly oppose the use of creativity in problem solving. T or F 3. Speed is not an important factor to customers when they have a problem to be solved. T or F 4. Conflict is a hostile encounter that occurs as a result of opposing needs, wishes, or ideas. T or F 5. Brainstorming is an effective problem- solving strategy for individuals to use. T or F 6. Flowcharts are a simple approach to diagramming a problem that involves recording the arguments for and against a solution. T or F 7. Showing anger to a customer is appropriate. T or F 8. The solutions that customer service provid- ers come up with are always right. T or F 9. Habits can be a barrier to problem solving. T or F 10. Follow-up is not important. Customers remember the beginning of an interaction, not the end. T or F Problem Solving 47 1. Explain the problem-solving model and the seven steps to determining and implementing a solution. 2. How can brainstorming provide the opportunity for creative problem solving? 3. Why is it helpful for organizations to train their employees in possible approaches to problem solving? 4. How can the use of creativity in problem solving more effectively address unique situations? 5. A positive way to view problems is to think of them as opportunities. How can this approach reduce the temptation to respond defensively to customers’ problems or frustrations? 6. Discuss some guidelines to follow when encountering conflict. 7. Why is a simple approach to problem solving, like the use of pro/con sheets, frequently the most productive? 8. Select a problem or decision to be made and create a mind map to explore possible solutions. 9. Why is an understanding of your company’s policies important when negotiating a solution to a challenge? 10. How important is follow-up to the solution of a problem? OPPORTUNITIES FOR CRITICAL THINKING SKILL BUILDING Problem Solving and Decision Making Most customer service interactions require that problems be rectified and that decisions be made. Customer service providers have to equip themselves to analyze situations and to efficiently determine appropriate solutions. Using the problem-solving strategies, determine your own solutions to the following “What would you do?” scenarios: The accounts receivable department that you manage has been having problems with customers not paying their bills on time. An additional problem is that numerous customers are sending the wrong portion of their bill with their payment. It has been suggested that the real problem is that the billing statement needs a new, more readable look.Applying one of the problem- solving strategies, determine the most appropriate solution to this problem. You have recently been feeling dissatisfied in your position as a reservation associate at a nationally recognized car rental company. There are opportunities for advancement at your current company, but you might like to look elsewhere for a new opportunity. Applying one or more of the problem-solving strategies, determine an appropriate direction to take. In your position of corporate trainer, you have noticed that many of your trainees/ customers are not following through with the assignments that you give them and that frequently they are not prepared for presentations when they are due. Consider the problem-solving strategies and use at least one to determine a solution to this situation. 48 Chapter Three 1. To provide individuals with the opportunity for additional research in an area of customer service of their choice. 2. To compile information collected in a concise and factual written report. 3. For individuals to orally share information in their report with others. Challenge Objectives Research Activity Today, more than any other time in history, people are seeking information. It has become easy to research almost anything on which an individual or group may need information. The ability to collect and compile accurate research is a skill that all professionals need to develop. While it is fun and easy to get information, the ability to sift through information and to compile it into usable form is an important part of formulating informed conclusions. CHALLENGE Assignment With your instructor, choose a topic relevant in customer service to research. Try to find a topic that not only will have available information but also is of interest to you. If it can help you in your current or future employment, even better! Conduct your research in an organized and professional manner. The Internet is a wonderful research tool that is used commonly by today’s professionals, but try to confirm the validity of the information you collect. Just because information is found on the Internet (or anywhere else), it is not necessarily true. Research your chosen topic as extensively as possible. Attempt to acquire a well-rounded perspective on your topic. You should have a minimum of four sources of information. One of your sources should be from the Internet. You may use several sources from the Internet, but at least one source should come from another place. A personal inter- view with a professional is an interesting way to supplement your other informa- tion and can provide a real-world perspective. Ethics in Action You are the manager of a local “box type” store. Customers come to you to stock up on basic items and to get great prices on everyday products. Today a couple came to one of your checkout stands. They wanted to know how they could get the gift card that was promised following a $50.00 purchase of some specific items. The checker did not know anything about this promotion. She called her supervisor and the supervisor indicated to the customer that your company never did that type of promotion and that the customers were wrong. The customers became visibly upset and said that they had traveled from another community to make the purchase and receive the gift card. The supervisor also told them to go home and reread the ad and if they were correct bring it into the store. At this point, the customers passed on their desired purchase and checked out their other items. They immediately asked to speak to you. Now you must solve the problem. How do you keep these customers satisfied and willing to continue to do business with you in the future? Incidentally, you don’t know anything about the ad in the newspaper either but it really DID run. Problem Solving 49 1. T 2. F 3. F 4. T 5. T 6. F 7. F 8. F 9. T 10. F ANSWERS TO QUICK QUIZ Presentation Compile the information that you have gathered into a written report. Reports should be well written and easily understood. All reports are to be typed and  should be five to eight pages in length. Footnotes are not necessary, but endnotes should be included to accurately credit your sources. Reports should be presented informally to the class by each individual. This will allow all participants to benefit from your research. Have fun with your research. The topic that you choose will probably be one that you will be interested in for years to come! 50 Remember ThisQuality is never an accident; it is always the result of high intention, sincere effort, intelligent direction, and skillful execution; it represents the wise ch oice of many alternatives. Willa A. Foster Strategy for Formulating a Plan for Success CHAPTER FOUR Explain and list examples of high-touch and low-touch customers. Express an understanding of consumption behavior. Use market segmentation to divide customers into serviceable groups. In this chapter, you will learn how to Define strategy. Create goals necessary for planning. Explain the importance of infrastructure. List examples of culture in the workplace. CHAPTER OBJECTIVES Strategy for Formulating a Plan for Success 51 strategy A plan for positive action. planning Finding a recognizable direc- tion to focus on. More specifically, planning is the establishment of specific customer service goals. infrastructure Made up of the networks of people, physical facilities, and information that support the produc- tion of customer service. “My dreams are worthless, my plans are dust, my goals are impossible. All are of no value unless they are followed by action. I will act now.” Og Mandino Why a Strategy? Excellent customer service is not an accident but the result of a well- thought-out plan. The most important step toward achieving excellent customer service is developing a strategy. A strategy is a plan for positive action. A plan is always necessary when attempting to accomplish goals. A strategy can help a business to determine the proper level of cus- tomer service. If too much customer service is provided, it may create a financial problem. If too little customer service is provided, customers may take their business elsewhere. Several variables must be considered when developing a c ustomer ser- vice strategy: planning, infrastructure, culture, high-touch and low-touch customers, consumption behavior, and market segmentation. Planning When undertaking the challenge of developing a comprehensive customer service strategy, planning is the first step. To begin the planning process, customer service providers must establish goals to determine what they would like to accomplish in their customer service. Planning is, in a broad sense, finding a recognizable direction to focus on. More specifically, planning is the establishment of specific customer service goals. These goals may vary from reducing customer complaints to answering customer calls in 20 seconds or less. Establishing customer ser- vice goals will help customer service providers to define what they would like to accomplish. It is not uncommon for additional goals or priorities to surface as the strategy is being developed. Importance of Infrastructure Customer service depends on the existence of an appropriate infrastructure. An infrastructure is made up of the networks of people, physical facilities, and information that support the production of customer service. Frequently, organizations attempt to implement customer service programs without considering the capabilities of their existing infrastruc- ture. For example, if a company adds a toll-free customer service hotline and does not increase the number of telephone lines into its business, it may do more damage than good to its customer service reputation. While adding the toll-free line was an excellent idea, the lack of extra lines may cause customers to become frustrated and hang up before their questions or concerns have been addressed. 52 Chapter Four One way of thinking of an infrastructure is that it is the “high- way” that gets you where you need to go. Without a “highway,” we do not always realize what is possible. Many cities find that if their infrastructures (water, sewer, roads, electricity, etc.) do not keep up with population growth or shifts, public services become inadequate. It is always interesting to see the new businesses that seem to pop up when a new road is built. In many cases, the need for those businesses already existed but, because the infrastructure was lacking, they did not open. Infrastructures require a lot of planning. If future needs are not anticipated, future costs may be greater. Very few infrastructure investments show a positive return in less than three to five years. The infrastructure should meet the needs of the customer. The largest cost of producing great service is creating the infrastructure to support it. Infrastructure must be used to its fullest potential. If current technology is in place but employees have not been trained to use it, it is wasted. Unfortunately, this is apparent in all too many businesses. Numerous voice mail systems, computers, copiers, software, and fax machines are never used because the people to whom they were made available were never trained on them or never made the commitment to initiate their use. Today’s customers use technology and they expect their customer service providers to use it. As sales grow, the company’s ability to serve its customers’ needs should also. Culture A customer service environment should have a customer service-oriented culture. Culture is composed of the values, beliefs, and norms shared by a group of people. Many people are not aware of the fact that every business has its own unique culture. All too often, management preaches the importance of positive customer service but then does not provide a work environment that allows that positive customer service to happen. If the “culture” does not encourage excellent customer service, excellent customer service will not exist. Examples of Culture in Specific Industries 1. Typical workday hours 2. Industry lingo 3. Peer accountability 4. Levels of certification 5. Extra company-sponsored activities culture Composed of the values, beliefs, and norms shared by a group of people. Strategy for Formulating a Plan for Success 53 Southwest Airlines is recognized as a service provider with few customer complaints and consistent on-time performance. This is largely due to the customer service culture that it creates for its employees. It encourages its employees to go above and beyond the call of duty. It allows its employees to dress comfortably yet professionally. Humor is an important part of the airline–customer relationship. Three ways that Southwest Airlines succeeds in creating a customer-friendly culture are as follows: Practice the Golden Rule: Do unto others as you would have them do unto you, both internally and externally. View internal customers as number one: Southwest believes that if you take care of the internal customers, they will automatically take care of the external customers. Work hard, play hard: Celebrate successes, offer incentives, and give people a reason to work hard. High-Touch and Low-Touch Customers There are many different types of customers and customer services. Depending on several variables, customers will have different customer service expectations. One method of understanding customers is to clas- sify them as high-touch or low-touch customers. High-touch customers require a high level of customer interaction. These customers come into their customer service experience expecting a high level of service. In most cases, their perception is that the cost of providing the service is included in the price. If they do not experience a high level of interaction, they will probably be dissatisfied. The customer may not be capable of completing the interaction without assistance. Examples of High Touch 1. Bank lobbies 2. Specialty stores 3. Hotel lobbies 4. Purchase of real estate 5. Lawyers and accountants 6. Prestige restaurant When a choice is given, many customers will choose a low-touch experience and may even resent being required to participate in a high- touch experience. Low-touch customers expect a low level of customer interaction. Low touch frequently exists because of technology. It tends to have high usage and low cost per use. high-touch customers Require a high level of customer interaction. low-touch customers Expect a low level of customer interaction. 54 Chapter Four Examples of Low Touch 1. Pike passes (debit cards used on turnpikes) 2. Automatic teller machines 3. Express rental car checkout 4. Hotel bill viewing on television and express checkout 5. Pay-at-the-pump gasoline 6. Fast-food drive-up windows 7. Do-it-yourself copy shops 8. Online bill paying and account management 9. Self checkout 10. Downloading of music or ringtones If customers are satisfied with and even expect a low-touch expe- rience, it is inappropriate to require them to participate in a high-touch experience. Customers have many reasons for taking advantage of low- touch customer services. A mother with small children may choose to go to the drive-up window at her bank because it is much more convenient than unloading her children and going inside. If, upon arrival at the bank, she is told that her routine transaction must be completed inside, she may become discouraged and postpone completing it. If it happens often, she may change to a bank that will provide her with the conveniences that she requires. Consumption Behavior Consumption behavior refers to the customer’s usage and payment patterns. Evaluating consumption behavior can be a relatively easy method of collecting information about a customer. This is especially true if the organization has an established method of customer data collection. Sit down with your team and discuss the concept of high-touch and low-touch customers. Attempt to identify which group, high touch or low touch, represents the greatest percentage of your customers. Remember, the trend is for businesses to offer an increasing number of low-touch customer opportunities. Brainstorm with your group ideas as to methods of offering additional low-touch customer opportunities. Delete the ideas that are not feasible in your organization. Invite your supervisor to hear your ideas for creating new low-touch opportunities. He or she may not have considered all of the possibilities! TEAM TIME consumption behavior Refers to the customer’s usage and payment patterns. Strategy for Formulating a Plan for Success 55 Most companies today have a computerized method of obtaining informa- tion about their customers’ behavior patterns. Unfortunately, many do not know what to do with the information they have gathered. They have too much information that does not easily provide an improved understanding of the customer. Some of the important questions to ask when identifying consumption behavior are What are customers buying? Why did they buy it? Why did they buy more today than they did in our last interaction? Why did they call with a question? What was their question? How much did they buy? Have they bought from us before? How did they pay? When will they be installing/assembling the product? What else have they bought recently? The more information an organization has about its customer ’s consumption patterns, the better prepared it is to create a strategy to better serve that customer. Most companies serve a variety of different customers with unique consumption patterns. It is not appropriate to serve all customers in exactly the same way. Companies that do so risk offending some customers, over-serving others, and neglecting others. A guttering company had installed a top-of-the-line guttering material on a very expensive home. When the home was purchased, the new homeowners called the company to install some additional guttering. The company failed to show up on three different days that they were scheduled to do the installation. When they did arrive and completed the work, the homeowner was not home. No bill was left for the homeowner to pay. Three days later, an invoice was received by mail with the invoice date of the first scheduled installation day. The homeowner received the bill and placed it in the “to be paid” file. It was the homeowner’s pattern to pay bills on a designated day during the week. The day after receiving the invoice, the homeowner received an angry phone call from the collections individual at the guttering company asking why the bill was not paid yet. The homeowner stated that the bill had just been received and would be paid within the next few days. The collections person then stated that all bills were to be paid cash on delivery. When the homeowner explained that no bill was left after the work was completed and that the bill had just come in the mail, he was again told that the company did not look kindly on customers who failed to pay. The guttering company expected payment immediately or it would take action against the homeowner. The homeowner ended the phone 56 Chapter Four call promising to send a check immediately and feeling upset at the fact that he had received the call in the first place. That evening (after the payment had been mailed), a neighbor stopped at the homeowner’s house to compliment his unique gutters and ask who had installed them. The homeowner shared the story and also stated that no matter how attractive the guttering was, he would never recommend the company to anyone else. On the surface, this sounds like just a griping customer story about an unglamorous home improvement product. The reality is that many businesses generate all of their revenue selling products or services that are not extremely exciting. This company could have preserved its reputation and possibly retained a potentially influential customer by examining the customer’s consumption behavior and improving its method of collecting on unpaid accounts. Too many companies end up hurting their business opportunities because they do not consider their customers’ consumption behavior. How many times have you seen a company advertise or at least list on a product box or installation instructions that it has a free customer help line, only to attempt to call the number and then find out that the help line is available only from Monday through Friday 8:00 a.m. to 5:00 p.m. Eastern time? Does anyone have a problem with his lawn mower during other hours or attempt to install software on her home computers at other times? Identifying consumption behavior of specific customers can enable an organization to most effectively serve the customers when, where, and how they need it. Segmentation of Your Market Understanding your customers’ similarities is important when developing a customer service strategy. Market segmentation is dividing customers into groups with similar characteristics. Segmentation will help to divide customers into serviceable groups, making it easier to assess the appropriate services to provide. Segmentation can also identify unique customer groups with special needs, such as health clubs with babysitting services or eye care clinics with available customer transportation. Segmentation can also identify common and less common customer service needs. Segmentation is often difficult because of customer diver- sity, but it is an excellent starting point when developing a strategy. Sample Customer Service Segments 1. Types of service needed or desired 2. Similarities among your current customers market segmentation Dividing customers into groups with simi- lar characteristics.“Go the extra mile. It’s never crowded.” Unknown Strategy for Formulating a Plan for Success 57 3. Peak hours of your business and the specific customers doing busi- ness at those times 4. The amount of service desired 5. Creation of your own segments that are appropriate to your product or service Development of a Strategy When the variables—planning, infrastructure, culture, high- and low- touch customers, consumption behavior, and market segmentation—have been evaluated, it is time to create a customer service strategy. The following seven guidelines provide a guide for creating the strategy: 1. Segment your customers: Divide them into groups with similar characteristics. 2. Identify the largest and most profitable customer groups: Initially, it is better to serve the largest customer group, representing the major- ity of your business. 3. Determine your customers’ expectations: Find out what your cus- tomers want from their experience with you. 4. Develop a plan to achieve their expectations efficiently: Create an innovative strategy that will allow you to serve your customers effectively. 5. Implement the plan: Put your new strategy into practice, implement- ing all aspects of the strategy at the same time. 6. Set an evaluation timetable: Before implementing your strategy, determine when an evaluation of its success will be conducted. 7. Evaluate and continue to improve the strategy: Evaluate the effectiveness of the new customer service strategy and make appropriate improvements. Keep making changes to keep the new strategy as current as possible. Make a list of some of the market segments of which you are a part. Try to list as many as 25 different segments to which you have a connection. Notice how diverse the segments are and how similar and dissimilar the other individuals in each of the segments are to you. Apply your new awareness of the diversity of market segments the next time you are segmenting your own customer groups. Job Link 58 Chapter Four KEY TERMS consumption behavior culture high-touch customersinfrastructure low-touch customers market segmentationplanning strategy QUICK QUIZ 1. A strategy is a plan for positive action. T or F 2. By establishing customer service goals, customer service providers define what they would like to accomplish. T or F 3. Infrastructure investments usually have an immediate payback. T or F 4. The values, beliefs, and norms shared by a group of people are their personality. T or F 5. Bank lobbies, specialty stores, hotel lobbies, lawyers, and accountants are all examples of low-touch customer encounters. T or F 6. Low touch frequently exists because of technology. T or F 7. Online bill paying is growing in popularity as a low-touch customer opportunity. T or F 8. Consumption behavior is irrelevant and difficult information to collect. T or F 9. Market segmentation is dividing customers into groups with similar characteristics. T or F 10. Setting an evaluation timetable is one of the guidelines for developing a strategy. T or F 1. Explain market segmentation. 2. Define culture and give two examples of culture in the workplace. 3. Explain the difference between high-touch and low-touch environments. 4. What variables should be considered when developing a customer service strategy? 5. Look for examples of infrastructure in your own organization. 6. Contrast the potential success of a strategy that is developed according to the guidelines for creating a strategy and one that is not. 7. Identify some customer service market segments that you are in. 8. Give examples of situations where high-touch and low-touch environments are appropriate. 9. What role do customers’ expectations play in the establishment of customer service strategy? 10. Examine the culture of your own workplace. OPPORTUNITIES FOR CRITICAL THINKING Strategy for Formulating a Plan for Success 59 SKILL BUILDING Time Management Time management is necessary for anyone who deals with customers. No one can improve your time management skills but you. If we have not done an effective job of managing our time, we will be more likely to become frustrated and to take our frustrations out on our customers. It is easy to let time slip away or to allow one customer to take the amount of time that would ordinarily be divided among several. Time management must be ongoing and regularly practiced to make it a way of life. Here are ten tips for better time management: 1. Set goals and determine their priority. 2. Keep an updated calendar handy at all times. 3. Set tentative deadlines and reward your- self for meeting them. 4. Make a to-do list for the next day before you go to bed at night! 5. Take a break! 6. Focus on what must be accomplished. 7. Work smart—not hard. 8. Use the Swiss cheese method. (Break tasks into smaller pieces and work on them a little at a time.) 9. Evaluate. (Determine what is taking all of your time.) 10. Reward yourself for time well managed. To evaluate your own time management, complete the following exercise: For three to five days, keep a log of how your time is spent. Record your activities, phone calls, breaks, and so on in accurate time intervals. Be honest about the time that you spend on all activities. Also, record whether the time was spent on a professional or per- sonal activity. Analyze the amounts of time that you have spent on all of your different activities. Sample Time Log START TIMESTOP TIMEELAPSED TIMEACTIVITY CODEACTIVITY DESCRIPTION COMMENTS Activity Codes Work-Specific Tasks—WST Work-General Tasks—WGT Personal-Productive—PP Personal-Nonproductive—PNP Miscellaneous—MISC 60 Chapter Four 1. To demonstrate an understanding of what a departmental factoid is. 2. To create a list of unique terminology used to communicate within an organization. 3. To learn to create an attractive brochure that is informational and easy to read. Divide the time spent into five catego- ries: work-specific tasks, work-general tasks, personal-productive, personal-nonproduc- tive, and miscellaneous. Also include any comments that would clarify your activity or that you believe are pertinent. After tallying how your time was spent, attempt to draw conclusions about how you are spending your time. If more than 20 percent of your time at work is being spent on personal activities or 20 percent of your time at home is being spent on work activities, it may indicate that you are allowing each to spill over to the other. Sometimes the conclusion that we draw from keeping a time log is that unimportant activities are taking the majority of our time. Time management is an ongoing process. Try to use your time more appropriately; you may be surprised at the result.If possible, share your time log with at least one other person. Ask those you share it with to suggest ways that you could bet- ter manage your time. Other people’s ideas on how we can better manage our time can be helpful because we learn from their experiences. Ethics in Action Your coworker has been arriving back at their workstation late following their lunch break for the last few weeks. Your department is evaluated on a departmental basis. Your coworker’s tardiness is bringing down pro- ductivity, which could put the entire group’s efficiency rating in jeopardy. Some others in the group are becoming angry and are about to report the tardy employee. What would you do? Challenge Objectives Departmental Factoid One of the unique aspects of life in any professional environment is the special- ized terminology that is used to communicate within departments and institu- tions. Unfortunately, this unique terminology is frequently learned the hard way through individuals questioning what a certain word or abbreviation means. Customers, both internal and external, may have a difficult time knowing the meaning of specialized terms. This specialized terminology is commonly called a departmental factoid. CHALLENGE Assignment Create a list of departmental factoids that would help your customers to better understand how to speak the language of your specific area. Good candidates to be included on your list are those words that you find yourself frequently defin- ing or those that you had to seek an explanation for when you began working in your specific department or industry. Strategy for Formulating a Plan for Success 61 Presentation 1. T 2. T 3. F 4. F 5. F 6. T 7. T 8. F 9. T 10. T ANSWERS TO QUICK QUIZ Present your list of departmental factoids with definitions in the form of an informational brochure. Your brochure should include the following: 1. Cover page with title and graphic 2. Attractive layout detailing your factoids and their definitions 3. Methodical arrangement of factoids (alphabetical, numerical, etc.) 4. Helpful hints for the reader to remember the specific factoids 5. Professional appearance 6. Easy to read A successful brochure is not only attractive but also informational. In the business world, the production of brochures can be costly if they are not well designed and useful. Helpful Hint: Take this opportunity to try Microsoft® PowerPoint® or similar publishing software. Several are available, and they can make an ordinary sheet of facts into a very attractive and readable document with minimal effort—one more beneficial skill to add to your professional resume! 62 Create coproduction examples within your own company. Discuss the importance of a well-designed customer service system. In this chapter, you will learn how to List examples of empowerment. Explain the importance of a mission and purpose statement. Define coproduction and self-sufficiency. CHAPTER OBJECTIVES Remember This Creative thinking may mean the realization that there’s no particular virtue in doing things the way they have always been done. Roger Van Oeck Empowerment CHAPTER FIVE Empowerment 63 empowerment To enable or permit customer service providers to make a range of decisions to assist their customers. purpose The reason for an organization’s existence. mission The means by which the organization will fulfill its purpose. What Is Empowerment? As businesses struggle to retain their current customers and to attract new ones, management is required to look beyond traditional approaches. One new approach that has significant implications in the customer service industry is the idea of empowerment. In customer service, empowerment is to enable or permit customer service providers to make a range of decisions to assist their customers. Customer service providers are continuously faced with customer situa- tions that are unique to the customer and that are somewhere beyond the boundaries of the existing policies. Through empowerment, customer service providers are given the discretion to make decisions to further assist their customers. Empowerment allows customer service providers to decide on their own whether or not customers’ requests should be granted. Frequently, when customers have contacted a company with an inquiry, they have fully explained their situation to the person who is handling their call. If providers are truly empowered, they can, within limits, decide how to resolve the situation. If the providers have to put the customers on hold or make them wait for an answer while the situation is explained to a supervisor, everyone loses. The customers have to wait or possibly retell their stories, the providers are taken away from their regular duties feeling like helpless middlemen, and the supervisor has to hear a hurried explanation of the situation. This scenario could be avoided through empowerment. Importance of a Mission and Purpose Statement Empowerment is a philosophy that must be reflected in the culture of a business. The culture is composed of the values, beliefs, and norms shared by a group of people. In an “empowered culture,” employees know the range of their power. They have been trained in the range of possible solu- tions to questions, and they know that their superiors are willing to live with their decisions. All businesses that deal with customers should have an official mis- sion and purpose statement. This statement expresses the purpose—the reason for the organization’s existence—and the mission—the means by which the organization will fulfill its purpose. Empowerment = Opportunity Empowerment is a true opportunity. Customer service providers who deal with a large number of customers frequently know the solution to most common questions and problems. If they are given the power to 64 Chapter Five deal directly with some of the more routine issues, more time is avail- able for them to handle the more unique situations and to be thorough with all of their customers. Empowerment also frees the time of super- visors who may otherwise be less productive because they have to deal with issues that could be handled more quickly by the customer service providers. Take a minute to write down your own personal purpose statement. Why do you exist? Write your statement down on a card and place it where you can see it often. Do your priorities fit your purpose? Job Link Examples of Empowerment At a local bank, all bank tellers are given $100 each month to distribute among their customers. This money is allocated to be used to compensate customers for being inconvenienced, for errors, or for having an especially long wait. The tellers can use this money as they deem appropriate. They can send the customers flowers, buy a steak dinner or tickets to a baseball game, or perform other goodwill gestures. The employees may not give any money or gifts to members of their families. They must document on an official form whom the gifts were given to and why. The employees know that at any time the bank customer may be contacted to confirm the donation. Some utility companies are empowering their customer service providers by giving them the opportunity to hear a customer’s situa- tion and then to grant that customer special payment arrangement that will better meet the customer’s current financial needs. The employees are also encouraged to send four cards to the customers of their choice each day. These cards may recall something that the customer shared with the customer service provider like the birth of a new baby or the purchase of a new home. The cards may also say “congratulations,” “just a note,” or “oops—we made a mistake.” The intent is to create relationships with the customers, so that they feel as though they have a real link with a person within the company. Steps to Empowering Customer Service Providers Empowerment does not just happen. It is the result of a company’s focused efforts to establish guidelines, train employees, accept conse- quences, and celebrate positive results. When creating an empowerment “Those who bring sunshine into the lives of others cannot keep it from themselves.” James M. Barrie Empowerment 65 program within your organization, consider the following recommen- dations: 1. Paint a picture of what you hope to accomplish: This “picture” can be an inspiring reminder of what your organization is trying to accomplish and how it can benefit each member of the organization. 2. Allow workers to own their empowerment choices: Give them responsibility they can handle and give them feedback on their choices. Do not punish when mistakes occur, but instead retrain. Employees will avoid taking empowerment chances if they fear repercussions. 3. Reward and recognize positive examples and results of empower- ment: You will show those in your organization that you are committed to the empowerment process. 4. Commit for the long haul: Positive results will not necessarily appear overnight, but they will be worth the wait! Coproduction of Customer Service Another way of thinking of empowerment in customer service is to empower the customer. Coproduction occurs when customers participate in providing at least a part of their own service. Customers are often willing and interested in participating in the customer service process. Examples of Coproduction 1. Salad bars (make your own salad as you like it) 2. Free beverage refills that you get yourself 3. Self-service copy shops 4. Parents’ ability to check their children’s grades online 5. College self-advisement (create your own schedule) 6. Completion of medical and insurance information while waiting for the doctor 7. Availability of your account number or medical chart number 8. Requests that deposit slips be completed before going through the bank line and providing a place for customers to fill them out 9. Telephone customer assistance lines 10. Payment at the pump for gasoline A customer service system should be designed so that customers are allowed and encouraged to provide their own customer service. If everything else is equal, a system produces service more effectively when the customers participate as much as they can. (William H. Davidow and Bro Uttal, Total Customer Service: The Ultimate Weapon. New York: HarperCollins, 1990) Included in the concept of coproduction is customer self-sufficiency. Self-sufficiency happens when customers use systems in place to meet coproduction When customers participate in providing at least a part of their own customer service. “When was honey ever made with one bee hive?” Thomas Hood 66 Chapter Five their own service needs at a level that results in satisfaction. As the market has evolved, customers have become willing participants in the provision of their own customer service. Observant businesses have put, or are in the process of putting, in place the tools for customers to successfully achieve their desired level of customer service. Some of these tools include: Self checkout “Build your own anything” Online warranties Instructions How-to videos Automatically texted available bank balances Online bill paying Shipping tracking information Prescription fulfillment via bar code scanning The main difference between coproduction and self-sufficiency is that coproduction usually takes place at a designated time (i.e., paperwork filled out in the doctor’s office while waiting for an appointment) and self-sufficiency is available when and where the customer the customer wishes to access it. Self-sufficiency strives to give the customer addi- tional independence. A customer using an appliance that needs to see the owner’s manual is more likely to go to their computer to search for it online than they are to dig out an old file of owner’s manuals from their desk drawer. Hopefully they will find the manual quickly and have their question answered. In the attempt to address this emerging trend, a photographic supply company in Texas no longer includes warranties or instructions with their products. Instead they e-mail, at the time of their purchase, the customers a link to obtain it online and then post all of the information at their product site, so that a simple search will result in the customers finding the information. Their customers have been pleased with this simple change in the way that this company works to serve them. When customers can experience positive customer service when and where they desire it, their level of satisfaction will increase. Why Coproduction Works Coproduction works because when customers participate in the process, they have some degree of ownership of the situation. In a manner of speaking, they have contributed to its success. Coproduction also works because customers are not only contributing to the customer service experience but also staying occupied instead of feeling that they are waiting endlessly or being imposed on. In addition, customer service providers have someone who is sharing the work and responsibility; they are therefore less stressed in successfully performing their jobs. self-sufficiency Customers using systems in place to meet their own service needs at a level that results in satisfaction. Empowerment 67 Coproduction is not about making the customer do all of the work. It is, instead, about creating a partnership. Coproduction is not about aban- doning your customers, being unwilling to assist, or letting the blind lead the blind. If a system is designed for coproduction but some element of the process is not in place, the system will fail. A business that requires the customer to fill out an order form in a store to complete a sale but that does not have pencils or order forms available will not succeed in empowering the customer. In this instance, coproduction cannot succeed. Coproduction is not appropriate in every customer service situation or for every customer. In a prestige environment, it is inappropriate to expect that the customer will automatically want to participate in pro- viding customer service. The customers may believe that they have paid (or are going to pay) someone else to do it. The following are some techniques to help customers become better coproducers: Ask telephone callers to be prepared: Have you ever wondered why you are placed on hold when calling in a mail order purchase and then a pleasant voice reminds you to have your catalog and credit card handy? The company is very subtly reminding you to be a coproducer. Repeat important information: Asking customers to confirm their drive-up window orders allows mistakes to be corrected and customers to rethink their choices if they have a change to make. Train customers to be coproducers: Provide little things like simple instructions on a form to be completed, prominently displayed signs indicating “express lanes” in discount stores, handing menus to cus- tomers who are waiting to be seated in restaurants, cart return areas in parking lots (along with a sign thanking customers for the cart return), and so on. When customers know what you expect of them, they can assist you more quickly and efficiently. Tell customers why they should want to be coproducers: If customers understand how everyone involved benefits from coproduction, they are more likely to participate enthusiastically. Sit down with your team and discuss the concept of coproduction. Remember, coproduction occurs when customers participate in providing at least part of their own service. Create a new method of coproduction for your department. Coproduction should be a positive asset to the customer service experience. Make the process simple and easily explained. Test the new method of coproduction; and, if it passes your review, share your concept with a supervisor. The supervisor will likely be impressed with the initiative of your team! Way to go! TEAM TIME 68 Chapter Five customer service system Any set of procedures that contributes to the completion of customer service. coproduction self-sufficiencycustomer service system empowermentmission purpose KEY TERMS QUICK QUIZ 1. Empowerment is to enable or permit cus- tomer service providers to make a range of decisions to assist their customers. T or F 2. In an “empowered culture,” employees are unclear as to the range of their power. T or F 3. The reason an organization exists is its purpose. T or F 4. Coproduction is when the customers partic- ipate in providing at least a part of their own service. T or F Design of Systems Empowerment and coproduction are two facets of customer service that do not happen automatically. They must be carefully included in a customer service system. A customer service system is any set of procedures that contributes to the completion of customer service. Not all customer service systems work efficiently and effectively. They must be designed to do so. Unfortunately, many systems are in place because sometime in the past someone decided that a situation would be handled a certain way, and no one has ever updated the procedure. Frequently, the person who has created a system is not the person who has to work with it. The best person in an organization to participate in creating a new system is the person who deals with it on an ongoing basis and who can see “the big picture.” If a question is repeatedly asked or a process has more than a few steps, a system update may be needed. Guidelines for System Design The following six guidelines will help to create an effective customer service system: 1. Identify: an area in need of a new procedure or a system update. 2. List: the steps necessary to create or improve the system. 3. Review: the mission and purpose statement to make sure that you stay on track with the company’s goals. 4. Seek to empower: those involved, both providers and customers. Eliminate unnecessary steps. 5. Create a culture: that supports empowerment. 6. Evaluate the system’s effectiveness: after it has been in operation for a specified period of time.“Those who bring sunshine into the lives of others cannot keep it from themselves.” Empowerment 69 1. List three examples of coproduction. How do coproduction and self- sufficiency differ? 2. What are some guidelines for creating an effective customer service system? 3. How can updating a system or creating a new system enhance the provision of excellent customer service? 4. What are some types of businesses that are the most conducive to coproduction? 5. Write a mission and purpose statement for your department or class. 6. Explain empowerment. 7. How can a lack of empowerment affect a customer service provider’s ability to provide the service that customers expect? 8. Why are so many ineffective systems in place in organizations? 9. In your experience, are customers willing to provide a part of their own service? Why or why not? 10. Why are individuals sometimes resistant to new systems? OPPORTUNITIES FOR CRITICAL THINKING 5. Self-checkout lanes in stores are controver- sial examples of coproduction. T or F 6. Coproduction means that customers do the majority of the work in a customer interaction. T or F 7. A set of procedures that contributes to the completion of customer service is a system. T or F 8. The best person to help to create a system is frequently the person who deals with it on an ongoing basis. T or F 9. Systems are applicable in a wide variety of areas in business and in life. T or F 10. Creating a culture that supports empow- erment is an important part of creating a successful customer service system. T or F SKILL BUILDING Creating Coproduction Most organizations can meet a customer’s basic needs. To be truly successful in the future, organizations must create an environ- ment in which customer service is proactive and not mandatorily reactive. In a coproduc- tive environment, customers are allowed and encouraged to participate in providing at least a part of their own service. Some of the requirements of coproduc- tion are Coproduction must create a partnership between the customer and the provider. Customers must have available the tools necessary to coproduce. Customers must know what their role in coproduction is. List some ways that you could create coproduction in your own organization. Share your new ideas for coproduction with your coworkers or small group. Strive to sell others on the positive benefits of creating coproduction! 70 Chapter Five You work at a very popular video rental store. You have a great relationship with your customers and have gotten to know them all personally. When they come in, they look for you and seem to think of you as a friend. Today one of your favorite customers came in. She was very upset because she had received a letter from your company informing her that her account would be charged for a video that she never had returned. She is on a limited income and said that she could not afford to pay for the movie. She didn’t even remember the movie and cannot find it. She came to you because you are her “friend.” She has requested that you waive the fee for the movie. This is against company policy but you hate to disap- point any customer. What should you do? One more thing to know, after she left you looked at her account. Sadly, this is not the first time that she has made this mistake. Ethics in Action Challenge Objectives 1. To demonstrate an understanding of how systems can affect the success of a customer service program. 2. To implement the students’ ideas in their own work environments (contingent on their supervisors’ approval). 3. To successfully present to others the system developed. Assignment Observe your work or personal environment. Attempt to identify an area of con- fusion or disorganization or a system that in your opinion is just not working as well as it could. Once you have identified this area, attempt to design an improved system to handle the challenge more effectively. Your system should include the steps necessary to better deal with the situation. Review the guidelines for creating an effective customer service system for additional guidance as you create your system. Also include a list of those who will be participating in the implementation of the new system. Presentation Present your newly designed system in the form of a proposal. Include in your proposal 1. A cover letter or memorandum introducing your proposal 2. Explanation of the current system or the lack of system 3. Reasons why a system update is needed 4. How the new system will improve efficiency 5. How much you estimate it will cost to implement Design of a New System Customer service is more likely to occur when a well-designed customer service system is in place. Since many customer service systems are outdated or were created by individuals unfamiliar with the unique characteristics of a situation, a system update or review may be necessary. By learning how to create an effective customer service system, customer service providers are equipping themselves with the ability to initiate and request change. CHALLENGE Empowerment 71 6. How you will train those affected by the new system to implement it 7. An explanation of the system itself 8. Visual aids that further illustrate the system 9. A summary paragraph that expresses the key aspects of the proposed system The success of your proposal will not depend on how intricate the system itself is, but instead on how well it is designed and how well you express your ideas on paper and communicate in written form. Helpful Hint: Take this opportunity to create a Microsoft ® PowerPoint ® pre- sentation to share your proposal. If you have not previously worked with PowerPoint, ® ask a friend to help or just jump in. It is an easy-to-learn program and will greatly enhance your professionalism. 1. T 2. F 3. T 4. T 5. T 6. F 7. T 8. T 9. T 10. T ANSWERS TO QUICK QUIZ 72 List the five main methods of communication. Demonstrate the use of voice inflection to positively convey information. Create your own words to use/words to avoid. In this chapter, you will learn how to Explain the relationship between communication and customer service. Define customer intelligence. Discuss the benefits of relationship marketing. CHAPTER OBJECTIVES Remember This Obstacles are those frightful things you see when you take your eyes off your goals. Unknown Communications in Customer Service CHAPTER SIX Communications in Customer Service 73 communication The process in which information, ideas, and understanding are shared between two (or more) people. customer intelligence The process of gathering information; building a historical database; and developing an understanding of current, potential, and lapsed customers. relationship marketing Cultivating a lasting and mutually beneficial connection with customers. What Is Communication? Customer service requires the ability to communicate effectively. Communication is the process in which information, ideas, and understanding are shared between two (or more) people. Frequently, individuals think that they are communicating, but the element of understanding may not be taking place. Customer service providers must develop their communication skills so that they are proficient in all methods of communication. Building Customer Intelligence The challenge of communicating effectively is made more difficult when providers do not have a good understanding of who their customer really is. One way to develop a more intimate understanding of customers is to build customer intelligence. Customer intelligence is the process of gathering information; building a historical database; and developing an understanding of current, potential, and lapsed customers. Customer intelligence or a customer IQ allows organizations, specifically customer service providers, to better serve customer groups. It can help businesses to appropriately tailor services and service approaches to specific cus- tomers. Most business people today have recognized the importance of identifying why customers are more loyal to one organization than to others offering similar service or product opportunities. Customers are participating in the collection of customer intelligence more today than any time in history. For years, businesses have attempted to identify the best method of rewarding customers for their business and loyalty. Many businesses have found an excellent method of doing so and of collecting customer intelligence in the process. Targeted reward programs offer customers the opportunity to sign up for various types of rewards. This can be an accu- rate method of tracking customer purchases and of rewarding customers for their loyalty. CVS, American Eagle, JC Penney, numerous hotel chains, and many other companies have been successful with this strategy. They can collect pertinent information while enticing the customer to come back and make additional purchases and take advantage of further services. The customers feel good about their savings and the company can continue to collect purchasing information. The most important benefit may be that the customers feel like the company appreciates their business. As a company is developing customer intelligence, it must strive to obtain a true picture of the customer. Examining only selected areas of customer information can result in a fragmented view of customers. In this instance, no information would be better than inaccurate information. Customer intelligence can enhance the possibility of improved relationship marketing. Relationship marketing is cultivating a lasting and mutually beneficial connection with customers. Many businesses 74 Chapter Six already have a considerable amount of information about customers at their disposal; they just have not recognized what can be interpreted from customer data. The methods by which customers choose to conduct busi- ness; the time of day they have questions; and the depth of their expected interactions, purchasing patterns, expectations, and much more fall into the realm of customer intelligence. As with any personal or business relationship, the more we get to know and understand others, the better we can communicate with them. The more positively and appropriately we approach our communication efforts with customers, the more likely that we will succeed in effectively serving our customers. Customer intelligence takes market segmentation a step further. Remember, market segmentation means dividing customers into groups with shared characteristics; customer intelligence examines not just today’s customers but also lapsed customers. Finally, customer intelligence is continually being developed and added to as new information or trends are discovered. Methods of Communication Five main methods of communication are used in effective customer service interaction. 1. Listening: The ability to hear and understand what the speaker is saying. 2. Writing: Communicating by using the written word so that others can understand the intended message. 3. Talking: Speaking, using words and terminology that others can comprehend. 4. Reading: The ability to look at and comprehend the written word. 5. Nonverbal expression: Tone and inflection of voice, facial expressions, posture, and eye contact. Nonverbal communication can contradict the message conveyed through another method of communication. All methods of communication are used in customer service. Customer service providers must continue to improve their communication skills. Different environments place greater emphasis on different methods of communication, but listening is thought by many to be the most important method of communication. Listening To listen to your customers is to show them that you care about and respect their questions and concerns. It is not easy to be a good listener; it takes practice and dedication to improve your listening techniques. Listening is a skill that must continuously be developed. listening The ability to hear and understand what the speaker is saying. writing Communicating by using the written word so that others can understand the intended message. talking Speaking, using words and terminology that others can comprehend. reading The ability to look at and compre- hend the written word. nonverbal expression Tone and inflection of voice, facial expressions, posture, and eye contact. Nonverbal communication can contradict the message conveyed through another method of communication. “Learn to listen. Opportunity could be knocking at your door very softly.” Frank Tyger Communications in Customer Service 75 Several barriers to good listening exist. A listener may be distracted from what is being said, may have a closed mind to the speaker and the message, may not stop talking, or may be lazy and unwilling to make the commitment to be a good listener. Many people believe that we have shorter attention spans because of the visual environment in which we live. We have become so accustomed to commercial interruptions and the pause button on our remote that we find it difficult to pay attention to a speaker without allowing our minds to drift to other things. The best way to keep your mind focused on the speaker and to avoid becoming distracted is to pay attention. We can think about 10 times faster than we can speak, so frequently we have processed what speakers have said and are waiting for them to catch up with us. By focusing on speakers and on what is being said, we are less likely to miss the messages being delivered. We must also avoid becoming visually distracted. The clock on the wall, the cut on your finger, what is happening in the hallway, and your daily To-Do List are all tempting diversions. Visual distractions may be very appealing because they require little effort to receive and may pro- mote new ideas and thoughts, all of which take away from our ability to really hear what is being said. The closed mind is a tremendous challenge to listening. No human being is without ideas, beliefs, and values. Those things that we think and believe may prevent us from really hearing what someone is saying. A good listener must consider what is being said and avoid jumping to conclusions. When we open our minds to new ideas, we have the opportunity to learn new things and to hear different perspectives. Listening requires the listener to stop talking and to hear what the speaker is saying. It is not uncommon for communication problems to arise when the speaker is trying to convey the situation but the listener interrupts before the speaker is finished. It has been said that humans were given two ears and one mouth because we are supposed to listen twice as much as we speak. Putting that into practice is not as easy as it sounds. When listening to someone, allow the speaker to complete the thought before giving your response. Be an observer. Watch for pauses in the speaker’s delivery that may indicate that the speaker is finished speaking. Also, wait until the speaker has stopped talking before you determine your response. A good listener 1. Conveys sincerity 2. Does not interject his or her own thoughts 3. Nods head 4. Does not finish the sentence for the speaker 5. Paraphrases what was said 6. Leans toward the speaker 7. Shares positive comments 8. Shows good eye contact 76 Chapter Six To improve your listening skills, try the following: 1. Focus on the speaker and what he or she is saying. 2. Look at the speaker and make eye contact when possible. If you are listening on the telephone, make notes as you listen. 3. Listen with an open mind. 4. Rephrase what was said to clarify that you understood the intended message. 5. Control your body language. Do not show impatience or disapproval. A good listener knows the joy of sharing and communicating with others. Work to become the best listener you can be. Voice Inflection as a Customer Service Tool Many communicators have a hard time conveying their spoken message to others. If others frequently ask you to repeat what you said, cut you off before you are finished speaking, or do not take you seriously, the problem may be the way you use your voice. Voice inflection is a variation in the pitch, timing, or loudness of the voice. Pitch is the highs and lows of the voice. A national study has shown that some of the most unpleasant voice characteristics of Americans are talking in a whining, complaining, or nagging tone; a high-pitched, squeaky voice; a loud, grating voice; mumbling; and talking too fast. Vocal problems are amplified by the telephone. Your voice and message reveal some very important characteristics about the person you are. Some of the characteristics revealed are Level of job satisfaction Attitude Gender Education Knowledge level Speed that you work and react Confidence Practice good listening skills. The next time a coworker stops to talk with you, practice good listening skills. Look him or her in the eye, nod your head, let the person finish his or her sentences, and repeat what was said to you. Your coworker will think that you cared about what he or she was saying, and you will be practicing an effective customer service tool. Give it a try! Job Link voice inflection A variation in the pitch, timing, or loudness of the voice. pitch The highs and lows of the voice. Communications in Customer Service 77 The part of the country you are from Status Energy level Mood Many people believe that our voices reflect our personalities. To illustrate the power of voice inflection, try the following exercise. Read the following sentence in your normal voice: John solved the software problem. Repeat the sentence as a question, then as a secret, and then with surprise. The message conveyed using different voice inflection should have been different each time it was read. The voice inflection that we use can send different messages depending on where we place emphasis. To improve your voice inflection, try the following: 1. Tape yourself. 2. Ask friends for their honest assistance. 3. Make a conscious effort to improve. 4. Keep listening to yourself. It is easy to slip back into old habits. Excellent voice inflection takes practice! Telephones and Customer Service When you are on the telephone, you are selling yourself. A large percentage of customer service interaction takes place by phone. Due to this fact, customer service providers must have outstanding telephone skills. When communicating with customers by phone, the advantages of face-to-face communication do not exist because there are no visual aids or body language. Instead, the communicator must depend on the listening skills, the ability to respond effectively to questions, and voice inflection. The following are seven steps to answering a call successfully: 1. Smile! Your voice will sound friendlier if you have a smile on your face! 2. Answer the call with an enthusiastic and professional greeting. Your entire organization is depending on you to make a positive first impression. • Greet the caller. • Identify your organization or department. • Introduce yourself. • Offer your assistance. 3. Ask questions about anything that is not clear to you. If additional information is needed, ask for it and explain why it is needed. 78 Chapter Six 4. Give answers and assistance as quickly as possible. If you cannot solve the problem or answer the question, let the customer know what will happen next. 5. Thank the caller. Ask if you may be of further assistance. 6. Conclude the call in a positive manner. Think of every call as the beginning of a new relationship. 7. Follow up on the call to make sure that the customer is pleased with the result and to make sure that everything you promised was delivered. Organization is crucial when you interact with customers on the telephone. To become more organized, consider the following: Always have a notepad available. This is handy for making notes and jotting down the customer’s name. Know the company’s policies or have a reference close by. Tell the customer your name. Practice great listening skills. Check back with the customer to ensure that something was really completed. Words to Use/Words to Avoid When dealing with customers, some words are more positive and appropriate to use. Many of us use very negative and demeaning words when we speak with others. If we interact with customers, we must rework our vocabulary so that we use words to create a positive environment. Some customer service providers find it helpful to list Words to Use/Words to Avoid on a card so that it is available for easy reference. Sit down with your team and discuss the concept of Words to Use/Words to Avoid. Within your team, create your own list of 10 words to use and 10 words to avoid. Customize your words to fit your specific business. Consider the cus- tomers that you serve as you choose your words. When your list is completed, duplicate the list and have each team member strive to use or avoid the words. In two weeks, meet with your team again and discuss how effective or ineffec- tive the words have been as you have dealt with customers. Hopefully you will find that you are having more word success with your customers due to better word choices. TEAM TIME Communications in Customer Service 79 Power Phrases By using power phrases, we can send the message to our customers that they are very important and that we value their opinions. Here are 10 examples of power phrases: 1. Due to your specialized knowledge. 2. What a unique suggestion! 3. I’d like your considered opinion. 4. Please. 5. You are absolutely right! 6. If I could borrow just a moment of your time. 7. May I? 8. As you, of course, know. 9. I’d like your advice. 10. I would appreciate it if. Using power phrases in our conversations with customers can express to them that their ideas are important. We can also let them know that we recognize the value of their time and expertise. Words to Use Words to Avoid Please Can t Yes May I Don’t Consider this You have to Do Don’t tell me no Let’s negotiate Won’t Will Not our policy Thank you Not my job You Profanity Us Vulgarity Appreciate Problem Can Sorry Use customer’s name Love slang (honey, etc.) Would you like We’ll try Opportunity Haven’t had time Challenge I don’t know Regret Hang on for a secondNever 80 Chapter Six Power of Eye Contact Eye contact is always important when we are communicating with others. Eye contact is allowing our eyes to make visual contact with someone else’s eyes. In our culture, eye contact conveys sincerity and interest. Avoiding eye contact may suggest a lack of concern or lack of honesty. Our eyes can also convey compassion and caring. Customers may perceive that a cus- tomer service provider is not interested in what they are saying if they do not periodically make eye contact with the customer. Even when a customer service provider deals with customers by telephone, he or she must be concerned with eye contact because of interaction with internal customers. When dealing with people from other cultures, customer service providers should be aware of cultural differences. In many other cultures, eye avoidance is a sign of respect. Be sensitive to others, but use eye con- tact whenever possible. Appeal to the Senses in Communication When attempting to communicate with customers, it is helpful to appeal to as many senses as is possible. A waiter in a restaurant can create a dramatic picture of a food item if he describes it vividly for you and then shows it to you. He is appealing to your senses of sound, sight, and possibly smell. The combination creates more impact than appealing to just one of the senses. An example of this in customer service is when a customer has brought in a bill that he or she believes is incorrect; it would be helpful to show the customer the billing method and to describe how the bill was determined. The more senses we appeal to, the greater the possibility that customers will understand our message. When customer service providers work exclusively on the telephone, they may appeal to additional senses not only by clearly explaining to the customer the answer to their concern but also by providing written documentation of what was discussed. This documentation could be e-mailed or mailed as a follow-up to the phone conversation. Communication and Technology The customer service industry has been greatly impacted and enhanced by technological advances. Customer service providers must familiarize themselves with the technological opportunities that they have available to them. Six main areas of technology have emerged as being impor- tant to the customer service industry. The Internet, e-mail, automated phone systems, voice mail, fax machines, and texting are actively in use on a daily basis. Customer service providers must become proficient in using these eye contact Allowing our eyes to make visual contact with someone else’s eyes. Communications in Customer Service 81 technologies so that they can enhance their productivity and ability to serve the customer efficiently. Internet The Internet has become an important part of most consumers’ everyday life and its usage grows daily. Any company serving customers must not underestimate its importance. Customers go online to research potential purchases, comparison-shop, get answers to questions, make purchases, check order status, check warranties, and talk to friends and acquaintances on Facebook. The list goes on and on! As customers continue to exercise their desire to use the Internet as a customer service tool, organizations must continuously increase and improve the information and services offered. A company’s website can be an important customer service offer- ing. Web addresses on products must be accurate, information on the site must be attractive and up-to-date, and the site must be easy to navigate. An excellent website can actually save a company vital customer service dollars and can complement other technologies offered to the customer. A customer desiring to place an order by phone may hear a message while they are waiting on hold that invites them to place their order over the Internet. At this point, the customer may make a decision to become a coproducer and to look up the Web address. They will likely go online while they are still holding on the phone line. If they can get to the website easily and can see how to place an order, they will likely do so. The cus- tomer is served, the order is placed, the customer did not hang up in frus- tration, and was served in a manner that they hopefully feel great about. In the end the company can count that customer as being served efficiently. Electronic Mail Many businesses have incorporated electronic mail programs into their computer systems. Electronic mail, or e-mail, has in many cases eliminated the need for the paper memoranda that clutter employees’ mailboxes, desks, and trashcans. It has also shortened the time spent on communications between people and departments. E-mail is probably most beneficial when we are interacting with both internal and external customers. A response that previously would have taken a few days to flow through the company mail system can now be delivered almost immediately. As with other com- munication technologies in use in customer service, e-mail requires that the user understand how the system works. Numerous companies are send- ing e-mails to external customers to confirm orders, announce shipping dates, share warranty information, and extend special offers, and the list goes on. One new reality of using e-mail to communicate with customers is that the expected response time has gotten so short that customers may be waiting at their computer for a response. This can sometimes result in 82 Chapter Six unmet expectations on the part of the customer. Therefore, customer ser- vice providers must strive for the quickest response time possible. When using e-mail, users should become familiar with the usage policies of their organizations. There are several practices that are considered appro- priate among all e-mail users. The following are some of the most common: Never type in uppercase. Using capital letters is considered poor etiquette and is harder to read. Remember to periodically clean out your mailbox. By cleaning out your mailbox, you will be sure to discard old mails and will be reminded of what is current and pending. Check your junk mail periodically. Some e-mail filters may direct important correspondence there incorrectly. Avoid sending personal messages over the system. When you are communicating electronically, you are usually using someone else’s resource. You may also accidentally send your message to the wrong mailbox. Even a secured message can be broken into. Since e-mail has no provision for voice inflection, it is incapable of showing emotion. Some users like to use emoticons, or icons that add emotion to the screen, to add personality to their messages. Books are available that show how to create emoticons. Most e-mail can ask for confirmation that mail has been received. Use this feature whenever possible. E-mail has added a new dimension to the challenges of communicating with both internal and external customers. Familiarize yourself with the system in your organization. Automated Phone Systems Anyone who has called a 1-800 line has undoubtedly interacted with an automated phone system. Schools, small businesses, and doctor’s offices now use some type of automation as a part of their phone system. One huge benefit of an automated phone system is that it replaces the human that used to have to respond to all incoming calls, answer questions, and then connect the caller to the appropriate office. These systems can save payroll dollars and time and can increase efficiency. Unfortunately, the average customer probably has at least one horror story of being caught “in the system.” Companies that use automated phone systems should check the system—essentially call themselves on a regular basis. The volume of the automated speaker or music should be set at a pleasant level. The menu should be accurate and as concise as possible. A system that has a voice recognition feature should actually comprehend the average caller’s voice. All customer service providers should be prompted to pass along any feedback that they receive from customers on problems or potential glitches in the automated system. The use of an automated phone system can be cost effective and an asset if managed properly. Communications in Customer Service 83 Voice Mail Most corporations have some type of voice messaging system in place. Customer service providers must be comfortable using their customers’ voice mail systems and must understand their own system. Voice mail systems provide customers and customer service providers with wonderful opportunities for interaction. When customers are not immediately available, messages can be left to provide faster feedback. For customers, voice mail systems can allow their calls to be answered faster and the customers know that either the calls will be answered soon or they can leave a recorded message detailing their situation. When leaving a message on voice mail, practice the following steps to increase customer responsiveness: 1. Speak clearly and slowly; identify yourself, your company, the day and date, and the time. 2. State the reason for your call. 3. Suggest to the customer what the next step should be. Does he or she need to call you back or wait for more information? 4. Leave your name and the phone number where you can be reached. You have already given the customer your name; but, in case he or she did not write it down, give it again with your phone number. 5. Close with a positive farewell. Remember that when leaving a recorded message, time may be short, so be as brief and to the point as possible. Customers may become frustrated with having to talk to “a machine” when they have a question or problem. When answering complaints about voice mail, do not dismiss the complaint as being unimportant. Ask your customer questions so that you can find out what really went wrong. If the customer claims that the system is not working, call it yourself. The best way to find out how well something is working for your customer is to become the customer. If you find that something is malfunctioning in the system or that the system is awkward to work with, share the infor- mation with others who can make changes. Sometimes the problem is easily corrected. The music playing in the background may be too loud or may not be tuned in well, an out-of-date holiday greeting may be played, or the voice on the recording may be irritating. Fax Machines Fax machines have become necessary fixtures in most offices; but, surprisingly, many people do not know the basic guidelines for using them. When using a fax machine, a fax cover sheet should always be used. A fax cover sheet does not need to be fancy but should include several pieces voice mail A system in which a spoken message is recorded and stored in the recipient ,s voice mailbox. The recipient can later retrieve the audible message. 84 Chapter Six of key information. Include the following: your name, title, department, company, address, phone number, fax number, number of pages in your fax (including the cover sheet), and an introductory message. If the information you are faxing is confidential, place a warning statement or disclaimer on the cover sheet. The fax cover sheet is the first impression that the recipient has of your company. If your company does not have an official fax cover sheet, create one including all of the pertinent information and possibly your company logo. It will not take long to make it, but the positive impression will be long term. When faxing information, strive for accuracy. Double-check the number you are calling. A fax will not go through unless you reach another fax machine, and it is unlikely that you would reach another machine if you dialed incorrectly, but it could happen. Make sure that the faxed information is readable. If the print is too small to read easily, enlarge it before faxing. If you have had difficulty in receiving responses after sending a fax, try using a broad-tipped pen and writing ATTENTION or IMPORTANT across the cover sheet. A faxed signature is in many cases considered as valid as a witnessed signature. This can really shorten the time it takes to do business, but it also places a considerable amount of responsibility on the parties involved. Whenever possible, fax information after hours. Customers will be pleased because you will not be tying up their machine during peak usage; you will also save on long-distance costs. Finally, make sure that your fax machine is well maintained and that it has an adequate paper supply. A difficult-to-read fax does not speak well of your company. Texting An emerging method of communication that businesses are using at an increasing level is texting. Customers’ use of their cell phones as their personal “communication central” has gone up dramatically over the last few years. Businesses need to create a method to help customers to communicate in the method that they prefer. This may be by using their cell phone and receiving or sending a text. Numerous businesses have identified effective methods of incorporating texting into their system of doing business. The local pharmacy may send customers a text to indicate that their prescription is ready. A customer may request or confirm an appointment by text. A bank may text customers their available balance on a regular basis. So many new examples have emerged of businesses creatively using this technology. Since not all customers wish to receive texts or may not have affordable texting plans, businesses should never assume that all customers want to communicate in this way. The exciting opportunity that now exists is that it is one more way to serve customers in the manner that they wish to do business. Communications in Customer Service 85 QUICK QUIZ 1. Customer service providers must be proficient communicators. T or F 2. Customer intelligence is the process of gathering information; building a historical database; and developing an understanding of current, potential, and lapsed customers. T or F 3. Relationship marketing rarely has a positive impact on business. T or F 4. Identifying why a customer has lapsed can help a business to make a positive change. T or F 5. A good listener plans his or her answer while the speaker is talking. T or F 6. The way you use your voice does not significantly impact how a message is received. T or F 7. Taking notes during a phone interaction can be helpful in becoming more orga- nized as you attempt to address customer concerns. T or F 8. Can’t, never, don’t, and you have to would not be considered words to use. T or F 9. Eye contact can convey sincerity and interest. T or F 10. E-mail is replacing face-to-face commu- nication with both internal and external customers. T or F“Questions persuade more powerfully than any other form of verbal behavior.” Neil Rackham communication customer intelligence eye contact listeningnonverbal expression pitch reading relationship marketingtalking voice inflection voice mail writing KEY TERMS Developing excellent communication skills can give a customer service provider the best opportunity to communicate with customers in a manner that encourages understanding. The effective incorpora- tion of the five methods of communication—listening, writing, talking, reading, and nonverbal—into our daily lives can provide us with the best means of communicating positively with our customers. 1. List four words to use and four words to avoid. 2. List and define the five methods of communication. 3. What factors can cause people to have poor listening skills? 4. What characteristics can an individual’s voice reveal about him or her? 5. Explore some tactics for recording information received by telephone. What procedures does your company use? 6. How can the development of customer intelligence enhance relationship marketing with specific clients? OPPORTUNITIES FOR CRITICAL THINKING 86 Chapter Six 7. How should you respond if a face-to-face customer refuses to maintain eye contact? 8. How do you view voice mail systems as a customer? As a customer service provider? 9. What information should be included on a fax cover sheet? 10. Investigate the privacy issues related to e-mail. SKILL BUILDING Listening The need for outstanding listening skills is recognized by most customers and their ser- vice providers. One of the biggest obstacles to the development of effective listening skills is a poor self-awareness of our own listening abilities and habits. Individually or in a group, have someone read the following story aloud. After it has been read, try to answer the accompanying listening comprehension questions from memory. Do not suggest that the listeners take notes, but they may if they initiate it. The reader should read at a normal pace. Kendall needed to go to the store to pick up a few items for her dinner party. Before she left, she decided to make a shopping list so that she would not forget anything. Unfortunately, she could not locate any paper so she wrote her list on a sack from the 5 & 10 Drug Store. The first item she listed was lettuce, but two heads or one? One would be sufficient. She also needed steaks. Of the eleven people she had invited, only eight had responded to the invitation. Kendall’s friends Jacob and Andrew did have a reputation for just showing up, so she determined that she should buy food for two extras. This meant that she should buy ten steaks. She also needed potatoes, car- rots, bread, milk, sour cream, green beans, and two dozen eggs. Kendall considered garnishing her salad with tomatoes but decided against it. She thought that her list was complete but looked in her refrigerator to be sure. One final item that she needed was strawberries for the dessert. Off to the store she went. Try to answer the following listening com- prehension questions, recalling the story that was just read. 1. Who was having the dinner party? 2. How many had confirmed that they were coming to the party? 3. What was on the shopping list? 4. What was the list written on? 5. What type of meat was being served? Check your answers with the story. If you answered correctly, you are probably a good listener. If you were unable to respond accurately to the questions, you may need to work on improving your listening skills. Complete the following listening self- assessment to evaluate yourself as a listener. 1. List four of your best qualities as a listener. 2. List four of your most common listening weaknesses (mind wanders, etc.). Rank them from worst to best. 3. How long is your average attention span? 4. List four qualities of outstanding listeners. 5. List any outside distractions that inter- fere with your ability to be an effective listener. Examine the answers that you gave to the listening self-assessment questions. Now that you have identified your listening strengths and weaknesses, you can begin to establish an action plan to become a better listener. Write Communications in Customer Service 87 Mystery Shopper Customer service and satisfaction can be difficult to evaluate. One method of evaluating service levels is through mystery shopping. You may know someone that periodically “shops” a business and then writes an evaluation. If you do an Internet search for mystery shopping, dozens of websites pop up offering employment, sample surveys, and reasons why mystery shopping is important. Mystery shopping is important because it allows a business or upper management to get a real-life evaluation of how well a business functions when it does not know it is being watched. Most employees can recall a time when “the big boss” was visiting and the employees were instructed to be on their best behavior. While this is a common part of the way that many businesses function, it does not provide a realistic assessment of how customers on a daily basis are treated and how they may perceive the business’s service levels. CHALLENGE Challenge Objectives 1. To create a comprehensive questionnaire for observation of customer service. 2. To administer the questionnaire using an observational method. 3. To compile the results of the mystery shopping activity into a usable collection of information. Assignment Identify a type of business to evaluate for your mystery shopping activity. Create a comprehensive survey for your use as you “shop” your businesses. Your survey should include at least 10 questions relating to a variety of customer service questions relevant to the industry you are shopping. You may want to refer to the sample question topics for inspiration. Organize your survey in a methodical manner and use a separate form for each business you “shop.” These completed surveys will document your results. three specific goals that you can work toward to improve your listening and a timetable for the accomplishment of your goals. Outstanding listening skills can be the determining factor between an average customer service provider and an outstanding one. Happy listening! Ethics in Action You are the owner of a successful construction company that specializes in custom homes. You have been very busy the last few years. While you are grateful for the success, you no longer can handle every issue for every customer. About 11 months ago you hired a great guy to assist you and work with your customers. You have been very generous with this employee and included him in the company insurance plan, and gave him a company vehicle and considerable flexibility. He is currently working with about eight customers with homes at various degrees of completion and they all love him. To them he is the “face” of the company. Today he very unexpectedly came in and told you that he was going to work for a competitor. He said he appreciated the opportunities that you had given him but that he had to do what was best for his family. He told you that this would be his last day and that he would bring you the keys to his company vehicle as soon as he got his wife’s car out of the shop. How do you respond to him? What will you tell the customers that he has been working with? 88 Chapter Six 1. T 2. T 3. F 4. T 5. F 6. F 7. T 8. T 9. T 10. T ANSWERS TO QUICK QUIZ Sample Question Topics Physical appearance of the business How quickly you were greeted Ability of customer service representative to answer product questions Professionalism Suggestive selling Pace of the transaction Detracting factors Odor Appearance of employees Physical layout Temperature Parking lot Adequate lighting Availability of parking Feeling of safety Courtesy of customer service representative Knowledge of customer service representative How the customer service representative handled the situation Overall feeling of satisfaction Other comments about your customer experience If you would do business with this company again If you would recommend this company/product to others And so on Presentation After you have shopped your businesses, review the results. Prepare a fact sheet for each business evaluated. Your fact sheet should provide clear information and any pertinent details that further explain the responses. Fact sheets should be typed, well organized, and professionally written. Remember, mystery shopping is a tool so that a business can have another set of eyes and experiences. The goal is to have a better understanding of how the business is really serving its customers. You may find that you enjoy being a mystery shopper and want to consider it as a possible career opportunity! 89 CHAPTER OBJECTIVES Coping with Challenging Customers Remember This Nothing gives one person so much advantage as to remain cool and unruffl ed under all circumstances. Thomas Jefferson In this chapter, you will learn how to List reasons that customers are challenging. Explain the five tips to keep from creating challenging customers. Explain the productive nature of empathy. Define responsibility check. Discuss what to do when you make mistakes with customers. CHAPTER SEVEN 90 Chapter Seven Who Are Challenging Customers? As we interact with others in our daily lives, we become painfully aware of the fact that some individuals are easier and more enjoyable to be around and to spend time with than others. Those individuals who, for one reason or another, “bother” us are the people that we probably attempt to avoid. Unfortunately, in business, we cannot avoid our customers. In fact, we are frequently required to spend the greatest amount of our time with those customers that we find the most challenging. Who are challenging customers? Challenging customers are those customers with problems, questions, fears, and personalities that require us to work to achieve true communication. Because all individuals have their own unique personalities and sets of past experiences, individuals will not find the same customers challenging. Although challenging customers may be difficult to interact with, the reality is that they are still our customers and our overall goal is to provide them with excellent customer service and a feeling of satisfaction with their experience. Why Are Customers Challenging? Customers may be seen as challenging for a wide variety of reasons. They may have personalities or communication styles that we find difficult to interact with. Thus, customers may be seen as challenging without having done anything specific to us. Customers may be perceived as challenging because of any or all of the following reasons: They do not speak your language. They do not have expertise or an understanding of the specific product or situation. They may be openly hostile. They are visibly upset about something (and it may not have anything to do with you or your company). They are very quiet and noncommunicative. They show an attitude of superiority. They are impatient. They imply that they are doing you and your company a big favor for doing business with you. They appear to embody the type of person that you have a personal bias against. They are so nice that you hate to have to give them bad news. They are extremely angry. They have difficulty in making decisions. Everyone is someone’s challenging customer. Customers want to believe that they are the most important persons in our lives at this moment. challenging customers Those customers with problems, questions, fears, and personalities that require us to work to achieve true communication. Coping with Challenging Customers 91 As we strive to provide excellent customer service, each customer should be the most important person at the moment. Challenging customers are never challenging by accident. They come into our interactions with past experiences, perceptions, expectations, frustrations, the stresses of daily life, and the desire for us to show that we value them as our customers. Customer service providers also bring their own unique sets of ideas to an interaction. The difference between the two is that the customer service provider is responsible for building the bridge of communication. Are You Creating Challenging Customers? Some customers are just challenging, no matter what we do or do not do for them. Most individuals who work with the public believe that they do a good job of interacting with their customers, but the reality is that at times we may create many of the customer problems that we experience. While we should be thankful for the customers who are for the most part happy and cooperative, our mannerisms or comments may “rub them the wrong way” or really offend them and cause them to become irritable or uncooperative. Five Tips to Keep from Creating Challenging Customers 1. Respect the customer’s time: Always work at peak efficiency. It is easy to fall into a laid-back manner of dealing with those that we feel comfortable with. Stay focused on the customer. 2. Do not impose your bad or negative mood on anyone else: Everyone has a bad day once in a while, but customers should never be able to tell that you are having a rough day. Both customers and customer service providers have problems, but customers do not enter into the customer experience to hear what is going on in your life. People will avoid dealing with you if you earn the reputation of being moody or having up and down days. Do not neglect your interactions with your internal customers. It is not enough to be nice to your external customers and then to treat your coworkers negatively. Frequently, if you immerse yourself in doing your job and being positive, you will forget what was bothering you and will have a better day than you expected. 3. Recognize regular customers with a smile and try to learn their names: Customers must value the experience they have by doing busi- ness with your organization. It is not too much for them to expect that you would remember them from one interaction to another. Giving someone a look of recognition is a great place to start. Recognizing customers starts with deciding that you are going to make the effort to do it. Everyone feels more welcome and a part of things if they think “The best bridge between despair and hope is a good night’s sleep.” E. Joseph Cossman 92 Chapter Seven that someone else recognizes them. Try for one week to call everyone possible by name, including your internal customers, and you will see positive results. You may increase the morale in your work area and you will end your workday feeling like you have a lot of new friends! People usually choose to do business with people they like! 4. Avoid destructive remarks: Insults or little “zingers” that seem like creative and “smart” responses may seem appropriate and may give you the satisfaction of having the last word and make you feel like the winner now. In the long run, they will make you the big loser. Some customers may seek ways to get back at you, and others may avoid you and your company because they were hurt or assume that the entire organization is as rude as you were. The Golden Rule is a good one to follow in this situation. If you would not want someone to say it to you, do not say it to them. In the long run, destructive remarks are just that, destructive. 5. Show initiative: Show customers that you are willing to complete a task or go the extra mile for them. Laziness abounds in our society today. What a refreshing experience to do business with someone who offers to do a little something extra or to carry through a project to the end. Customers may not expect to work with someone with initiative, so you will be a hero in their eyes. Characteristics of Challenging Customers Challenging customers can be categorized in many different ways. The following are 10 characteristics of challenging customers. Remember, challenging customers are frequently challenging because of who we are, not who they are. Sit down with your team and discuss the ques- tion, “Are you creating challenging customers?” Attempt to be honest in your assessment. Most organizations have challenging customers; the difficulty is identifying whether or not you are creating them. Refer to the five tips to keep from creating challenging customers as you conduct your discussion. If your team determines that you may be creating challenging customers, develop an action plan to stop doing so. Sometimes the easiest way to stop having to deal with chal- lenging customers is to stop creating them! TEAM TIME 1. Language and/or cultural barriers: As our society continues to include people from other cultures, we will increasingly come into contact with individuals who speak English as a second language or who barely Coping with Challenging Customers 93 speak English at all. Communication can be challenging, even when we speak the same language. When attempting to communicate with others who have difficulty with English, speak slowly and clearly. Avoid using slang terms that are hard to translate. If words are not conveying the intended message, try illustrating with hand motions. Do not pretend that you understand what the customer said if that is not the case. Ask ques- tions and repeat what you understood. Try not to become frustrated. Even customers who have a hard time understanding our spoken messages deserve patience. They are still our customers. Sometimes, writing out the message makes it easier for non-English-speaking persons to understand, because they can refer to their dictionaries. Keep an appropriate language dictionary handy so that you can clarify what they are saying. If all else fails, suggest that the customer call back or come back with an English-speaking friend who can help resolve his or her situation. Identify the most common languages that are dealt with in your business in your part of the country. The languages that these customers speak may be appropriate languages for you to begin to learn. Many customer service-oriented companies are requiring fluency in specific languages as a condition for employment. Some individuals offend those from other cultures out of ignorance. Learn about the cultures of your customers. Information is readily available, and all will benefit from the insights into customers’ native traditions, ways of doing business, concerns, and beliefs. America is a melting pot of unique individuals with something to offer and with dollars to spend with either your organization or someone else’s. 2. Older customers: American society is getting older. As this fact becomes more and more apparent, it becomes important to recognize the characteristics of older customers. First of all, what does it mean to be older? Different people will give different responses. For our purposes, older cus- tomers will be defined as those customers who are 65 years of age and older. This is a significant percentage of the American population. The stereotypes of an older person as one who is incapable of making decisions and having little discretionary income are ideas of the past. Today’s 65+ customer is independent, active, self-sufficient, and living life to the fullest. When dealing with older customers, customer service providers must remember to treat them with respect and attention. Their purchas- ing power is extremely significant. Older customers may require some special attention. They may have some trouble reading fine print, may have a slightly slower response time, or may be slightly hard of hear- ing. When interacting with an older person, always show a high level of respect. Recognize the individual’s need for self-respect. While many older customers are pleased to find out that they are eligible for senior citizen discounts, some may not appreciate being informed that they qualify. Never talk down to an older person by referring to them as “little lady” or “young man.” Although you may be trying to warm up to them, such expressions just call more attention to them. 94 Chapter Seven If you notice that customers are having difficulty in reading, sug- gest that they move to a better-lit area; if they are still having difficulty, offer to read the information to them. Many older people have trouble hearing. A simple approach for helping them to understand what you are saying is to look at them while you are talking so that they can see your lips moving. Do not shout, as this draws undue attention. Do speak clearly, at a moderate pace, and do not mumble. Older customers may be unfamiliar with some current technology. This is certainly not necessarily the case, but it may be. If customers are not currently in the workforce and do not work with items such as computers, fax machines, the Internet, and cash registers, they may find them over- whelming. On the other hand, some older customers may be much more proficient than we are because they have invested time in learning new technologies. If customers seem to be unsure of how to use equipment, ask if you may be of assistance. If they accept your offer, assist them in a positive manner. If they refuse your offer, allow them to figure it out for themselves. 3. Impatient customers: People today operate at a fast pace. As we go about our daily personal and business lives, we are often attempting to accomplish many tasks within a short time. Often the challenge is not attainable. Our customers are attempting to do the same thing. The rush to fit everything in can cause customers to become impatient. When custom- ers are impatient or irritable, it is important to remember that they may be bothered by something beyond our control—a traffic snarl, a headache, or a dread of completing the task at hand. There are times when their impatience is due to something that we have done or due to an antiquated system of doing business. When calling customers on the telephone, always ask if you are calling at a convenient time. A customer who is in the middle of doing something important is likely to express his or her impatience to us and may be distracted as we talk. Emphasize to your customers that your goal is to work with them as efficiently as possible. Tell them that you have their interests in mind. Stay on the task at hand and complete their business quickly and accurately. Impatient customers may complain that you are disrupting their work or are bothering them. Strive to show the impatient customers, through your actions, that your company is worth the investment of their time. 4. Angry customers: Unfortunately, anger is a common emotion in customer service. Both internal and external customers experience anger from time to time. Anger among internal customers, if improperly managed, can create an all-out war between departments—a situation that does not promote easy internal customer service in the future. Many external customers call with customer service challenges only when they are angry. Anger can be like a dynamite waiting to explode. If not properly defused, it can cause quite a commotion. Coping with Challenging Customers 95 To respond to a customer’s anger, try to calm the customer. It is important for the customer service provider to stay calm. Angry cus- tomers have the ability to bring out anger in everyone with whom they come into contact. Ask the customer to explain his or her situation. Allow customers to vent their situation and feelings. They will feel better when they get it all out. Do not interrupt them; let them get it out, and then respond. Acknowledge the customer’s emotions, but find out the facts. As the customer is explaining, he or she may be losing some of the original fury. The customer has found someone who is willing to listen. Attempt to find effective solutions to the situation. Angry people can become abusive or may resort to the use of profanity. This puts the customer service provider in a difficult situation. Should he or she take the abuse or stop it and risk making the customer even more angry? One response to a customer’s use of vulgar language is to say, “I realize that you are upset, but I am not used to being spoken to in this way; please limit your explanation to the facts.” Always approach customers with respect, even when they are behaving in an unprofessional manner. Acknowledge their emotions; but, as quickly as possible, look for an opening to gain control of the conversation. Phrases like “I recognize your frustration . . .” or “Let’s find a positive conclusion to this situation” are lead-in sentences that may allow the customer service provider to take charge. Customer anger provides the opportunity for a new relationship to begin and can have a positive result. 5. Analytical customers: Customers who are analytical tend to need facts and like to know that they are speaking with someone who is knowledgeable about his or her product or company. They frequently take an objective approach to decision making and problem solving. Analytical people rarely show their emotions and are not concerned about your emotions. They are not concerned with whether or not you like them. Analytical customers like consistency and proof. When dealing with customers who want facts and definite answers, treat them with respect and give them what they want. Tell them how a bill was figured, what the billing dates are, when the interest rate is going up, and anything else that they ask that you can give a factual response to. Ask them if they have additional questions, and answer them efficiently. 6. Noncommittal customers: Some customers have difficulty in making decisions. They may be unwilling to commit because they are seeking information from several sources, or they may be hesitant in making a decision. Individuals seem noncommittal for a variety of reasons. They may have been too quick in the past to commit to one option and then have regretted their choice. They may have financial constraints that require them to carefully survey all options and determine the short-term and long-term feasibility of a decision. Other customers may have to consider the expectations of their superiors or coworkers who are not present but who will also benefit from the decision. 96 Chapter Seven When interacting with noncommittal customers, keep in mind that customers are not slow to decide because they want to frustrate you. They have their own reasons for being hesitant to commit. To help them to a speedier decision, detail the possible options. Ask if there is any- thing that you have not explained. Suggest that they make a decision today. If they are not ready to do this, suggest a timetable that would allow a moderate amount of time for their consideration of a decision. The timetable will give them a deadline to work toward and will dimin- ish the possibility that the information that you have shared with them will become out of date. 7. Superior customers: Some customers may present to the customer service provider the impression that they are in some way superior. It is important not to take this type of attitude seriously. Customers who show an attitude of superiority can be frustrating to interact with. They may be rude or may make condescending remarks. In reality, customers who present themselves in this manner are frequently very insecure and feel as though they can somehow seem better if they put someone else down. They want you to know how important they consider themselves. When dealing with this type of customer, the customer service provider must recognize his or her own self-worth. The temptation is strong to enter into a competition with the customer to see who really is better, but this is an unproductive waste of time, and no one really wins in the end. When possible, use the customer’s attitude of superiority to your advantage. Praise his or her accomplishments and importance. Suggest that your resolution of their situations will enhance their customer’s position. By helping the customer to see that he or she will be the winner in the end, the competition can be reduced. 8. Immature customers: It is probable that a customer service provider will have the opportunity to interact with many immature customers. A great deal of customer service centers around problem solving, and immature customers are likely to have some problems. Late or unpaid bills, excuses, or blaming others for their problems are common occurrences among immature customers. When interacting with immature customers, listen to their explanation of the situation before responding. Allow them to fully describe their problem or ques- tion. When responding, be frank about the consequences that may result from not paying bills and other similar dilemmas. If they have ques- tions, answer them fully. Your perception may be that they are asking something that “everyone knows,” but they apparently do not if they are asking. Immature customers need to know that their actions affect others. Stress the importance of your company policies and the need to treat all customers fairly and consistently. Immature customers may really not know any better than to act and react in the manner that they are sharing with you. Customers who complain about having to pay a large utility bill on time and say that if Coping with Challenging Customers 97 they pay it, they will not have any money left to go out to eat probably need a “reality check.” Be firm with them. They may not appreciate your enforcing your company’s policies now, but in the future they will learn from the experience. 9. Talkative customers: Talkative customers can be exciting to be around. They may be outgoing and may have interesting stories to tell. They are often good storytellers and may secretly enjoy hearing themselves talk. Although we may periodically enjoy being around talkative people, we must still conduct business efficiently. Some talkative customers may be difficult to be around. When communicating with talkative customers, approach them in a positive and open manner. Allow them to share their questions or concerns. Help them to stay on the subject by asking specific questions that further explain the situation. Express your interest in rectifying their circumstances. Show appreciation for their knowledge and abili- ties. Operate at a fast pace, use humor to keep the discussion focused, and ask them if they have further questions. Conclude by expressing appreciation for their patience and understanding. It is sometimes hard to terminate conversations with talkative customers; try a phrase that suggests that they are on a time schedule. “I don’t want to take any more of your limited time” may be an effective closing. 10. Customers with special needs: Customer service providers may from time to time have customers who require additional assistance because of a special need. Special needs customers include all customers who, because of individual circumstances, require our productive cooperation. It may be difficult to recognize a special needs customer, because many individuals who are viewed by society as having special needs do not perceive themselves in this way. When communicating with someone with a disability, consider the following: • If a person has a hearing loss, speak directly to the person. If they have an interpreter or assistant with them, acknowledge them but continue to speak to the customer. Speak clearly and slowly, facing the individual. Include appropriate facial expressions since people who are deaf depend a lot on facial expressions and gestures for communication cues. • If a person is in a wheelchair, try to communicate with them at eye level. Do not touch the wheel chair or any walking appliance. This would be considered a violation of their personal space. • If a person is visually impaired, never play with or talk to a guide dog; you will distract the animal from its job. • If a person has a speech impediment, be patient and listen carefully. Avoid the temptation to finish their sentences for them. 98 Chapter Seven Additionally, you should never assume someone needs or wants help—but do not be afraid to inquire politely. For example, simply say, “May I be of assistance?” As always, special needs customers should be treated with respect. Strive to understand their questions and concerns, and attempt to provide appropriate solutions. Respect: A Classic Idea that Still Works! As our society becomes more focused on the unique differences among individuals of different ages, it is easy to fall into the “generation gap syndrome.” This is the idea that individuals who grew up at different times and shared different life-shaping experiences cannot ever really communicate. This could not be a more incorrect notion! People of all ages can communicate and coexist peacefully, but the necessary ingre- dient is respect. Respect means to give someone recognition or special regard. To respect or to show respect for someone else does not minimize our own self-worth. Instead it allows the opportunity for us to learn from someone else and to grow in ways that we would not if we interacted only with those just like us. Respect is not limited to those in a different age group but should be shown to all others. By using courtesy titles like “Sir,” “Ma’am,” “Mr.,” and “Mrs.,” we show professionalism and dem- onstrate the regard we have for the other individual as our customer. If a customer does not desire to be addressed this formally, we should follow through with his or her wishes. Never show condescension. Talking down to customers, even very young ones, only makes them feel uncom- fortable and may make them angry. There is also the implication that customers are unable to understand the information that we are sharing with them. Finally, show respect for customers’ knowledge. Customers today are better informed and more sophisticated than they ever have been in history. Age, sex, race, education, and so on have no real bearing on what a customer may have an in-depth knowledge of. If we allow ourselves to recognize the knowledge of our customers, we will benefit and end up learning from them. respect To give someone recognition or special regard. Think about the customer group that you find to be the most challenging. Try to identify why that group is challenging to you. List five things that you can do to better serve that customer group. Post the list in your work area and the next time you encounter your own most challenging customer give it a try. Both you and your customer will benefit! Job Link Coping with Challenging Customers 99 Understanding the Positive Power of Empathy Empathy is the ability to understand what someone is experiencing and to take action to assist in resolving the situation. Empathy is productive. When we show people empathy, we do not express our sorrow over their situation. Instead we listen to their explanation of the situation and say, “What can we do to help you?” The main focus of empathy is problem solving. If a customer calls to say that he or she is late paying a bill because there was a death in the immediate family, he or she has obviously suf- fered an emotional experience. By showing empathy, we convey that we are sorry to hear of the loss and would like to minimize stress if we can. Perhaps we can arrange an extended due date for the billing or arrange for special financing. In either case, the customer service provider is helping the customer to resolve his or her problems rather than dwelling on them. Responsibility Check Businesses walk a fine line with regard to customer service. In most cases, a business has what the customer wants and needs, but a business must be managed with profitability in mind. Sometimes a customer will make an unjustified request for service. This request may put the customer service provider and the business where he or she works in an awkward position. Should the customer service provider provide the service and risk profit- ability or refuse to provide the service and risk losing a customer? One method for dealing with this type of situation is to perform a responsibility check. A responsibility check is assessing a situation and determining who should have responsibility and who really does have the responsibility. Sometimes a customer is unhappy with us for not doing something that was really his or her responsibility. To provide excellent cus- tomer service, the customer must be permitted to participate in the process and not just benefit from it. Accountabilities must be created and enforced. An example is a situation in which a responsibility check is appro- priate between a student and a professor. In an educational setting, the students are the customers and the professor is the customer service pro- vider. The overall goal is to provide the student with the opportunity for learning with the positive outcome of a good grade. The professor needs to keep his or her students satisfied so that they will continue to enroll in classes, but at the same time he or she must strive to maintain the integrity of the course and institution for all students. If a student/customer who has not attended class and who is not succeeding approaches his or her professor and suggests that since the student is the customer the student should receive a good grade for the class, the professor must perform a responsibility check. Whose responsibility is it to enable the student to earn a good grade? It is a joint responsibility between the professor and student. The professor must provide pertinent information, be available to empathy The ability to understand what someone is experiencing and to take action to assist in resolving the situation. responsibility check Assessing a situation and deter- mining who should have responsibility and who really does have the responsibility. 100 Chapter Seven answer questions, and test fairly. The student must attend class, read the textbook, and study. The student was not living up to his or her respon- sibility. If the student is not making the necessary contribution, it would detract from the integrity of the course if the professor gave the student a better grade. When providing customer service, all customers must be considered, not just a few. The goal in performing a responsibility check is to clarify what went wrong in a situation and to shift the responsibility to the responsible party. The shifting of responsibility can be enhanced by coproduction of customer service. A responsibility check is a positive approach to creating the opportunity for excellent customer service by requiring all who are involved to participate in the process and to take responsibility. A respon- sibility check must be handled tactfully, but it can create an opportunity for better customer service to all customers. What to Do When You Are Wrong As a customer service provider interacts with his or her customers, the possibility exists that he or she will not treat all customers as well as they should be treated. Customer service providers are only human and may be tempted to take out their frustrations on their customers, or they may make mistakes. When you believe that you have treated a customer inappropriately, try the following: Review the situation: Examine your behavior and the words that have been spoken. Try to look at the situation from the customer’s point of view. Observe the customer’s reaction: Is the customer visibly upset? Does the customer seem surprised or hurt by your actions? Admit the mistake: Whether or not it was an error in your information or judgment, it is always best to acknowledge that you are aware of it. Apologize for your actions or error: Express to the customer that you regret the problem, but do not make excuses for why it occurred. Find a solution and implement it: The most effective way to undo the improper treatment of a customer is to create an effective solution and to put it into effect as quickly as possible. Six Super Ways to Cope with Challenging Customers 1. Listen: Allow customers to express their concern or to share their side of the story. 2. Ask questions: Seek clarification of the problem. Determine the variables involved. “The journey toward excellence is a never- ending road.” H. James Harrington Coping with Challenging Customers 101 3. Show empathy: Attempt to understand what the customer is expe- riencing and take action to assist in resolving the situation. 4. Solve the problem: Determine the most appropriate solution to the situation. Use creativity and follow company policies as you seek to create a positive outcome for both the customer and your organization. 5. Follow up: Restate what has been decided and how the situation is being resolved. Ask the customer if he or she has any more questions. 6. End on a positive note: Thank customers for their understanding. Bid them farewell in an enthusiastic manner so that they remember the professional manner in which you resolved their problem. Customers are more likely to remember the end of an interaction than the beginning. Payoffs of Coping with Challenging Customers Customer service providers must think of their customers as long-term assets! Keeping in mind that it is much easier to retain an established customer than it is to recruit new customers, the customer service provider should be extremely motivated to resolve challenging customers’ problems. Customers should be made to feel better at the end of an interaction than they felt at the beginning. It is easy to take care of customers when things are going well; it is when things become challenging that difficulties may arise. We learn to deal with conflict by confronting it. When we require ourselves to develop skills or to learn new information, we are creat- ing an environment where we can become better at managing conflict. Challenging people are a reality of customer service! Knowing how to handle them appropriately can reduce both our customers’ stress and our own. By learning to cope with challenging customers, we become more effective and efficient assets to our company and the job that we were hired to perform. challenging customers empathyrespect responsibility check KEY TERMS QUICK QUIZ 1. Avoidance is an excellent technique for managing challenging customers. T or F 2. Everyone is someone’s challenging cus- tomer. T or F 3. Respecting the customer’s time is one way to keep from creating challenging customers. T or F 4. Using insults or little “zingers” shows how creative and smart you are. T or F 102 Chapter Seven 5. A customer service provider should emphasize to his or her customers that his or her goal is to work with them as efficiently as possible. T or F 6. Respect is the ability to understand what someone is experiencing and to take action to assist in resolving the situation. T or F 7. A responsibility check is assessing a situ- ation and determining who should have responsibility and who really does have the responsibility. T or F 8. Customer service providers should never admit that they were wrong. T or F 9. Showing empathy is highly unprofessional. T or F 10. There are few measurable benefits of coping with challenging customers. T or F 1. Explain responsibility check. 2. Why are some customers challenging to one individual and not to another? 3. List and explain five characteristics of challenging customers. 4. What type of customer do you find to be the most challenging and why? 5. What are some methods of response to an angry customer who becomes verbally abusive? 6. How can you end discussions with overly talkative customers without offending them? 7. Contrast empathy and sympathy. Which is more productive? 8. Share a situation in which you gave a customer incorrect information and then corrected your mistake. 9. Why is it important to end every customer interaction on a positive note? 10. What are some of the payoffs of coping with challenging customers? OPPORTUNITIES FOR CRITICAL THINKING SKILL BUILDING Coping with Challenging Customers Customers may be challenging for a variety of reasons. In some instances, customers are not doing anything to challenge us other than just being themselves. Challenging customers are a reality of professional life, especially in the customer service industry. One of the best methods of becoming more comfortable with challenging custom- ers is to practice. Resolve the following “What would you do?” scenarios. In your job as a receptionist in the inter- national affairs department, you have the opportunity to interact with numerous people each week. Even though you con- sider yourself to be a good communica- tor, you sometimes feel frustrated as you attempt to communicate with some of your non-English-speaking customers. What can you do to improve your skills in communi- cating with these challenging customers? You work in the order confirmation depart- ment of a large catalog company. Part of your job responsibility is to call suppliers to confirm the ship dates for ordered goods. You spend your entire day on the telephone and for the most part enjoy your job. Your only real frustration is that when you call a few of your customers they react impatiently Coping with Challenging Customers 103 and rush to get off of the phone. What can you do to improve your skills in communi- cating with impatient customers? In your position of residential services coor- dinator at a major telephone company, you encounter customer problems and concerns daily. While most customers state their situation and are open to your information and knowledge, you do have one type of customer that you find to be challenging. Today, you had a call from a customer angry about receiving a cancellation notice from your company due to nonpayment on the account. As you discuss the situation, the customer tells you that she thinks that it is unfair to expect a payment every month and that your rates are too high. She goes on to tell you that if she paid her bill in full and on time, she would not have any money left over to eat out. You recognize that this customer is lacking maturity; how do you respond appropriately to this and similar customers? Ethics in Action You have just made an informational presenta- tion to a group of enrollees in your new benefits program. You represent the insurance company and will only be at this location for two days. One of the enrollees approaches you and starts to critique your presentation. You aren’t sure how to react. As you are formulating a response, he starts to cry. What do you do? Quality Recognition Form A unique way to encourage employees to recognize coworkers for going above and beyond is the use of Quality Recognition Forms. Quality Recognition Forms may be known by different names, but their purpose is to create a culture where expressing appreciation and publicly noting someone else’s contribution are encouraged. Companies are using this idea in a variety of different ways. In some cases, the forms are available within a company’s internal network. In these instances, the form can be completed on the employee’s desktop computer and then submitted. Sometimes the submission of the form is to a supervisory or man- agement person and then to the employee being recognized. In other cases, it may just go to the supervisor and into the employee’s file. The same type of submission can occur with just a paper copy. The use of this type of recognition can also be used as a means for employees to receive awards (monetary, time off, extra long lunch, qualifying for a raise, etc.). One of the most important aspects of this type of recognition program is that it gets away from the usual way of doing business. Contrary to a traditional recognition system in which excellence is identified from the top down, it allows employees to cheer each other on. This creates a culture in which employees want to highlight their coworkers’ successes. This tends to be a culture that a success- oriented customer service professional wants to work in. CHALLENGE Challenge Objectives 1. To identify the criteria necessary to be recognized for excellence in quality. 2. To demonstrate the initiative necessary to complete and communicate, in writing, an observance of quality. 3. To observe the positive result that can come from recognizing and celebrating someone else’s good work. 104 Chapter Seven Create a list of criteria that you believe are important to identifying excellence in quality. They can be as broad or as specific as you like. If possible, use your current workplace as your source for evaluation. Your criteria list should have a minimum of five components; as many as ten are appropriate. Complete more than one draft of your criteria and edit it so that you express yourself in the most professional manner possible. Assignment Presentation Remove or make a copy of the Quality Recognition Form. Complete the form in full. Attempt to be as clear as possible as you explain the quality performance that you have observed. You may want to create a rough draft of your description and proofread it so that your final description is as professional as possible. When you submit your completed form, attach to it the criteria list that you created and used to identify excellence in quality. Helpful Hint: The Quality Recognition Form (the form could be renamed) is an excellent motivation/recognition tool. Think about proposing this to your own employer or company. Some companies use this within the company, sometimes delivered online, as a way for employees at all levels to recognize outstanding performances from their coworkers. Share the idea with your supervisor. It may be your way to be recognized as the professional that you are working to become! 1. F 2. T 3. T 4. F 5. T 6. F 7. T 8. F 9. F 10. F ANSWERS TO QUICK QUIZ Quality Recognition Form (Please provide enough detail for proper evaluation) I recognize for the quality achievement of Signed Dated (please circle one) • Individual • Team/Group (list team members) 105 106 Perform your own self-assessment identifying individual strengths and weaknesses. Share your own methods of self-motivation with others. In this chapter, you will learn how to Define motivation. Differentiate between needs and wants. List common motivating factors. Explain the impact that high or low morale may have on an organization. CHAPTER OBJECTIVES Remember This The reward of a job well done is to have done it. Ralph Waldo Emerson Motivation CHAPTER EIGHT Motivation 107 motivation The individual drive that causes us to behave in a particular way. What Is Motivation? Every professional is at one time or another faced with the challenge of finding the motivation to perform a task or to fulfill an obligation. Motivation is the individual drive that causes us to behave in a particular way. Motivation is very personal. Different people are motivated by different rewards, experiences, and circumstances. The motivating force that causes one individual to get up every morning would not necessarily be enough to get his or her next-door neighbor out of bed. It is because of the personal nature of motivation that managers, coworkers, and individuals are continuously seeking to develop a better understanding of what is necessary to create motivation. Motivation is important in both our personal and professional lives. Motivation may be the push that gets us started or the gasoline that keeps us going. Employees who work together will have differing levels of motivation at any given time. This suggests that coworkers will not be involved in the same set of circumstances and may have more or less desire to accomplish a task or to work more quickly. An employee who will be starting a week’s vacation as soon as his or her work is completed may be especially motivated to complete the work. His or her coworkers who do not have a vacation to look forward to may be less motivated to work hard. When motivation levels vary, it is helpful to work within a group. In this instance, the possibility exists that when one employee is less motivated, others will be more motivated. Unfortunately, this is frequently not the case. One or more of the employees may perform the bulk of the work while the others reap the benefits. This circumstance can greatly reduce motivation over time. Motivation in customer service should ideally come from manage- ment to employee. Several methods of encouragement can be implemented to keep the enthusiasm of customer service providers high. Recognition programs, suggestion rewards, and daily encouragement all help to keep customer service providers feeling good about the roles they are playing in the overall provision of excellent customer service. Some organizations create unique strategies to motivate their employees. Humor has been found to be an important part of today’s motivated workplace. Individual companies approach the use of humor in different ways, but in most instances it can lighten a possibly stressful environment. Studies have shown that laughter can be the key to increased morale and overall job satisfaction. Humorous job titles, jokes of the day that come up on screen when the computer is turned on, and theme dress days can all add humor to the professional workplace. Other companies offer their employees the opportunity to participate in snack days when all employees bring their favorite “munchies,” casual dress days, the opportunity to participate on the company softball team or to sit in company seats at a basketball game or symphony concert, 108 Chapter Eight annual company activities, monthly birthday celebrations, and numerous other creative motivational activities. The motivating force behind these activities is that they enhance the unity of the employees. They create shared experiences that can bond employees to each other. Employees who see themselves as an important part of a team are likely to feel a stronger sense of motivation. Unfortunately, this type of positive leadership is not always available. In those situations, customer service providers must take responsibility for their own motivation. Needs and Wants When attempting to understand the diversities of motivation, it is helpful to define needs and wants. Needs are our personal requirements. Some needs are instinctive, or primary, like the need for air and food. Other needs are learned, like the specific foods that we enjoy or do not care for; these needs are called secondary needs. Both primary and secondary needs are vital to motivation. Many individuals have difficulty in viewing their real needs and may confuse them with wants. For example, most adults need some form of transportation to enable them to get to work and to fulfill their obligations. They need a basic automobile or access to public transportation, but in response to their needs they may want a sleek new car. Wants are things or experiences that are desired. Wants have little relationship to needs. While the satisfaction of our needs satisfies our personal requirements, wants have little or nothing to do with what we must have. Individuals commonly desire what they do not really need. While this fact helps to drive the American economy, it may set some individuals up for disappointment if they are unable to obtain what they perceive as their needs. Needs and wants are extremely motivational. Most individuals are willing to work hard to get what they want or need. Wants may be related to our self-image and reflect a desire to display to others our success or perceived success. A salesperson who is having difficulty in making his or her commission may, upon receiving a large check, purchase a prestige watch. In this instance, the salesperson’s need to show himself or herself and others that he or she is successful may overshadow the need to pay rent. When applying an understanding of needs and wants to motivation in a professional environment, misconceptions are common. What man- agement may perceive as being the needs of its employees may in reality have little importance and may result in having little motivational effect. An employee who has a day off coming but must work overtime so that he or she can take it may obtain little or no motivational value from the day off. As frequently happens when attempting to understand expectations and perceptions, incorrect analysis may be made. needs Our personal requirements. wants Things or experiences that are desired. “There’s only one corner of the universe you can be certain of improving and that is yourself.” Aldous Huxley Motivation 109 Motivating Factors People have been trying to understand motivation for many years. Numerous studies have been conducted in the attempt to fully understand what motivates individuals. Motivation can be both positive and negative. A positive motivation would drive a travel agent to book enough vacations so that he or she would qualify for a free trip. A negative motivation may drive people focused on losing weight to starve themselves. In both cases, motivation exists. It appears that the motivation to win the trip is of a more positive nature. Some common motivating factors that have been discovered among adults are Individual respect Challenging work Encouragement from management Financial security Opportunities to express creativity Job security Opportunities for advancement Unified work environment Good benefits A project approaching completion An approaching vacation Recognition from others Positive relationship with customers While all adults may not be motivated by all of the preceding circumstances, many will find them to be driving forces that help them to stay focused and to accomplish their goals. Individuals must become familiar with their individual motivating factors. Frequently, employers fail to recognize the diversity of the factors that may motivate their  employees. Instead, they may focus too much attention on the motivation realized from the employees’ paycheck. When the company is unable to increase the employees’ pay level, the employer may perceive that the motivation is gone. Studies have shown that many adults believe that as long as their basic needs are being covered by their incomes, they will realize more motivation from other factors than just their paychecks. Recognition is another motivating factor that may be misunderstood. A manufacturing company developed a program of recognizing outstanding employees by honoring them with a special luncheon and a commemorative mug. While the employees were honored to receive the special recognition, they were disappointed to find that the company 110 Chapter Eight made no special announcements to the other employees that the special employees had been honored. The only way for the honored employees’ peers to hear about the honor was for the outstanding employees to spread the word themselves. This diminished the motivation that resulted from the honor. Understanding of Morale Morale is an individual’s or group’s feelings or attitudes toward a job, supervisor, or company. High morale may result when employees are feeling good about their work, a high level of overall satisfaction is occurring, and employees are secure in their jobs. During high morale, employee loyalty and dedication are strong. High morale may be created by supportive management; a unified work environment; and individual, department, or corporate successes. High morale may result in increased productivity. Because employees are feeling good about their situation, they are less likely to miss work and are more likely to make an appropriate contribution while they are there. Low morale is when employees and, possibly, management are feeling less positive about their work and organization. Low morale may be caused by poor management, negative employees sharing their dissatisfaction with others, a company’s uncertain future, rumored layoffs, too much work or overtime, and smaller-than-expected salary increases. Low morale can result in absenteeism, unprofessional behavior, and high turnover. Low morale may be difficult to correct. Even managers who are aware that it exists may have difficulty in changing it. A company that announces on the television news that it will be laying off a number of its employees within the next several months will probably see a decline in the morale of its employees. If employees are uncertain of their employment future, they may find it difficult to have a positive feeling toward their organization and everyone associated with it. Identify your top five positive motivating factors. Remember, motivating factors are the driving forces that help to keep us focused on accomplishing our goals. List them in order of importance to you. Place your list of motivating factors someplace that you can refer to the next time you need some encouragement. A little motivation can go a long way! Job Link morale An individual’s or group’s feelings or attitudes toward a job, supervisor, or company. Motivation 111 Self-Concept and Motivation Self-concept and motivation are linked in the process of enabling individuals to work productively with others. Self-concept is the way in which a person sees himself or herself and thinks that others see him or her. An individual with a strong self-concept is able to view his or her own abilities in a positive way. Such people do not have to turn to others for affirmation; they find affirmation within themselves. A positive self-concept results in a person with the self-confidence necessary to deal with others in a professional and productive manner. Customer service providers must work to develop a positive self-concept. Angry customers may take out their frustrations on the person who is trying to assist them in finding resolutions to their problems. When this happens, it would be easy for an individual with a poor self-concept to take the customers’ words or actions personally. A positive self-concept creates the armor necessary to keep customers’ actions in perspective. Unfortunately, many people do not have a positive self-concept. Society places a number of unrealistic examples of perfection before us. The media continue to show us that in order to be truly happy we must be  attractive, tall, thin, witty, affluent, and perfect in every way. This example sets many people up for disappointment. How can we interact with the world in a positive manner if we are less than what we see as ideal? This is a challenge that faces most Americans. Others are not influenced by the example that the media have  established but have been surrounded by negative people. Negative people can easily chip away at an individual’s self-concept. If someone tells me that I am not good, why shouldn’t I believe them? The most important Sit down with your team and discuss the concept of morale. Remember, morale is an individual’s or group’s feelings or attitudes toward a job, supervisor, or company. Try to identify what the morale level is in your department and company. If morale is high, determine what has contributed to the high level of overall satisfaction with the company. If morale is low, consider what has caused this to happen.Whether morale is high or low, create a list of the factors that have caused morale to be at that level. Discuss with your team your findings. If morale is low, consider what your team could do to raise morale. If you are fortunate enough to work for a company or department that has high morale, congratulations! Although morale is not the only determining factor of happiness in the workplace, it is an important one to pay attention to. TEAM TIME self-concept The way in which a person sees himself or herself and thinks that others see him or her. 112 Chapter Eight thing that people with a less-than-positive self-concept can do is to realize that they alone have the power to change the way that they see themselves. Methods of Improving Self-Concept Every individual has the ability to improve his or her own self-concept. While others can affect how individuals see themselves, change must begin within the individual. The first step in improving oneself is to perform a self-assessment. A self-assessment is an individual evaluation in which individual strengths and weaknesses are identified. A self- assessment helps individuals to determine where they are headed if they make no changes in themselves or in their behavior. A self-assessment must be per- formed honestly and is meant to evaluate the individual. Instances in which individuals believe that they have been overlooked or have experienced “bad luck” are not relevant during a self-assessment. Excuses and blame do not contribute to the performance of an accurate self-assessment. To begin performing a self-assessment, ask yourself the following questions and record your answers on a sheet of paper or on your computer. 1. What are my strengths? What do I receive compliments from others for having done well? What do I think that I am good at? 2. What are my weaknesses? What activities do I feel less confident in performing? Do I frequently make excuses or blame others for my failures? Do I finish what I start? Do I say yes too often? Do I pull my weight in a group activity? 3. How do I see myself? Am I dependable? Do I speak well in front of others? How is my sense of humor? What do I like most about myself? What do I like least? If I could change one thing about myself, what would it be? 4. What are my likes and dislikes? What kind of activities do I enjoy participating in? Do I like to sit in one place as I work, or do I like to move around? What subject did I enjoy the most while attending high school or college? 5. Do I establish goals and work toward achieving them? Do I take pride in successfully accomplishing a task? It is not enough to perform a self-assessment. After assessment, the individual must evaluate the recorded information. When evaluating, it is helpful to draw conclusions and to develop a plan for the future. Review the responses that you recorded as you performed your own self-assessment. Are there specific areas in which you are pleased with your responses? As you draw conclusions about your strengths and weaknesses, recognize that the future will be much more productive if you consider your strengths and weaknesses in establishing goals. Even if you were not entirely pleased with the outcome of your self- appraisal, you now have valuable new information about yourself. Most self- assessment An individual evaluation in which individual strengths and weaknesses are identified. Motivation 113 people have very little self-awareness because it is sometimes difficult to recognize who we are and how others see us. It is much easier to make excuses for our failures and to blame our circumstances on someone else. Do not dwell on any negative information that your self-appraisal may have revealed. Go forward making goals to emphasize the positive aspects of yourself and exploring ways to improve those areas that need improvement. Above all, accept yourself as the unique person that you are. Ten Tips for Improving Self-Concept When working on improving your self-concept, try the following 10 tips: 1. See yourself as a success: Every individual has a special contribution to make to society. Those individuals who see themselves as successful will as a result demonstrate more self-confidence as they interact with others. Seeing yourself as successful affects your actions. In most cases, you will behave as a successful person because in your mind you see yourself that way. By dressing the part of a successful person, you will also demonstrate to others that you pay attention to detail. A person who presents a sloppy or extreme outward appearance may send the message to others that he or she lacks credibility or is not able to fit in well with others. 2. Spend time with positive people: Positive people tend to share encouragement with those they spend time with. By surrounding yourself with positive people, you will be more likely to hear positive comments and to think in a more positive manner. Positive people see what can happen, not what cannot. An individual who looks at the bright side of life will remind us of our successes at times when we are having difficulty seeing them. 3. Eat right: One of the challenges of leading a busy life is the temptation not to eat the foods that will make us healthy. It is easy to become so involved in carrying out our responsibilities that we neglect our own health. If location or time restraints require that you frequently eat at fast-food restaurants, make the healthiest choices possible. Too much caffeine from coffee, soda, or candy bars can cause the body to experience high and low feelings. Try to drink six to eight glasses of water each day. Water will keep your body hydrated and help you to avoid the highs and lows that frequently result from too much caffeine. If the temptation to hit the snack machine at break time is too great, plan ahead by bringing nutritious snacks from home. Carrot and celery sticks, raisins, cheese, fruit, nuts, or low-fat crackers can help to keep you going until your next meal. 4. Break a task down into smaller steps: Sometimes it is difficult to dive into a project because it seems overwhelming. A good way to get started is to break the task down into several smaller tasks. If a quarterly report must be written, begin by creating the cover page. Then create the outline. Make the completion of the report a priority, but complete it a “Success is achieving your personal best.” Elaine Harris 114 Chapter Eight piece at a time. It also helps to become more organized. Make sure that your desktop, information system, paperwork, and message system are all organized so that you can operate at peak efficiency and follow through on the commitments that you make. 5. Get enough sleep: Most adults need an average of eight hours of sleep per night. Try to determine the appropriate amount of sleep for you. If you awake feeling tired, must always be awakened by an alarm clock, and tend to drag as the day goes on, you probably need more sleep. Try going to bed 30 minutes earlier each night for one week. If you are still tired, go to bed 45 minutes before your usual bedtime. By experimenting with different amounts of sleep, you should be able to recognize how much sleep your body really needs. Busy lifestyles may make it difficult to maintain a consistent sleeping schedule, but the benefits are worth it. A well-rested person usually has more patience, a greater attention span, and the ability to be more productive than someone who is tired. Feeling rested may help your self-concept to soar! 6. Reward successes: When you accomplish something that you are proud of, reward yourself! Most of us know when we have done a good job, but all too often we may forget to give ourselves a well-deserved pat on the back. Take yourself (and a friend) to lunch to celebrate, spend some time doing something that you enjoy, or smile with the satisfaction that you did something well. Some people find it helpful to keep a record of their accomplishments. This record can be a special file or list. Too  many people focus on what they cannot do instead of what they can do. By  acknowledging and rewarding our successes, we can recognize what we are good at and will have a sense of accomplishment. 7. Practice positive self-talk: Everyone talks to themselves occasionally. Unfortunately, what we say to ourselves is not always positive. By saying negative things to ourselves, whether out loud or silently, we reinforce negative thoughts and ideas. We may also begin to rehearse confrontations that we fear may occur. This may cause us to doubt our abilities and to focus too much attention on negative issues. Try talking positively to yourself. Talk out loud in your car or home and silently when around others. Tell yourself that you can handle the challenges that are placed before you. Be your own encourager! You can accomplish great things when you tell yourself, “You can do it!” 8. Do something for someone else: Doing something for someone else is often the best thing that we can do for ourselves. By helping someone else, we focus our attention on someone else’s needs. Unselfishness has long been recognized as a boost to an individual’s self-concept. Offer to help the new employee learn the ropes, hold the door open for someone, take a sick friend dinner, walk your vacationing neighbor’s dog, or do that little some- thing extra for a customer. Everything that you do for someone else gives you an internal reward. You feel good about having done something. Whether or not the act is ever repaid is unimportant. You did it; that is what counts! Motivation 115 9. Exercise!: More and more companies are recognizing the benefits of having fit employees. Even if your company does not have a wellness program in place, you can create your own individual fitness routine. When you exercise, the positive results include having more energy, fewer aches and pains, and valuable reflection time. Healthy employees tend to miss work less often and frequently approach challenges with a more positive attitude. Fitness counselors recommend that you always consult your doctor before embarking on a new fitness regimen. Finding the time to work exercise into your life may be challenging, but even a few minutes of stretching can be beneficial. A common time for exercise for professionals is in the morning. Fewer interruptions can take away the opportunity for exercise if the day has just begun. To begin incorporating exercise into your daily life, try walking instead of driving (if that is reasonable), take the stairs instead of the elevator, do stretching exercises at your desk, or take a nice walk with a friend or loved one after work. The exercise will help you to feel better both physically and emotionally. 10. Learn something new: It is never too late to learn something new. A new trend among adults is to embrace the idea of lifelong learning. Lifelong learning means that we never assume that we know all of the answers or that we are too old to appreciate new ideas. With the changes that are occurring in technology, we are seeing a need for additional training more than ever before. In addition to gaining new knowledge, learning something new allows us the opportunity to meet new people, explore new ideas, and add new skills to our resume. To begin to discover the learning opportunities around you, read professional publications, learn new software programs, enroll in classes at the local community college, pursue an advanced degree, listen to books on tape, or devote time to learning something that you have always wanted to know how to do. Even if your learning does not apply to your professional position, you are broadening your knowledge base, and that will translate into new confidence that you will take to work every day. Power of Self-Motivation Customer service is frequently a thankless job. Unfortunately, our customers usually come to us when they have problems or are upset. To achieve excellence in customer service, one must have the ability to review a situation and to motivate himself or herself. Behaviorists have studied motivation for many years, and some of their basic conclusions have a few key commonalties. The most obvious one is that we all have motivations that cause us to do what we do. It is commonly suggested that we individually have the ability to motivate ourselves. This is sometimes the only motivation that we are going to get. 116 Chapter Eight So how do individuals begin to motivate themselves? The following seven steps may provide a good start: 1. Post quotations that you find motivating at your workstation so that you can see them throughout your day. If you surround yourself with positive messages, even the most challenging customer will have a hard time breaking your spirit. 2. Follow the tips for improving self-concept. By developing a strong self-concept, you will feel good about yourself, inside and out. 3. Set goals and strive to achieve them. By staying focused on your goals, you will be more likely to accomplish them and to have the satisfaction of achievement. 4. Read motivational books or listen to motivational books on tape. Look for opportunities to listen, whether while driving, taking a walk, or working out. The motivational message will stay with you after the tape is over. 5. If you are having a low-energy day, walk, talk, and act like you are full of energy. Before long you will forget that you were tired and will feel as good as you look! 6. Develop your sense of humor and let others see it. A good laugh can help both you and those around you to feel refreshed and motivated! 7. Have fun! Motivated people accomplish their goals, feel good about who they are, and enjoy life. By following these steps for self-motivation, you will embark on the  positive journey to becoming and staying a motivated person. Serve as a motivator to others and they will in turn serve as motivators for you. Teamwork A recent USA Today article suggested that employees prefer working on teams to handling projects alone. Teamwork means working together to improve the efficiency of the whole. For many employees, the idea of teamwork is appealing because employees can experience a unified approach to projects or work that does not exist when all responsibility rests with one individual. Some of the reasons why employees prefer teamwork, according to a survey conducted for Dale Carnegie & Associates, are as follows: Indicated lower stress—72 percent Increased work quality—67 percent Improved attitude—67 percent Increased profitability—67 percent Increased productivity—66 percent teamwork Working together to improve the efficiency of the whole. “Good friends are good for your health.” Irwin Sarason Motivation 117 Teamwork does not work in every environment, but in those where it is appropriate, it can improve morale and result in a more positive and motivational work experience. Methods of Saying Thank You and Motivating Others Sometimes the most motivating action that we can share with others is to express our appreciation to them. Saying thank you does not have to be expensive, but it can have rewards that are beyond measure. While some companies do not recognize the benefits of expressing appreciation, many of the managers and companies that employees want to work for appreciate the tremendous power of recognition. People need to see that their efforts are appreciated. Letting employees know that they have done a good job or that their extra attention in completing a project was noticed can be the motivating force that encourages them to keep up the good work. Many companies do not have the financial resources to allow or may have trouble justifying the expense of a monetary reward. Employees usually do not care how much a thank you costs, but they appreciate the recognition it implies. Some inexpensive but meaningful ways to say thank you follow. Extend the lunch hour by 15 minutes. Bring donuts for the entire department to celebrate an individual’s or group’s special efforts. Send a personal note of thanks. Give the employee corporate tickets to a special event. Acknowledge employees’ contributions in a department or company newsletter. Designate a casual day in the employee’s honor. Allow the special employee to leave work early to beat rush hour traffic. Most employees appreciate any gesture of appreciation, no matter what. The motivating force behind the thank you is that employees and departments know that their efforts are noticed. Employees feel more pride in their work and in their contribution to the overall efforts of a company that is glad to have them as a part of the team. morale motivation needsself-assessment self-conceptteamwork wants KEY TERMS 118 Chapter Eight QUICK QUIZ 1. Most people are motivated by the exact same thing. T or F 2. Humor is not a motivating force in today’s workplace. T or F 3. Our personal requirements are referred to as needs. T or F 4. Wants have little relationship to needs. T or F 5. High morale can result in absenteeism and high turnover. T or F 6. People with a strong self-concept have to turn to others for affirmation. T or F 7. “Bad luck” is a great excuse for a lack of achievement. T or F 8. Individuals have the ability to improve their own self-concept. T or F 9. Reading motivational books can help an individual increase his or her self-motivation. T or F 10. Feeling appreciated does not significantly increase job satisfaction. T or F OPPORTUNITIES FOR CRITICAL THINKING 1. How can the use of humor aid in the motivation of employees? 2. What is the difference between needs and wants? 3. List some of your own needs and wants. Which needs and wants do you find the most motivating? 4. What are some of the motivating factors found to be common among adults? 5. Which motivating factors are the most important to you individually? 6. What factors can cause low morale? 7. Why do you think that so many people have a poor self-concept? 8. Perform your own self-assessment. 9. How can a healthy diet enhance an individual’s self-concept? 10. What can be done to increase self-motivation? SKILL BUILDING Human Relations The ability to interact effectively with and motivate others is an important skill to develop. By striving to improve human relations skills, customer service providers prepare themselves for positive internal and external customer experiences. Discuss and determine an appropriate resolution to the following human relations scenarios: Your company prefers that all employees adhere to policies when responding to customer requests. A few months ago, you waived the policy and gave a customer an extension on her account. Until today, you had forgotten about the incident. A different customer called to request an extension. When you denied the customer’s request, citing the policy, the customer responded by saying that he knew you had waived the policy for the other customer. How can you respond to this situation and keep both the customer and your company happy? Recently you have noticed a morale problem in your own department. Employees are arriving late to work, are taking a lot of personal calls during work hours, and are complaining about things that previously were not problems. Since you have no real authority, how can you assist in improving Motivation 119 Ethics in Action You have recently been hired to work in the Bursar’s Office of the local community college. You believe that you were hired because you have the unique ability to convey empathy while also solving the problem at hand. Today you showed up for your first day at work. One of your new coworkers has just posted a sign that says, “Poor planning on your part does not constitute an emergency on my part.” What should you do? morale and in making your department a nicer place to work? Last week you gave a customer the answer to a question. The customer was not pleased with the answer and left angry. Today, it came to your attention that the answer that you gave the customer was not correct. In fact, the cor- rect answer is in his favor. How can you contact the customer and convey the cor- rect answer while maintaining your own professionalism? Prepare a Company Newsletter 1. To personalize the student’s understanding of customer service. 2. To provide an opportunity to actively illustrate an understanding of customer service. 3. To successfully present the completed newsletter to others. Prepare a company newsletter for the company of your choice. This newsletter should be creatively presented and should be filled with suggestions about how to improve the employees’ customer service. Your newsletter should be a minimum of two pages and a maximum of four pages. Review the newsletters that you have received observing style, content, and layout techniques. Attempt to create a newsletter that you would be motivated to read. Present your company newsletter in letter quality form. Your newsletter should be typed (and illustrated if you choose). It should be creatively displayed to encourage reading. Your newsletter should include the following: 1. A recognizable logo (your own design or someone else’s) 2. A newsletter name 3. At least one article related to customer service 4. Your name listed as the editor of the newsletter Happy creating! Helpful Hint: Try using a desktop publishing or word processing program with a newsletter wizard to begin learning to create a newsletter. This is a good way to learn the program and to easily produce a professional document. CHALLENGE Challenge Objectives Assignment Presentation 1. F 2. F 3. T 4. T 5. F 6. F 7. F 8. T 9. T 10. F ANSWERS TO QUICK QUIZ 120 Demonstrate effective goal setting. Create your own job aids. Experiment with illustrating leadership without position in your own work setting. In this chapter, you will learn how to Define leadership. Perform a self-appraisal of your own leadership abilities. Differentiate between formal and informal leaders. List characteristics of excellent leaders. CHAPTER OBJECTIVES Remember This The most valuable gift you can give another is a good example. Leadership in Customer Service CHAPTER NINE Leadership in Customer Service 121 leadership The ability to influence others. Leadership Defined The customer service industry is in great need of leadership. Leadership is the ability to influence others. The most recognizably outstanding companies are known for their excellent leadership. Excellent leadership is a requirement of any business providing products or services to customers. Leadership is not the automatic result of a title; it requires the development of effective leadership skills and practice implementing them. Leadership skills are developed through the dedicated effort of individuals to improve their own abilities and to blend their own philosophies with those of their organization. No company can produce outstanding service unless the key managers are obviously committed to a positive customer service philosophy. Rules and policies are not the answer. Policies promote consistency, but they are not capable of influencing others in a positive way; and, when presented improperly, they may appear harsh and unfriendly. Leaders have a vision of what can be, and they share that vision with others around them. Excellent leaders serve as coaches, counselors, and positive examples. They have the skills to actually perform the work for which those they are leading are responsible. Leaders must promote an interdependent environment. An interde- pendent environment is one that continually reminds employees that no one individual is responsible for an organization’s success. Success comes as the result of the unified effort of all participants contributing to the whole. The idea of interdependency means that no one individual should have to carry all of the responsibility, with others reaping the benefits but not pulling their own weight. This philosophy is not instinctive. It must be created and perpetuated by the leaders of an organization. Anything less than an interdependent philosophy can breed a “that’s not my job” men- tality. When the leaders of an organization allow this mentality to set in, unity begins to fade away and disappears quickly. Leaders demonstrate empowerment. They allow their employees to make a range of decisions to assist their customers. Excellent leaders train their employees to make decisions, which benefit both the customers and the company. Employees have confidence in their own abilities and are able to share enthusiasm and knowledge with customers without fear of making mistakes. By demonstrating interdependency, a vision for the future, and empowerment, excellent leaders create a culture in which excellence in customer service is the standard. Customer service providers must serve as leaders for their customers. Through their interactions, they share information, character, values, and enthusiasm with customers. Customers need leadership just as much as employees do. Customers feel more comfortable with products and services, methods of billing, the sharing of special circumstances, and special needs if they are treated with respect by an individual who is 122 Chapter Nine capable of leading them through the process to the next necessary step. Customer service providers have a tremendous amount of influence over their customers. All individuals in an organization must work to develop their own leadership skills so that they can be as effective as possible in their roles as leaders. Know Thyself Leadership begins in our own minds. We must first see ourselves as leaders, and then others will begin to see our leadership abilities. Leadership necessitates self-knowledge. Individuals must become aware of their own strengths and weaknesses. After identifying strengths and weaknesses, customer service providers can begin to overcome their weaknesses and to refine their strengths. A self-appraisal can be performed simply. By writing down strengths and weaknesses, customer service providers can determine a starting point. To know yourself as a leader, ask yourself the following questions: How effectively do I relate to others? Do I practice excellent time management? What are my values? Is my knowledge level what it should be? Do I share my knowledge with others? Are my customers a priority to me? Am I willing to take risks? Do I establish measurable goals for myself? Do I willingly work toward department and company goals? Do I play mind games with my coworkers and superiors? Do I allow negative thoughts to cloud my attitude? Do I actively acknowledge accomplishments of others? Am I likable? Do I willingly go above and beyond the call of duty? These are not the only questions that will help customer service providers to begin to develop a self-knowledge of their leadership skills, but they are a good place to start. No one can change someone else. People may try, but, in reality, change must begin from within. A manager has the following motto hanging on the wall of his department: “I am responsible for my own success, no excuses!” This motto represents the manager’s attitude toward the responsibility of each of his employees to change themselves. The business world today is highly competitive. Fewer and fewer people are getting ahead because of whom they know. Advancement is more commonly based on an individual’s proven abilities and desire to perform. Excuses do nothing but hold people back. Most of all, customers “The first responsibility of a leader is to define reality. The last is to say thank you. In between the two, the leader must become a servant and a debtor. That sums up the progress of an artful leader.” Max DePree Leadership in Customer Service 123 do not want to hear a customer service provider’s excuses. Customers have enough of their own challenges. They want to interact with enthusiastic and well-trained customer service providers who can solve their problems. Excellent leaders are self-confident. If others criticize them, they are willing to examine the area of criticism and determine whether the criticism is deserved. If it is, they make changes and grow stronger from the experience. People want to be around self-confident people. Those with self-confidence have found approval within themselves, so they are not seeking it from others. Formal and Informal Leaders Within any organization, several types of leaders exist. A common method of defining leaders is to categorize them as either formal leaders or informal leaders. Formal leaders have the authority and power of their official position. Formal leaders have been chosen by their organization to lead others. They may have been given special training to better prepare them for their roles as leaders. Formal leaders have a high level of accountability. Because the organization has selected formal leaders and has given them specific responsibilities, they are accountable to their superiors. Informal leaders have no official authority but do have the ability to influence others. Informal leaders are not chosen by management to fulfill their roles as leaders. The people who interact with informal leaders have unofficially appointed them. Frequently, informal leadership is an assumed role. Either an individual has unofficially taken on the role of leader or others in a department, organization, or company have begun to think of and treat him or her as a leader. Informal leaders can either help or hurt the formal leadership of an organization. Informal leaders who do not support the goals of an organization or manager can undermine the efforts of the formal leadership. For example, they might use their influence to persuade other employees to be uncooperative or difficult. On the other hand, informal leaders who are supportive of the formal leadership and its goals can serve as motivating forces to encourage other employees to work together. Both formal and informal leaders can contribute to the success of a customer service program. Formal leaders can create a culture that encour- ages excellent customer service. They can empower employees to make appropriate decisions and to serve as positive examples of what the com- pany desires from employee performance. Informal leaders can also help to create a customer-friendly culture. In addition, they can motivate their coworkers to higher levels of professionalism, can improve morale, and can relate to coworkers in areas in which formal leaders may have difficulty. The employees of a large utility company were experiencing a new philosophy in the way that management wanted them to approach their business. The leadership of the organization had always demonstrated the idea that their company was the only utility provider; therefore, the formal leaders Have the authority and power of their official position. informal leaders Have no official authority but do have the ability to influence others. 124 Chapter Nine Consider the formal leaders that you interact with in your daily life. List five qualities that describe the formal leader that you most respect. Think about how you could work to develop the qualities that you most admire in this person. Observing a positive leader can be a great way to develop your own leadership skills! Job Link customers had to do business with them. This philosophy had resulted in a group of unmotivated employees who reluctantly came to work dressed sloppily, who complained about how unappreciated they were, and who basically thought of customers as a huge inconvenience. When technology allowed new competition to enter the marketplace, the management of the company had to change its philosophy on the level of customer service that it was willing to provide. Suddenly, the same managers who were casually approaching every aspect of their business were telling their employees about the importance of customer service. The employees were not interested in changing their behavior. They resisted change and envisioned retirement on the horizon. It seemed that no matter what the formal leader- ship of the company did or said, it fell on deaf ears. Out of desperation, they turned to the informal leaders whom they rec- ognized among their employees. They did have a few employees who had positive attitudes, who were excited about the new competitive approach to business, and who were highly influential with the other employees. These employees were invited to participate in updated customer service training and were encouraged to enroll in business courses at the local junior college. The employees were asked to help win over their coworkers—not in an obvious way but through their actions. While this approach did not have immediate results, over a period of time it did prove to be effective. It became accepted behavior to come to work professionally dressed and with a profes- sional attitude. The company managers firmly believed that had it not been for the influence of the company’s informal leaders, they would not have seen such a quick transition in attitudes and behavior of their employees. Coach or Counselor Leaders serve as both coaches and counselors as they lead their employees. They must be available to train, correct, and encourage their employees. In addition, they must help employees work through the challenges that may pre- vent them from doing their best work. We are exposed to leaders early in life. The earliest leaders in a child’s life are his or her parents, teachers, and coaches. It is from that early exposure that many future leadership expectations develop. Employees need excellent leaders. They need to have someone who will consistently show encouragement and who will help them to become Leadership in Customer Service 125 successful. Good leaders have high expectations, and their employees want to do things well. Excellent leaders recognize that employees want to be noticed. They are observant of employees’ efforts and notice when they are successful and when they are experiencing difficulty. Leaders know that sometimes employees gain more from experiencing failure than from always experiencing easy success. As coaches, leaders recognize the value of delegation. Delegation involves assigning responsibility, granting authority, and creating account- ability. To delegate a task to employees means that the employees know what they are supposed to do and are trained to do it. They are given the power to get it done. Finally, they are expected to do it. If they do not do it, they are confronted and required to give an explanation. Accountability is one of the hardest aspects of delegation and of leadership because many individuals find confrontation difficult. Confrontation does not have to be negative. It is simply an opportunity to obtain additional information and to remind an employee of what was expected. Good leaders notice what is happening with their employees and in their business. They are aware when things are going well as often as they notice when things are not going well. They are quick to reward others with a compliment or another form of recognition. Leaders usually reap what they sow. If employees are treated well by their leaders, they will usually treat their leaders well in return. As counselors, leaders are good listeners. They allow others to share situations and ideas. They do not interrupt. Openness to new ways of doing things is a welcome mat to new ideas and may cultivate creativity. When others share confidences, excellent leaders respect the privilege of the information and keep the knowledge to themselves. The unique combination of coaching and counseling allows a leader to assist others in achieving individual excellence. Characteristics of Excellent Leaders The characteristics that describe excellent leaders are varied. While everyone has his or her own definition of what it takes to be an outstanding leader, some characteristics are important to all definitions. Excellent leaders 1. Show care and respect. 2. Practice what they preach. 3. Have expertise in the area in which they are working. 4. Practice consistency. 5. Behave professionally. 6. Allow employees to do what they have been empowered to do. 7. Give support. 8. Demonstrate flexibility. 9. Make time for others. 10. Are personable. 126 Chapter Nine Excellent leaders are not afraid to praise the work of others. Many salespeople and customer service providers will tell you that praise makes them feel confident and competent. Studies have shown that workers with only average ability had an increase in their quality of work after their manager began a concentrated program of praising their performance and of giving constructive feedback to them in an encouraging manner. Author Joseph Klock of Selling Power magazine suggests the following guidelines for praising employees: Praise in public at every opportunity. Before you tell your people what you don’t like about what they have been doing, tell them what you do like. Provide frequent feedback. Not everyone who becomes a formal leader will demonstrate the characteristics that describe an excellent leader. These are the skills to be developed and refined to become an excellent leader. At different times, while interacting with different people, leaders discover that some characteristics may be easier to display than others. This is representative of the diversity of people and situations. An excellent leader always strives to be as effective as possible. Leadership and Goals Leadership requires finding the balance between what has to be done and who has to do it. This balance can be realized because of the establishment of well-defined goals. A goal is an identified result to strive to accom- plish. Goals must be written down. Goals that are not recorded tend to become resolutions that are easily forgotten and are rarely accomplished. Goal setting is the process of establishing goals and evaluating their importance. To effectively determine goals, one must identify what needs to be accomplished. Goals can be established for small as well as large challenges. To record a goal effectively, follow these three steps: 1. Write down the overall goal to be accomplished: Goals should be as specific as possible. 2. Identify how the goal may be accomplished: What has to happen for the goal to be successfully completed? 3. Include a date or time when the goal will be completed: A deadline gives a timetable during which the goal is to be accomplished. Just establishing goals is not sufficient. Goals must be constantly pursued so that they are accomplished. Some individuals find it helpful to record their goals on cards and to display them so that they are continually reminded of the goals that they are working to achieve. “The only limits are, as always, those of vision.” James Broughton goal An identified result to strive to accomplish. goal setting The process of establishing goals and evaluating their importance. Leadership in Customer Service 127 The establishment of goals can serve as a motivator. The reminder that a goal is close to being accomplished can be the driving force that encourages a department or individuals to continue their efforts. When establishing goals, it is helpful to begin with the end in mind. By recognizing the desired end result, individuals may be reminded of what is to come if the goal is achieved. In addition, their actions are more likely to stay on track, allowing them to be more productive. Goals are important in our professional and personal lives. Professionals should be familiar with the goals that their company has established for the organization. Professionals should also establish their own sets of personal goals. Personal goals should encourage personal growth, financial goals, and career advancement. Sometimes one individual’s goals can serve as an inspiration to others. A junior college student had a hard time making his college classes a pri- ority; he enjoyed working and had a number of hobbies that distracted him from his studies. To help himself to stay on track and to accomplish the grades that he desired, he began establishing semester goals. His goals began small. The first semester, his goal was to stay enrolled in all of his classes for the entire semester. He successfully accomplished his goal, but his grades were not very good. The next semester, his goal was to stay enrolled in his classes all semester and to finish his classes with a grade of C or better. He again accomplished his goal. He began to see that he was succeeding in areas where he previously had not been successful. From this time forward, he established goals for each semester. Every time that this student accomplished a goal, he treated himself to an activity in which he had long desired to participate. He decided on the reward when he first established his goals. Because he had accomplished goals, he not only benefited from the original goal, but he had also gone hot air ballooning, become certified in scuba diving, and taken a hiking trip to the mountains; and the list went on! His reward system required that he also have a goal of having adequate finances available to pay for his reward, but that was a separate goal that he was motivated to accomplish. One semester during a class discussion on goal setting, he shared his method of setting semester goals with the members of his class. The other classmates were inspired by his accomplishments. They were also inspired by his reward system. By the end of the semester, he had several other students who joined him as he celebrated his post-semester reward of hang gliding. They had also accom- plished their semester goals! Today, this student is a successful real estate agent and he is continuing to accomplish his goals. Creation of a Customer Service Culture Leadership in customer service is illustrated through culture, which those in supervision create. As discussed previously, culture consists of the values, beliefs, and norms a group of people share. A customer service environ- ment should have a customer service-oriented culture. If this culture does culture Consists of the values, beliefs, and norms a group of people share. 128 Chapter Nine not encourage excellent customer service, then excellent customer service will not happen. A part of the culture that the leadership of an organization can inspire is the attitude of the employees. Leaders can inspire positive attitudes even when the chips are down and things are not going as well as desired. This is the time when employees are really watching their leaders. If the leaders demonstrate that they are fearful of what is happening and suggest that they think that things are out of control, others around them will begin to feel the same way. Customer service requires much more than a positive attitude, but attitude is an integral part of the process. If the culture requires that customers be treated with respect, the result will be, in most cases, that the customers will be treated with respect. This also requires that those in leadership roles live according to the rules of the culture. Too often, the leaders of an organization act as though they are the only ones who deserve respect. When this attitude and behavior are an accepted part of an organization’s culture, little respect will exist. Additionally, if the leadership provides a safe environment for taking risks, efficiency and creativity will probably be improved. A positive customer service culture should show respect and concern for employees, be helpful in assisting in the problem-solving process, and provide positive recognition whenever possible. Benefits of Job Aids One of the common responsibilities of leaders is to provide training for their employees or coworkers. A well-trained workforce is one that is appropriately equipped to provide customers with excellent customer service. Unfortunately, one of the realities of training is that as time passes after the original training session, some of the knowledge may be forgotten. It is unreasonable to think that anyone could remember every detail of a training session, especially if he or she did not have the opportunity to use the knowledge frequently. Job aids can assist in circumventing this problem. Job aids are leader- ship tools to reinforce training. Job aids can take a number of forms. They can be anything from a concise how-to-operate card posted on the fax machine to a list of “words to use” at every customer service provider’s workstation. The important benefit of job aids is that they help people do things correctly the first time. Job aids are usually a combination of visual information and written information. They should always be concise and to the point. Unfortunately, Americans have a documented aversion to instruction manuals. This makes the value of job aids even more impor- tant. The user may never have been taught or never have read how to perform a procedure. A job aid can serve as a miniature training program. Job aids are appropriate for both employees and for customers. Any situation in which a question may be asked concerning how to do something may indicate a need for a job aid. As technology continues to job aids Leadership tools to reinforce training. Leadership in Customer Service 129 become a more important part of customers’ lives, job aids will help them to actively take advantage of the technological opportunities. Job aids can remind users to use caution when operating dangerous equipment, and they can improve the safety of a work environment. Many banks have added to their customer service offering by adding 24-hour automated account information lines. These telephone lines can provide customers with a considerable amount of information if the cus- tomers know how to operate them. If customers do not understand the operating procedure, they may get caught in a technological loop that will provide only frustration. To assist customers in using this technology, many banks send customers cards with the information line telephone number and with the specific numbers to press for the different types of account information. These cards can be posted near a telephone or can be carried in the customer’s wallet for easy reference. Job aids assist customers in being coproducers of their own customer service. Remember that coproduction is when external or internal customers participate in providing at least a part of their own service. Job aids remind customers how easily they can do something. A large travel agency went to great expense to install a new telephone system. They invested additional money by providing extensive training for their employees so that they could use all of the features offered. One month after the training was completed, a check was performed to determine which of the features was being used the most. Unfortunately, the results were discouraging. Almost none of the new features were being used. In fact, very few employees had even recorded their own voice mail messages. The managers were called in and told to go back to their employ- ees and to find out why the system was not being used. After the employees were surveyed, it was discovered that although the employees were excited about all of the capabilities of the new telephone system, they could not remember how to perform all of the specific procedures. When the employ- ees were working with customers all day, they did not have time to study the instruction manuals. After the management became aware of the problem, they created job aids to be placed on all of the telephones explaining the main functions and procedures. Usage went up almost 100 percent! When the employees could easily reference how to use the system, they began using it. Job aids are helpful in aiding the recall of all of the following: Computer command and software usage Recommended telephone greetings How to operate copy machines, fax machines, modems, or specialized equipment Steps in a problem-solving process Telephone system usage Safety precautions How to file insurance claims Anything else that employees or customers have been trained or encouraged to do 130 Chapter Nine The creation of job aids requires a degree of creativity. Leaders must look for opportunities in their own environments that could be enhanced by the addition of a supplementary leadership tool to reinforce training. Leadership without Position Unfortunately, in customer service, management and staff sometimes have an adversarial relationship. Those individuals who are supposed to act as leaders do not do so. In the area of customer service, all too often it is the managers who send their employees out to be trained in how to provide excellent cus- tomer service, while lacking the skills themselves. This can be discouraging for employees. In these instances, it is necessary for informal leaders to take a leadership role. This means that those employees who are respected by their peers and thought of as informal leaders can help to create an environment that encourages customer service, an environment that their managers may not be creating. This can be referred to as leadership without position. Sit down with your team and discuss job aids. Remember, job aids are leadership tools to reinforce training. Think about ways that job aids could be used within your department or company. Job aids help people to do things correctly and serve as a miniature training program. Create a creative job aid that will assist in the ongoing training of individuals within your organization. Think through all of the methods of explaining the information in your job aid. Try to make the job aid as simple and to the point as possible. This may require a few revisions. When you are satisfied that your job aid is creatively presented and accomplishes its goal, share it with your supervisors. You and your team may have designed an effective training tool that will benefit your entire company! Happy creating! TEAM TIME Leadership without position may require a certain degree of assertiveness on the part of employees. Informal leaders or motivated employees can look for opportunities to share their leadership skills with others in an unofficial way. Any time that individuals interact in a positive manner, an environment begins to become more unified. If employees want to have a more positive influence in their workplaces, they can be the ones to get it started. Some things that you can do to show your leadership are 1. Congratulate someone for handling a situation well. 2. Make suggestions to your supervisors of ways to help improve your efficiency. Leadership in Customer Service 131 3. Greet your coworkers with a smile. 4. Treat others as you would like to be treated. 5. Add your own positive method of showing leadership and encouragement. Your Boss Is Your Customer Too! One of the most challenging customers that you deal with each day may be your boss. Remember that your relationship with your inter- nal customers is an important key to success in serving your external customers. Your relationship with your boss can make your professional life full of joy and reward or a daily-dreaded task. Successful customer service providers are already actively attempting to understand and to meet the needs of their other customers; why not include your boss in that group? To begin to meet and exceed your boss’s expectations, try the following: Be a team player: By allowing your boss to be the coach of his or her own team, you give him or her the opportunity to lead you to accomplish organization or department goals. Find out what your boss considers to be important: By identifying your boss’s priorities, you develop an awareness of what he or she is striving to accomplish. You can then be of assistance in those specific areas. Be a collaborator, not a complainer: Nobody wants to be around someone who is always griping about something. If you disagree with how a project is being coordinated, share your ideas and take it in stride if your suggestions are not implemented. Never criticize, insult, or make fun of the boss to others. This is a reflec- tion of your own bad attitude and others will recognize it. Being a part of the solution is much more positive than being a part of the problem. Have reasonable expectations: Your boss can only do what is within his or her power and ability to perform. In most work environments, several people report to their supervisor; therefore, you are not the only person your boss must consider when making changes or assignments. Go to work each day with a great attitude and the willingness to be a professional: Every individual must take responsibility for his or her own performance. Attitude plays an important role in how suc- cessful a person is in his or her professional life. In addition, the will- ingness to embrace new technologies and systems may be challenging at first, but it will usually ignite a new enthusiasm for the customer, the work, and hopefully even the boss. 132 Chapter Nine Through excellent leadership, the management and employees of companies can more effectively serve both internal and external customers and can demonstrate that they are accomplishing the goal of providing excellent customer service. culture formal leaders goalgoal setting informal leadersjob aids leadership KEY TERMS QUICK QUIZ 1. The most recognizably outstanding com- panies are known for their excellent leadership. T or F 2. Leaders must promote an independent environment. T or F 3. To be effective leaders, individuals must become aware of their own strengths and weaknesses. T or F 4. Formal leaders have neither authority nor power. T or F 5. Informal leaders have no real power, either official or unofficial. T or F 6. Excellent leaders are not afraid to praise the work of others. T or F 7. Goals that are not written down are usually achieved. T or F 8. The values, beliefs, and norms a group of people share are their culture. T or F 9. Job aids are mini training programs. T or F 10. By congratulating someone for handling a situation well, an employee is showing leadership without position. T or F 1. Identify five qualities of a good leader. 2. List and explain four things that can be done to show leadership without position. 3. Why are many of the companies that are recognized for providing outstanding customer service known for their outstanding leadership? 4. Explain an interdependent environment. How important is it? 5. How seriously should an organization regard its informal leaders? 6. List some characteristics of excellent leaders. 7. Why are so many individuals in leadership such poor leaders? 8. Have you seen individuals who establish goals accomplishing them? Do you set your own goals? 9. What is a job aid? Create a job aid that would assist your internal or external customers. 10. What does leadership without position mean? OPPORTUNITIES FOR CRITICAL THINKING Leadership in Customer Service 133 SKILL BUILDING Leadership Most individuals need the positive influence that excellent leaders share with those around them. Excellent leaders become positive examples for others because they have rec- ognized and have worked to refine their interaction skills. By observing individuals who demonstrate positive leadership, we can identify qualities to develop in ourselves. Identify one individual who, in your opinion, is an excellent leader. List the quali- ties that this individual demonstrates as he or she interacts with others. Include such qualities as level of expertise, personality, and so on. Now examine and list your own quali- ties as a leader. Even if you are not in a formal leadership role, you probably still possess leadership abilities. After listing your own leadership qualities, compare them with those of the excellent leader that you observed. Develop goals that can help you to enhance and improve your current abilities so that you can become a more skilled leader. Ethics in Action You are an assistant manager at a local bank branch in an outlying community. You walk into a “sister” branch of the bank to make a deposit. You don’t know anyone there but as you are waiting in line you hear a torrid story, shared between tellers, of an affair that is supposedly taking place between the branch manager and another teller. Since you are fifth in line, you are not the only person that is hearing this story. What should you do? Résumé Every rising professional must at some point create a marketing piece that will help to sell him or her to prospective employers. That marketing piece is a résumé. A résumé is a powerful yet concise breakdown of your education, your job experience, and anything else that will illustrate for a prospective employer that you are the best candidate for a new job or opportunity. A résumé is not just about your past jobs; it is about you. An effective résumé is creatively written to emphasize your positive attributes and experience. Even a less-than-perfect past work history can be described in a positive way. If you have never created your own résumé, the task may seem difficult and overwhelming. Numerous resources are available to assist you in the process. Your local bookstore or library will have books on résumé writing, and a search on the Internet can provide you with helpful information and examples. Services are available to create a résumé for you for a fee. While this may seem like an easy way to have a great résumé, it can be very costly and will not allow you to easily (and inexpensively) modify it for a specific position. You may also find out after you have paid for it that the résumé that you paid someone to prepare is not any more professional than one that you could have created yourself. A few items to consider as you begin to create your own résumé are the following: Include your name. Avoid using nicknames. If your name may be considered unisex, include Mr. or Ms. to remove any question as to your sex. Include your address and phone number and use a number that would allow you privacy. (In other words, do not put your current work number if you CHALLENGE 134 Chapter Nine are looking for a new job.) If you have a fax number, include it; and definitely include your e-mail address. Your e-mail address will show that you are using current technology and will give the prospective employer a quick way to con- tact you. If you include your e-mail address, make sure that you check your e-mail daily so that you do not miss out on an important message. Create and include a job objective that describes what type of job you are seeking. When you create your own résumé, you can easily change your objective as you apply for different types of work. Your job objective should be one or two sentences. Include your work experience in reverse chronological order. This means your most recent experience is listed first working back from there. As you list your work experience, include your title, place of employment, location of the company (town and state are detailed enough), and your dates of employment. Describe what your responsibilities were in each position. If you had several positions at one company, list them all as separate jobs. Wherever possible, list your successes in your position. If you helped to increase sales or saved the company money through a new method of doing business, include that in your description. If the title of your position does not describe what you really did, include the additional duties. If you have gaps in your paid employment history, include any positive details to cover the time span. If you were a student, a stay-at-home parent, a volun- teer, or in another unpaid position, you can describe this in a way that shows you in a positive manner. If you are fluent in additional languages, have specialized computer skills, or have related activities or interests that help to qualify you for a position, that information should be included. Place this information in either the previous work experience section or in an additional information section. Include a listing of your educational background. This section should also be in reverse chronological order. Finally, on a separate page, list your references. You should always ask people if they are willing to serve as a reference for you before you list them. If they agree to serve as a reference for you, determine what address, phone number, and e-mail address they would like for you to use. Most reference pages include three or four references. Choose your references carefully; family members are not usually considered to be unbiased references. Always save your résumé on your computer or external drive so that you can use or modify it in the future. Challenge Objectives 1. To collect the necessary information to create a professional résumé. 2. To organize and design your résumé. 3. To create a professional résumé that is appropriate for the area of employment in which you would like to work. Assignment Create a résumé for yourself. Consider all of the previously listed topics as you develop a résumé that is a marketing piece that will help to sell you to prospective employers. Leadership in Customer Service 135 Presentation 1. T 2. F 3. T 4. F 5. F 6. T 7. F 8. T 9. T 10. T ANSWERS TO QUICK QUIZ Submit to your instructor your completed résumé. Your résumé should be perfect! Proofread it several times and then have someone else review it. A professional résumé is always typed, is very readable, and does not have too many fonts or very large or very small print. You should have no misspelled words or grammatical errors. All sections should be parallel. This means that the same time arrangement (reverse chronological order) and the same style headings should be used throughout. If this is the first résumé that you have created, congratulations! The first résumé is always the hardest one to write. Keep extra copies of your résumé and save it on your computer so that the next time you will just have to edit your work to update it. Helpful Hint: Microsoft ® Word ® has a great résumé wizard and several sample résumé styles that will allow you to fill in your own information for a professional résumé very quickly. 136 List the steps for establishing a customer – retention program. Create your own list of ideas for evaluating your own performance. In this chapter, you will learn how to Define customer retention. Explain the value of existing customers. Define churn (or churn rate). Calculate churn rate, defection rate, and customer lifetime value. Identify how to tell if you need to improve your customer retention. CHAPTER OBJECTIVES Remember This A truly satisfied customer shall return!! Customer Retention and Measurement of Satisfaction CHAPTER TEN Customer Retention and Measurement of Satisfaction 137 customer retention The continuous attempt to satisfy and keep current customers actively involved in conducting business. “Become a partner with your customer, not just a vendor. The distinction is impor- tant. A vendor simply takes the customer’s money and provides a product. A partner takes the customer’s money and provides a “solution” that looks suspiciously like a “product” except it costs more.” Scott Adams What Is Customer Retention? Customer retention is the continuous attempt to satisfy and keep current customers actively involved in conducting business. The importance of keeping current customers has been known for a long time. Interestingly, even though managers have recognized this fact, very few have created an active approach for keeping customers. Most businesses are focused on finding new customers, not on maintaining existing ones. Numerous businesses send salespeople out to make the initial sale and then leave customer maintenance to the customer service department. The trend today is to recognize the importance of those customers who have already made the commitment to do business with us and to create an environment that encourages those customers to continue to work with us. Most individuals who work with customers know that it is much more costly to attract new customers than to keep the ones they already have. In spite of this knowledge, most companies do not have a plan specifically designed to maintain a relationship with existing customers. For many companies, the plan has been informal to the point of being nonexistent. Most customer service providers and salespeople know they need to be nice to their customers, but it takes a more deliberate approach to retain customers. Some companies follow up with their customers when business is poor and they are in need of additional income. This is a poor representation of a customer-retention program. A well-developed plan for customer retention creates an environment in which current customers’ needs are met on an ongoing basis and new needs are explored. Customers are reminded by their experiences that they are valued customers of a company and, therefore, they have the desire to continue to do business with that company. Real customer retention consistently reminds customers that they are important. The result of customer retention is that customers will be so satisfied by a company that they are not motivated to seek other opportunities. They see that their dollars are well spent and that they are receiving a positive return on their investment. Customers also develop a stronger loyalty to those companies that show an interest in them. Value of Existing Customers Existing customers have a tremendous value! They know how our company approaches business. Existing customers know us and our policies. They are familiar with our products and services. They frequently buy without requiring a sales pitch. They will not tolerate a decline in our quality, but they will consider new product or service offerings more easily. Our existing internal customers are especially important. We must work to maintain our internal customer relationships. Internal customers are frequently taken for granted. Because internal customers are the 138 Chapter Ten people we work with, it is difficult and sometimes impossible to find new internal customers. Internal customers may not be able to stop doing business with us, but they can become difficult to work with. Anything that unifies internal customers can have a positive effect on the success of a business. Existing customers have the desire for our company and for us to expand our offerings. The more we can do for them, the easier it is for them to do business with us. All customers want to feel as though they are appreciated, even those cooperative customers who have never made a complaint. Unfortunately, it is easy to overlook those customers who are the most important to us. A customer who has done business with a department store for a number of years and who has a store credit card may resent the store’s offering new credit customers a special discount on their first purchase if they open a new account. The long-term customers may or may not have received special incentives when they opened their accounts; but, if time has passed, the appeal of the initial offering has been forgotten. The long-term customers want an up-to-date display of the company’s appreciation for their business. What can the department store do? Discount coupons, pre- ferred customer mailings, deferred billings, and invitations to special events can be positive incentives. With the competition that exists in business today, there is always another company working to attract our customers’ business. Customer retention is not dependent on technology. Technology may assist in the process, but customer retention is really nothing more than common courtesy, showing customers that you care and appreciate them. Someone once said, “Don’t date your customers; marry them.” What were they talking about? If we “marry” our customers, we make a commitment. We let them know that we are in an ongoing relationship. We do not just show our positive qualities and hope that our weak- nesses never show up. By “marrying” our customers, we show them that we are concerned with their success and happiness today and in the future. As companies enter into financial commitments, which is what doing business is, they are weighing the reasons for committing their dollars. They want to know that they are getting a “bang for their buck.” If they are not, they may choose to allocate their dollars elsewhere. One area in which the need for customer retention is especially important is in the area of nonprofit business. Businesses that seek donations or time from individuals must have a customer-retention program in place. Customers are becoming cautious about how and where they invest their money and time. If they do not see it going for a worthwhile cause or do not see that they are getting anything from the investment, they may redirect their spending. Few individuals would want to return to a social, civic, or religious organization that did not periodically say thank you or acknowledge their presence until they were gone. “In a world where progress is measured in bits and bytes, advanced technology will never be able to replace the need for good minds, strong will, and unselfish hearts.” Clifton Taulbert Customer Retention and Measurement of Satisfaction 139 Understanding Churn Marketing programs within established organizations, large and small, continue to focus on attracting new customers while the needs and desires of current customers are frequently neglected. What this approach fails to benefit from is the tremendous value of satisfying and retaining existing customers. A way to measure the significant value of retaining existing cus- tomers is to measure the churn rate, defection rate, and customer lifetime value for a given year. Churn (or churn rate) is the number of customers who leave a business in a year’s time divided by the number of new customers in the same period. Churn = (number of defections)/(numer of new customers) This tells us that if 210 customers stop using a service and 350 customers purchase for the first time, there is a 60 percent churn rate. Defection rate is the percentage of customers who leave a business in one year. Defection rate = (customers who left)/(customers we had) If we began the year with 1,000 customers and ended the year with 350 fewer accounts, our defection rate is 35 percent. Customer lifetime value is the net present value of the profits a customer generates over the average customer life. Customer life time value = (yearly profit) × (customer life in years) If your average customer generates $3,000 in profit per year and your average customer life is 8.6 years, then your customer lifetime value before factoring in net present value is $25,800. Once you know how much it costs to lose a customer, you can make decisions regarding investments to retain customers. From this method of determining churn, defection rate, and customer lifetime value, it is easy to determine that even a small reduction in customer defections can result in positive profit results. How to Tell If You Need to Improve Your Customer-Retention Programs If you do not have answers for all of the following questions, it is time to develop a customer-retention program within your company. 1. Are you measuring customer satisfaction? 2. What level of priority is being placed on customer satisfaction? churn (or churn rate) The number of customers who leave a business in a year’s time divided by the number of new customers in the same period. defection rate The percentage of customers who leave a business in one year. customer lifetime value The net present value of the profits a customer generates over the average customer life. 140 Chapter Ten 3. Do you measure quality standards and communicate results with management and staff? 4. Do you train and retrain customer service providers? 5. What is your level of employee turnover? 6. How much do you spend to keep current customers? 7. What is your cost for acquiring customers? 8. What is your customer-defection rate? 9. What do you do to get customers back? 10. Do you deliver on what you promised to your customers? Development of a Customer-Retention Program When developing a customer-retention program, it is important to create a program that is manageable and that supports the goals of the organization. Some of the most basic approaches to customer retention are follow-up phone calls, face-to-face visits, special events, name recognition, reminder faxes, coupons, newsletters, and the willingness to do a little something extra. Customer retention requires initiative. It means that customer service providers must tune in to what the customer needs and be ready to suggest new opportunities. It also means that providers must cultivate relationships with customers and convey the message that the customer is more than just a business contact. One company began its customer-retention program by implementing what was called “Fun Fridays.” One Friday each month was designated as “Fun Friday.” On “Fun Friday,” every employee in the organization stopped what they were doing to call an assigned number of customers. The time allotted for calling was 10 minutes. The goal was to reach all customers by phone at least once in one year. The customer conversations were opportunities to ask the customers how they were doing, to ask if they had any special needs, and to let them know that their business was greatly appreciated. To add to the excitement of “Fun Fridays,” employees were allowed to dress casually, were served donuts in the morning, and were qualified for prizes by participating. Everyone from the president to the mailroom clerks participated in calling customers on “Fun Fridays.” An additional benefit of “Fun Fridays” was that those employees who previously had not had the opportunity to interact with customers began to feel as though they too had customer relationships. By allowing everyone to participate, no one individual or department had all of the responsibility for customer retention. When establishing a customer-retention program, remember the following: 1. Examine who your customers are and what specific needs they have: If you understand who your customers are, a customer- retention program can be effectively created to cater to them and their business needs in an appealing manner. Customer Retention and Measurement of Satisfaction 141 2. Identify specific objectives to be realized by the program: Determine what is to be accomplished by the creation of a retention program. Objectives should be specific: to increase sales, to improve communication, or to enhance customer loyalty. 3. Create a manageable program of customer retention: Customer- retention programs should be manageable. They may need to start small and grow as they become successful and become a part of doing business. 4. Create a culture that stimulates customer interest: Management should provide an employee environment that makes it acceptable and appropriate to encourage customers to continue to do business with the company. Management should also provide active examples of management’s philosophies in the managers’ behaviors. 5. Determine a timetable for evaluation: When a customer- retention program is developed, it should designate a time at which an evaluation process will be implemented. At the time of evaluation, improvements can be made and successes can be recognized. Measurement of Satisfaction As we strive to provide customers with excellent customer service, we must periodically measure our customers’ satisfaction. As discussed in Chapter 1, customer satisfaction is the customer’s overall feeling of contentment with a customer interaction. When attempting to measure our customer’s satis- faction, expectations and perceptions must be considered. To measure satisfaction, frequent questions must be asked of many customers. The most common method of asking questions to determine satisfaction is through a survey. When preparing to create a customer measurement device, it is important to ask relevant questions that will provide an opportunity to generate helpful information. When creating a format for measuring customer satisfaction, ask Who are the customers? How did they begin doing business with your company? Where are they located? Where did they conduct business with you (if there are multiple locations)? When did they conduct business? What did they like about the experience? How can we do a better job? To effectively measure customer satisfaction, we must look at the customers’ situations from their perspectives. A measurement format should be to the point and should not take more than a couple of minutes to complete. If it must be returned by mail, it should have a “postage paid” 142 Chapter Ten indication. Most customers will not seek out postage to mail a customer response unless they are very upset with our performance. A discount store conducted a survey to determine what the customers liked or did not like about the store. The survey asked questions about the interior lighting, ease of finding merchandise, and prices and many other questions that would help provide better service to the customers. They did not ask anything about the parking lot or how safe the customer felt coming into the store. One customer responding to the survey had very positive responses to all of the questions about the interior of the store. When he or she was being thanked for participating in the survey, the customer asked if there were no questions to be asked about the parking lot. The survey administrator responded by saying that the parking lot was not important to the store at this time. This was not the right response for this customer! The customer shared that although there was satisfaction with everything inside the store, she was hesitant to come to the store after dark because of the inadequate lighting in the parking lot. There was also concern about the lack of identifiable handicapped parking spaces, the lack of lines dividing the parking spaces, and the number of stray shopping carts that could possibly damage surrounding cars. What this experience showed the company was that the original survey was not creating an accurate picture of how the customers felt about doing business with the company. Although things inside the store met the customers’ expectations, the customers might not come inside because of the parking situation. Sources of Information There are several sources for obtaining information about customers’ satisfaction. The following list includes some possible sources: 1. Informal surveys: Informal surveys can provide insights about what customers like and dislike. Informal surveys may not be statistically measurable, but they can help businesses to know their customers better. 2. Comment cards: The use of comment cards is one of the most popular methods of determining a customer’s satisfaction. They are easy to Share the concept of customer retention with a coworker (in case he or she is not familiar with it). Together, think of three things that you or your company could do to retain customers. Remember, customer-retention techniques do not have to be complicated. Now share your ideas with your supervisor and see what he or she thinks. Job Link Customer Retention and Measurement of Satisfaction 143 create and are frequently available from company home offices. They do not provide detailed information, but they can provide immediate feedback. Customers may complete comment cards while they are involved in the customer experience. 3. Verbal comments: Verbal comments are easy to collect, but they are often ignored. By asking customers about their experiences, information can be obtained. To accurately collect information from verbal comments, employees must be encouraged to document comments on a customer log so that the comments are not lost. 4. Historical data (point of sale): With the use of computers in most workplaces, it is easy to collect historical data. To find out how much customers have purchased, how often they have purchased, and other related data, we can access the information at the touch of a button. Unless they are incorrectly entered, historical data can be very accurate resources for understanding customers. While historical data do not allow for emotion or opinions, they do give information concerning what is actually happening. 5. Sales: Like historical data, sales do not show emotion, but they do show what customers are currently doing. If they are increasing or decreasing orders, it will be reflected in sales. Sales are a good current indication of customer satisfaction, but they should be used in combination with other sources of information. 6. Corporate-generated surveys: Many corporations generate surveys that are sent to their customers. Corporate-generated surveys are usually more detailed than informal surveys, and the data that they reflect are usually statistically measurable. Corporate-generated surveys may ask questions about products as well as the service that was received. Corporate-generated surveys can collect a quantity of information, but they may have a lower response rate, depending on the customers surveyed. 7. Discussions with internal customers: Internal customers frequently have information about what customers like, do not like, and are interested in. If internal customers are never asked what their customers have told them, they may never have the opportunity to share their valuable information. Internal customers usually know what is not working well for customers and where snags in the system exist. 8. Focus groups: Focus groups are random groups of customers or prospective customers who are brought together to discuss current or future offerings of a business. Focus groups are sometimes challenging to coordinate, but they can cultivate a creative approach to understanding customers. Questions can be asked of the group and the responses can be recorded for future development. 9. Toll-free phone numbers: By providing customers with toll-free numbers to reach the company or department easily, we can encourage them to contact us when a question or problem arises. Toll-free numbers should be answered promptly by knowledgeable 144 Chapter Ten employees who are well trained in answering customer questions and in responding to customer concerns. Some customers will call to share observations as they are occurring. These same customers may not take the time to convey their observations in writing. Customer comments should be documented so that they can be considered with other sources of customer information. 10. Customer intelligence information: Remember, customer intelligence is the process of gathering information; building a historical database; and developing an understanding of current, potential, and lapsed customers. The use of customer intelligence allows businesses to build on information already gathered and to add new information to get a total understanding of the unique customer relationship. When information already gathered does not have to be rediscovered, problem identification and solving can begin more quickly and affordably. Benefits of Measuring Your Effectiveness Several benefits can be realized by measuring a company’s or a department’s effectiveness. By measuring effectiveness, weaknesses can be discovered so that corrections can be made. New customer needs can also be recognized so that new programs can be created and implemented to satisfy customers’ current needs. Since customers may not share ideas and problems unless they are asked, the creativity of customers may go unnoticed. According to the Harvard Business Review, a 5 percent increase in customer retention yields about 25 percent to 125 percent increase in profits. A wonderful benefit of measuring effectiveness is that we can discover what we are doing well. Customers are often quite satisfied by our offerings; but, unless they are allowed to share their satisfaction, the offering may be changed or updated to a degree that the customer may become dissatisfied. Tips for Realistically Determining Your Effectiveness When attempting to realistically determine effectiveness, it is important to ask well-developed questions. Those questions should be asked of a variety of customers so that responses reflect a broad spectrum of customers. If a problem exists that is not going to be corrected no matter what customer responses are, it should not be presented to customers for consideration. Explain why the questions are being asked. Express advance appreciation to the customer before he or she shares information. Thank the customer for having taken his or her valuable time to share responses. Explain that through the responses of many customers, the customer intelligence The process of gathering information; building a historical database; and developing an understanding of current, potential, and lapsed customers. Customer Retention and Measurement of Satisfaction 145 company can attempt to improve its services and continue with services that are currently meeting the needs of customers. Why Surveys Do Not Always Reflect Reality One of the most common methods of measuring customer satisfaction is through the use of surveys and comment cards. While these are the most common methods of measurement, they do not necessarily reflect a real picture of customer satisfaction. Frequently, the primary customers who take the initiative to respond to surveys and comment cards are those cus- tomers who are dissatisfied with their experiences or those customers who hope to gain from their comments. Satisfied customers may not take the time to express their satisfaction and therefore may not be included in the overall picture of satisfaction. An additional problem with surveys and comment cards that may make them unreliable sources of information is the method of questioning that is used. This may be reflected in both the way that the questions are asked and the specific questions that are asked. Information may come back as being very positive, when in reality there are problems. Questions can be asked to avoid subjects that may receive negative responses. If a company has areas of customer interaction that are known by employees to be in need of improvements but upper management is not aware of them or upper management is being shielded from the information, these are areas that may never be addressed. Questions can be worded in such a manner that the information will not be revealed. Sit down with your team and discuss who your customers are. Talk about what makes them unique. What do they have in common? What are their differences? Why do they continue to do business with your company? The different members of your team may have different ideas about who your customers are. These differences may be due to the different areas of the business that the members represent. Now that you have identified who your customers are, create a short survey (10 ques- tions or less) to share with them. Your survey should ask them questions about their level of satisfaction. Discuss the kind of questions that you want to ask so that you can clearly deter- mine their satisfaction levels. You may want to focus on one specific area of your business. When you have your survey completed, share it with customers during a one- to-two-week period. At the end of that time, analyze the results. While this will not be a scientific study, it can share some information with your company that it can benefit from. Any information that helps you to better serve and keep your customers is a good thing! TEAM TIME 146 Chapter Ten Surveys may not ask enough questions to establish valid informa- tion. A survey was circulated to establish customer interest in a new ser- vice that would be available for customer use after hours. The survey asked if the customers would like to see the new service offered. The survey results were overwhelmingly positive. The service was added. Unfortunately, very few customers ever took advantage of the service. The company was perplexed that the survey results could so over- whelmingly suggest that the service was desired and then have so few customers take advantage of its offering. A second survey was circulated to the same customers; the only addition to the original survey was the question “Would you actively participate in using this service?” The response was that almost none of the customers said yes. Upon further analysis, it was discovered that, although the customers thought that the service sounded like a wonderful idea, most did not believe that they would actually be able to use it. The omission of one question greatly affected the validity of the survey. Ideas for Evaluating Your Own Performance Sometimes the most effective method of evaluating customer satisfac- tion is to evaluate your own performance. If we examine the areas of our company and department that have the most questions asked, we may identify strengths and weaknesses without going to the customer. To evaluate your own performance, ask yourself these questions: Do my customers know that I am here to assist them with any questions that may arise? Am I well informed about the systems that my company offers to customers? Do I convey enthusiasm and interest to my customers? What skills could I develop that would enable me to better assist my customers? Do I practice name recognition and work at developing a relationship with my customers? What else could I do to assist my customers and department as we work to provide excellent customer service? What Measurement of Satisfaction Means to Your Business By measuring our customers’ satisfaction, we deepen our relationship with our customers. We consider the customers’ level of satisfaction, their expectations, and their perceptions. We ask questions and create an environment that encourages the sharing of ideas and concerns. The mes- sage that is conveyed to customers is that our company is interested in Customer Retention and Measurement of Satisfaction 147 knowing what they think and is willing to actively strive to satisfy them. The seeking of feedback from customers can in itself result in positive customer retention. churn (or churn rate) customer intelligencecustomer lifetime value customer retentiondefection rate KEY TERMS QUICK QUIZ 1. Customer retention is not as important as attracting new customers. T or F 2. Customers develop a stronger loyalty to those companies that show an interest in them. T or F 3. Existing customers will accept a decline in service without question. T or F 4. Customer lifetime value is the percentage of customers who leave in one year. T or F 5. Customer retention involves conveying to the customer that they are more than just a business contact. T or F 6. When establishing a customer-retention program, it is important to examine who your customers are and what specific needs they have. T or F 7. When measuring current customer satisfac- tion, the upcoming advertising campaign is an important consideration. T or F 8. Informal surveys are statistically measur- able and are therefore an extremely reliable source of information. T or F 9. Focus groups are random groups of customers or prospective customers who are brought together to discuss current or future offerings of a business. T or F 10. Seeking feedback from customers will never result in positive customer retention. T or F 1. List five sources of information that would give insights as to the quality of a business’s customer service. 2. Define customer retention. 3. What is the one thing that you and your company could do to retain your current customers? 4. Why is maintaining existing customers so important? 5. How do you measure churn or churn rate and why is it an important number to know? 6. What are some guidelines to consider when creating a customer-reten- tion program? 7. Create your own device for measuring customer satisfaction. Try to limit it to 10 questions or fewer. 8. Verbal comments from customers are sometimes the easiest to get. Why are they not always the most accurate measure of customer satisfaction? 9. What are some questions that can assist an organization in evaluating its own performance? 10. Why should all customer service providers develop their own philosophy of customer service? OPPORTUNITIES FOR CRITICAL THINKING 148 Chapter Ten SKILL BUILDING Customer Retention The value of existing customers is greater than what many organizations realize. Unfortunately, most organizations direct the majority of their customer efforts toward new customers and therefore do not effectively meet the needs of the customers they already have. Customer retention is the continuous attempt to satisfy and keep current custom- ers actively involved in conducting business. Customer-retention efforts do not have to be expensive and are frequently not dependent on technology. The best customer-retention programs start small and encourage com- munication while reminding the customer that the organization is still out there ready to serve them. Either individually or in a small group, list 10 creative elements that would seek to keep current customers involved in your busi- ness. Your ideas should reflect the specific customers that you interact with and their own unique set of needs and circumstances. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. After recording the creative elements that would seek to keep current customers involved, rank them according to how easy they would be to implement. By exploring the customer-retention ideas that you have recorded, you have established the basis for a customer-retention program. Share your ideas with others in your organization and begin the process of retaining customers! Ethics in Action Your coworker, Vicki, is having a bad day. She is being short with customers to the point of rudeness. Should you bring it to her attention, share the observation with your supervisor, or do nothing? Write Your Own Philosophy of Customer Service There are as many different interpretations of customer service as there are individuals. Although businesspeople and customers are talking about the importance of customer service, many have never defined for themselves or for someone else what they believe customer service to be. Customer ser- vice providers must combine the knowledge that they have acquired about customer service with the realities of their professional environment. This definition of customer service becomes your individual philosophy. A phi- losophy is the combination of the ideas and convictions of an individual. In customer service, a well-developed and realistic philosophy can be the key not only to success in the industry but also to differentiating between individuals when they are applying for employment or are candidates for advancement. CHALLENGE Customer Retention and Measurement of Satisfaction 149 1. To allow students the opportunity to develop their own philosophies of customer service. 2. To integrate the students’ up-to-date knowledge of customer service with their own experiences and day-to-day realities in the industry. 3. To convert ideas to words successfully and concisely. Challenge Objectives Assignment Consider the knowledge that you have acquired about customer service. Combine this knowledge with the practical experiences that you have had in customer service situations (both as a customer and as a provider). Compose in written form, as concisely as possible, your philosophy of customer service. Your philosophy should include (1) how you define customer service and (2) what you believe about customer service. Include any pertinent examples and any other information that supports your position. Presentation Prepare your philosophy of customer service in written form. Remember, your philosophy of customer service is completely your own. You may include specific definitions and ideas that were discussed in the book, but it should also include other specifics as to why you believe what you do. Be concise. 1. F 2. T 3. F 4. F 5. T 6. T 7. F 8. F 9. T 10. F ANSWERS TO QUICK QUIZ 150 Express an understanding of what a call center is and some of the new trends in call center management. Explain teleselling. List the new ways that customers are doing business over the Internet. Understand the balance of serving customers using traditional and technological methods. In this chapter, you will learn how to Identify some of the ways that customers of the twenty-first century search for and make purchases. Recognize customers’ expectations of service providers. Explain some of the most rapidly advancing technologies that customers are seeking out. CHAPTER OBJECTIVES Remember This The absolute fundamental aim is to make money out of satisfying customer s. Sir John Egan Technology and Customer Service CHAPTER ELEVEN Technology and Customer Service 151 social media Electronic com- munication used by consumers to share ideas, information, opinions, and personal messages. Today’s Changing Marketplace Today’s marketplace is full of changes. Opportunities that seemed possible only in the distant future are now upon us. Suddenly emerging are Facebook, Twitter, YouTube, communication by texting, blogs, membership/reward programs, e-mail, and the list goes on! Customers are embracing these new opportunities with an enthusiasm that sometimes exceeds business’s ability to deliver. In addition, customers may expect businesses to offer services that they are not quite ready to offer. This results in either offering services ahead of schedule or not offering them and being perceived as behind the competition. Increasingly a customer’s first attempt to gain information about a product or how to use it is by way of Google or other search engine. Social media is electronic communication used by consumers to share ideas, information, opinions, and personal messages. Customer service offerings are now being offered by way of social media. Social media is pushing companies to reevaluate and redefine how they serve customers. Some companies are using social media as a less expensive replacement for traditional advertising. There is virtually no cost associated with having a Facebook or Twitter account. No cost initially but as usage increases and the expectation of a more professional appearance, quicker response time, and increased functionality goes up so will the expense of the offering. The increase in the use of these methods of communication with custom- ers may be a reflection of the economic downturn or a fundamental shift in technology. Regardless of why a company has chosen to communicate with the customer in this way, the reality is that social media has become a part of the ever-changing opportunity to serve customers. Social media, on one hand, provides the chance for companies to have increased collaboration for problem solving. On the other hand, customers no longer complain in private. This reality gives customers increased power when seeking resolution to a problem. An offering that is neglected may bring nega- tive attention to a business. For example, a Facebook page that a customer is encouraged to “Like” and then never has any new postings or status updates may do more damage than not having the page at all. Customers may start to wonder what else in the business has been forgotten. When using social media to interact with customers it is helpful to remember the following: Express appreciation to customers for referrals. Congratulate them on successes or new opportunities and affiliations. Share information, not a heavy sales pitch. Use status updates to remind customers of upcoming deadlines, events, and opportunities. Link to other resources whether offered by you or not. Especially, YouTube videos, articles that mention your business or product, important links, etc. Share what is trending in your market, such as, books, products, topics, new information, and interesting tie-ins to your business. 152 Chapter Eleven A chain of pizza restaurants with an enormously successful delivery sys- tem introduced its own website to handle orders, customers’ comments, and complaints. This step was as a result of repeated customer requests although the company management was doubtful as to whether the website was needed, would prove profitable, and would enhance the already-successful delivery business. Customers liked the novelty of logging on to complete one more transaction in their busy lives. Customer usage increases daily, and as time has passed the efficiency of the website has increased. More and more businesses are being faced with this kind of decision—to introduce a ser- vice that optimizes current technology or to refrain from introducing it and seem behind the times. As time has gone by, since this initial introduction, the company has added menus online, couponing programs with coupons delivered via e-mail, and even a blog which encourages customers to share their favorite memories of eating this unique pizza. Today’s customers are intrigued by using new technologies to enhance their lives. Businesses have the challenge of identifying which technological opportunities their specific customers desire and how to deliver them in an easily usable fashion. Businesses must determine which technologies will bring about the desired customer result. Additionally, they need to analyze how much human power is needed to keep the technology current and up to date. Understanding the Customer of the Twenty-First Century Customers in the twenty-first century are sophisticated in the ways that they search for and make purchases. They expect the following from service providers: 1. Availability: Services are designed to meet the customer’s schedule. 2. Accessibility: When the customer needs to talk, the provider can be reached. 3. Accountability: Customers prefer quick and accurate answers to service questions. Source: Charlene Taylor, Rural Telecommunications magazine (November–December 1996). Customers want hassle-free customer experiences that are user friendly and that validate customers’ choices. Customers want to feel as though they are highly valued and that service responses are available when they really need them. Customers have busy lives today and will continue to have them. It is unlikely that customers are installing software for home use or will need to ask lawn mower repair questions during the hours of nine to five Monday through Friday. Finally, customers want to have service experiences that provide accurate answers in a timely manner. They expect increasing levels of accountability from the organizations they enter into “As we go forward, I hope we’re going to continue to use tech- nology to make really big differences in how people live and work.” Sergey Brin Technology and Customer Service 153 business with. Surveying customers is not enough to discover their prefer- ences. Customers expect the opportunity to offer their suggestions. A new marketing strategy is being offered in several metropolitan areas that promises “Hassle-Free” automobile purchases and accessible service, and is described as “Car buying for the new millennium.” When a customer recently called to make an appointment for an oil change, he was told that noon was not a good time to bring his car in, because the oil change technician would be at lunch. When the customer expressed that he needed to take care of this errand during his lunch hour, he was told that perhaps the customer could take a late lunch! The customer then stated that he could take his car to the oil change specialist down the street and that the specialist was never at lunch, the price was cheaper, and the car would be returned with the windows washed and the interior vacuumed. The customer did make an appointment and hung up. After thinking about his choice for a while, he decided that he would take his car to the other company for the oil change. When he called the dealer back, out of courtesy, to cancel his appointment, the on-hold message spoke of how the company was created to serve the customer. After several times of hearing the message and still being on hold, the customer hung up, frustrated and angry about how out of touch the company was with real customers. This is a perfect example of a company that is talking about service but obviously does not have a clue as to the real needs of its customer. Customers no longer stand for this kind of treatment. They take their business elsewhere; then, when companies feel the loss of customers, they all too often blame the economy or state that there is too much competition for the limited customer base. Customers expect enhanced service opportunities and do not settle for less than what meets their ever-changing needs. Embracing New Technologies Technology is progressing at a rate that is staggering. Customers are anx- ious to experiment with new technological options with the hope that they will be of benefit to them in some way. One possible reason that customers are more responsive to new technologies is that they have become, in many cases, very user friendly. As it becomes easier to understand and work with a system, people are drawn into using it. The positive benefit of this trend is that the standard of excellence is raised and, in most cases, the speed at which business is conducted increases. Some of the most rapidly advancing technologies that customers are seeking out and using are customer service call centers and customer service over the Internet, including online bill paying, buying and selling of goods and services, online tutorials, webinars (online collaboration or training), technical assistance, and e-mail. Smart phones are helping customer service to be “on the go,” and the ability to acquire knowledge is highly portable. When new technologies are introduced in the workplace, they are often greeted with a mixture of emotions—everything from enthusiasm to “Technology shapes society and society shapes technology.” Robert W. White 154 Chapter Eleven terror! New technologies mean new things to learn and old habits to break. To prepare others to greet the opportunities of new technologies with an open mind, take the following steps: Prepare your staff: Get the call center staff involved from the start. Train supervisors and team leaders first and get them to buy in. Develop a group of “change champions” who will act as advocates for the new technology. Sell your vision: Convey your enthusiasm and share how much easier work will be. Praise successful use of the new technology. Resist the temptation to complain. Celebrate small successes: Celebrate small milestones along the way to keep all involved excited. Avoid the “shelfware syndrome”: The temptation to give up and put the new technology on the shelf, never to be used. Source: Dr. Jon Anton, Customer Service Manager’s Letter (May 10, 1998). Call Centers One of the most dramatic growths that has been seen in customer service is the service offered via the customer service call center. Call centers have a unique advantage when delivering customer service. They can be located just about anywhere that has a sufficient worker base, and one call center site may handle a number of different companies’ calls. Customers are accepting a little less one-on-one service for the increased convenience of being able to talk to a call center. Call centers allow service costs to be reduced from the costs resulting from face-to-face encounters. A current trend in call centers is to locate them in foreign countries with eager workforces that are accustomed to a much lower rate of pay than the average American worker. Companies are still weighing the ben- efits of this business practice. From a cost basis, it can appear to be very beneficial to the bottom line; but customer satisfaction has in many cases suffered. Companies currently have to weigh the cost benefits against potential customer losses. Internationally located call centers incorporate extensive training programs to prepare their employees to professionally interact with American customers. These employees may even be given American-sounding names and biographies so that they can more easily interact with their American customers. When this approach to a call center is successful, the customer has no idea that they are not interacting with a customer service provider “just around the corner.” Call centers include the category of teleselling. Previously referred to as telemarketing, teleselling is selling products, services, or information via teleselling Selling products, services, or information via the telephone.“Any sufficiently advanced technology is indistinguishable from magic.” Arthur C. Clarke Technology and Customer Service 155 the telephone. Two types of calls fall within the area of teleselling. Inbound calls are calls that originate with the customer and may include catalog ordering, billing questions, technical support, product use, or other infor- mation. In many cases, inbound calls are being replaced by online ordering, which may decrease the number of customer service providers needed to answer the phones. Outbound calls are calls that originate from the call center to the customer and are usually intended to sell products or services, conduct market research, or respond to customer inquiries. Many call cen- ters handle both inbound and outbound calls. Most customer service call centers have sophisticated telephone systems that include special call routing or automatic call distribution, which allows calls to be routed to the next available service provider. They may be linked to a “call me” Web browser feature that allows customers linked with a company’s Internet site to be referred to a call center repre- sentative. The call center representative then calls the customer to respond to the customer request. Automatic number identification allows the call recipient to identify the incoming number and caller. Additional background or historical information may be displayed on the recipient’s computer screen to enable him or her to better serve the customer. The call center workplace is a fast-paced environment focused on serving the customer as quickly and professionally as possible. The call center is not for everyone; however, those individuals with excellent telephone skills, ability to handle stress, good computer skills or the aptitude to learn new computer systems, ability to stay at their workstation in front of a computer, enthusiasm, positive attitude, moti- vation, good problem-solving skills, professionalism, and the ability to see a call through to the end would be excellent candidates for call center positions. Because of the importance of telephone skills, many candidates are interviewed by telephone to identify their telephone techniques. Customer Service Over the Internet The growth of the Internet has exceeded most of the experts’ predictions. The importance of the Internet in the area of customer service is dramatic. So many customer services can be offered via the Internet that companies must attempt to identify whether or not a website would enhance their service offering. A website could offer product and company information, new products, ordering options, answers to commonly asked questions, owners’ manuals, part reorders, and technical updates—and the list goes on and on. Since so many customers have grown to expect company websites, many companies have been forced to create them. In some cases, their introduction is expensive and premature. A poorly designed website is frequently a bigger mistake than not having a website at all. inbound calls Calls that originate with the customer and may include catalog ordering, billing questions, technical support, product use, or other information. outbound calls Calls that originate from the call center to the customer and are usually intended to sell products or ser- vices, conduct market research, or respond to customer inquiries. automatic call distribution Allows calls to be routed to the next available service provider. “call me” Web browser Allows customers linked with a company’s Internet site to be referred to a call center representa- tive who then calls the customer to respond to the customer request. automatic number identification Allows the call recipient to identify the incoming number and caller. Additional background or historical informa- tion may be displayed on the recipient’s computer screen to enable him or her to better serve the customer. 156 Chapter Eleven Some additional Web-based services that customers are engaging in are as follows: Online bill paying. Numerous companies and banks are offer- ing customers the opportunity to receive and pay bills online. This involves some initial setup, but it can greatly expedite the tedious process of bill paying for customers. For vendors, it can cut out paper, printing, and postage expense. For customers, it decreases the time that the bill-paying process may take and saves on check writing and postage expense. It also may mean a greater likelihood that bills will be paid on time. Increased customer satisfaction is a very positive benefit of the online bill-paying opportunity. Companies that do not offer this customer option may be perceived as behind the times and not as technologically advanced. Buying and selling of goods and services. Online shopping is at an all-time high. In the early years of Internet shopping, customers told horror stories of how high postage expenses were and how products that were thought to have been ordered were really out of stock or on back order; and customers were fearful of giving out credit card information over the Internet. Most of these issues have been rectified. Customers today happily search out the best price and style options, thereby saving them time in not having to shop the local shopping mall. Most major retailers depend on the volume of sales that their online divisions create. Companies like eBay have enabled customers to buy and sell on their own without using the normal online retail approach. Setting up special payment accounts or using virtual credit cards has gone a long way in easing customers’ fears of having the wrong per- son obtain their credit card information. Fraud is still a great concern for anyone using the Internet. Customers should always show caution when they are using the Internet and should not give personal informa- tion out without ensuring that they are working with a secure site. Online tutorials. Companies can offer expanded training programs, operating instructions, and any other needed instruction through the use of online tutorials. Customers can access these tutorials at all hours and can in many cases repeat them until they are comfortable online bill paying Offers customers the opportunity to receive and pay bills online. Explore what bills you may be able to pay via the Internet. Go to both the company that you do business with and your bank. Find out which method of bill paying has the least additional charge or, hopefully, no extra charge and is the easiest to coordinate. Create your own pro/con sheet to determine whether or not this method of bill paying is appropriate for you. If you already participate in an online bill-paying program, way to go! You are already using technology to enhance your life! Job Link Technology and Customer Service 157 with the information. Answers to frequently asked questions (FAQs) may also be addressed in an online tutorial format. Webinars (online collaboration or training). Companies are using this new approach to training and information sharing. By using the Internet, specialized training can be delivered to a select group of customers. Training programs can be delivered without requiring the participants to travel, therefore saving money for the organization while improving skills. Technical assistance. A harsh reality of a technically advancing marketplace is the need for technical assistance. Sometimes technical assistance is delivered using a combination of the preceding approaches. Companies of all types can offer customers the opportunity to learn more about how to use a product or have questions answered via the Internet. E-mail. For more on e-mail, see Chapter 6. Call centers can provide considerable information and assistance to customers. A website can supplement what the call center is doing. Because so many consumers now have Internet access and actively use it, it makes sense that they would try a Web search to gain information or assistance from a company before they would track down a 1-800 number. By offering information via the Internet, companies may cut down on-hold times for customers with inquiries that could be answered via the website. In this respect, the telephone call center and the Internet can complement each other. Most Internet sites have e-mail links that provide one more customer service. While this does give customers the opportunity to ask individualized questions, it can provide the opportunity for service failures. Customers that communicate via e-mail are actively seeking responses to their specific questions. While the website is largely impersonal and somewhat generic, e-mail questions are not. Some studies suggest that customers expect an e-mail response faster than a voice mail message. Some companies have found themselves faced with needing to respond to many more e-mail inquiries than their staffing will allow. Additionally, if a customer has conducted a search and has found your company as a possible provider of a product or service he or she is seeking, it is almost certain that he or she is looking at other similar companies offering similar products or services. A customer seeking a provider of online stock trading services conducted a search to identify the companies that were offering this service. This search located several such providers. Two appeared to have the vari- ety of services the customer was seeking. He then e-mailed the same set of additional questions to both companies. One company responded within three hours, apologizing for taking so long to respond. The other company took approximately four days to reply, included no explanation of why it took so long, and then provided vague answers to the questions. With whom do you think that the budding investor ends up doing business? webinars Online collaboration or training. 158 Chapter Eleven Enhancing Service Experiences and Building Customer Loyalty With all of the new opportunities that await companies offering customer service, it would seem that all a company would have to do is to offer the emerging services. As we go forward into the twenty-first century, customers are looking for more. Customer loyalty will be one of the defining areas of success or failure for service providers. This is one area that has been facilitated by communication methods like Facebook or frequent e-mail updates. Getting a business name in front of the customer as often as possible may increase loyalty. Due to the large number of service providers and the diversity of services offered, customers will be exposed to different ways of serving the customer. Every service interaction is an opportunity to better understand customers and to build a relationship with them. If handled properly, that relationship becomes a loyal one in which customers come to think of the company as the only one for them and then continue to vote with their business. Sit down with your team and discuss how your company uses technology to serve your customers. Make a list of the different techniques that are in use. Then answer these questions: 1. Are all coworkers well trained in all tech- nologies? 2. Do our customers understand how to participate in the use of these technologies from their side? 3. What additional technologies could we incorporate to better serve our customers? Compile your findings and share them with your supervisor. You may share something with your supervisor that he or she had not thought of or that is in the works for your company. TEAM TIME social media automatic call distribution automatic number identification“call me” Web browser inbound calls online bill paying outbound callssocial media teleselling webinars KEY TERMS Technology and Customer Service 159 QUICK QUIZ 1. Customers are not really interested in using new technologies in their customer interactions. T or F 2. Customers are happy to take time away from their jobs during the week to have a lawn mower question answered. T or F 3. Praising employees’ use of new technology will help them to gain confidence. T or F 4. The location of call centers in foreign countries has always worked well in providing customers the best possible service. T or F 5. Inbound calls originate with the customer service provider. T or F 6. Automatic call distribution allows calls to be automatically routed to voice mail. T or F 7. Online bill paying is a big hassle that customers do not really want anyway. T or F 8. Customers trust the companies they do business with over the Internet and are therefore not concerned about fraud. T or F 9. Internet telephony is the same as wireless Internet. T or F 10. Customer loyalty will be one of the defining areas of success or failure for service providers. T or F 1. Describe some of the ways that customer service offerings are changing. 2. What are the three things that customers will expect from customer service providers as we move further into the twenty-first century? 3. Review the steps to prepare others to greet new technologies with an open mind and discuss your own reaction to the introduction of new technologies. 4. Explain the difference between inbound calls and outbound calls. 5. Discuss how many times you have called a 1-800 number in the last year and your expectations of the experience. 6. Conduct and tape-record a mock telephone interview. Listen to the tape and complete a self-assessment as to whether you would be a good candidate for a call center position. 7. Conduct an Internet search and, if possible, e-mail a question to two companies offering a similar product or service. 8. Compare the results and share your observations with others. 9. Give examples of businesses that could benefit from a website to supplement their customer service offerings. 10. What elements do you consider to be the most important in building customer loyalty? OPPORTUNITIES FOR CRITICAL THINKING 160 Chapter Eleven Current Events Reading professional publications is an outstanding way to increase your understanding of new trends in business. This is also true in the area of customer service. Numerous articles are written on the subject. These articles may be found in newspapers, business periodicals, customer-service-specific publica- tions, and at various locations on the Internet. Reading these articles is a good start to increasing your knowledge. Learning how to interpret the information included in articles is an additional skill. The completion of current event forms can begin the process of teaching individuals how to consider the facts in the article and then reminds them to consider their own thoughts and opinions on the topics covered. CHALLENGE 1. To locate sources for current articles on topics in customer service. 2. To read and analyze current customer service information. 3. To complete the current event form using good grammar and a professional writing style. Challenge Objectives Assignment Examine current business publications and/or the Internet to locate articles relating to current trends in customer service. Choose three articles that interest you and complete three separate current event forms. Read the articles and then SKILL BUILDING Technology Training Technology is an important part of our lives today. Unfortunately, most Americans do not take advantage of the opportunity to maximize the technologies they already possess. Consider how many times you have purchased a new television, DVD player, computer, printer, software package, camera, or other new technology and just started using it without reading the owner’s manual. All too often, the only time that we consult the owner’s manual is when some- thing will not work or breaks. Identify a product or service that you already own or have available to you. Read the owner’s manual (or specific parts) and learn how to use some feature of it that you have not previously known how to use. Now share the information with someone else who can benefit from the information. You may be surprised at how easy it is to learn a new technology when you read the instructions! Ethics in Action You have recently joined Facebook and are having fun connecting with old friends and new. Your company has a strict “no Facebook” policy at work but no filters are in place to block your access and to your knowledge no one really checks up on it. The two coworkers next to you have numerous personal calls everyday. You never have personal phone calls. Is there any real harm in logging in to Facebook at your desk and just minimizing it most of the time? After all, you aren’t wasting time on the phone! Technology and Customer Service 161 answer the questions listed on the current event forms. Try to relate the informa- tion in your articles to what you have been learning as you have been studying customer service. 1. F 2. F 3. T 4. F 5. F 6. F 7. F 8. F 9. F 10. T ANSWERS TO QUICK QUIZ Presentation Remove the current event form (Current Events and Customer Service). You will need to make copies or create your own form on the computer. Complete the forms in full. Try to be thorough yet concise as you answer each section. Use complete sentences and a professional writing style. The ability to read and understand current articles relating to business is a valuable skill that will serve you as you grow in professionalism. 162 Chapter Eleven Challenge 11 Current Events and Customer Service Name Name of article Where did you find the article? (Name of the publication, include the web address if applicable) What was the article about? (Give an overview of the article in your own words)Date What did you think about the article? (Include your opinions) Share any additional thoughts that you have about the article. 163 Remember ThisPromises may get you friends, but it is performance that keeps them. Owen Feltham Excellence in Customer Service CHAPTER TWELVE Express the fundamental requirements of creating a successful customer service program. List the rewards of providing excellent customer service. In this chapter, you will learn how to Summarize the purpose of your textbook. Detail examples of active companies that are succeeding in the provision of outstanding customer service. CHAPTER OBJECTIVES 164 Chapter Twelve Excellence Is the Goal To be successful in business today requires a commitment to excellence in customer service. If excellence is the goal, anything less is not acceptable. Many companies talk about the importance of providing excellent customer service and yet do little to initiate its offering. As stated in Chapter 1, one of the most effective and least expensive ways to market a business is through the provision of excellent customer service. It is not really a question of whether or not a business wants to provide customer service to its cus- tomers. Every business must provide customer service, even if they do not really want to. It has become mandatory. Customer service is exciting! If every customer is seen as a valuable asset who is difficult to replace, they are more likely to be cherished. When talking to individuals who interact daily with customers, most will tell you that an extremely fulfilling part of their job is creating positive solutions for their customers. Happy custom- ers keep coming back to do business and to renew the relationships that they have previously established. What’s Happening in the “Real World”? Countless companies are providing outstanding customer service in the “real world” every day. Sometimes they go unnoticed because they make it so easy to do business with them. In all too many instances we, as customers, are just taking their services for granted. The following are profiles of a few of those outstanding companies that are all positive examples of customer service. JKJ Benefits, LLC is an employee benefits/consulting firm in Fort Worth, Texas. They provide full-service employee benefits brokerage consulting in numerous states. JKJ strives to provide high-quality customer service with integrity. JKJ considers service to be a defining difference in their business. They pursue an “old fashioned” approach to the ways in which they serve their customers. They call their customers instead of exclusively e-mailing them. Personal contact is vital as they service their customers’ needs. That personal touch has allowed JKJ to hear customer successes and concerns, and to be proactive in addressing customer problems or new business opportunities. Customers are actively reevaluating employee benefits based on cost. As they attempt to balance what they can afford to provide for their employees with how much the company can spend, insurance/ benefits companies have a unique opportunity. JKJ is approaching this opportunity head-on. They learn their client’s business so they can tailor the benefits offering to the unique characteristics of the clients. They then offer specialized continuing education options such as COBRA Excellence in Customer Service 165 (Consolidated Omnibus Budget Reconciliation Act) and FMLA (Family Medical Leave Act) and other customer programs to enhance their customers’ ability to be successful in their respective businesses. JKJ sees partnering with customers as a beneficial marketing tool that has immeasurable payoffs for both the client’s business and JKJ’s. JKJ is a young company but they clearly are striving to deliver excellence in customer service through a variety of opportunities and will be a company to watch in the years to come. Quality Aircraft Accessories, Inc. (QAA) is a Class 1 and Class 2 FAA-approved repair station that overhauls, repairs, and exchanges aircraft engine accessories with customers primarily in the United States, but also in over 30 different countries. QAA is known in the general aviation industry for its one-day turn time when requested by customers. Parts that are shipped to QAA and received in the morning are repaired or overhauled and shipped back to the customer the same day whenever requested, and at no extra charge. QAA has a very successful approach to customer satisfaction and retention. The management of this company consistently adheres to a policy of not leaving the office without resolving customer issues. This has had a very positive result in a world where one of many customers’ greatest frustrations is not being contacted to resolve problems in a timely manner. QAA rarely has a face-to-face interaction with their customers. This reality has compelled management to invest a lot of time training new employees to be professional, well informed, and excellent time managers as they take customer calls and orders. They do not use any type of automated phone system and therefore have determined optimal staffing and training to promptly assist their customers. QAA knows that if their customers need a part or repair of a part, there is probably an aircraft on the ground that is not in the air doing its job. This realization has sped up the customer response time in contrast to competitors. QAA is not the highest price supplier in the market, but they are one of the higher ones. Customers receive numerous benefits from doing business with them though. QAA demonstrates professionalism in every thing they do. In a non-face-to-face industry, packaging appearance says a tremendous amount about your company. With this in mind, QAA has established very strict and specific shipping requirements. All parts are shipped in specialized packing material that is not standard in the industry. The packing tape is printed with the company’s logo and even the shipping label is customized and continues to enhance the company’s image. QAA ships over 60 boxes each day and in five years has only had 3 UPS claims. This extremely low claim ratio caused UPS to honor the company as the cover story in the UPS publication Compass in the Winter 2007 premiere issue. High-quality pack- aging and shipping standards leave QAA customers with a positive final impression of their company and build on the established image of amazing customer service. 166 Chapter Twelve A final unique customer service strategy that QAA uses each year is to honor their top 100 customers. Because the customers they want to express appreciation to may not only work in the front office or in the shop, QAA looked for a unique “gift” to share with them. The perfect idea resulted in a local company that roasted peanuts. QAA ships 50–100 pound burlap bags of roasted peanuts to their valued customers. The customers hang the bags of peanuts in their shops and invite all of their employees from all areas to grab some peanuts and enjoy the apprecia- tion gift. This unique tradition has become a much anticipated reward for important customers and goes a long way in successfully retaining their business. QAA is a success in customer service and a company that is an inspiration to learn more about. An independent telecommunications company serves approximately 15,000 customers in Oklahoma providing a complete set of advanced communications services ranging from local service to broadband Internet and Ethernet transport. As a regulated utility, telephone companies are sub- ject to the oversight of the Oklahoma Corporation Commission and must maintain a high level of customer service and customer communications. In its continuous attempt to keep pace with competitors and customers’ ever-changing priorities, this company has recently introduced an updated website with a new look that offers new features to customers like online bill payment that even allows customers the option to pay by online check, savings, or credit cards. This allows customers to save on postage and takes away the need for many customers to physically come in to the office to make a payment. Ultimately, the company plans to utilize the Web to allow customers to self-provision services. Civic involvement is a defining quality of the telecommunications company. They regularly participate in spon- soring local festivals and celebrations. They are an active partner in their community and are viewed very positively by customers. A local customer service presence differentiates them from their competitors. Customers appreciate knowing that the voice on the phone is a friend and neighbor and that by doing business with the local telephone company, they are support- ing their own business community. Community colleges fulfill an important and unique niche of the higher education arena. A regional community college in the Midwest serving approximately 12,000+ students is on the cutting edge as they serve their growing student base. While the primary focus of any school is educating its students, academic institutions today face competition from a variety of other similar institutions and other opportunities that students may be motivated to pursue. Most community colleges have some type of an open-door policy which means that almost any student is eligible to enroll in school. After succeeding in attracting those students, numerous factors work together to successfully retain those students until they graduate or until they have achieved the goals that they have set for themselves. Most colleges, including this one, are seeing a focus shift as they work to retain students. Students have a lot of concerns as they work to pursue Excellence in Customer Service 167 educational goals. A concern that has always existed is that of being able to pay for tuition, fees, and books. In years past if a student could not pay these expenses before the start of a new semester, he or she probably did not get to attend. Obviously, a student that has to step out of school for a semester is at a huge risk of not returning. To address this concern, alternative payment methods have been created. Students now can pay upfront, monthly or on some other prearranged schedule. Financial aid is an increasingly important component of paying for school. By having financial aid advisors available to assist in the completion of paperwork, meeting of deadlines, and even having computers for applying for assis- tance in the financial aid area, students may be able to receive dollars that will allow them to fund their education. Since the timing of financial aid dollars may not coincide with the start of a term and the disbursement of checks is time consuming, this school, and many others, has adopted the use of a debit card system. In this type of system, every student has an account for financial aid disbursements and refunds. Automated teller machines (ATMs) are located across the campus so that students can pull out money or use it like a checking account. Overall, the coordination of financial aid and varying payment plans can assist significantly, remov- ing one of the many concerns that students face. Creating a seamless program for the transfer of classes to another school or university is another method for retaining students. University parallel programs allow students to automatically feed into degree programs at a university. Students know that they are taking a class that will transfer and will therefore expedite their degree completion. Developmental classes help students when courses are difficult or they are insufficiently pre- pared for the class in their prior education. Student success is an excellent method of retention in a learning setting. If a student can take a lower-level course to give them an appropriate understanding of the material, they can then be better prepared to succeed in a course that is a higher level that is required to complete their degree. High academic standards are stressed, and enabling students to be equipped to succeed keeps both external and internal customers happy and working together as a team. The physical environment of this school is warm and inviting. The main classroom building feels a little like a mall setting. Parking is plentiful and once the students get into the building they usually stay on campus until they have completed their learning day. They can work and research in the well-appointed media center. Inviting spaces are located all across the campus. Group seating provides students a place to meet their friends or study groups or to just relax. The coffee bar is a fun place to hang out and to study. Retaining students is vital to the success of any educational system, but through the implementation of the diverse retention strate- gies students will be inspired to remain active customers in the process. Students are happy customers and sing the praises of this institution. Most consumers take it for granted that when they flip a light switch the light will come on. When it doesn’t who do we call? The electric company! 168 Chapter Twelve A large electric utility company in the South is an outstanding example of excellent customer service in action. With over 250 employees in the call center, billing, credit/collections, and related services, this utility must have the highest standards in hiring and training the proper people. A detailed screening process is the first step in identifying that appropriate person. Once they are identified as a potential candidate, they have a phone screen- ing, then an interview with a panel of peers and supervisors, a behavioral test, and then if each of these steps goes well, they may receive a job offer. Once hired, the new employee has three months of training before they are allowed to take customer calls without a trainer’s direction. This company sees a tremendous value in this detailed selection and training process. They currently have about a 6 percent turnover rate, and the majority of their employees plan to retire from the company. All employees are trained to handle any call that comes in. They are empowered to address all customers’ concerns from start to finish. They are trained to listen to what the customer may not be sharing that could be relevant to solving the customer’s problems. Unique payment options and flexibility may be all that is necessary to help a customer handle a challenging circumstance. As the economic conditions are fluctuating, customers are more likely to request installment payments or may choose to use their credit card to pay their bill. New methods of serving external and internal customers are continually being explored. External customers are offered different billing options, customer information, and superior service. Internal customers are offered unique work opportunities, career pathing, and job shadowing to identify areas they may want to pursue for promotions within the company and a very attractive and fun work environment. During a catastrophic ice storm a few years ago, customers really saw this company’s dedication to their customers in action. With up to 75 percent of their customers suffering from power outages due to the ice, these employ- ees still came in to work to answer customer calls. The same employees were in many cases also without power at their homes. With temperatures in the teens for several days, customer tensions were very high. People were cold and sitting in the dark. They wanted their power back on NOW! Customer calls were handled with professionalism and patience while at the same time repair crews from all over the country were outside in the cold working to get the power back on. The electric company recruited players from the area football teams to assist in checking on older customers and completing basic paperwork. Some customers were able to restore power within a few days; some others were without power for several weeks. When power was restored, customer feedback was very positive. It was a difficult circumstance that was made better by a provider that had employees that wanted to do all that they could to assist their customers. The examples of excellence in customer service are abundant. Pay attention to those providers that service you faithfully. We can all learn something from their example. Excellence in Customer Service 169 Getting Started Unfortunately, the main reason that more businesses are just talking about the importance of customer service and are not actually providing it is because they do not know how to get started. After reading this book and working through the skill-building exercises and challenges, you have explored the fundamental requirements of creating a successful customer service program. You now know much more than the average customer service provider or customer service manager. Take the knowledge that you have acquired, both from this book and from your own experiences, and begin to offer your customers an enhanced customer experience. Rewards of Providing Excellent Customer Service Companies that provide excellent customer service experience many rewards. Ten of the most beneficial follow: 1. Customers approach business expecting a positive experience. 2. Work is more personally fulfilling. 3. Customers act as coproducers (when appropriate) in assisting in the provision of their own customer service. 4. A unique competitive edge is achieved. 5. Customer challenges are recognized and productive solutions are developed to successfully retain current customers. 6. Problems are creatively solved in an effective and efficient manner. 7. Customer service providers and management feel positive about the roles that they are playing in creating positive exchanges between customers and their organization. 8. Work environments are more pleasant and productive because the value of internal customers is stressed through organization policies, procedures, and culture. 9. Businesses earn a positive reputation and the respect of customers and peers. 10. Profit goals are more successfully accomplished because business philosophies and focus are on satisfying customers. The challenge of seeking and achieving excellence in customer service is not easily overcome. Equipped with the knowledge necessary to create an environment that encourages excellent customer service, and the skills to successfully compete in the industry, the next step is to embark on the path of achieving individual and organizational excellence in customer service. GLOSSARY 170 automatic call distribution Allows calls to be routed to the next available service provider. automatic number identification Allows the call recipient to identify the incoming num- ber and caller. Additional background or historical information may be displayed on the recipient’s computer screen to enable him or her to better serve the customer. brainstorming A problem-solving strategy in which groups of two or more share ideas in an open and accepting environment. Ideas are shared with the group and recorded. “call me” Web browser Allows customers linked with a company’s Internet site to be referred to a call center representative. challenging customers Those customers with problems, questions, fears, and personali- ties that require us to work to achieve true communication. churn (or churn rate) The number of customers who leave a business in a year’s time divided by the number of new customers in the same period. communication The process in which informa- tion, ideas, and understanding are shared between two (or more) people. conflict A hostile encounter that occurs as a result of opposing needs, wishes, or ideas. consumption behavior Refers to the customer’s usage and payment patterns. coproduction When customers participate in providing at least a part of their own cus- tomer service. credibility The combination of our current knowledge, reputation, and professionalism. culture The values, beliefs, and norms a group of people share. customer attributes Characteristics that allow customers to be categorized according to demographic, psychographic, or firmographic information. customer intelligence The process of gathering information; building a historical database; and developing an understanding of current, potential, and lapsed customers. customer lifetime value The net present value of the profits a customer generates over the average customer life. customer retention The continuous attempt to satisfy and keep current customers actively involved in conducting business. customer satisfaction The customer’s overall feeling of contentment with a customer inter- action. customer service Anything we do for the customer that enhances the customer experience. customer service system Any set of procedures that contributes to the completion of customer service. defection rate The percentage of customers who leave a business in one year. demographic information Includes character- istics like age, income, marital status, educa- tion, stage in the family life cycle, whether they own or rent their home, gender, ZIP code, occupation, household size, mobility patterns, ethnic background, religion, and so forth. diagramming A problem-solving strategy that involves creating a visual representation of a problem and system so that improvements may be made. Diagramming includes pro/ con sheets, flowcharts, organizational charts, and mind mapping. electronic mail (e-mail) Sending messages directly from one computer terminal to another. Messages may be sent and stored for later retrieval. empathy The ability to understand what some- one is experiencing and to take action to assist in resolving the situation. Glossary 171 listening The ability to hear and understand what the speaker is saying. low-touch customers Those customers that enter the customer experience expecting a low level of customer interaction. Low touch frequently exists because of technology. market segmentation Dividing customers into groups with similar characteristics. mind mapping A creative approach to dia- gramming a problem in which a problem is recorded on paper and possible solutions branch out from the original problem. See Figure 3.5. mission The means by which an organization will fulfill its purpose. morale An individual’s or group’s feelings or atti- tudes toward a job, supervisor, or company. motivation The individual drive that causes us to behave in a particular way. needs Our personal requirements. negotiation The evaluation of the possible solu- tions to a challenge and the selection of the solution that is mutually beneficial. nonverbal expression Tone and inflection of voice, facial expressions, posture, and eye contact. Nonverbal communication can con- tradict the message conveyed through another method of communication. online bill paying Offers customers the oppor- tunity to receive and pay bills online. organizational charts A method of illustrating the hierarchy of a company by illustrating who reports to whom. See Figure 3.4. outbound calls Calls that originate from the call center to the customer and are usually intended to sell products or services, conduct market research, or respond to customer inquiries. perception The way we see something based on our experience. pitch The highs and lows of the voice. planning Finding a recognizable direction to focus on and the establishment of specific customer service goals. primary expectations The customer’s most basic requirements of an interaction. problem solving An active resolution to a challenging situation. pro/con sheets A simple approach to diagram- ming a problem that involves recording the empowerment To enable or permit customer service providers to make a range of decisions to assist their customers. ethics A set of principles that governs the conduct of an individual or group. expectations Our personal vision of the result that will come from our experience. external customers The customers we do busi- ness with outside our organization. eye contact Allowing our eyes to make visual contact with someone else’s eyes. facsimile (FAX) machine A machine that enables the transmission of graphic materials from one machine to another via telephone lines. firmographic information Includes character- istics about a company such as how many employees they have; the kind of business they are in; whether they are retail, wholesale, or a service provider; their hours of operation; and so on. flowcharts A diagramming approach to prob- lem solving that charts each step of a process to assist in determining why a problem is occurring. See Figure 3.3. follow-up Checking back to determine whether or not a situation is operating according to the initial plan. formal leaders Have the authority and power of their official position. goal An identified result to strive to accomplish. goal setting The process of establishing goals and evaluating their importance. high-touch customers Those customers who enter the customer experience expecting a high level of customer interaction. inbound calls Calls that originate with the customer that may include catalog ordering, billing questions, technical support, product use, or other information. informal leaders Have no official authority but do have the ability to influence others. infrastructure The networks of people, physi- cal facilities, and information that support the production of customer service. internal customers The people we work with throughout our organization. job aids Leadership tools to reinforce training. leadership The ability to influence others. 172 Glossary self-concept The way in which a person sees himself or herself and thinks that others see him or her. self-sufficiency Customers using systems in place to meet their own service needs at a level that results in satisfaction. social media Electronic communication used by consumers to share ideas, information, opin- ions, and personal messages. strategy A plan for positive action. talking Speaking, using words and terminology that others can comprehend. teamwork Working together to improve the efficiency of the whole. teleselling Selling products, services, or infor- mation via the telephone. values A combination of our beliefs, percep- tions, and ideas as to the appropriate response to a situation. voice inflection A variation in the pitch, timing, or loudness of the voice. voice mail A system in which a spoken message is recorded and stored in the recipient’s voice mailbox. The recipient can later retrieve the audible message. wants Things or experiences that are desired. webinars Online collaboration or training. writing Communicating by using the writ- ten word so that others can understand the intended message. arguments for and against a solution. See Figure 3.2. psychographic information Focuses on lifestyle, mode of living, needs, motives, attitudes, reference groups, culture, social class, family influences, hobbies, political affiliation, and so on. purpose The reason for an organization’s exis- tence. reading The ability to look at and comprehend the written word. relationship marketing Cultivating a lasting and mutually beneficial connection with customers. reputation management The process of identi- fying how a company is perceived and estab- lishing an action plan to correct, maintain, or enhance its reputation. respect To give someone recognition or special regard. responsibility check Assessing a situation and determining who should have responsibility and who really does have the responsibility. scope of influence Our ability to influence others based on our perceptions or experiences. secondary expectations Expectations based on our previous experiences that are enhance- ments to our primary expectations. self-assessment An individual evaluation in which individual strengths and weaknesses are identified. 173 Communication, 11, 13, 18, 20, 33, 72–85, 90, 91, 93, 97, 141, 148, 151, 166 ethics in action, 87 methods of, 73, 74, 84 skills, 11, 13, 15, 40, 73, 74, 84 Complaint letters, 4, 10–13 Compliment letters, 10–11 Conclusions, 27, 39, 45, 48, 60, 75, 112, 115 Conflict, 31–32, 101 Consumption behavior, 51, 54–56, 57 Contentment, 3, 10, 141 Coproduction, 65–67, 100, 129 examples, 65 requirements of, 69 Corporate generated surveys, 143 Courtesy, 3, 5, 9, 17, 88, 98, 138, 153 Coworkers, 6, 7, 19, 21, 44, 69, 76, 91, 95, 103, 104, 107, 119, 122, 123, 124, 128, 141 Creativity, 31, 35, 101, 109, 125, 128, 130, 144 Credibility, tips for cultivating, 15, 21–22, 39, 113 Criticism, 31, 123 Cultural barriers, 92–93 Culture, examples, 8, 31, 51, 52–53, 57, 63, 80, 92, 103, 121, 123, 127–128, 141, 169 in specific industries, 52 Customer, 1–9, 14–26, 30, 31, 32, 33, 36, 37, 38, 40–46, 48, 51, 52 attributes, 8 complaints, 3, 31, 40, 51, 53 feelings, 2, 3, 16, 44, 63, 90, 92, 95, 107, 110, 113, 114, 141 intelligence, 73–74, 144 lifetime value, 139 loyalty, 141, 158 needs, 140, 144, 152 retention, how to tell if you need to improve, 25, 136–147 ethics in action, 148 satisfaction, 2, 4, 141, 142, 143, 144, 146, 154, 156, 165 service, 1–9, 14–26, 30, 31, 32, 37, 38, 40, 41, 42, 43, 44, 45, 48, 51, 52, 53, 54, 56, 63, 64–66, 68, 70, 72–85, 90, 91, 93, 94, 95, 96, 97, 99, 100, 101, 103, 107, 108, 111, 115, 119, 120–132, 133, 137, 140, 148–149, 150–158, 163–168 INDEX Accessibility, 3, 24, 152 Action, 3, 5, 19, 22–23, 30–31, 33, 45, 51, 55, 86, 92, 99, 101, 117, 168 Alternatives, 25, 31, 32, 41, 167 Analytical customers, 95 Anger, 10, 16, 32, 42–43, 94–95 Angry customers, 94–95, 111 Apologizing, 44, 157 Appealing to the senses, 80 Appreciation as business strategy, 166 to cope challenging customers, 97 for customers ideas, 42 as customer needs, 5 customer ’s referrals, 151 for customer ’s responses, 144 to long term customers, 138 for motivation, 117 in quality recognition form, 103 Assumptions, 16, 45 Attention span, 75, 114 Attitude, 3, 4, 6, 8, 15, 76, 90, 96, 110, 111, 115, 116, 122, 124, 128, 131, 155 Automated phone systems, 80, 82 Automatic call distribution, 155 Automatic number identification, 155 Awareness, 41, 45, 57, 80, 113, 131 Barriers, 15, 44–45, 75, 92–93 Blogs, 151, 152 Brainstorming, 35 Call centers, 154–155, 157, 168 “Call me” web browser, 155 Challenges, 4, 7, 9, 13, 14–26, 30, 31, 35, 38, 39, 40, 48, 51, 60, 70, 73, 75, 79, 82, 87, 94, 102, 103, 107, 111, 113, 114, 119, 123, 124, 126, 134, 149, 152, 160, 169 ethics in action, 27 Challenging customers, 90–101, 131 characteristics of, 92–98 ethics in action, 103 tips to keep from creating, 91–92 Churn or churn rate, 139 Closed mind, 75 Comment cards, 4, 142–143, 145 Commitment, 19, 20, 21, 31, 52, 75, 114, 137, 138, 164 ethics in action, 10 examples, 2–3 sample segments, 56 provider, 2, 4, 5, 7, 8, 10, 15, 16, 17, 21, 22, 24, 25, 30, 31, 32, 37, 38, 40, 41, 42, 43, 44, 45, 51, 52, 63, 64–65, 70, 73, 74, 77, 78, 80, 82, 83, 85, 86, 91, 93, 95, 96, 97, 99, 100, 101, 107, 108, 111, 118, 121, 122, 123, 126, 128, 131, 137, 140, 148, 154–155, 169 systems, 68, 70 variables, 51, 53 Customer-retention program, devel- oping a, 137, 138, 139–141, 148 Decision-making, 18, 44 Defection rate, 139, 140 Delegation, 125 Demographic information, 8 Designing systems, 68, 70–71 Diagramming, 35, 36, 38 Electronic mail or e-mail, 81–82 Emoticons, 82 Empathy, 3, 41, 99, 101 Empowering, steps to, 64–65, 67 Empowerment ethics in action, 70 examples, 62–68, 121 Encouraging words, 42 Environment, 2, 7, 8, 17, 22, 30, 31, 32, 35, 40, 41, 52, 60, 67, 70, 74, 75, 78, 101, 107, 108, 109, 110, 117, 121, 127, 128, 129, 130, 131, 137, 141, 146, 148, 155, 167, 168, 169 Ethics, checklist, 23 Evaluating effectiveness, 146 Evaluation, 15, 33, 34, 40, 57, 87, 104, 105, 112, 141 Excuses, 45, 96, 100, 112, 113, 122–123 Expectations, ‘tips to exceed your boss’, 3, 5, 7, 8, 10, 15, 16–18, 20, 24, 27, 42, 53, 57, 74, 82, 91, 95, 108, 124, 131, 141, 142, 146 Explanation, 30, 34, 60, 63, 70, 95, 96, 99, 125, 157 External customers, 5, 6, 7, 53, 81, 82, 91, 94, 131, 132, 168 Eye contact, 39, 74, 75, 76, 80 174 Index warranties in, 66 webinars and, 157 Opportunities, 4, 7, 11, 18, 19, 21, 24, 25, 27, 31, 32, 35, 39, 41, 44, 47, 55, 56, 63, 64, 73, 74, 75, 79, 80, 83, 84, 85, 87, 95, 96, 98, 100, 102, 107, 109, 115, 116, 118, 119, 125, 126, 128, 129, 130, 131, 132, 133, 140, 141, 143, 151, 152, 153, 154, 156, 157, 158, 159, 160, 164, 165, 166, 168 Organizational charts, 35, 38 Outbound calls, 155, 159 Outsourcing, 24, 25 Partnerships, 67, 69 Past history, 45 Perception, 3, 15, 16, 18, 22 Perspective, 32, 45, 48, 75, 111, 142 Pitch, 76, 137, 151 Philosophy, 10, 15, 63, 121, 123–124, 148–149 Plan, 19, 40, 45, 50–58, 112–113, 137, 168 Plan of action, 45 Planning, 51, 57 Policy, 22, 23, 42, 118, 165, 166 Power phrases, 79 Price, 5, 6, 17, 53, 142, 153, 156, 165 Primary expectations, 17 Problem resolution, 41, 42 Problem solving, 29–46, 95, 96, 99, 128, 155 ethics in action, 48 Problem solving model, 32, 33, 34, 47 Problem solving strategies, 30, 35–40, 47 Pro/con sheets, 35–36, 47 Productivity, 81, 110, 116 Provider, 8, 63, 69, 70, 73 Psychographic information, 8 Purpose statement, 27–28, 63, 68 Quality, 5, 26, 39, 103–104, 126, 137, 140, 164, 165, 166 Quality Aircraft Accessories Inc, 165 Reading, 17, 34, 74, 85, 93–94, 160, 169 Relationship marketing, 73, 85 Reputation, management, 5, 6, 9, 19–20, 39, 43, 51, 56, 86, 91, 169 Resistance to change, 44 Respect, 6, 7, 16, 21–22, 42, 74, 80, 91, 93, 95, 98, 128 Responsibility, check, 6, 99–100, 102 Reward programs for customer intelligence, 73 through social media, 151 Rewards of providing excellent customer service, 169 Reward system, 127 Facebook, 18, 81, 151, 158, 160 Fax cover sheet, 83–84 Fax machines, 4, 52, 80, 83–84, 94, 128, 129 Fear(s), 23, 41, 45, 65, 90, 114, 121, 128, 156 of failure, 45 of success, 45 Firmographic information, 8 Flexibility, 41, 42, 125, 168 Flowcharts, 35, 36 Focus groups, 143 Follow-up, 3, 13, 30, 45–46, 80, 140 Formal leaders, 123–124, 130, 133 Goal(s), setting, 2, 7, 21, 22, 27, 28, 32, 43, 46, 51, 59, 68, 87, 88, 90, 94, 99, 100, 109, 110, 112, 113, 116, 122, 123, 126–127, 130, 131, 133, 140, 164, 166, 169 Habits, 15, 44–45, 46, 77, 86, 154 High-touch, 51, 53–54 customers, 53–54 examples, 53–54 Historical data, 73, 143, 144 Immature customers, 96–97 Impatient customers, 94, 103 Inbound calls, 155 Informal leaders, 123–124, 130 Informal surveys, 142, 143 Information, 3, 4, 5, 8, 9, 10, 12, 22, 24, 25, 27, 28, 30, 31, 34, 36, 38, 41, 43, 48, 51, 54, 55, 60, 65, 66, 67, 73, 74, 77, 81, 83, 84, 87, 88, 93, 94, 95, 96, 98, 99, 100, 112, 113, 114, 121, 125, 128, 129, 130, 133, 141, 142–143, 144, 146, 151, 154, 155, 156, 157, 160, 168 Infrastructure, 51–52, 57 Insecurity, 45 Interaction, 2, 11, 16, 17, 24, 25, 41, 43, 45, 47, 53, 55, 74, 77, 80, 83, 91, 101, 102, 121, 133, 141, 145, 158, 165 Interdependent environment, 121 Internal customers, 5, 6–7, 53, 80, 91, 92, 94, 129, 131, 137–138, 143, 167, 168, 169 Internet, 18, 48, 80, 81, 87, 94, 133, 153, 155–157, 160, 166 JKJ benefits, LLC, 164 Job aids, 128–130 Leaders, characteristics of excellent, 121, 122, 123–124, 125, 126, 128, 130, 154 Leadership, 108, 120–132 ethics in action, 133 Leadership without position, 130–131Listener, qualities of a good, 74, 75, 76, 86, 125 Listening, barriers to, 11, 30, 41, 74–76, 77, 78, 85, 86–87 Low-touch, 51, 53, 54, 58 customers, 51, 53–54, 58 examples, 54 Mailing lists, 5 Management, 4, 7, 15, 19, 22, 31, 34, 52, 54, 59, 60, 63, 87, 103, 107, 108, 109, 110, 122, 123, 124, 129, 130, 140, 141, 145, 152, 165, 169 Market segmentation, 51, 56, 57, 74 Measuring satisfaction, 141–142, 143, 145, 146–147 Mind mapping, 35, 38, 39 Misconceptions, 16, 108 Mission statement, 27, 63 Morale, 92, 107, 110, 111, 117, 119, 123 Motivating factors, 109–110 Motivations, 41, 104, 106–117, 155 ethics in action, 119 Name recognition, 5, 140, 146 Needs, 3, 5, 6, 7, 8, 10, 11, 21, 25, 31, 34, 41, 46, 47, 52, 56, 64, 66, 69, 70, 77, 81, 83, 84, 86, 93, 95, 96, 97, 98, 99, 108, 109, 110, 113, 114, 115, 117, 121, 124, 126, 128, 131, 133, 137, 138, 139–140, 141, 144, 145, 147, 148, 152, 153, 155, 156, 157, 164, 165, 166 Negotiation, 30, 40–43 process, 40, 42, 43 skills, 30, 40–43 Newsletters for customer appreciation, 5 for customer retention program, 140 employees contribution, acknowl- edgement, 117 preparation of, 119 as nontraditional approaches, 25 Noncommittal customers, 95–96 Non-English-speaking customers, 102 Nontraditional approaches, 24, 25 Nonverbal expression, 74 Obstacles, 15, 45, 86 Older customers, 93, 94, 168 Online business accounts and bills management in, 54, 153, 156, 166 coproduction and, 65 customer contacts in, 24 customer service through, 81, 156 frequently asked questions (FAQs) in, 3 menus in, 152 ordering or assistance in, 20, 155 stock trading through, 157 training programs in, 156–157 Index 175 Sales, 7, 52, 67, 134, 137, 141, 143 Scope of influence, 18, 26 Secondary expectations, 17, 26 Self assessment, 112 Self concept, tips for improving, 111–116 Self-sufficiency as coproduction concept, 65–66 Self talk, 114–116 Senses, appealing to the, 80 Service, 2, 7, 8, 10, 19, 20, 24–25, 52, 65, 66, 73, 121–122, 128, 145, 146, 151, 153, 154–155, 158, 164 Service costs, 154 Shifting responsibility, 43 Social media, 151–152 Solutions, finding, 30, 32, 34, 35, 36, 39, 42, 45, 63, 95, 98, 164, 169 Special needs customers, 97, 98 Speed, 30, 76, 153 Spoken messages, 76, 93 Strategy, 25, 35, 50–57, 153, 166 ethics in action, 60Suggestions, 4, 25, 31, 32, 35, 40, 42, 107, 130, 131, 153 Superior customers, 96 System, 4, 7, 67, 70–71 System design, guidelines, 68 Talkative customers, 97 Talking, 2, 74, 75, 76, 85, 94, 98, 114, 138, 148, 153, 164 Teamwork, 116–117 Technology, 9, 10, 24, 52, 53, 80–84, 153–154, 160 ethics in action, 160 Telephone(s), skills, 5, 24, 51, 67, 76–78, 80, 94, 129, 154, 155, 157, 159, 166 Teleselling, 154–155 Teleservices, 77–78 Texting, 80, 84, 151 Thinking speed, 5, 39, 40, 52, 113 Time management, 59–60 Training, 24, 25, 30, 39, 115, 123, 128– 129, 153, 154, 156, 157, 165, 168 Twitter, 151Understanding, 3, 15, 16–17, 27, 41, 47, 53, 55, 56, 73, 85, 99, 107, 108, 139 Unspoken messages, 41 Values, 7, 15, 22, 39, 45, 79, 91, 137–138, 139, 152, 166 Verbal comments, 143, 147 Vision, 7, 16–17, 44, 121, 155 Visual distraction, 75 Visual environment, 75 Vocal problems, 76 Voice inflection, 76–77, 82 Voice mail, 52, 80, 82–84, 129, 157 Wants, 5, 21, 108, 118, 131 Webinars, 153, 157 Word-of-mouth advertising, 18 Words to avoid, 78–79, 85 Words to use, 78–79, 85, 128 Writing, 10, 13, 74, 84, 93, 103, 122, 133, 144, 156 YouTube, 151
– Read Proctored Exam – Study Guide file to understand the assignment – 2 hours to complete – 60 multiple-choice questions – 13 main topics that the questions will address
Saylor URL: http://www.saylor.org/books Saylor.org 1 This text was adapted by The Saylor Foundation under a Creative Commons Attribution -NonCommercial -ShareAlike 3.0 License without attribution as requested by the work ’s original creator or licensee. Saylor URL: http://www.saylor.org/books Saylor.org 2 Chapter 1 Introduction to Law L E A R N I N G O B J E C T I V E S After reading this chapter, you should be able to understand the nature and sources of law, and the concept of the rule of law and how it affects business and economic prosperity. At the conclusion of this chapter, you should be able to answer the following questions: 1. What is the law? 2. Where does our law come from? 3. What is a rule of law? 4. How is the law relevant to business? 5. How does the study of the legal environment of business create a foundation for future business courses? You might be wondering what the law has to do with you. You try to follow the rules. You don’t get into any trouble. You want to engage in honest dealings in business. Besides, you can always hire an attorney if you need legal help. This may all be true. However, it is imperative for those in the business world to understand the legal environment in which they are operating. While you may have the best inte ntions and be truly diligent in your efforts to do business fairly, inevitably conflicts will arise in everyday business dealings. For example, what does it mean to do business “fairly”? Fair to whom? Fair to your shareholders? Fair to your employees? Fair to the consumers who will purchase your products? Through which ethical lens will you contemplate these issues? Trade -offs are a part of business. If you want to increase shareholder profits, you may need to reduce labor costs. One way to reduce labor cos ts is to use cheaper labor. If you pay your employees less, your employees will be less well off, but your shareholders may be happier. Consider the credit crisis that came to the world’s attention in October 2008 and nearly toppled the U.S. economy into d epression. Hundreds of thousands of homes were foreclosed by banks ( Figure 1.1 “The Credit Crisis” ), leading to a vicious cycle of depressed housing prices, shattered consumer confidence, and business retrenchment. You may be thinking that this has little to do with you or with the study of the Saylor URL: http://www.saylor.org/books Saylor.org 3 legal environment of business. Think again. The credit crisis affected everyone. And the nature of the crisis implicated several legal environment issues. Figure 1.1 The Credit Crisis Source: Photo courtesy of Bren del, http://en.wikipedia.org/wiki/File:Foreclosedhome.JPG . In a nutshell, the U.S. financial system nearly collapsed under the weight of high default rates among mortgagees, the issuance of excessive subprime mortgages to unqualified debtors, collateralized debt obligations (CDOs) that were not being serviced and could not be sold, and a mortgage banking system with flawed incentive structures from the bottom to the top. The mortgage industry created incentives for those who worked in that industry to act in their own self -interest to make a profit, even at the exp ense of the long -term health of the institutions for which they were working. Considering this flawed incentive system, the results were not surprising to many economists, who know that people tend to act in their own self -interest, even at the expense of their institutions’ goals. Mortgage brokers had very strong incentives to approve every mortgage applicant, regardless of creditworthiness or Saylor URL: http://www.saylor.org/books Saylor.org 4 ability to service the mortgage. This was because the lenders were pressuring them for more mortgages, so that the lenders themselves could sell those mortgages for a profit. And this pressure for “more” was endemic at every level of the mortgage industry, from the would -be homeowner who wanted more house than he or she could afford to the investment bankers who wante d more CDOs on which they could profit. However, excessive risk was undertaken, and when mortgagees began defaulting on their mortgages, the market became flooded with houses that had been foreclosed. As supply of houses increased and demand for them fell, housing prices plummeted, which meant that not only were the investors not receiving income on their investments, but also homeowners were losing the value of their investments, since their house prices were plummeting. The end result was that many homeow ners were “upside down” on their obligations, meaning that they owed more on their houses than what the houses were worth. This created an incentive for mortgagees to abandon their debt obligations. When the investors did not receive income on their invest ments, they also were not receiving the cash flow to cover their debts, and they could not service their obligations under their CDOs. Parties at every level began clamoring for protection from their creditors from the U.S. bankruptcy courts by filing peti tions for bankruptcy. Hyperlink: Credit Crisis http://vimeo.com/3261363 This video explains the credit crisis and will help you begin thinking about the intersection between the legal environment of business and the role of government in regulating business. After watching the video in Note 1.2 “Hyperlink: Credit Crisis” , consider the intersection between law and economics. Former Federal Reserve Chairman Alan Greenspan had consistently maintained tha t private regulation (that is, self -regulation by private industry) was better at containing risk than government regulation. But when the 2008 credit crisis manifested, Greenspan retracted this belief, at least in part. He expressed that he was in “a stat e of shocked disbelief” concerning the financial institutions’ inabilities to self -regulate. [1] He always believed that the incentive of survival of the institution itself would force banks to self -regulate. However, this “shocked disbelief” underscored a fissure within the discipline of economics —namely, whether the same economic principles that apply to individuals also apply to organizations. While we know from our study of economics that individuals act in their own self -interest, Saylor URL: http://www.saylor.org/books Saylor.org 5 the 2008 credit crisi s perhaps illustrated that people continue to act in their own self -interest, even when working within a firm. The firm itself is only a collection of individual people, and so the firm itself does not act in any type of organizational self -interest. You m ight be wondering why we are discussing economics. This is because economic principles are intertwined with economic prosperity, and economic prosperity is intertwined with business, as the preceding example illustrates. To understand what happened in the credit crisis and, more importantly, how to prevent something like this from happening in the future, we have to understand economic principles that impel behavior. Additionally, we have to understand how our laws can embody the knowledge that we have from economics to prevent situations like this from happening in the future. Specifically, while a basic principle of economics is that individuals act in their own self -interest, they do so within the rules of the game. That is, they do so within the paramete rs of the law. Additionally, sometimes individuals weigh the penalties of violating the law against the chances of getting caught to determine how they should behave. In both instances, the law is a restraint on behavior. Reflect on the credit crisis and h ow our laws could have entirely averted or seriously mitigated the fallout that resulted from it. For example, if the laws regulated the incentive structures that exist within private industry, the individual incentive to make a profit would not have been allowed to overtake the financial institutions’ need to self -preserve by limiting risk. Likewise, if our banking regulations limited the types of services that banks could offer, perhaps the exotic financial instruments that were created as a precursor to the credit crisis would not have been permitted in the first place. If the size of our financial institutions had been limited by law, the dangerous fallacy that the financial institutions were too large to fail could not have been perpetuated. If compensa tion packages were legally restricted by limitations on size or severed from linkages to performance, then individual incentives to maximize profit could have been restrained. Additionally, this situation raises several ethics questions. For example, was i t ethical to loan money to people who were not able to service those debts? As you think about these questions and the many other questions that will arise during your study of the legal environment of business, try to set aside any fixed ideas that you ha ve already formulated about law and the legal system. Many students who are new to the study of law find themselves sharply swayed by a Saylor URL: http://www.saylor.org/books Saylor.org 6 particular type of fiction that has grown around the legal system. Specifically, many students find that they harbor a s ense of repugnance to law, because they have heard that it is filled with frivolous lawsuits brought by a litigious public waiting to pounce at the smallest slight, along with money -grubbing attorneys waiting to cash in. We ask that you set aside those and any other preconceived notions that you may harbor about the law and the legal system. The law is a dynamic, sophisticated field. Frivolous lawsuits are not permitted to advance in our legal system, and most attorneys are committed to justice and fairness . They work hard to protect their clients’ legal interests and simply do not have the desire or the time to pursue frivolous claims. Indeed, there is no incentive for them to pursue such claims, because our legal system does not reward such behavior. Most people want to conduct themselves and their business dealings within the parameters of the law. Even if we are very cynical, barring any other compunction to behave well, we can see that it makes the most economic sense to do so. Following the rules of the game saves us money, time, and aggravation, and it preserves our individual and professional reputations. So if most people recognize that they have an incentive not to run afoul of the law, why are there so many legal disputes? There are many reasons for this, such as the fact that many of our laws are ambiguous, and reasonable people may disagree about what is “right.” Additionally, legal injuries happen even under the best of conditions, and the aggrieved parties need a method to press their claims to b e compensated for their damages. A common theme in the study of the legal environment is responsibility. Much of our legal wrangling seeks to answer the questions, “Who is responsible, and what should be done about this injury?” Additionally, and perhaps m ore importantly for business, is the concern of how to limit liability exposure in the first place. A solid understanding of the legal environment of business should help limit the risk of liability and thus avoid legal disputes. Moreover, it should help y ou recognize when you need to contact your attorney for assistance in defining the contours of the law, which are the rules of the game. The law provides continuity and a reasonable expectation of how things will be, based on how they have been in the past . It provides predictability and stability. This book does not teach you how to practice law or to conduct legal research. That is the work of attorneys. Legal research is a sophisticated method of research that seeks to determine the current state of Saylor URL: http://www.saylor.org/books Saylor.org 7 the law regarding narrowly defined legal issues. Legal research helps guide our behavior to help us comply with the rules of the game. When you need an answer regarding a specific legal issue, you will contact your attorney, who will research the issue, inform you of the results of that research, and advise you of the decisions you must make with respect to that issue. The goals of this book are practical. Try to conceptualize your study of the legal environment of business as a map by which you must navigate y our business dealings. We want to teach you how to read this map so that you are able to understand the law and how it affects your business and your life. Besides limiting legal liability proactively, an understanding of the law can also help you avoid se rious missteps. After all, ignorance of the law is no defense for violating the law. This chapter provides an overview of the legal system. We begin with a discussion of what the law is, and then we turn our attention to the sources of law, the rule of law , the reasons why rule of law is important to business, and how law affects business disciplines such as management, marketing, finance, and accounting. The chapter concludes with a discussion of the link between rule of law and economic prosperity. Key Ta keaways Law is a dynamic and ever -changing field that affects everyone, both in their individual capacities as people and in their business interactions. Studying the legal environment of business helps us understand how to reduce liability risks, identify legal problems that require an attorney’s assistance, and identify the links between business and the law. [1] Brian Knowlton and Michael M. Grynbaum, “Greenspan ‘Shocked’ That Free Markets Are Flawed,” New York Times , October 23, 2008, http://www.nytimes.com/2008/10/23/business/worldbusiness/23iht – gspan.4.17206624.html (accessed August 18, 2010). Saylor URL: http://www.saylor.org/books Saylor.org 8 1.1 What Is Law? L E A R N I N G O B J E C T I V E S 1. Understand the meaning of jurisprudence and how its study can lead to greater understanding of our laws and legal system. 2. Distinguish among law as power, legal positivism, legal realism, and natural law. 3. Examine strengths and criticisms of sever al theories of jurisprudence. 4. Explore examples of several theories of jurisprudence. If you were asked to define “the law,” what would you say? Is “you should eat five fruits and vegetables a day” a law? What distinguishes law from mere suggestions or good advice? The key difference is obviously enforcement and consequence. If you don’t eat five fruits and vegetables a day, you are not going to be imprisoned or fined. If you steal or embezzle, however, you may be prosecuted and face stiff financial penaltie s and imprisonment. Law , therefore, is a set of rules that are enforced by a government authority. Now consider the nature of law. Would you say that the law includes only the actual words that are written, or does it also include reading between the lines to discern the spirit of the law? Would you follow a law that you disagreed with, or would you ignore such a law? Do you believe that what the law actually is matters as much as who enforces it? Do you think that morality is a part of legality, or do you think that morality is wholly separate from the law? Based on the particular system of jurisprudence to which one ascribes, these questions will generate different answers. Not only will the answers to these questions differ, but the potential outcomes of legal disputes can also vary widely, depending on one’s conception of what the law is. These differences highlight fundamental disagreements over the nature of law. Jurisprudence is the philosophy of law. The nature of law has been debated for centuries, giving rise to a general coalescence of ideas to create particular schools of thought. Several different theories of jurisprudence are explored in the paragraphs that follow. At a most basic interpretation, some believe that law is simply power. That is, t he law is followed because the sovereign issues orders that are backed by threats. Consider tyrannical rulers who create Saylor URL: http://www.saylor.org/books Saylor.org 9 arbitrary laws or bad laws. If the sovereign has the power to enforce those “laws,” then regardless of the “badness” of the law, it is still law. The Nazis executed six million Jews pursuant to German law during World War II. Saddam Hussein routinely tortured and executed political opponents and minority Sunni Muslims in Iraq under Iraqi law. The military in Myanmar (known euphemistically as the State Peace and Development Council) imprisoned the democratically elected and Nobel Peace Prize –winning prime minister of the country, Aung San Suu Kyi ( Figure 1.2 “Aung San Suu Kyi” ), under color of authority . (Actions taken under the law are sai d to be under the color of authority.) Those who ascribe to the idea that law is power often argue that coercion is an essential and necessary feature of law. Figure 1.2 Aung San Suu Kyi Source: Photo courtesy of the U.S. Department of State, http://en.wikipedia.org/wiki/File:Burma_3_150.jpg . Let’s explore whether the law is nothing more than power. If an armed person robs your store, you will very likely hand over what ever it is that he or she wants. The robber has exercised power over you but has not exercised the law. This is because, as you might point out, an armed robber is not the sovereign power. But compare this to a sovereign who exercises power over you. For i nstance, imagine a government that institutes compulsory military service (the draft) under threat of imprisonment for failing to comply. The sovereign would have the power to deprive us of our liberty if we did not follow the rules; such a law certainly h as the force of power behind it. Many have criticized the understanding of law as nothing more than power backed by threats. For example, some point out that if law is nothing more than power, then the subjects of the law are Saylor URL: http://www.saylor.org/books Saylor.org 10 simply at the mercy of whoever is in power. If we look at the U.S. system of government, however, citizens generally do not feel that they are “at the mercy” of the government. This is because people also have power. People can elect their government officials, and they can vote “out” government officials who aren’t doing a good job. In this way, those in power are accountable to the people. Other criticisms include the more piercing observation that not all law requires the exercise or threat of overt power. For instance, many of our l aws rely on economic incentives, rather than force of power, to encourage compliance. Though penalty provisions may exist for violating those laws, those penalties may not be driving compliance itself. A competing view is that of legal positivism , whose pr oponents disagree that law is simply power. Legal positivists believe that the law is what the law says. The laws are written, human -made rules. The law is not drawn from any source higher than man. Legal positivists do not try to read between the lines. T hey may disagree with the law as it is written, but they will acquiesce to the sovereign power and follow the law as it is written. They reject any belief that they have an individual right to disobey a law that they happen to oppose, providing that the la w is from a legitimate source. Positivists believe that law is wholly separate from any consideration of ethics. Moreover, they do not believe that people have intrinsic human rights other than those created by the law. This is very different from a natura l rights perspective, which is discussed in the following paragraphs. Positivists differ from the view that law is simply power, because they believe that valid law must be created pursuant to the existing rules that allow the sovereign to create law. Unde r this way of thinking, an arbitrary declaration of law by a sovereign who did not follow the rules for creating the law would not be viewed as valid law. Additionally, positivists would not consider any rule or “law” created by an illegitimate ruler as va lid law. Consequently, a legal positivist would feel no need to obey an illegitimately created “law.” Consider the example of the draft again. Some people have a strong moral objection to engaging in armed conflict with other human beings. However, a legal positivist would most certainly comply with a law that required compulsory conscription, though he or she might use other legal channels to try to change the law. Saylor URL: http://www.saylor.org/books Saylor.org 11 A common criticism of legal positivism is that it prohibits individuals from remaining true to their own consciences when their consciences conflict with the laws of the sovereign. However, for a positivist, the desirability of enacting a law that might be viewed as “good” or “bad” is not relevant for determining what the law is. Some critics poi nt out that legal positivism is too limited in its conception of law. For instance, at least some laws seem to reflect a moral stance. The prohibition against insider trading (using nonpublic information to buy or sell a stock to make money) might be said to encompass the idea of fairness, which is a moral consideration. Likewise, due process (fundamental fairness and decency in government actions) might be said to encompass the ideas of both fairness and a moral position against cruelty. Moreover, not all law is the result of a sovereign -issued, written rule. For example, international customary law has developed through customary practices. It is valid law, but it is not a set of rules handed down from a sovereign ruler. A different viewpoint is legal reali sm , which is the belief that the law itself is far less important than the consideration of who is in the position to enforce the law. Like positivists, legal realists believe that law is the product of human making. However, unlike positivists, they belie ve that the outcome of any issue that arises under law is dependent on the person, such as a judge, who is in the position to exercise power under the mantle of the law. Additionally, realists believe that social and economic considerations should be broug ht to bear in legal disputes, which may very well be “extra” considerations that are not captured by the written law itself. If a realist brought a dispute before a particular judge who was known to be unsympathetic to that particular type of dispute, the realist would believe that the judge’s decision would reflect that leaning. For example, if a dispute arose under the Clean Water Act, and the defendant was a legal realist who believed that the judge was unduly harsh with environmental offenders, the lega l realist would not look to the actual words of the Clean Water Act itself to determine a likely outcome. Instead, the defendant would view the judge’s personal and professional beliefs about water pollution as determinative factors. Moreover, if the plain tiff in the same case were a realist who did not believe that the Clean Water Act was very strong, that plaintiff might hope that the judge would Saylor URL: http://www.saylor.org/books Saylor.org 12 consider the social importance of clean water to human health, natural environment, and nonhuman animals. Crit ics of legal realism point out that those who are in the position to exercise the power of the law over others should not circumscribe the checks and balances of our system of government by considering factors outside of legitimate sources of law when maki ng decisions. For instance, they argue that judges should not use any factors other than the written law when rendering decisions. Legal realists, however, point out that judicial interpretation not only is necessary but also was contemplated by our Foundi ng Fathers as a built -in check and balance to our other branches of government. Natural law is the idea that humans possess certain inalienable rights that are not the products of human -made law. Therefore, we can say that natural law differs from both positivism and realism in this important respect. Humans are able to reason, and therefore the y are able to discover moral truths on their own. They are not automatons who require a sovereign power to tell them right from wrong. Natural law adherents do not reject human -made law. However, they recognize that human – made law is subordinate to natural law if the two types of law conflict. Civil rights activists often rely on natural law arguments to advance their platforms. This is true today as well as historically. For example, a civil rights advocate might point out that regardless of what the law “ says,” discrimination based on race is simply wrong. If the written law allowed racial discrimination, natural law adherents would not recognize the law as valid. Each theory of jurisprudence can inform our understanding of legal issues by allowing us to s ee the same thing from many different perspectives. Moreover, depending on philosophical perspective, there may be several possible outcomes to the same legal dispute that are equally supportable. This understanding can help us identify common ground among disputants as well as points of departure in their reasoning. K E Y T A K E A W A Y S Saylor URL: http://www.saylor.org/books Saylor.org 13 Different theories of jurisprudence inform our understanding of what the law is. Examining legal issues through the lenses of different theories of jurisprudence allows us to see how different outcomes can be defended. E X E R C I S E S 1. Read “The Case of the Speluncean Explorers” at http://www.nullapoena.de/stud/explorers.html . Identity the justice’s opinion with which you most closely agree. Name the different theories of jurisprudence used by each justice in reaching his or her opinion. 2. What are some examples of natural law in our legal system or system of governance? 3. Is it more important for you to follow the le tter of the law or to follow the spirit of the law? In what circumstance would you believe the opposite to be true? 4. Can you think of any examples of law in which the threat of force or power is not needed? 5. Do you believe that morals are a part of our law, or do you believe that morality and law are separate concepts? Saylor URL: http://www.saylor.org/books Saylor.org 14 1.2 Sources of Law L E A R N I N G O B J E C T I V E S 1. Differentiate between social customs and law. 2. Become familiar with primary sources of law in the United States. 3. Understand the difference between public law and private law. 4. Understand the relationship between state and federal systems of government. Hyperlink: Supreme Court Friezes http://www.supremecourt.gov/about/north&southwalls.pdf Along the north and south walls of the Great Hall at the U.S. Supreme Court, friezes representing the great lawgivers in history are carved in marble. Among them are Hammurabi, Moses, Solomon, Draco, Confucius, Muhammad, Napoleon, and one American. Click the link to find out who he is. Where does the law come from? How do you know right from wrong? Certainly your caretakers taught you right from wrong when you were a child. Your teachers, community elde rs, and other people who were in the position to help shape your ideas about appropriate manners of behavior also influenced your understanding of which behaviors are acceptable and which are not. Additionally, employers often have very firm ideas about ho w their employees should comport themselves. Those ideas may be conveyed through employers’ codes of ethics, employee handbooks, or organizational cultures. Of course, actions that are considered “wrong” and inappropriate behavior are not violations of the law. They simply may represent social norms. For example, it is generally not acceptable to ask strangers about their income. It is not illegal to do such a thing, but it is considered impolite. Imagine that you are interviewing for a position that you re ally want. Can you imagine yourself asking your potential employer how much money he or she makes? It would not be illegal for the employer to refuse to hire you based on your lack of social skills. However, it would be illegal for the employer not to hire you based solely on your race. Saylor URL: http://www.saylor.org/books Saylor.org 15 So what is the difference? One type of “right from wrong” is based on societal norms and cultural expectations. The other type of “right from wrong” is based on a source recognized as a holding legitimate authority to make, and enforce, law within our society. These are two types of rules in our society —social norms and laws. A Question of Ethics In January 2010, Haiti, the poorest country in the Western Hemisphere, was struck by a massive earthquake that killed tens of thous ands —maybe even hundreds of thousands —of people. Rescue workers rushed to remove survivors from the rubble, but in the days following the earthquake thousands of people wandered the streets without food or shelter. Some instances of looting and violence oc curred as survivors grew desperate for sustenance. In the meantime, Royal Caribbean operated a cruise line that made a regular stop at Haiti, at a private beach where it had previously spent millions of dollars in improvements to ensure that the vacationer s on its cruise ships would enjoy themselves during their overnight stops. Within a week of the disaster, Royal Caribbean was seeking to assure its customers that the stop in Haiti was not unethical. It pointed out that bringing tourist dollars to Haiti wa s actually an ethical thing to do, despite the thousands of dying and injured just a short distance away. If you were scheduled to begin a vacation on a Royal Caribbean cruise ship that docked at its private beach during the week following the earthquake, would you go? If you decided to go, how would your friends and family react to your choice? If Royal Caribbean was not legally required to issue refunds for nonrefundable tickets, should it be willing to issue refunds anyhow? Check out a video of Royal Car ibbean’s CEO discussing his company’s involvement in bringing emergency supplies to Haiti, as well as the potential for using ships as hotels or hospitals in the interim. http://cnn.com/video/?/video/world/2010/01/18/ct.anderson.haiti.cruise.cnn Social customs may be violated on pain of embarrassment or ostracism. Someone ma y choose to ignore social customs, but there are usually negative social or professional consequences to doing so. A person who violates social customs may be said be a boor, or people may try to avoid that person Saylor URL: http://www.saylor.org/books Saylor.org 16 because his or her actions and comments ma ke others uncomfortable. However, no legal repercussions follow violating social customs. Violations of law are different. Violating the law carries penalties, such as liability or loss of liberty, depending on the type of violation. While we may generally decide whether or not to conform to social customs, we are compelled to obey the law under threat of penalty. Law can generally be classified as public law or private law. Public law applies to everyone. It is law that has been created by some legitimate authority with the power to create law, and it has been “handed down” to the people within its jurisdiction. In the United States, the lawmaking authority itself is also subject to those laws, because no one is “above” the law. If the law is violated, pena lties can be levied against the violator. These penalties are also “handed down” from some recognized source of authority, like the judiciary. Of course, people in the United States may participate in many law -creating activities. For instance, they may vo te in elections for legislators, who, in turn, create legislation. Likewise, if people have a legal claim, their case may be heard by the judiciary. It’s important to note, however, that not all law is public law. Private law is typically understood to be law that is binding on specific parties. For instance, parties to a contract are involved in a private law agreement. The terms of the contract apply to the parties of the contract but not to anyone else. If the parties have a contract dispute, they will b e able to use dispute -resolution methods to resolve it. This is because both parties of the contract recognize the judiciary as a legitimate authority that can resolve the contract dispute. However, regardless of the resolution, the terms of the contract a nd the remedy for breach will apply only to the parties of the contract and not to everyone else. Additionally, some law is procedural and some law is substantive. Procedural law describes the legal rules that must be followed. In other words, it details t he process or rules that are legally required. For instance, the U.S. government must generally obtain a warrant before searching someone’s private home. If the process of obtaining the warrant is ignored or performed illegally, then procedural law has bee n violated. Substantive law refers to the actual substance of the law or the merits of the claim, case, or action. Substantive law embodies the ideas of legal rights and duties and is captured by our different sources of law, like statutes, the Constitutio n, or common law. Saylor URL: http://www.saylor.org/books Saylor.org 17 Sources of Law In the United States, our laws come primarily from the U.S. Constitution and the state constitutions; from statutory law from Congress, the state legislatures, and local legislative bodies; from common law; and from administrative rules and regulations. Executive orders and treaties are also important sources of law. These are all primary sources of law . As is true in any democracy, U.S. law reflects the will of the people who vote for representatives to make the law. In this way, U.S. law is also a reflection of public policy. Secondary sources of law include restatements of the law, law review and journal articles, uniform codes, and treatises . These sources are created by legal scholars rather than by a recognized, legitimate law – creating authority. However, these sources are read by and often influence those who are in the position to create law. Members of the judiciary, for example, may consult a restatement of law or law -review articles when making decisions. Lik ewise, state legislatures often adopt whole or parts of uniform acts, such as the Uniform Commercial Code (UCC) . When a body of secondary law is formally adopted by a legitimate lawmaking authority, then it becomes primary law. In this example, adoption of the UCC by a state legislature transforms the UCC from a secondary source of law (a model code) to a primary source of law in that state —namely, a statute. Hyperlink: The U.S. Constitution http://www.archives.gov/exhibits/charters/constitution_transcript.html Read the U.S. Constitution at this link. The U.S. Constitution created the structure of our federal government. Among other things, it sets forth the thr ee branches —the legislative, executive, and judicial branches. It provides organizational and procedural requirements, defines the boundaries of each branch’s jurisdiction, and creates “checks” on each branch by the other branches. For example, look at Not e 1.26 “Hyperlink: The U.S. Constitution” . As you can see, in Article II, Section 2 the president is the commander in chief of the several armed forces, but he does not have the power to declare war. That duty falls to Congress. Saylor URL: http://www.saylor.org/books Saylor.org 18 The first ten amendments to the U.S. Constitution are known as the Bill of Rights. Some of the Founding Fathers did not believe that a Bill of Rights was necessary because the power granted to the federal government created by the U.S. Constitution was expressly limited. Any powers not expressly granted to the federal government by the U.S. Constitution are reserved to the states. This means that if the U.S. Constitution does not state that one of the federal branches of government has jurisdiction over a particular area, then that a rea falls to the states to regulate. Despite the limited power granted to the federal government by the U.S. Constitution, as a condition of ratification, many states insisted on a written Bill of Rights that preserved certain individual civil rights and l iberties. Today, business entities that are treated as legal persons under the law, such as corporations, enjoy many of these rights and liberties, just as if they were natural human beings. Each state also has its own constitution, and those constitutions serve essentially the same function for each individual state government as the U.S. Constitution serves for the federal government. Specifically, they establish the limits of government power, create protections for fundamental rights, and establish the organization and duties of the different branches of government at the state level. This dual system of government present in the United States is called federalism , which is a governance structure whereby the federal government and the state governments coexist through a shared power scheme. State laws may not conflict with federal laws, including the U.S. Constitution. This is because the U.S. Constitution is the s upreme law of the land. Statutory law is law created by a legislative body. Congress is the legislative body at the federal level. The states also have legislative bodies, most of which are bicameral , like our federal system. The state legislatures’ names vary by state. For instance, in Indiana, the legislature is known as the General Assembly. In North Dakota, it is the Legislative Assembly. In New York, it is called the Legislature. Nevertheless, their purposes are the same. They are the legislative branc hes of their respective state governments. Congress is composed of a Senate, with 100 members, and a House of Representatives, with 435 members. The forefathers who wrote the Constitution deliberated and argued over how to compose the legislature, and the result is a deliberative body that doesn’t always respond quickly to the will of the Saylor URL: http://www.saylor.org/books Saylor.org 19 majority. Since population numbers from the census taken every ten years determine how many House seats a state receives, smaller states are sometimes disproportionately r epresented in the Senate. Alaska and Delaware, for example, have only one representative in the House, but each has two senators. Senators serve six -year terms, and members of the House of Representatives serve two -year terms. There are no term limits for either senators or members of the House. One benefit of having no term limits is that institutional knowledge and wisdom can be carried forward in perpetuity. One drawback is that elected officials may hedge their votes on important issues in a calculated way, to ensure reelection. If term limits were imposed, then vote pandering would not be a problem, but the Congress would be forever laboring with many inexperienced lawmakers. As you can see from Note 1.32 “Hyperlink: How a Bill Becomes a Law” , a bill may be introduced in Congress through the Senate or through the House of Representatives. Both the House of Representatives and the Senate have many committees, and these are related to all areas under the purview of Congress to legislate. After a bill is introduced, it is sent to an appropriate committee in the chamber of the Congress where the bill originated. If the committee moves forward with the bill, it modifies the bill as it sees fit to do, and then it sends the bill to the house of origin ation (either the Senate or the House of Representatives) for a vote. If the bill passes, then it is sent to the other house (again, either the Senate or the House of Representatives), where it undergoes the same process. If the other house votes to approv e the bill, then the bill goes to the joint committee, which is composed of members of both the House of Representatives and the Senate, where final work is completed. After that, the bill is sent to Congress for a full vote. If the bill passes, it is sent to the president. If the president signs the bill, then it becomes a statute. The president may veto a bill. A presidential veto is an executive “check” on the legislative body. However, if the president vetoes a bill, the legislature can override the vet o by a supermajority vote. A congressional override is a legislative “check” on the executive branch. These checks are built into our U.S. Constitution. Hyperlink: How a Bill Becomes a Law http://www.lexisnexis.com/help/CU/The_Legislative_Process/How_a_Bill_Becomes_Law.htm Saylor URL: http://www.saylor.org/books Saylor.org 20 Check out the interactive flowchart for how a bill becomes law. Be sure to click on the different boxes for additional inform ation about each step. Importantly, Congress may not act outside of its enumerated powers. Many people wrongfully believe that Congress can do anything. That is simply not true. Look at Article I, Section 8, accessible through Note 1.26 “Hyperlink: The U.S . Constitution” , for the enumerated powers of Congress. Remember that any power not granted to the federal government by the U.S. Constitution is reserved to the states. This means that if Congress passed a law in an area that was actually reserved to the states to regulate, Congress would have acted outside the scope of its powers. If challenged, the law would be struck down as unconstitutional. As a practical matter, this means that many U.S. states have state laws that are very different from each other. For instance, in Oregon, certain terminally ill patients may legally commit suicide under the state’s Death with Dignity Act. However, in many other states, such an act would be illegal. Common law is judge -made law. Common law is a feature of most countr ies previously colonized by Great Britain, where it originated. In continental Europe, an alternative system called civil law developed, where judges do not have the power to create law through interpretation. In civil -law jurisdictions, only the legislatu re may create law. A jurisdiction is an area where power may be exercised. In a common -law system, when an appellate court hears cases and writes opinions, rules of law are created, formed, and shaped. After a particular legal issue has been decided in a j urisdiction, there is a high probability that subsequent cases that present the same legal issue will use the same rule of law generated from already -decided cases regarding the same legal issue. This policy is known as stare decisis , or “let the decision stand.” This is how a precedent is formed, though precedents may shift or change over time. Precedents also may be entirely overturned, though that is rare. Precedents and stare decisis allow us to anticipate the behavior of others and to gauge the legalit y of our own actions. Legal reasoning is used by attorneys to argue for a particular outcome in a case and by judges when rendering decisions. At its most basic form, legal reasoning involves first identifying the legal question, which is the issue in disp ute. Then, the rule of law that applies to that issue is identified. The rule of law may be drawn from precedent, for example. The facts of the case are analyzed against the rule of law to Saylor URL: http://www.saylor.org/books Saylor.org 21 reach a supportable conclusion. This method of legal reasoning is r eferred to as the IRAC method, which is an acronym for issue, rule, analysis, and conclusion. Common law is an important source of law in those many areas that are reserved to the states to regulate. A state may exercise its police powers to regulate the s afety, health, and welfare of its citizens, for example. The laws implemented in these areas may give rise to laws in divergent areas, such as property law (e.g., zoning regulations), so -called vice laws (e.g., restrictions on vice business activities in c ertain areas or during certain days), and domestic relations (e.g., laws relating to marriage and adoption). It’s also important to note that precedents vary among different jurisdictions because precedents created by one jurisdiction are not binding in ot her jurisdictions. Most administrative agencies are created by the legislature. At the federal level they are created by Congress, and at the state level they are created through the state legislative bodies. Administrative agencies may be thought of as a delegation of congressional authority to area experts in particular fields, so that those experts can engage in limited lawmaking, adjudicative procedures, and investigations within their particular purviews. Laws made by administrative agencies are called rules or regulations . Administrative agencies are created by enabling legislation , which sets forth the agencies’ jurisdictional boundaries, rule -making procedures, and other information relating to agencies’ scopes of power. K E Y T A K E A W A Y S The legal system in the United States is composed of multiple jurisdictions at the local and state levels and one federal jurisdiction. Local and state laws may not conflict with federal laws. Primary sources of law in the United States include constitutional law, s tatutory law, common law, and administrative law. E X E R C I S E S 1. Identify an action that would violate social norms but would not violate any laws. Can you identify any violations of law that would not violate any social norms? 2. What are three specific powers of Congress? What are three specific powers of the executive branch? Do you think that the powers of the judicial branch are well defined? Why or why not? 3. What areas of law have been reserved to the states to regulate? How do you know? 4. Identify a bill in eit her the House of Representatives or the U.S. Senate. What stage(s) of the bill process has it passed through? To be passed into law, what stages must it still pass through? Saylor URL: http://www.saylor.org/books Saylor.org 22 5. Which three federal administrative agencies affect you or your family the most? Why ? Saylor URL: http://www.saylor.org/books Saylor.org 23 1.3 The Rule of Law L E A R N I N G O B J E C T I V E S 1. Understand what a rule of law system is. 2. Explore the U.S. rule of law system. When you hear the term “rule of law,” what comes to mind? It may seem like an ambiguous term, but it is used frequently in legal and governance circles. Rule of law is a system of laws under which the people and the government are bound, which allows predictability and restraint of government action. A rule of law legitimizes the law. It establishes clear rules of behavior, establishes (or captures) precedent, and seriously undermines any defense of ignorance of the law. Moreover, it holds people to the same standards, though in many ancient rules of law, the standards differed depending on the person’s classification. For instance, men often had different rights than women. Slaves were a different legal class than those who were free, and indentured servants were often a different classification altogether. When people are held to the same standards, we can see systems of fairness (that is, equal justice under the law) emerging, at least for those within the same class. The Founding Fathers of the United States did not create our rule of law system out of thin air. Many rule of law systems existed prior to the founding of the United State s. The U.S. rule of law system has many similarities with prior rule of law systems from which our Founding Fathers drew their ideas. We can trace elements of our legal genealogy back to ancient Babylon. For example, who has the right to govern, the legiti mate sources of law, the organization of government, substantive and procedural legal responsibilities, processes for dispute resolution, and consequences for legal transgressions are all common foci for rule of law systems. Can you imagine if we had no wa y to determine these things? Imagine that we did not know who had the legitimate right to govern or that we did not know which sources of law were legitimate. If we did not have a rule of law system that specified and legitimized these and other foundation al issues, chaos would rule. There would likely be competing claims of authority between different factions of power if our U.S. Constitution and our state constitutions did not create our systems of government. Saylor URL: http://www.saylor.org/books Saylor.org 24 Likewise, there would be competing sources o f law —such as those based on religious texts, or others created by modern human beings —if our constitutions did not legitimize the manner in which laws were to be created. Also, there would be different methods of dispute resolution. Perhaps some people wo uld favor a vigilante system, while others would prefer a procedural system. This type of unpredictability would result in a very unstable society. We should not take the American rule of law system for granted. It provides predictability and stability to our lives. Rule of law systems establish authority, create expectations for behavior, and establish redress for grievances and penalties for deviance. Governance of conflict and the attainment of peace among the governed are primary goals of rule of law sy stems. For example, securing peace is a goal within the U.S. rule of law system. The U.S. Constitution’s preamble states, “We the People…in Order to…insure domestic Tranquility.” We see this same notion in the English Bill of Rights of 1689 , though th e wor ds used are somewhat different. According to many rule of law systems, the attainment of peace relies on the establishment of a hierarchical authority structure. This recognition of the right to govern provides legitimacy. For instance, in the Code of Hamm urabi and the Magna Carta , these rights are derived from religious authority. In the U.S. Constitution and the English Bill of Rights of 1689, the power is derived from the people. Note the difference between power and authority. Power is the ability to ma ke someone behave in a predictable manner. Authority draws its strength from legitimacy. Imagine that your friend told you that his mother granted him the right to govern others. Would you believe him? Probably not. Why? Because it is unlikely that you wou ld recognize your friend’s mother as having a legitimate authority to bestow the right to govern on anyone, including your friend. Imagine, instead, the governor of your state. You probably recognize the authority of the governor to govern, because you rec ognize that the people, through representative government, have the authority to elect the governor to do so. The rule of law of the federal government in the United States is composed of many different sources of law, including constitutional law, statuto ry law, rules and regulations promulgated by Saylor URL: http://www.saylor.org/books Saylor.org 25 administrative agencies, federal common law, and treaties. Additionally, within the United States, several state and local jurisdictions exist, each having its own rule of law systems. Moreover, the U.S. system of governance is one of federalism, which allows different rule of law systems to operate side by side. In the United States, these systems are the federal government and the state governments. Organizational structures for government —including who has the right to govern —are also set out in rule of law systems. For instance, the Code of Hammurabi identified a ruler: Hammurabi himself. The English Bill of Rights of 1689 required representative bodies. The U.S. Constitution organized the U.S. government by c reating the legislative, executive, and judicial branches. These models minimally provide order and, in some cases, provide opportunities for the governed to participate in government, both of which create role expectations of the governed. Notably, even t hough our Founding Fathers relied on prior rule of law systems when creating our Constitution, they were unable to resolve all challenges that exist when people live together. Today, for instance, one unresolved challenge is reflected in the tension betwee n personal liberty and responsibility to state. We have many individual rights and personal liberties, but as some argue, we do not have many responsibilities to the state. We could have a system that requires greater duties — such as the legal duty to vote, to serve in public office or in the military, or to maintain public lands. Unresolved challenges highlight the fact that rule of law systems are not perfect systems of governance. Nevertheless, these systems create expectations for conduct, without which governance of conflict could not reasonably exist and peace could not be attained. The U.S. Constitution is the foundation on which the U.S. federal rule of law system rests. It asserts the supremacy of law. “We the people” is a very important part of the preamble, because it confers power on the people as well as on the states. Notably, unlike the Magna Car ta and the English Bill of Rights of 1689, it does not focus on individual rights. Of course, the Bill of Rights does focus on individual rights, but those amendments were passed after the Constitution was written. (That is why they are called amendments to the constitution.) The U.S. Constitution implemented the supremacy of law using structure and processes. The Founding Fathers were particularly concerned about giving the government the power to do its job without encouraging tyranny. They built in proce sses to ensure the supremacy of law. Indeed, ours is “a government of laws and not of men,” John Adams Saylor URL: http://www.saylor.org/books Saylor.org 26 wrote in the Massachusetts Constitution. Thomas Paine noted the same sentiment in Common Sense , when he wrote, “the law is king.” K E Y T A K E A W A Y S Rule of law is a system of published laws under which the people and the government are bound, which allows predictability and restraint of government action. A rule of law system allows people to understand what is expected of them. It provides a system that allo ws many people with different beliefs and cultures to live together in peace, by providing methods by which conflicts can be resolved. The U.S. rule of law system contains many elements of prior rule of law systems. E X E R C I S E S 1. View the Code of Hammurabi at http://avalon.law.yale.edu/ancient/hamframe.asp . Scroll down slightly until you see the subheading “Code of Laws.” Find three laws that you believe are similar to laws that we have in the United States. 2. Given the long history of rule of law systems, why hasn’t any rule of law system been developed that resolves all problems? Name three social problems that our rule of law system does not address, or does not address adequately. 3. Are t he Ten Commandments a rule of law system? How many of the Ten Commandments are illegal in your state today? 4. What problems would exist without a rule of law? 5. How does the rule of law affect business? Saylor URL: http://www.saylor.org/books Saylor.org 27 1.4 Importance of Rule of Law to Business L E A R N I N G O B J E C T I V E S 1. Determine why the rule of law is important to business. 2. Identify several areas of law that are especially relevant to business and the importance of the rule of law to those areas. 3. Identify how the rule of law limits government. 4. Identify how the rule of law protects people from harmful business practices. As you may have guessed by now, the rule of law is important to business. Can you imagine trying to do business without being able to have any reasonable expectations of other people’s behavior? Would you be willing to conduct business if you had no legal means by which to protect your property interests? And in the case of a dispute, without a rule of law system, there would be no established way of resolving it. Without the rule of law, busines s would be chaotic. This section provides some overarching examples of why the rule of law is important to business. Before getting to those examples, imagine this: What if you did not know how to play chess, but you tried to play anyhow? You would probabl y become frustrated very quickly, because you would see no logic in the movement of your opponent’s pieces, and you would not be permitted to move some pieces like you might wish to. Sometimes you would see your opponent move his or her knight two spaces i n one direction and then one space in another. Other times, you would see your opponent move his or her bishop diagonally. Moreover, you would not understand what you were and were not permitted to do. You would also not know how to penalize an opponent wh o moved his or her pieces incorrectly to gain advantage or to take something of yours. This is analogous to what it’s like to do business without understanding the rules of the game. The rule of law establishes rules that people —and businesses —must follow to avoid being penalized. The rule of law not only allows people to understand what is expected of them in their personal capacities but also sets forth rules for businesses so that they, too, know what is expected of them in their dealings and transaction s. In addition, it restrains government and others from infringing on Saylor URL: http://www.saylor.org/books Saylor.org 28 property rights. Should disputes arise, the rule of law provides a peaceful and predictable means by which those disputes can be resolved. The rule of law provides guidance and direction in every area of business. For example, it provides a means to bring a complaint against another party to a neutral decision maker so that a decision can be made regarding the dispute. Because of our rule of law system, we know that we are permitted to file a complaint in the proper court to commence litigation. Or we can try an alternative method of dispute resolution if we do not wish to engage in litigation. We know that we are permitted to do these things because our rule of law system allows us to do them. Moreover, we can expect some sort of resolution when we institute such a proceeding. This expectation is reasonable only because we have a rule of law. Additionally, in the United States, the rule of law provides a sophisticated system of federalism, where state and federal laws coexist. This allows people and businesses to determine which system of government pertains to them and which jurisdiction they belong to. Imagine that you sell firearms in a retail capacity. You would be subject to both state and federal laws. You would be required to carry a federal permit from the federal administrative agency known as the Bureau of Alcohol, Tobacco, Firearms, and Explosives. You would be forbidden from engaging in illegal arms trading. According to state la ws, you would likely have to ensure that each purchaser of a firearm held a valid permit for a firearm. You would be required to check identification, enforce waiting periods, and refuse to sell guns to people who were not permitted to carry them according to your state’s laws. If we did not have a rule of law system, you might be uncertain how to conduct your business, and you would be subject to arbitrary enforcement of unstated or ex post facto (retroactive) laws that affected your business. The rule of law also governs contracts between people and between merchants. Under the common law system, certain elements of a contract must exist for the contract to be enforceable. Under the Uniform Commercial Code (UCC), merchants are governed by a separate set of rules that anticipate and allow for flexibility in contractual terms, to facilitate business needs. In the event that terms conflict in an offer and acceptance between merchants, the UCC allows “gap fillers” to complete the terms of the contract without n eed for the contract to be rewritten or for formal dispute resolution. Saylor URL: http://www.saylor.org/books Saylor.org 29 Moreover, businesses rely on the rule of law to help them enforce contracts against contractors who fail to perform. Additionally, because we have a rule of law system, employers know t he rules of the game regarding their relationship to employees, and employees know the rules with respect to their obligations to employers. Likewise, business partners, members of boards of corporations, and members of limited liability companies all know what is expected of them in their roles vis -à-vis the business and other people within their organizations. When someone does something that is not permitted, there is legal recourse. The rule of law also provides protection for property. Imagine if we di d not have protection for nontangible property, such as intellectual property like trade secrets, trademarks, or copyrights. It would be very difficult to protect this type of property if we did not know the rules of the game. People would not have the inc entive to create or share new intellectual property if they had no reasonable expectation of being able to protect it or of being rewarded for their creations. Likewise, the rule of law allows us to protect tangible property without having to go to extraor dinary measures. For instance, if we had no rule of law system to convey and maintain legal ownership to us for our real or personal property, we might be forced to hire expensive private security forces to guard our property when we could not be there to physically protect it ourselves. Businesses also rely on the rule of law to govern their debtor and creditor relationships. And, if financial matters do not go as anticipated, our legal system allows businesses to ask the court for protection from creditor s under our bankruptcy law. This allows businesses to protect their property from creditor repossessions or foreclosures while they get back on track financially. The rule of law also protects people from businesses. For example, Congress has enacted antit rust legislation that prevents certain anticompetitive practices, such as colluding and price fixing. Additionally, businesses are prohibited from using deceptive advertising and are held responsible when they manufacture or sell defective products that ca use injury. The rule of law also protects businesses from government. Since everyone is subject to the rule of law, this means that government itself may not overextend its reach when regulating or investigating Saylor URL: http://www.saylor.org/books Saylor.org 30 businesses. Government must play by the rule s, too. For example, imagine that our government could do anything, without any limits or jurisdictional restraints. A business operating in such a climate might find itself subject to government closure on a whim, or excessive taxes, or requirements to pa y bribes to gain permits to do business. Our rule of law system prevents such abuses. Without a rule of law system, people would have to exact satisfaction for the wrongs committed against them on their own. They would have to physically protect their own property. This would lead to a breakdown in social structure, and it would result in vigilante justice and physical strength playing primary roles in dispute resolution. K E Y T A K E A W A Y S The rule of law system in the United States sets the rules of the game f or doing business. It creates a stable environment where plans can be made, property can be protected, expectations can exist, complaints can be made, and rights can be protected. Violation of the law can result in penalties. The rule of law protects busin ess, protects consumers from harmful business practices, and limits government from engaging in abusive practices against businesses. E X E R C I S E S 1. Have you ever played a game in which you did not know all the rules? Have you ever tried to speak a language in which you weren’t fluent? What was the outcome? 2. What incentive or motivation would exist to work for your employer if you were not certain that you would be paid for your efforts and your time? What incentive would you have to invent something new, create a work of art, or write a book if you had no legal expectation that you would be able to protect your creation? 3. Imagine that you are an entrepreneur. What type of business would you open? Would you know what types of permits were required to conduct your b usiness and which government entities had jurisdiction over your business? If not, how could you find out? 4. What would business be like in a land without any rule of law system? Be specific. Saylor URL: http://www.saylor.org/books Saylor.org 31 1.5 How Law Affects Business Disciplines L E A R N I N G O B J E C T I V E S 1. Identify the relevance of law to business disciplines. 2. Understand the relevance of law to the study of business. 3. Identify how the rule of law protects people from harmful business practices. Foundational courses taken by undergraduate business students usu ally include accounting, finance, management, and marketing. An understanding of the legal environment of business is relevant — indeed, essential —to functioning well within each of those disciplines. Additionally, a solid understanding of the legal environm ent can help avoid liability or at least minimize risk. In business, it is not enough to comport yourself and your business ethically. You must also ensure that you understand the legal environment in which you are working. Therefore, it is important to yo u, to your employer, and to all the other people who may be relying on your business expertise —such as your employees and your family —to understand the legal environment. Such an understanding will help you avoid or lessen the likelihood of liability expos ure, enabling you to manage your business affairs successfully, unhampered by unmanaged legal liability risks. This section provides some examples of how law affects specific business disciplines. During the last several years, accountants have been in the limelight due to culpable behavior of some members of the profession during well -known business scandals, such as Enron. Largely as a result of the fallout from the Enron case, Congress passed the Sarbanes -Oxley Act (SOX) of 2002, which imposed stringent oversight requirements on accounting and auditing firms. The requirements seek to ensure competence, compliance with security laws, and conduct consistent with generally accepted accounting principles. Of course, the Enron scandal and SOX were both fairly dramatic examples of how law can affect accounting. Other ways in which law affects this discipline are through regulation. For example, the U.S. Securities and Exchange Commission’s (SEC) mission is to protect investors and to maintain a fair market, amon g other things. Accordingly, the SEC enforces accounting and auditing policies to Saylor URL: http://www.saylor.org/books Saylor.org 32 allow investors to make decisions based on accurate information. The SEC pursues charges of accounting fraud and oversees private regulation of the accounting profession. The law also affects finance. Like accounting professionals, many who work in finance are also regulated by the SEC. The SEC is concerned that investors receive accurate information to make investment decisions. Moreover, the SEC enforces prohibitions against insider trading and pursues claims of other types of securities fraud, such as Ponzi schemes . Similarly, several statutes protect consumers in financial transactions. For example, the Truth in Lending Act (TILA) requires lenders to accurately provide info rmation concerning the costs involved in offers of credit. TILA and its corresponding Regulation Z are administered by federal banking agencies. Law also affects those in management. For instance, knowledge of employment law is essential to those in human resources. Title VII of the Civil Rights Act prohibits discrimination related to protected characteristics in hiring and employment practices. Those in management also must be aware of the potential liability that demands on employees might create. For exam ple, in Oregon, McDonald’s was found to be liable for injuries resulting when an off -duty, off -premises worker fell asleep while driving. [1] The employee had worked three shifts during a twenty -four -hour period. The court held that employers have a duty to avoid conduct that creates a foreseeable risk of harm to others. If your field is marketing, the law also relates to your work. Marketers must be particularly attuned to tort law, consumer protection law, and intellectual property law. For example, to a void charges of libel, those in advertising need to take care not to defame another person, business, or product. It might be tempting to do so, especially if you were engaged in serious competition with another company that sold a similar product. Likewis e, marketers must take great care not to engage in deceptive advertising practices, lest their employer run afoul of the Federal Trade Commission’s (FTC) policies or the FTC Act. Additionally, marketers must be aware of other people’s intellectual property to avoid copyright or trademark infringement in their own work product. Saylor URL: http://www.saylor.org/books Saylor.org 33 These are a few examples of how the law relates to specific business disciplines. Of course, this is just an overview. It is incumbent on each business professional to become familiar with the legal environment in his or her profession. Employers may provide training regarding legal environment issues, such as anti –sexual harassment training or anti –insider trading training, but ultimately, becoming familiar with the legal environment is each person’s individual responsibility. Remember that a defense of “I didn’t know the law!” is no defense at all. K E Y T A K E A W A Y S The law is relevant to every business discipline. Minimizing liability exposure is a primary concern of business, and an understanding of the legal environment relevant to each disciplinary perspective helps business practitioners minimize their risk of incurring liability to themselves or to their employers. E X E R C I S E S 1. Which business discipline is your favorite? Find a newsp aper article that illustrates a legal problem pertaining to that discipline that could have been avoided with a better understanding of the legal environment of business. 2. How can employers use knowledge of the legal environment of business to minimize liab ility exposure? Identify three concrete ideas. 3. How can employers stay current with the legal environment of business? For example, how would other employers in Oregon find out about the case of the off -duty, off -premises worker mentioned in this section? I f you were an employer in Oregon, how might this case change your business practices? 4. Do you think that if employers train their employees how to behave on the job, those employers should be absolved from legal liability resulting from employees’ actions? For example, imagine that an employer provides training to its employees regarding how to avoid sexual harassment in the workplace, but an employee ignores the training and sexually harasses a colleague. Should the employer bear liability in that situation ? Why or why not? [1] Faverty v. McDonald’s , 892 P.2d 703 (Or. Ct. App. 1995). Saylor URL: http://www.saylor.org/books Saylor.org 34 1.6 Concluding Thoughts This chapter provides an introduction to the legal environment of business. Knowledge of the legal environment of business is essential to successful business practices. This involves understanding what the law is, where it comes from, and specifically how it relates to business. Moreover, different philosophies of law exist. Approaching a problem from different perspectives allows for multip le outcomes to be explored. Additionally, when people approach the same problem from different legal philosophies, reasonable minds can disagree on the outcome. Familiarity with government structure and an understanding of rule of law are essential to succ essful business operations. Ultimately, businesspeople should be able to recognize legal situations, minimize liability exposure, and know when to consult an attorney. As you embark on your study of the legal environment, try to remain oriented. Ask yourse lf questions like “Where does this piece of law fit in the business world?” and “Why is it important for me to know this?” Studying the law can, at times, seem like studying pieces of a very large jigsaw puzzle. You may not immediately see how individual p ieces fit together, but with protracted study of law, it will become clear. Often, with that understanding, the depth of law becomes apparent. Additionally, it is very helpful if you try to find contemporary examples of the concepts that are discussed in t his book. When surfing the Internet, watching movies, or reviewing current events, try to “issue spot.” In other words, try to identify the legal issue raised by the particular problem presented. Try to figure out which jurisdiction would have authority ov er the issue. State government? Federal government? Both? Try to determine which type of law would control or be determinative of the outcome. Is it a statutory issue? A constitutional issue? A regulatory issue? Also, try to ask yourself why the dispute wa s raised. Will the parties involved be able to work it out on their own? If not, why not? Has the issue entered into litigation? How could the issue have been avoided with better planning and greater familiarity with the legal environment? This little game can give you practice in orienting yourself as you gain footing in the study of law and the legal environment of business. We wish you every success in your course! Saylor URL: http://www.saylor.org/books Saylor.org 35 Saylor URL: http://www.saylor.org/books Saylor.org 36 Chapter 2 The Court System L E A R N I N G O B J E C T I V E S After reading this chapter, you should have a thorough understanding of the U.S. court system and how it affects the conduct of businesses and individuals. Specifically, you should be able to answer the following questions: 1. What role does each of the three branches of government play? 2. How do th e other two branches of government balance the judiciary? 3. How are the state and federal courts structured? 4. What are the primary differences between trial and appellate courts? 5. How does the Supreme Court do its work? As you now know, laws are meaningless if they are not enforced. Companies have to make a barrage of decisions daily, from product development to marketing to strategies to maintain growth, but most of these are based on sound business acumen rather than legal requirements. If a company does viol ate a law, however, it must be held accountable. Typically, that accountability comes in the form of a lawsuit heard in court. Whether a suit is brought by a supplier, customer, employee, shareholder, or other stakeholder, litigation is a fact of life for companies. As future business professionals, being familiar with our court system will lay the foundation for your understanding of the litigation process. Saylor URL: http://www.saylor.org/books Saylor.org 37 2.1 The Third Branch L E A R N I N G O B J E C T I V E S 1. Understand the constitutional basis for the judicial branch. 2. Explore the differences among the three branches of government. 3. Learn about the chief justice’s role in judicial administration. 4. Explore the concept of judicial review. 5. Become familiar with how the other two branches check and control the judiciary . Under the federal Constitution, power is separated among three branches of government. Article I of the Constitution allocates the legislative power to Congress, which is composed of the House of Representatives and the Senate. Congress makes laws and re presents the will of the people in doing so. Article II of the Constitution creates the executive power in the president and makes the president responsible for enforcing the laws passed by Congress. Article III of the Constitution establishes a separate a nd independent judiciary , which is in charge of applying and interpreting the meaning of the law. The U.S. Supreme Court sits at the top of the federal judiciary as the supreme court of the land. There are nine judges on the Supreme Court. (See Figure 2.1 “The U.S. Supreme Court in 2009” .) Figure 2.1 The U.S. Supreme Court in 2009 Saylor URL: http://www.saylor.org/books Saylor.org 38 Justice Stevens has since retired and was replaced by Justice Kagan in 2010. Source: Photo courtesy of Steve Petteway, Collection of the Supreme Court of the United States, http://en.wikipedia.org/wiki/File:Supreme_Court_US_2009.jpg . The Constitution is remarkably short in describing the judicial branch. The president, under Article II, has the power to nominate judges with the advice and consent of the Senate. Article III also provides the following: “The judicial power of the United States, shall be vested in one Supreme Court, and in such inferior courts as the Congress may from time to time ordain and establish. The judges, both of the supreme and inferior courts, shall hold their offices during good behaviour, and shall, at stated times, receive for their services, a compensation, which shall not be diminished during their continuance in office.” Under the Constitution, therefore, there are only two requirements to becoming a federal judge: nomination by the president and confirmati on by the Senate. There are no age, citizenship, or qualification requirements. If the president wanted to, he Saylor URL: http://www.saylor.org/books Saylor.org 39 could nominate any reader of this book as a federal judge. Additionally, the Constitution guarantees that judges are relatively free from politic al interference by providing them with lifetime tenure and a salary that cannot be reduced. It is commonly accepted that the three branches of government are coequal, but in reality they are very different. The judiciary is the only unelected branch of gov ernment and is therefore the most mysterious. Although many Americans know who the president is, and many are familiar with their representatives in Congress, very few know the names of the judges who sit on the Supreme Court or any lower court. When polit icians run for Congress or president, they spend months campaigning, begging voters to look into their eyes and trust them enough to cast their votes. Since judges are not elected, the vast majority of Americans cannot associate them with a face. Indeed, m any visitors to the Supreme Court building in Washington, DC, routinely come face -to-face with a justice and don’t realize it. The three branches also consume vastly different resources in serving the public, with the entire federal court system consuming less than two -tenths of 1 percent of the federal budget. The political branches capture the public imagination with monuments and landmarks (Air Force One, the White House, the Capitol), while the federal judiciary works in relative anonymity. (All federal judges, for example, travel commercially and do not have access to government -owned planes.) Finally, the judiciary is designed to be the most remote branch from the people. In addition to being unelected, federal judges have life tenure and can be remove d from office only through impeachment. They also tend to be in public office far longer than politicians. While the United States has had forty -four presidents and more than two thousand members of Congress, Chief Justice John Roberts is only the seventee nth chief justice. Roberts was only fifty years old when he became chief justice and will likely be chief justice for many decades to come, certainly long after his nominating president, George W. Bush, has faded from public life. When we speak of the “federal judiciary,” we are referring to a very small entity compared to other federal bureaucracies. The Supreme Court (the building, justices, and staff) is one part of the federal judiciary. The district and appellate courts (described later in this cha pter) are another part, and they also comprise judges and staff (although these courts do not own their own buildings; rather, all Saylor URL: http://www.saylor.org/books Saylor.org 40 courts other than the Supreme Court are rented from other branches of the government). The Administrative Office of the Unite d States Courts runs the day -to-day issues for all the courts, such as payroll and rent. A second component of the judiciary is the Federal Judicial Center , an agency dedicated to conducting research on judicial administration and providing judicial educat ion. A third component is the United States Sentencing Commission (USSC) , established by Congress to make recommendations on how to establish uniformity in federal criminal sentencing. In addition to his responsibilities in hearing cases and writing opinio ns, the chief justice oversees the overall operation of the federal courts and represents the courts to the other branches of government. When it comes to hearing and deciding cases, however, the chief justice is “first among equals”: he has no more power than any of the other justices, known as associate justices . In that capacity, the chief justice traditionally releases an annual report on the judiciary. Since becoming chief justice in 2005, Chief Justice Roberts ( Figure 2.2 “Chief Justice John G. Robert s”) has focused his annual reports on judicial pay. Although judicial salaries cannot be reduced, years have passed since Congress approved a cost -of-living increase for judges. District court judges are currently paid $169,300 (the same salary as members of Congress), while circuit court judges are paid $179,500. Supreme Court justices earn $208,100, and the chief justice earns $217,400. While this may seem like a lot of money, it’s important to keep in mind that the integrity of the judicial system depend s on attracting the very best lawyers to join the bench. Lawyers of that caliber are also in high demand in private law firms, where they can earn many times more than what judges earn. As a result, high -quality lawyers who otherwise may serve the country by becoming judges never even consider joining the bench. As you can see from Note 2.11 “Hyperlink: Excerpt from 2008 Year – End Report to Congress” , there is a risk, the chief justice believes, that the pool of judicial talent may be limited to less -than -the-best lawyers or those who are independently wealthy. Figure 2.2 Chief Justice John G. Roberts Saylor URL: http://www.saylor.org/books Saylor.org 41 Source: Photo courtesy of the Supreme Court of the United States, http://en.wikipedia.org/wiki/File:File -Official_roberts_CJ_cropped.jpg . Hyperlink: Excerpt from 2008 Year -End Report to Congress http://www.supremecourt.gov/publicinfo/year -end/2008year -endreport.pdf I suspect many are tired of hearing it, and I know I am tired of saying it, but I must m ake this plea again — Congress must provide judicial compensation that keeps pace with inflation. Judges knew what the pay was when they answered the call of public service. But they did not know that Congress would steadily erode that pay in real terms by r epeatedly failing over the years to provide even cost -of-living increases. Last year, Congress fell just short of enacting legislation, reported out of both House and Senate Committees on the Judiciary, that would have restored cost -of-living salary adjust ments that judges have been denied in past years. One year later, Congress has still failed to complete action on that crucial remedial legislation, despite strong bipartisan support and an aggregate cost that is miniscule in relation to the national budge t and the importance of the Judiciary’s role. To make a bad situation worse, Congress failed, once again, to provide federal judges an annual cost -of-living increase this year, even though it provided one to every other federal employee, including every Me mber of Congress. Congress’s inaction this year vividly illustrates why judges’ salaries have declined in real terms over the past twenty years. Saylor URL: http://www.saylor.org/books Saylor.org 42 Our Judiciary remains strong, even in the face of Congress’s inaction, because of the willingness of those in p ublic service to make sacrifices for the greater good. The Judiciary is resilient and can weather the occasional neglect that is often the fate of those who quietly do their work. But the Judiciary’s needs cannot be postponed indefinitely without damaging its fabric. Given the Judiciary’s small cost, and its absolutely critical role in protecting the Constitution and rights we enjoy, I must renew the Judiciary’s modest petition: Simply provide cost -of-living increases that have been unfairly denied! We have done our part —it is long past time for Congress to do its. The Supreme Court is a well -known institution today, but it wasn’t always that way. When the Court first met, many of the justices (then appointed by George Washington) couldn’t travel in time for the Court’s opening day, so the session was dismissed. For the first three years of its existence, the Court heard no cases of any importance. John Jay, the first chief justice, traveled to Europe while he was chief justice to negotiate the Jay Treaty wit h Great Britain. While there, he won election as governor of New York. He was reappointed as chief justice by President Washington and confirmed by the Senate but declined to return to the Court, citing the Court’s lack of energy, weight, and dignity as pa rt of his reasoning. It wasn’t until John Marshall became the fourth chief justice (a position he held for a record thirty -four years) that the Supreme Court firmly established itself as a separate and coequal branch of government. The Supreme Court did no t even get its own building until 1932, years after the nation’s capital was established in Washington, DC. Before then, it met in the basement of the old Senate building to hear cases. When William Taft (the only president who also served as a Supreme Cou rt justice) became chief justice, he persuaded Congress to appropriate funds, and the Court finally got its own building in Washington, DC (see Figure 2.3 “U.S. Supreme Court” ). Hyperlink: Supreme Court Virtual Tour http://supremecourt.c -span.org/VirtualTour.aspx The Supreme Court building, located at 1 First Street, is an impressive marble building that sits at the northern border of Washington, DC’s, famous plaza. It is open year -round and is free to visit. If you have Saylor URL: http://www.saylor.org/books Saylor.org 43 not been there, you can use the link to take a virtual tour of the entire building, inside and out, courtesy of C-Span. The Supreme Court’s early malaise can partially be attributed to the problem that no one really had a good idea of what the Supreme Court was supposed to do. There were few cases of tremendous national importance in the new republic, and a quirky tradition known as “riding circuit” meant that the Supreme Court justices also acted as lower appellate c ourt judges, thus making their work at the Supreme Court somewhat duplicitous. The Constitution simply states that the judicial power of the United States is vested in the Supreme Court, without expounding what that means. It wasn’t until 1803 that the mod ern role of the Supreme Court began to emerge. In 1800, the presidential election between John Adams and Thomas Jefferson nearly tore the country apart. The election was bitter, partisan, and divisive. Jefferson won but wasn’t declared the winner until ear ly in 1801. In the meantime, Adams and other Federalists in Congress attempted to leave their mark on government by creating a slate of new life -tenured judgeships and appointing Federalists to those positions. For the judgeships to become effective, certa in paperwork (known as commissions) had to be delivered in person to the new judges. At the time power transitioned from Adams to Jefferson, several commissions had not been delivered, and Jefferson ordered his acting secretary of state to stop delivering them. When Jefferson came to power, there was not a single judge from his Democratic -Republican Party sitting on the bench, and he wasn’t keen on expanding the Federalist influence on the bench any further. One Federalist judge, William Marbury, sued the secretary of state, James Madison, to deliver his commission. The case was filed in the Supreme Court, led by Chief Justice John Marshall ( Figure 2.4 “Chief Justice John Marshall” ). Marshall himself was a Federalist and had served as Adams’s secretary of st ate, so he understood how political the case was and how he stood to be accused of bias if he ruled the wrong way. In a shrewd and calculated move, he ultimately ruled against Marbury but at the same time declared that it was the Supreme Court’s role to de cide the meaning of the Constitution. This is called judicial review , and it makes the U.S. Supreme Court the most powerful judicial body in the world. The following is from Marbury v. Madison : “It is emphatically the province and duty of the Judicial Department to say what the law is. Those who apply the rule to particular cases must, of necessity, expound and Saylor URL: http://www.saylor.org/books Saylor.org 44 interpret that rule. If two laws conflict with each other, the Courts must decide on the operation of each.” [1] Figure 2.4 Chief Justice John M arshall Source: Photo courtesy of the U.S. Department of State, http://www.flickr.com/photos/statephotos/2267272626 . Chief Justice Marshall did not invent judicial review; it is a feature of most common -law countries and as a concept goes back centuries. He did, however, institutionalize judicial review at the U.S. Supreme Court at a time when there was great uncertainty about the Court’s future role in government. While all t hree branches are bound to uphold the Constitution, on all matters relating to the meaning of the Constitution, the Supreme Court has the final say. After Marbury v. Madison , it took the Supreme Court nearly sixty years to again use the power of judicial r eview to strike down legislation. The case was Dred Scott v. Sanford , [2] and it involved a slave who traveled with his owner, a doctor in the army, to many states including free states ( Figure 2.5 “Dred Scott” ). Dred Scott filed suit for his freedom, and the case ended up before the Supreme Court. In what many commentators call the Supreme Court’s “self -inflicted injury,” the Court, in an Saylor URL: http://www.saylor.org/books Saylor.org 45 opinion written by Chief Justice Roger Taney, used judicial review to overturn the Missouri Compromise and held that Dr ed Scott was not a person under the Constitution and therefore could not file suit. The decision hastened the country into Civil War, and it took years for the Supreme Court to recover its standing with the public. Figure 2.5 Dred Scott Source: Photo courtesy of the Missouri Historical Society, http://en.wikipedia.org/wiki/File:DredScott.jpg . Judicial review means that any federal court can hold any act of the president or the Congress to be unconstitutional. It is a power that rests with each of the more than eight hundred federal judges, from the trial courts through the appellate courts. It is an extraordinary power in a democracy, as an unelected life -tenured person or group of persons overturns the acts of a popularly elected branch of government. Rather than give rise to judicial tyranny, however, our system of checks and balances ensures that the other two branches also play a critical role in “checking” the judiciary. Tak e, for example, the executive branch. The president can control the judiciary by making careful judicial selections. The power of the president to name federal judges is absolute —he is not required to consult with any other individual in making his choice. As a matter of custom, presidents have traditionally looked to senators to provide names of judicial candidates for consideration, and some Saylor URL: http://www.saylor.org/books Saylor.org 46 presidents are more willing than others to defer to the advice of aides and advisors. For much of the nation’s hist ory, the Senate routinely confirmed the president’s choices. President Reagan’s nomination of Robert Bork in 1987 changed that tradition forever. Alarmed Democrats grilled Bork in confirmation hearings and ultimately declined to confirm him, setting the st age for a new breed of confirmation hearings where senators try to ascertain not just the nominee’s character but also how he or she will judge certain issues. Judicial nominees, especially to the Supreme Court, are under so much scrutiny now that sometime s even the president’s own party will turn against a nominee. This happened to President George W. Bush when he named his close friend Harriet Miers to fill a vacancy left by Justice Sandra Day O’Connor’s retirement. Alarmed at her lack of judicial experie nce and record on conservative judicial issues, Republicans urged the president to reconsider his choice, and Ms. Miers eventually withdrew as a nominee. Presidents hope, and believe, that their selections reflect their own ideologies and beliefs. Federal judges are notoriously independent, however, and many demonstrate little hesitance to overrule their nominating president if they believe it necessary to do so. Several presidents have been disappointed in their nominee as they watched the judge move away from his or her earlier political roots. For example, President Eisenhower, a Republican, nominated Earl Warren as chief justice. Warren would later transform the civil rights landscape with a series of decisions, leading Eisenhower to describe nominating Warren as “the biggest damned fool mistake I ever made.” [3] President Nixon, a Republican, placed Harry Blackmun on the Supreme Court, only to see Blackmun later move to the left and author Roe v. Wade , [4] the principal decision legalizing access to abortion services. More recently, President George H. W. Bush nominated David Souter to the Court on the belief that Souter would be a reliable conservative. Souter quickly aligned himself with the liberal wing of the Court. In addition to nominating judge s, the president serves as a check on the judiciary by being the primary means of enforcing judicial decisions. Federal judges do not control any police force and as such are unable to ensure their decisions are carried out. That responsibility falls on th e executive branch. No matter how much a president may disagree with a judicial decision, it is a testament to Saylor URL: http://www.saylor.org/books Saylor.org 47 our republican form of government, and the rule of law, that the president nonetheless faithfully executes a federal court’s decision. Hyperlink: The Little Rock Nine http://www.npr.org/templates/story/story.php?storyId=14091050 Figure 2.6 Elizabeth Eckford Source: Photo courtesy of Will Counts, http://en.wikipedia.org/wiki/File:Little_Rock_Desegregation_1957.jpg . After the Supreme Court handed down its seminal decision in Brown v. Board of Education , [5] many Southern states continued to resist desegregation. In Little Rock, Arkansas, the local NAACP chapter enrolled nine students in Little Rock High School to begin with the fall term in September 1957. Several segregationist groups protested, and Arkans as governor Orval Faubus deployed Arkansas National Guard troops to stop the students from entering the school. President Eisenhower reluctantly ordered the 101st Airborne Division of the U.S. Army to Little Rock to ensure the students could enroll and att end class. Click the link to listen to a story about one of the students, Elizabeth Eckford ( Figure 2.6 “Elizabeth Eckford” ), who tried to enroll in Little Rock High School that day. Saylor URL: http://www.saylor.org/books Saylor.org 48 The Congress can also play an important role in “checking” the judiciary. The most obvious role is in confirming judicial selections. In the last few years, judicial confirmations have become a political battlefield, as activists on both the left and right seek to block judicial nominees they view as being too radical. It’s not unusual for some judicial candidates to wait years for their confirmation hearings. President George W. Bush, for example, initially appointed Chief Justice Roberts to a court of appeals judgeship in 2001, but he wasn’t confirmed until 2003, after Republi cans regained control of Congress in midterm elections. Similarly, the newest member of the Supreme Court, Elena Kagan, was nominated for a federal appellate judgeship in 1999 by President Bill Clinton but was never confirmed due to Republican objections t o her nomination. In addition to confirmation, Congress also controls the judiciary through its annual budgetary process. Although the Constitution protects judicial salaries from any reductions, Congress is not obligated to grant any raises. For several y ears, judges have worked without cost -of-living raises. Although no one has seriously suggested that Congress is withholding money from the courts in retaliation for judicial decisions, some have observed that Congress would like to see the judicial branch yield on some high -profile issues such as televising Supreme Court proceedings in turn for pay raise consideration. Finally, Congress can control the judiciary by determining how the courts are organized and what kind of cases the courts can hear. After t he 1800 presidential election, for example, the newly elected Congress canceled the Supreme Court’s term for the entire year while they reorganized the judiciary. More recently, several conservative members of Congress have suggested splitting up the liber al- leaning Ninth Circuit Court of Appeals on the West Coast, to reduce its influence. The Constitution also gives Congress the authority to determine the courts’ jurisdiction. Congress has used this authority in the past to take away controversial cases fr om judicial consideration. During Civil War Reconstruction, for example, Congress passed a law taking away the Supreme Court’s jurisdiction to hear an appeal from a newspaper publisher jailed for publishing articles opposing Reconstruction. [6] Recently, Congress did the same thing, removing federal court jurisdiction from hearing appeals involving detainees held at the military prison in Guantanamo Bay. In the recent past, members of Congress have also introduced legislation prohibiting federal courts fro m hearing Saylor URL: http://www.saylor.org/books Saylor.org 49 cases about the public display of religion and flag burning or from using any foreign law as support for their decisions. K E Y T A K E A W A Y S The third branch (judicial branch) is the only unelected branch of government. As such, it can sometimes appear remote or detached from the American public. The judiciary is composed of federal courts, the Administrative Office, the Federal Judicial Center, and the U.S. Sentencing Commission. The chief justice has administrative responsibilities over these ag encies in addition to his adjudicatory duties. The judiciary comprises less than two -tenths of 1 percent of the federal budget. In spite of this, judicial pay is very low compared to pay in the private sector and is a source of tension between the judiciar y and the other branches of government. Marbury v. Madison established the doctrine of judicial review, which allows courts to determine the final validity of laws as well as the meaning of the Constitution. Judicial review is an awesome power, and it is u sed sparingly. The president can check the judiciary through appointments and the enforcement of judicial decisions. The Congress can check the judiciary through funding, administrative control of court calendars and funds, and jurisdiction -stripping legis lation. E X E R C I S E S 1. Do you believe that judicial review is a good thing for American democracy? Why or why not? 2. How does the Constitution guarantee judicial independence? Do you think judges have enough independence? Too much? 3. How much money do you think fed eral judges should be paid? 4. Do you believe that Congress should have the ability to remove cases from federal courts? If so, what types of cases are appropriate for removal? 5. What options does a president have if he disagrees with a federal court’s opinion? 6. Should a federal court force desegregation on a community that is overwhelmingly against it? [1] Marbury v. Madison , 5 U.S. 137 (1803). [2] Dred Scott v. Sanford , 60 U.S. 393 (1857). [3] John Fox, “Biographies of the Robes: Earl Warren,” PBS , December 2006, http://www.pbs.org/wnet/supremecourt/democracy/robes_warren.html (accessed August 22, 2010). [4] Roe v. Wade , 410 U.S. 113 (1973). Saylor URL: http://www.saylor.org/books Saylor.org 50 [5] Brown v. Board of Educa tion , 347 U.S. 483 (1954). [6] Ex parte McCardle , 74 U.S. 506 (1869). Saylor URL: http://www.saylor.org/books Saylor.org 51 2.2 Activists and Strict Constructionists L E A R N I N G O B J E C T I V E S 1. Explore the strict constructionist, or originalist, judicial philosophy. 2. Explore the judicial activist philosophy. 3. Learn about the modern origin of the divide between these two philosophies. 4. Examine the evolution of the right to privacy and how it affects judicial philosophy. 5. Explore the biographies of the current Supreme Court justices. In the early years of the republic, judges tended to be much more political than they are today. Many were former statesmen or diplomats and considered being a judge to be a mere extension of their political activities. Consider, for example, the presidential election of 1800 between John Ad ams and Thomas Jefferson. Even by today’s heated standards of presidential politics, the 1800 election was bitter and partisan. When Jefferson won, he was in a position of being president at a time when not a single federal judge in the country came from h is political party. Jefferson was extremely wary of judges, and when the Supreme Court handed down the Marbury v. Madison decision in 1803 declaring the Supreme Court the ultimate interpreter of the Constitution’s meaning, Jefferson wrote that “to consider the judges as the ultimate arbiters of all constitutional questions is a very dangerous doctrine indeed, and one which would place us under the despotism of an oligarchy.” [1] A few years later, the first justice to be impeached, Samuel Chase, was accused of being overly political. His impeachment (and subsequent acquittal) started a trend toward nonpartisanship and political impartiality among judges. Today, judges continue this tradition by exercising impartiality in cases before them. Nonetheless, charg es of political bias continue to be levied against judges at all levels. In truth, the majority of a judge’s work has nothing to do with politics. Even at the Supreme Court level, most of the cases heard involve conflicts among circuit courts of appeals or statutory interpretation. In a small minority of cases, however, federal judges are called on to interpret a case involving religion, race, or civil rights. In these cases, judges are guided sometimes by nothing more than their own interpretation of case law and their own conscience. This has led some activists to claim that judges are using their positions to advance their own political agendas. Saylor URL: http://www.saylor.org/books Saylor.org 52 In general terms, judges are thought to fall into one of two ideological camps. On the politically conservative right, judges are described as either strict constructionists or originalists . Judges who adhere to this philosophy believe that social change is best left to the politically elected branches of government. The role of judges is therefore to strictly inte rpret the Constitution, and nothing more. Strict constructionists also believe that the Constitution contains the complete list of rights that Americans enjoy and that any right not listed in the Constitution does not exist and must be earned legislatively or through constitutional amendment. Judges do not have the power to “invent” a new right that does not exist in the Constitution. These judges believe in original meaning , which means interpreting the Constitution as it was meant when it was written, as opposed to how society would interpret the Constitution today. Strict constructionists believe that interpreting new rights into the Constitution is a dangerous exercise because there is nothing to guide the development of new rights other than a judge’s i ndividual conscience. Justice Antonin Scalia, appointed by Ronald Reagan to the Supreme Court in 1984, embodies the modern strict constructionist. Hyperlink: Justice Antonin Scalia Figure 2.7 Justice Antonin Scalia Saylor URL: http://www.saylor.org/books Saylor.org 53 Source: Photo courtesy of Steve Petteway, Collection of the Supreme Court of the United States, http://en.wikipedia.org/wiki/File:Antonin_Scalia,_SCOTUS_photo_portrait.jpg . http://www.cbsnews.com/stories/2008/04/24/60minutes/main4040290.shtml In 2008, Justice Antonin Scalia ( Figure 2.7 “Justice Antonin Scalia” ) sat down with 60 Min utes to discuss a new book he wrote and his originalist judicial philosophy. Click the link to watch a portion of this fascinating interview with one of the most powerful judges in the country. On the politically liberal left are judges who are described a s activist. Judicial activists believe that judges have a role in shaping a “more perfect union” as described in the Constitution and that therefore judges have the obligation to seek justice whenever possible. They believe that the Constitution is a “livi ng document” and should be interpreted in light of society’s needs, rather than its historical meaning. Judicial activists believe that sometimes the political process is flawed and that majority rule can lead to the baser instincts of humanity becoming th e rule of law. They believe their role is to safeguard the voice of the minority and the oppressed and to deliver the promise of liberty in the Constitution to all Americans. Judicial activists believe in a broad reading of the Constitution, preferring to look at the motivation, intent, and implications of the Constitution’s safeguards rather than merely its words. Judicial activism at the Supreme Court was at its peak in the 1960s, when Chief Justice Earl Warren led the Court in breaking new ground on civi l rights protections. Although a Republican, and nominated by Republican President Eisenhower, Earl Warren became a far more activist judge than anyone anticipated once on the Supreme Court. Chief Justice Warren led the Court in the desegregation cases in the 1950s, including the one affecting the Little Rock Nine. The “Miranda” [2] warnings —familiar to nearly every American who has ever seen a police show or movie —come from Chief Justice Warren, as does the fact that anyone who cannot afford an attorney has the right to publicly funded counsel in most criminal cases. Figure 2.8 President Franklin Roosevelt Saylor URL: http://www.saylor.org/books Saylor.org 54 Source: Photo courtesy of the U.S. Library of Congress, http://loc.gov/pictures/resource/cph.3c17121 . The modern characterization of judges as politically motivated can be traced to the Great Depression. Against cataclysmic economic upheaval, Americans voted for Franklin D. Roosevelt ( Figure 2.8 “President Fran klin Roosevelt” ) in record numbers, and they delivered commanding majorities in both the Senate and House of Representatives to his Democratic Party. President Roosevelt vowed to alter the relationship between the people and their government to prevent the sort of destruction and despair wreaked by the Depression. The centerpiece of his action plan was the New Deal, a legislative package that rewrote the role of government, vastly increasing its size and its role in private commercial activity. The New Deal brought maximum working hours, the minimum wage, mortgage assistance, economic stimulus, and social safety nets such as Social Security and insured bank deposits. Although the White House and the Congress were in near -complete agreement on the New Deal, t he Supreme Court was controlled by a slim majority known as the “Four Horsemen of the Apocalypse” because of their dire warnings of the consequences of economic regulation. Three justices known as the “Three Musketeers” —Justice Brandeis, Justice Cardozo, a nd Justice Stone — opposed the Four Horsemen. In the middle sat two swing votes. The Four Horsemen initially prevailed, and one by one, pieces of President Roosevelt’s New Deal were struck down as unconstitutional reaches of power by the federal government. Frustrated, President Roosevelt Saylor URL: http://www.saylor.org/books Saylor.org 55 devised a plan to alter the makeup of the Supreme Court by increasing the number of judges and appointing new justices. The “court -packing plan” was never implemented due to the public’s reaction, but nonetheless, the swing votes on the Supreme Court switched their votes and began upholding New Deal legislation, leading some historians to label their move the “switch in time that saved Nine.” During the public debate over the Supreme Court’s decisions on the New Deal, the jus tices came under constant attack for being politically motivated. The loudest criticism came from the White House. Hyperlink: Fireside Chats http://millercenter.org/scripps/archive/speeches/detail/3309 One of the hallmarks of FDR’s presidency was his use of the radio to reach millions of Americans across the country. He regularly broadcast his “fireside chats” to inform and lobby the public. In this link, President Roosevelt complains bitterly about the Supreme Court, claiming that “the Court has been acting not as a judicial body, but as a policy -making body.” Do modern politicians make the same accusation? The abortion debate is a good example of the politically charged atmosphere surrounding modern judicial politics. Strict constructionists decry Roe v. Wade as an extremely activist decision and bemoan the fact that in a democracy, no one has ever had the chance to vote on one of the most socia lly controversial and divisive issues of our time. Roe held that a woman has a right to privacy and that her right to privacy must be balanced against the government’s interest in preserving human life. Within the first trimester of her pregnancy, her righ t to privacy outweighs governmental intrusion. Since there is no right to privacy mentioned in the Constitution, strict constructionists believe that Roe has no constitutional foundations to stand on. Roe did not, however, declare that a right to privacy e xists in the Constitution. A string of cases before Roe established that right. In 1965 the Supreme Court overturned a Connecticut law prohibiting unmarried couples from purchasing any form of birth control or contraceptive. [3] The Court reasoned that the First Amendment has a “penumbra of privacy” that must include the right for couples to choose if and when they want to have children. Two years later, the Supreme Court found a right to privacy in the due process clause when it declared laws prohibiting m ixed -race Saylor URL: http://www.saylor.org/books Saylor.org 56 marriages to be unconstitutional. [4] As a result of these decisions and others like them, the phrase “right to privacy” today is widely accepted as a form of litmus test for whether a judge (or judicial candidate) is a strict constructionist or activist. Video Clip: A Question of Ethics: The Right to Privacy and Confirmation Hearings Since federal judges are appointed for lifetime, the turnover rate for federal judgeships is low. Recently, the Supreme Court went through an eleven -year period without any changes in membership. In the last five years, however, four new justices have joined the Court. First, John Roberts was nominated by George W. Bush in 2005 to replace retiring Justice Sandra Day O’Connor. President Bush did not have the opport unity to nominate anyone to the Supreme Court during his first term as president, and John Roberts’s nomination was viewed widely as a smart move to place on the Court a young, smart, and popular judge with solid Republican credentials. (Roberts began his legal career as an attorney with the Reagan administration.) Before the Senate could confirm Roberts, however, Chief Justice Rehnquist died of thyroid cancer while still in office. President Bush withdrew his nomination and renominated John Roberts as chie f justice, which the Senate confirmed. President Bush then began looking for a nominee to replace Justice O’Connor. His first nominee was a close personal friend, Harriet Miers. Selecting Miers allowed him to replace a woman with a woman, something importa nt to First Lady Laura Bush. More importantly, the president felt that Miers, a born -again Christian, would comfortably establish herself as a solid judicial conservative. Others in the Republican Party, however, were nervous about her nomination given her lack of judicial experience. (Miers had never been a judge.) Keen to avoid another situation in which a conservative president nominated a judge who turned out liberal, as was the case with President George H. W. Bush’s nomination of David Souter, key law makers put enough pressure on Miers that she withdrew her nomination. For his second nominee, President George W. Bush selected Samuel Alito, a safe decision given Alito’s prior judicial record. Although he has been on the Court for only a few years, most legal observers believe Alito’s nomination is critical in moving the Court to the political right, as Alito has demonstrated himself to be more ideological in his opinions than the pragmatic O’Connor. In his first term as president, President Barack Obama has had the opportunity Saylor URL: http://www.saylor.org/books Saylor.org 57 to name two justices to the Supreme Court: Sonia Sotomayor in 2009 to replace David Souter and Elena Kagan in 2010 to replace John Stevens. Both nominations are widely regarded as not moving the Court too much in either direction in terms of activism or originalism. There are now three women on the Supreme Court, a historical record. Hyperlink: Biographies of the Current Supreme Court Justices http:/ /www.supremecourt.gov/about/biographiescurrent.pdf The Supreme Court today is more diverse than it ever has been throughout its history. The hardworking men and women of the Court command respect from the legal community both in the United States and abroa d. Click the link to explore their biographies. K E Y T A K E A W A Y S Judicial conservatives, also known as originalists or strict constructionists, believe that the Constitution should be interpreted strictly, in light of its original meaning when it was written. They believe that societal change, especially the creation of new civil rights, should come from the political process rather than the judicial process. Judicial liberals, also known as judicial activists, believe that judges have a role to play in shapin g a more perfect union. They believe that the outcome of a case is paramount over other considerations, including past precedent. Judicial activists are more likely to find new civil rights in the Constitution, which they believe should be broadly interpre ted in light of modern society’s needs. The modern fight over judicial conservatives and judicial liberals began with FDR’s New Deal and his court – packing plan and continues to this day. The right to privacy is a good example of the difference between judi cial conservatives and judicial liberals, and it is seen as a test to determine what philosophy a judge subscribes to. After a long period of stability, membership in the Supreme Court has changed substantially in the last three years with three new member s. The Court remains closely divided between judicial conservatives and judicial liberals, with conservatives poised to control the Court’s direction. Justice Anthony Kennedy, a moderate conservative, remains the key swing vote on the Supreme Court. E X E R C I S E S 1. Read Justice Stewart’s dissent in the Griswold case here: http://www4.law.cornell.edu/supct/html/historics/USSC_CR_0381_0479_ZD1.html . Although he Saylor URL: http://www.saylor.org/books Saylor.org 58 believes Connecticut’s law is “uncommonly silly,” he nonetheless believes that it’s not unconstitutional. Do you think that judges have an obligation to overturn “uncommonly silly” laws? 2. Modern judicial confirmation hearings have been describ ed as an intricate dance between nominees and Senators, with the nominees giving broad scripted answers that reveal little about their actual judicial philosophy. Do you agree with this characterization? Do you think any changes should be made to the confi rmation process? 3. If you were president, what characteristics would you look for in nominating federal judges? 4. If an elected legislature refuses to grant citizens a right to privacy, do you believe it is appropriate for the courts to do so? Why or why not? 5. If a president believes that the Court has reached the wrong result, should the president be able to change the Court by increasing its numbers or forcing early retirement? [1] Thomas Jefferson to William C. Jarvis, 1820, in The Writings of Thomas Jeffer son , ed. Andrew A. Lipscomb and Albert Ellery Bergh, Memorial Edition (Washington, DC: Thomas Jefferson Memorial Association of the United States, 1903 –4), 15:277, quoted in Eyler Robert Coates Sr., “18. Judicial Review,” Thomas Jefferson on Politics & Gov ernment: Quotations from the Writings of Thomas Jefferson , 1999, http://etext.virginia.edu/jefferson/quotations/jeff1030.htm (accessed September 24, 2010). [2] Miranda v. Arizona , 384 U.S. 436 (1969). [3] Griswold v. Connecticut , 381 U.S. 479 (1965). [4] Loving v. Virginia , 388 U.S. 1 (1967). Saylor URL: http://www.saylor.org/books Saylor.org 59 2.3 Trial and Appellate Courts L E A R N I N G O B J E C T I V E S 1. Learn the differences between the state and federal constitutions. 2. Understand subject matter jurisdiction. 3. Explore the state and federal court systems. 4. Distinguish the work of trial and appellate courts. In many American cities, you can find both a state and a federal courthouse. These courts hear different types of cases, involvin g different laws, different law enforcement agencies, and different judicial systems. The rules governing the procedures used in these courts are known as civil procedure or criminal procedure and are sometimes so hard to understand they confound experienc ed attorneys and judges. Nonetheless, as future business professionals, it’s important for you to understand the general boundaries between state and federal courts. Most people forget that there are actually fifty -one separate legal systems in the United States: one federal and fifty in the states. Within each legal system is a complex interplay among executive, legislative, and judicial branches of government. The foundation of each of these systems of government is a constitution. Some state constitution s are actually older than the federal Constitution, while others are relatively new. The Massachusetts Constitution, for example, was ratified in 1780, seven years before the federal Constitution. The Montana Constitution, on the other hand, was adopted in 1972. In some states, state constitutions remain vibrant and provide civil protections beyond the federal Constitution. Several state Supreme Courts, for example, have interpreted their various state constitutions as prohibiting treating gays and lesbians differently when it comes to marriage under their “equal protection” provisions. Other state supreme courts have interpreted their state constitutions to grant citizens the right to choose the time and manner of their own death. Since these decisions are by state supreme courts interpreting their own state constitutions, they are beyond the reach or review of the federal Congress or federal courts. This dynamic power sharing between state and federal governments is known as federalism and is a key feature of our republican form of government. Saylor URL: http://www.saylor.org/books Saylor.org 60 To determine which court a case belongs in, lawyers look first to what the case is about. The rules of subject matter jurisdiction dictate whether a case is heard in federal or state court. Lawsuits involving state law s are generally heard in state courts. Most criminal laws, for example, are state laws. There may be wide differences among the states about what behavior constitutes criminal behavior. Speed limits, for example, are different from state to state. Even ser ious crimes such as murder or manslaughter, and possible defenses to those crimes, are defined differently by the states. Domestic issues such as divorce and family law are also handled at the state level. Some states make it very easy to marry (Nevada pro vides an obvious example), while others define marriage differently. Some states permit same -sex marriage, but most do not. Child custody and adoption laws are state based. Property and probate laws are also based on state law. Laws related to the transfer of property (including real estate), vehicle or watercraft ownership registration, and the disposition of property after death are different depending on what state you live in. The laws surrounding contracts are also passed at the state level (although m ost are based on a common law called the Uniform Commercial Code [UCC] ). Finally, the law of torts is state based. Torts are any civil wrong other than a breach of contract and can cover a vast array of situations in which people and businesses suffer lega l injury. Some states are far friendlier toward torts than others, and the resulting patchwork of tort laws means that companies that do business across the country need to bear in mind the different standards they are held to, based on what state their cu stomers live in. Given the wide array of subject areas regulated by state law, it’s not surprising that for most individuals and businesses, their experience with courts is with state courts. Nonetheless, cases do sometimes end up in federal court as well. Federal court subject matter jurisdiction is generally limited to cases involving a federal question —either the federal Constitution or a federal law. Cases involving the interpretation of treaties to which the United States is a party are also subject to federal court jurisdiction. In fact, any case involving the United States as a party is properly litigated in federal court. Finally, in original jurisdiction cases (so called because the Constitution specifically grants this jurisdiction), lawsuits betwee n states can be filed directly with the U.S. Supreme Court. Ongoing disputes between Wyoming and Montana over the use of the Tongue and Powder rivers, for example, were litigated in the Supreme Court in 2005. Saylor URL: http://www.saylor.org/books Saylor.org 61 Sometimes it’s possible for a federal court to hear a case involving a state law. These cases are called diversity jurisdiction cases, and they arise when all plaintiffs in a civil case are from different states than all defendants and the amount claimed by the plaintiffs exceeds seventy -five thousand dollars. Diversity jurisdiction cases allow one party who feels it may not receive a fair trial where its opponent has a “home court” advantage to seek a more neutral forum to hear its case, a process called removal . Within both the federal court and the s tate court system, there is a hierarchy of higher and lower courts. The diagram in Figure 2.9 “State and Federal Court Systems” demonstrates this hierarchy. The U.S. Supreme Court is the highest court in the country, and all courts are bound to follow prec edent established by the U.S. Supreme Court through the doctrine of stare decisis . Keep in mind, though, that if an issue is exclusively a state matter (such as a state court interpreting its own state’s Constitution), then the U.S. Supreme Court has no ju risdiction on that matter, leaving the state supreme court as the highest court on that particular issue. Figure 2.9 State and Federal Court Systems On the left -hand side of the diagram is the federal court system. Cases are filed in a U.S. District Court, the trial court in the federal system. Under the court administration system, there are ninety – Saylor URL: http://www.saylor.org/books Saylor.org 62 four judicial districts in the country. Some states with low population have only one judicial district, while more populous states have multiple judicial districts. The districts are named for their geographical location —the federal court in Manhattan, for example, is the U.S. District Court for the Southern District of New York. The U.S. Department of Justice, which acts as the prosecutor representing the federal government in both civil and criminal cases, divides its attorneys among the ninety -four judicial districts, with each district led by a U.S. attorney appointed by the president without any Senate confirmation. As a trial court, the U.S. district courts hear civil and criminal trials. The trials may be bench trials (heard only by the judge), or they may be jury trials. At the trial, witnesses are called and their testimonies are recorded, word for word, into a trial record (transcript of what was s aid in the courtroom along with supporting documentation). At the conclusion of the trial, if the losing side is unhappy with the outcome, it is entitled as a matter of right to appeal its case to the U.S. Circuit Court of Appeals. There are thirteen circu it courts of appeals in the United States, also spread geographically through the states. A party losing an appeal at the circuit court level can appeal one more time to the U.S. Supreme Court for review, but given the extremely small odds of that appeal being granted, most federal litigation ends at the U.S. circuit court level. On the right side of the diagram is the state court system. In all fifty states, a trial court of general jurisdiction accepts most types of civil and criminal cases. These courts are called various names such as superior court, circuit court, or district court. Confusingly, trial courts in New York State are called supreme courts. There may be other courts of limited jurisdiction at the state level, such as traffic court, juvenile court, family court, or small claims court. Increasingly, states are also experimenting with specialized drug courts to treat drug abuse (not distribution or trafficking) as a health problem rather than a criminal problem. State judges may be either appoin ted by the governor or elected by the public. Like their federal counterparts, state trial courts hold trials, and most preserve a trial record for review by an appellate court. In thirty -nine states, a party that loses at trial can file an appeal with an intermediate court of appeals. The remaining states are smaller and therefore don’t maintain this level of appeal, in which case appeals are filed directly with the state supreme court. In states with an intermediate court of appeals, the party losing the appeal can Saylor URL: http://www.saylor.org/books Saylor.org 63 typically file one more time with the state supreme court, although state supreme court rules vary on whether appeals are a matter of right or discretion. Finally, in certain cases that involve a federal constitutional right, a party that loses at the state supreme court level can appeal to the U.S. Supreme Court for review. These cases are typically criminal and involve the application of the Constitution to criminal procedure, evidence collection, or punishment. Whenever an appeal is filed, the trial record is forwarded to the appellate court for review. Appellate courts do not conduct new trials and are unable to recall witnesses or call new witnesses. The trial court’s duty is to figure out the facts of the case —who did what, when, why, or how . This process of fact -finding is an important part of the judicial process, and a great deal of deference is placed on the judgment of the fact finder ( trier of fact ). The trier of fact is typically the jury, or the judge in the case of a bench trial. On appeal, the appellate judge cannot substitute his or her interpretation of the facts for that of the trier of fact, even if the appellate judge believes the trier of fact was wrong. The issues on appeal are therefore limited to questions of law or legal er rors. For example, the appellate court may disagree with the trial judge’s interpretation of the meaning of a law, or it may disagree with a ruling the trial judge made about what evidence should be admitted or excluded to the trier of fact. The deference to the trier of fact (trial court) means that, as a practical matter, appeals are rarely won. Even if a litigant is successful in persuading a court of appeals that legal error has taken place, it doesn’t automatically win the case. In most cases, the best remedy a litigant can hope for is for the court of appeals to send the case back to a trial court (a process called remand ) for reconsideration or perhaps a new trial. K E Y T A K E A W A Y S There are fifty -one separate legal systems in the United States, each with its own executive, legislative, and judicial functions. State constitutions remain a vibrant source of civil rights protections for many citizens because state constitutions are permitted to grant more civil rights (but not less) than the federal Cons titution. Subject matter jurisdiction is the authority of a court to hear a case based on its subject matter. State law claims are generally heard in state courts, while federal question cases are generally heard in federal court. Federal courts sometimes hear state law claims under diversity jurisdiction. Federal cases are filed in a U.S. district court and appealed to a U.S. circuit court of appeals. State cases are Saylor URL: http://www.saylor.org/books Saylor.org 64 typically filed in a trial court and appealed to an intermediate court of appeals. The U.S . Supreme Court is the highest court in the country, and all other courts must follow the precedent in Supreme Court opinions. Trial courts are the triers of fact, and their judgment is not questioned by appellate courts. Appellate court review is limited to legal errors. E X E R C I S E S 1. Do you think that the “home court advantage” that justifies diversity jurisdiction still exists? Why or why not? 2. Should states retain the ability to grant more civil rights than the federal Constitution? Can you think of historic al examples of this happening? What implications does this have for the future? 3. Stare decisis requires courts to respect and follow established precedent. Why do you think stare decisis is important in our common -law system? What do you think would happen if courts were not bound to stare decisis? 4. Under what circumstances do you think the Supreme Court should feel comfortable abandoning a prior precedent? Do you think the answer differs depending on whether you believe in judicial originalism or activism? Saylor URL: http://www.saylor.org/books Saylor.org 65 2.4 The Certiorari Process L E A R N I N G O B J E C T I V E S 1. Understand the Supreme Court’s jurisdiction, including what kinds of cases are selected for review. 2. Explore what happens when lower courts of appeal disagree with each other. 3. Learn about the Supreme Court’s process in hearing and deciding a case. Video Clip: The U.S. Supreme Court The Supreme Court’s jurisdiction is discretionary, not mandatory. This means the justices themselves decide which cases they want to hear. For the justices to hear a case, the losing party from the appeal below must file a petition for a writ of certiorari . During the 2008 term (a term begins in October and ends the following June), the Supreme Court received approximately 7,700 petitions. Of these, about 6,100 were in forma pau peris , leaving only approximately 1,600 paid petitions. In forma pauperis petitions are filed by indigent litigants who cannot afford to hire a lawyer to write and file a petition for them. Supreme Court rules permit these petitions to be filed, sometimes handwritten, without any filing fees. These petitions are typically filed by prisoners protesting a condition of their detention or a defect in their conviction and are quickly dismissed by the Supreme Court. Not all in forma pauperis petitions are meritle ss, however. In the case of Gideon v. Wainwright ,[1] a poor defendant convicted of burglary without being represented by a lawyer filed a handwritten in forma pauperis writ of certiorari with the Supreme Court. The Court granted the writ, heard the case, and ruled that Gideon was entitled to have a lawyer represent him and that if he could not afford one, then the government had to pay for one. Gideon was retried with a lawyer’s assistance, and he was acquitted and released. Of the 7,700 petitions filed in the 2008 term, 87 cases were eventually argued. With such a large number of petitions filed, and a less than 1 percent acceptance rate, what kind of cases do the justices typically grant? Remember, the Supreme Court is a court of discretionary jurisdictio n. It does not exist as a court to right every legal wrong, or to correct every social injustice. Typically, the cases fall into one of three categories. The first category is a case of tremendous national importance, such as the Bush v. Gore [2] case to d ecide the outcome of the 2000 presidential election. These cases are rare, Saylor URL: http://www.saylor.org/books Saylor.org 66 but they dominate headlines on the Supreme Court. Second, the justices typically take on a case when they believe that a lower court has misapplied or misinterpreted a prior Supreme Court precedent. This category is also fairly infrequent. By far, the majority of cases granted by the Supreme Court fall into the third category, the circuit split . Recall that there are thirteen circuit courts of appeals in the United States (see Figure 2.10 “Geography of U.S. Federal Courts” ). Eleven are divided geographically among the several states and hear cases coming from district courts within their jurisdiction. Thus, for example, someone who loses a case in federal district court in Pennsylvani a will appeal his or her case to the Third Circuit Court of Appeals, while a litigant who loses in Florida will appeal his or her case to the Eleventh Circuit Court of Appeals. In addition to the eleven numbered circuit courts, there are two additional spe cialized courts of appeals. They are both seated in the District of Columbia. The U.S. Court of Appeals for the Federal Circuit is a specialized court that mainly hears appeals involving intellectual property cases, such as those involving patent law. Deci sions by this court on patent law are binding on all district courts throughout the country, unless overruled by the Supreme Court. The second specialized court is the U.S. Court of Appeals for the District of Columbia Circuit. Although this appellate cour t has the smallest geographical area of any court of appeal, it is a very important court as it hears cases against the federal government and the myriad federal agencies in Washington, DC. Chief Justice Roberts, as well as Justices Scalia, Ginsburg, and T homas, served on this important court before being appointed to the Supreme Court. A circuit split arises when the circuit courts of appeals disagree with each other on the meaning of federal law. Let’s assume that two similar cases are being decided in fe deral district court at the same time, one in California and the other in South Carolina. The cases present similar facts and involve the same federal law passed by Congress. Both cases are appealed —the California case to the Ninth Circuit and the South Ca rolina case to the Fourth Circuit. On appeal, it’s possible that the two appellate courts may come to opposite conclusions on what the law means, especially if Congress has recently passed the law. Since the circuit court of appeal decision is binding for that circuit, the state and meaning of federal law is different based on where a citizen lives. The Supreme Court is Saylor URL: http://www.saylor.org/books Saylor.org 67 therefore very likely to grant certiorari in this case to resolve the split and decide the meaning of the law for the entire country. Figur e 2.10 Geography of U.S. Federal Courts Source: Photo courtesy of the U.S. Department of Justice, http://en.wikipedia.org/wiki/File:US_Court_of_Appeals_and_District_Court_map.svg . When a petition for writ of certiorari is filed with the Supreme Court, the party that won the case in the appeal below (called the respondent) files an opposition. Together, these two documents are considered by the justices during one of their weekly conferences to decide whether or not the case should be granted. As previously discussed, cases that fall into one of three categories are generally granted, while others are di smissed. The conference works on the rule of four —only four justices (a Saylor URL: http://www.saylor.org/books Saylor.org 68 minority) need to agree to hear a case for the petition to be granted. The vast majority of cases are dismissed, which means the decision of the lower court stands. Each Supreme Court justice is permitted to hire up to four law clerks every term to assist with his or her work. These law clerks are typically new attorneys from the nation’s best law schools. Being selected as a clerk is obviously very prestigious, and the job is reserved for the brightest young legal minds. Many justices rely on their clerks to read the thousands of filed petitions and to make recommendations on whether or not to grant the case. This arrangement, called a cert pool (the clerk assigned to the case writes a memo that is circulated to all the justices), has been criticized as giving too much power to inexperienced lawyers. Participation in the cert pool is voluntary and not all the justices participate. Justice Alito, for example, does not participate, and his clerks read all the incoming petitions independently. Until his retirement, Justice Stevens also did not participate in the cert pool process. If a petition is granted, the parties are then instructed to file written briefs with the Court, laying out argu ments of why their side should win. At this point, the Court also allows nonparties to file briefs to inform and persuade the justices. This type of brief, known as an amicus brief , is an important tool for the justices. Many cases before the Supreme Court are of tremendous importance to a broad array of citizens and organizations beyond the petitioner and respondent, and the amicus brief procedure allows all who are interested to have their voice heard. For example, in the 2003 affirmative action cases fro m the University of Michigan, more than sixty -five amicus briefs were filed in support of the university’s policies, from diverse parties such as MTV, General Motors, and retired military leaders. Hyperlink: Amicus Briefs http://www.vpcomm.umich.edu/admissions/legal/gru_amicus -ussc/um.html The University of Michigan affirmative action cases drew national attention to the practice of colleges and universities usi ng race as a factor in deciding whether or not to admit a college applicant. The Supreme Court ultimately held that race may be used as a factor but not as a strict numerical quota. The Court was aided in its decision by numerous amicus briefs urging it to find in favor of the university, including briefs Saylor URL: http://www.saylor.org/books Saylor.org 69 filed by many corporations. Click the link to read some of these briefs and to understand why these companies are strong supporters of affirmative action. After the justices have read the briefs in the cas e, they hear oral arguments from both sides. Oral arguments are scheduled for one hour, in the main courtroom of the Supreme Court building. They are open to the public but not televised. Members of the press are given special access on one side of the cou rtroom, where they are permitted to take handwritten notes; no other electronic aids are permitted. During the oral arguments, the justices are interested not in the attorneys repeating the facts in the briefs but rather in probing the weaknesses of their arguments and the implications should their side win. The justices typically hear two or three cases a day while the Court is in session. Before each day’s session, the marshall of the court begins with the invocation in Note 2.58 “Hyperlink: Oyez.org” . Hy perlink: Oyez.org http://www.oyez.org/media/oyezoyezoyez After the oral arguments, the justices once again meet in conference to decide the outcome of the case. Unlike the other branches of government, the justices work alone. No aides or clerks are permitted into their conferences. Once they decide which side should win, they begin the task of drafting their legal opinions. The opinions are the only way that justices communicate with the pu blic and the legal community, so a great deal of thought and care is given to opinion drafting. If the chief justice is with the winning side, he or she decides which justice writes the majority opinion , which becomes the opinion of the Court. The chief ju stice can use this assignment power wisely by assigning the opinion to a swing or wavering member of the Court to ensure that justice’s vote doesn’t change. If the chief justice is in the minority, then the most senior of the justices in the majority decid es who writes the majority opinion. Dissenting justices are entitled to write their own dissenting opinions , which they do in hopes that one day their view will become the law. Occasionally, a justice may agree with the outcome of the case but disagree with the majority’s reasoning, in which case he or she may write a concurring opinion . After all the opinions are drafted, Saylor URL: http://www.saylor.org/books Saylor.org 70 the Court hands down the decision to the public. Except in very rare instances, all cases heard in a term are decided in the same ter m, as the Court maintains no backlog. K E Y T A K E A W A Y S The Supreme Court has discretionary jurisdiction to hear any case it wishes to hear. Every year, the chance of having the Supreme Court hear a particular case is less than 1 percent. The Supreme Court is more likely to hear a case if it involves an issue of national importance, if the Court believes a lower court has misinterpreted precedent, or if the case involves a split in the appellate circuits. A circuit split occurs when two or more federal circuit courts of appeals disagree on the meaning of a federal law, resulting in the law being different depending on where citizens live. Although it takes a majority of justices to vote together to win a case, only a minority decides the Court’s docket under the rule of four. The Supreme Court decides cases every term by reading briefs and amicus briefs and by hearing oral arguments. In any case, the Court may issue a majority opinion, dissenting opinions, and concurring opinions. E X E R C I S E S 1. Do you believe that Su preme Court oral arguments should be televised, as government proceedings are on C-Span? Why or why not? 2. Do you think the Supreme Court should act more as a court of last resort, especially in serious cases such as capital crimes, or should the Supreme Cou rt continue to accept only a very small number of cases? [1] Gideon v. Wainwright , 372 U.S. 335 (1963). [2] Bush v. Gore , 531 U.S. 98 (2000). Saylor URL: http://www.saylor.org/books Saylor.org 71 2.5 Concluding Thoughts As the smallest branch of government, and with the shortest founding text in the Constitution among the three branches, the U.S. judiciary faced uncertainty and political interference in its early days. In recent decades, however, the judiciary has matured into an independent and transparent institution, remarkably resilient to politic al turbulence and attack. It’s also a relative bargain for taxpayers, considering its role as the primary interpreter and defender of the Constitution. None of this has prevented political attacks on the judiciary, which continue to this day. You may recal l the Florida case involving Terri Schiavo, a patient in a permanent vegetative state, and what happened when her husband won judicial relief to stop medical measures to keep her alive. Prominent pro -life politicians launched vitriolic attacks on the judge s involved. Attacks on the judiciary for politically unpopular decisions have become so toxic that former Supreme Court Justice Sandra Day O’Connor has made it part of her post -Court retirement to stop these attacks and inject more civility into political treatment of judges. While citizen frustration with government is not new, dangerous threats against the judiciary are on the rise and represent a worrying trend. You may spend your entire life without ever meeting a single judge. If you do have experience s with a judge, you will likely find him or her to be surprisingly human, honest, and above all, fair. The judiciary lacks a natural constituency, so the burden of ensuring the continued success of this American institution falls on all of us, citizens and corporations alike. Saylor URL: http://www.saylor.org/books Saylor.org 72 Chapter 3 Litigation L E A R N I N G O B J E C T I V E S In this chapter, you will explore our litigation system in detail. Litigation provides an opportunity for each side in a dispute, whether criminal or civil, to lay their side of the story to an impartial jury or judge and ask that jury or judge to decide who wins and loses, and how much the loser should pay or how much time the defendant should spend in jail. After reading this chapter, you should have a deeper understanding of how litigati on is conducted in the United States. Specifically, you should be able to answer the following questions: 1. Who are the parties involved in litigation? 2. What is standing and how does it impact litigation? 3. How does a court obtain personal jurisdiction over a defendant? 4. How does a trial progress from beginning to end? 5. How does a losing side appeal a case? Even if you’ve never stepped foot in a courtroom before, you can probably describe what a courtroom looks like. It’s a large, imposing room with tall ceilings , flags on stands, and wood paneling on the walls. The majority of the floor space is taken up with seating for the public. The front of the courtroom is dominated by the bench, behind which the judge sits, above everyone else in the room. Next to the benc h is a solitary chair with a microphone in front of it, where a witness sits. Along one side of the wall is a separated area with two rows of seats, where the jury sits. Facing the bench, and always closest to the jury, is one table for the party that is c arrying the burden of proof in the case: the prosecution in a criminal trial and the plaintiff in a civil trial. Across the aisle, there is another impressive table for the opposite side, the defense . When court is in session, a hush settles into the room so that everyone can hear the judge, commanding in presence, or the witness, captivating in detail. Saylor URL: http://www.saylor.org/books Saylor.org 73 Many of us have such clear imagery of a courtroom because our experiences are drawn from popular culture. Whether in movies ( A Civil Action , To Kill a Mockingbird , Erin Brockovich ), on television shows ( Law & Order , L.A. Law , Boston Legal ), or in fictional books ( The Firm , Twelve Angry Men ), courtroom scenes capture our imagination and fire our sense of righteousness and justice as good always prevails o ver evil. In our collective courtrooms the truth always comes out, our ideals are always upheld, and the bad guys always lose. Who could forget, for example, the psychological breakdown on the witness stand in the movie A Few Good Men , as Jack Nicholson pl ays it out? Video Clip: You Can’t Handle the Truth Scenes like these, while providing wonderful imagery, are pure fiction. In a real courtroom, there is no back -and -forth argument between counsel and witness as examinations proceed through questioning alon e. In a real courtroom, the truth doesn’t always emerge. In a real courtroom, there are many shades of gray between good and evil. And finally, in a real courtroom, the bad guys don’t always lose, and the good guys don’t always win. As future business prof essionals, your responsibility to your company, to your company’s stakeholders, and to yourself is to avoid ever seeing the inside of a courtroom. Acting ethically and legally, and identifying the legal pitfalls that you may encounter by mastering the elem ents of this course, will help you achieve this goal. Agreeing to arbitration for parties that you have a preexisting relationship with, such as your customers, suppliers, or employees, will also help you stay away from a courtroom. In spite of this planni ng, however, many companies still find that litigation is sometimes unavoidable. Whether litigation is initiated against parties you don’t have a contract with (such as another company that steals your intellectual property rights) or by parties you don’t have a contract with (such as a customer who is injured by your product or an employee harassed by another employee), litigation may be the only dispute -resolution mechanism available. In this chapter we’ll explore the process of litigation from the beginn ing to the end. You’ll learn about the parties involved and about preliminary matters such as standing and personal jurisdiction and then explore the trial and appeal. We’ll also discuss the role of lawyers and juries in our litigation system. By the end o f the chapter, you’ll have an appreciation that while our litigation system is Saylor URL: http://www.saylor.org/books Saylor.org 74 cherished for its ability to resolve disputes peacefully and establishes a hallmark for public accessibility, for businesses it is often a far from satisfactory forum for disput e resolution. Key Takeaways Litigation is an inevitable part of a business’s activities. Lawsuits, trials, and appeals can be ruinously expensive for some companies, especially small – and medium -sized enterprises. Learning about our litigation system will give you the skills and comfort you need should your company find itself in litigation. Saylor URL: http://www.saylor.org/books Saylor.org 75 3.1 The Parties Involved L E A R N I N G O B J E C T I V E S 1. Identify the parties involved in litigation. 2. Explore the role of lawyers in our adversarial system. 3. Understand the roles and obligations of jurors. The litigation system relies on parties bringing forth and defending their respective claims. As in the game of chess, each move can take place only if a player makes a decision to move in a particular direction; the game does n ot play itself. Courts, jurors, and witnesses are similarly moribund: it is up to the players, in this case called litigants , to act decisively. Occasionally, a court may act sua sponte , without a direct request from a party. A judge may decide, for exampl e, to fine a party for bad or unethical behavior. These actions are fairly rare. More commonly, judges act on a motion filed by either party asking the judge to make a particular decision. The party that begins the lawsuit is called the plaintiff in a civi l case. The plaintiff is a victim that has presumably suffered some sort of legal wrong that the law recognizes. The plaintiff brings suit against the defendant —the alleged wrongdoer or perpetrator. Note that in a criminal trial, the party that initiates l itigation is the prosecution, representing the people of a state or, in federal cases, representing the people of the United States. In a criminal trial the alleged wrongdoer is also called the defendant. Many cases involve multiple plaintiffs and multiple defendants. Civil procedure encourages, and makes it easy for, parties to air all their grievances against each other at once. All parties, and every possible claim (each claim is a separate violation of law) arising out of a single incident or series of related incidents, should be identified and named in a lawsuit. For example, if you go to an off – campus party one night and witness a friend being harassed, you might feel the need to step in to defend your friend. The harasser may then turn his attention toward you, perhaps taking a swing at you. Let’s assume that the harasser is drunk and misses, but in return you take a swing and hit him, knocking him to the ground. The harasser may file a lawsuit against you, alleging assault and battery. The harasser i s the plaintiff, and you are the defendant. The lawsuit filed in court would be Saylor URL: http://www.saylor.org/books Saylor.org 76 captioned Harasser v. You . You might decide in return to file a claim against the harasser, alleging that the harasser started the fight and that you acted in self -defense. This is called a counterclaim , and you are now the counterplaintiff , making the harasser the counterdefendant . In return, the harasser may allege that he wasn’t really harassing your friend but trying to defend himself from your friend’s unwanted advances. The harasser may sue your friend as a third -party defendant through a process called joinder . Except in some small -claims courts, parties hire attorneys to litigate most cases. Sometimes individuals feel like they have a sufficient grasp on the law to pro ceed in litigation without a lawyer or that they have sufficient legal training (or even a law degree) that hiring a lawyer would be a waste of money. Individuals who represent themselves are called pro se litigants and can only proceed pro se if the judge overseeing the case allows it. Abraham Lincoln once famously said, “He who represents himself has a fool for a client.” The complexities of litigation require a cool and detached mind to thread a route to success, and if you are representing yourself it i s all too easy to allow passion to cloud your judgment. Attorneys are sometimes called members of the bar . The U.S. legal profession is unique in several respects. In most countries, legal education is an undergraduate program followed by a period of appre nticeship before an individual is allowed to practice law. Many countries also make a distinction between attorneys who litigate in court and those who do not. In the United Kingdom, for example, solicitors are lawyers who deal with ordinary legal matters outside of court, while Queen’s Counsel (QC) are specially trained lawyers who are permitted to argue in court. In the United States, lawyers undertake three years of graduate study resulting in the award of the Juris Doctorate degree, or JD. Every year, m ore than thirty thousand students graduate from U.S. law schools with their JD. They then sit for the bar exam in the state where they wish to practice. Since the practice of law in the United States varies widely by different jurisdictions, lawyers are on ly permitted to practice in jurisdictions where they are licensed. Some states permit lawyers from out of state, after a few years of being in practice, to apply for bar admission without taking the exam through a process called reciprocity. Other states, notably California and Florida, require attorneys to take the bar exam no matter how long they have been in practice. If a lawyer is dealing with an issue or matter that takes Saylor URL: http://www.saylor.org/books Saylor.org 77 him or her out of state to litigate a case, he or she can ask to be admitted tem porarily by a court in that foreign state through a motion called pro hac vice . Once the lawyer passes the state’s bar exam or is otherwise admitted, he or she is permitted to practice all aspects of law in that state, from drafting wills and contracts to arguing a case before the U.S. Supreme Court. Attorneys in the United States are broadly divided into civil and criminal attorneys; few lawyers excel in both areas. Civil attorneys generally work in two different categories: in law firms, where they may represent multiple clients, and as in-house counsel , where they represent only one client, their employer. Most large corporations have an in -house legal department to control legal costs but may still hire outside counsel for representation and advice in co mplex matters. With the possible exception of politicians, no other profession is subject to more morbid jokes than lawyering. William Shakespeare famously wrote in Henry VI , through a character speaking of a utopian world, “The first thing we do, let’s ki ll all the lawyers.” In spite of this public animosity toward lawyers, however, if there comes a time when someone needs a lawyer, it’s not uncommon to hear them wish they had the most aggressive lawyer money can buy. Perhaps part of the reason the public has a low opinion of lawyers can be traced to the ethical and legal obligations of attorneys. Lawyers may be the most regulated of all the professional industries, and they are required to comply with complex and sometimes rigid rules of professional condu ct. Unlike rules for other professions, the rules of professional conduct for lawyers are largely drafted and enforced by the bar itself (other lawyers and judges) and almost never involve external enforcement mechanisms. These rules govern virtually every aspect of the practice of law, and a violation of these rules can result in disciplinary action from the state bar or supreme court of the state in which the lawyer practices, up to lifetime disbarment. When President Bill Clinton, for example, lied under oath about certain aspects of his extramarital affairs, he was suspended from practicing law for five years in Arkansas and ordered to pay a $25,000 fine. These rules of professional responsibility require attorneys to represent their clients with zealous advocacy. Ordinarily, we associate the word “zealot” with extremists, but that is the standard by which lawyers must represent their clients. This might clarify why some lawyers act the way they do. Saylor URL: http://www.saylor.org/books Saylor.org 78 One of the most sacrosanct rules of professional respons ibility is the obligation to keep a client’s secrets. The communications between a client and his or her attorney are absolutely confidential under the attorney -client privilege doctrine. There are many privileges under the law, such as the spousal privile ge, doctor -patient privilege , and priest -penitent privilege . The attorney -client privilege, however, is arguably the strongest of these privileges. The privilege belongs to the client, and the attorney is not permitted to reveal any of these communications without the client’s consent. A narrow exception exists for clients who tell their lawyers they intend to harm others or themselves, but attorneys must tread very carefully to avoid violating the privilege. Many members of the public feel that the privile ge may be open to abuse and can’t understand, for example, why an attorney can’t reveal a client’s confession to a heinous crime. Ultimately, the privilege exists for the client’s benefit. Someone who cannot communicate with his or her attorney freely is u nable to help the attorney prepare the best possible case for litigation. You should note that in -house attorneys represent the corporations they work for and not individual employees. If you communicate with an in -house attorney for the company where you work, for example, that communication may not be automatically protected by the attorney -client privilege. Hyperlink: The Lynne Stewart Case http://www.lynnestewart.org Lynne Stewart, a human rights attorney, was assigned to represent Sheik Omar Abdel -Rahman, the blind Egyptian cleric convicted of conspiracy in the 1993 World Trade Center bombing in New York City. As part of her representation, she agreed to abide by certain conditions when communicat ing with her client, including not speaking to the media. Ms. Stewart broke those promises and inadvertently passed on a communication from her client to his followers around the world. She was indicted and convicted of conspiracy and providing material su pport to terrorists. She was sentenced to a twenty -eight -month prison term. Click the link to read more about her case, including the legal documents involved. A very controversial aspect of the case involved the use of secret cameras and recorders to list en in on her conversations with her client while he was in prison. Figure 3.2 Lynne Stewart Saylor URL: http://www.saylor.org/books Saylor.org 79 Source: Photo courtesy of Robert B. Livingston, http://en.wikipedia.org/wiki/File:Lynne_Stewart.JPG . In spite of an attorney’s professional obligations to his or her client, it’s important to remember that ultimately a lawyer’s first duty is to the administration of justice . The rules of professional co nduct are written with this goal in mind. The requirements for lawyers on civility, honesty, and fairness are all written to ensure that lawyers represent the very best aspects of our judicial system. Let’s say, for example, a client admits to his lawyer t hat he is guilty or liable in a case. The client then wants to testify under oath that he is innocent. Although a lawyer cannot tell anyone what her client has told her, the lawyer is also prohibited from knowingly suborning perjury . The attorney must eith er convince the client to not testify, or withdraw from the case. In the case in Note 3.31 “Hyperlink: A Question of Ethics” , an attorney goes a little too far in her representation and draws a heavy fine from a judge as a result. Hyperlink: A Question of Ethics The Case of the Birther Attorney Order Hon. Clay D. Land, U.S. District Judge, District Court for the Middle District of Georgia, Case No. 4:09 -CV -106, Rhodes v. MacDonald , at http://www.scribd.com/doc/20996403/Gov -uscourts -gamd – 77605 -28 -0. Saylor URL: http://www.saylor.org/books Saylor.org 80 Throughout the presidential election campaign in 2008, persistent rumors swirled around whether Barac k Obama was born in the United States, a requirement under the Constitution to serve as president. After the election, California attorney Orly Taitz launched a campaign to prove that the president was not, in fact, born in Hawaii. Her bizarre tirades agai nst the media and the courts earned her this unusual reprimand from a federal judge. Click the link to read the entire order. Do you believe that in their “zealous” representation of their clients, attorneys have the ethical duty to pursue claims such as t hese? Order Introduction Commenting on the special privilege granted to lawyers and the corresponding duty imposed on them, Justice Cardozo once observed, “Membership in the bar is a privilege burdened with conditions. [A lawyer is] received into that anci ent fellowship for something more than private gain. He [becomes] an officer of the court, and, like the court itself, an instrument or agency to advance the ends of justice.” Competent and ethical lawyers “are essential to the primary governmental functio n of administering justice.” For justice to be administered efficiently and justly, lawyers must understand the conditions that govern their privilege to practice law. Lawyers who do not understand those conditions are at best woefully unprepared to practi ce the profession and at worst a menace to it. When a lawyer files complaints and motions without a reasonable basis for believing that they are supported by existing law or a modification or extension of existing law, that lawyer abuses her privilege to p ractice law. When a lawyer uses the courts as a platform for a political agenda disconnected from any legitimate legal cause of action, that lawyer abuses her privilege to practice law. When a lawyer personally attacks opposing parties and disrespects the integrity of the judiciary, that lawyer abuses her privilege to practice law. When a lawyer recklessly accuses a judge of violating the Judicial Code of Conduct with no supporting evidence beyond her dissatisfaction with the judge’s rulings, that lawyer ab uses her privilege to practice law. When a lawyer abuses her privilege to practice law, that lawyer ceases to advance her cause or the ends of justice. Saylor URL: http://www.saylor.org/books Saylor.org 81 It is irrefutable that a lawyer owes her client zealous advocacy, but her zeal must be constrained withi n the bounds placed on her as an officer of the Court and under the Court’s rules. Specifically, Rule 11 of the Federal Rules of Civil Procedure expressly sets forth the outer boundaries of acceptable attorney conduct. That rule prohibits a lawyer from ass erting claims or legal positions that are not well -founded under existing law or through the modification, extension, or expansion of existing law. Rule 11 also prohibits an attorney from using the courts for a purpose unrelated to the resolution of a legi timate legal cause of action. Regrettably, the conduct of counsel Orly Taitz has crossed these lines, and Ms. Taitz must be sanctioned for her misconduct. After a full review of the sanctionable conduct, counsel’s conduct leading up to that conduct, and co unsel’s response to the Court’s show cause order, the Court finds that a monetary penalty of $20,000.00 shall be imposed upon counsel Orly Taitz as punishment for her misconduct, as a deterrent to prevent future misconduct, and to protect the integrity of the Court. Payment shall be made to the United States, through the Middle District of Georgia Clerk’s Office, within thirty days of today’s Order. If counsel fails to pay the sanction due, the U.S. Attorney will be authorized to commence collection proceed ings. The Court does not take this action lightly, and in fact, cannot recall having previously imposed monetary sanctions upon an attorney sua sponte. As the Orly Taitz case demonstrates, attorneys must take care to respect a court’s authority at all time s and conduct themselves in a civil manner. Most attorneys have no problem discharging this obligation to the judge, but it is to the jury that they focus their attention the most. In our legal system, the jury has a very special role to play in ensuring c itizen participation in the administration of justice. As the trier of fact, the jury has the duty of determining the truth in any given situation: who said and did what, why, and when? Do you know when someone is lying to you? Have you ever been lied to s o well that you didn’t find out about the lie until much later? Have your roommates or friends who were involved in a dispute ever asked you to decide who should win? In essence, being a juror relies on those same human skills. In every legal proceeding, e ach of two adversarial sides, absolutely opposed to each other, claims that it is right and the other side is wrong. Our litigation system is a process by which each Saylor URL: http://www.saylor.org/books Saylor.org 82 side gets to present its case to a group of stranger citizens, and then ask them to decide who is lying and who is telling the truth. There are two types of juries. A grand jury is a group of citizens convened by the prosecution in serious criminal cases to simply determine whether there is probable cause to believe that a crime has occurred an d whether it’s more likely than not that the defendant in question committed the crime. The grand jury serves as a procedural step to prevent prosecutors from abusing their powers of arrest and indictment, a sort of “sanity check” on the awesome power of g overnment to accuse citizens of crime. The grand jury requirement exists at the federal level and in some, but not all, states. A grand jury typically meets for an extended period of time and can hear several different cases in one day. The grand jury does not determine guilt or innocence. A petit jury does that. This jury is impaneled for a specific trial. During the trial, members of the jury listen to the evidence presented and then deliberate as a group on what they believe the facts of the case are. Th ey then apply the law, as instructed by the judge, to the facts. There are typically twelve members in a petit jury in criminal trials and from six to twelve members in civil trials, and generally speaking they must arrive at a unanimous verdict. The jury system is a jewel in our litigation system for it involves ordinary citizens in adjudicating all sorts of disputes, from domestic family issues to complex business and insurance litigation to heart – wrenching criminal cases. There are problems with administ ering this system, however. Both grand and petit juries are drawn from citizen voter and driver license rolls. In high -profile cases, it may be difficult to find citizens who have not heard about the case or who can be impartial about the case, in spite of their promises to be open minded. When Enron collapsed in 2001, for example, defense attorneys for former CEO Jeff Skilling argued strenuously that the trial should not be held in Houston, where almost every citizen was affected in some way by the energy giant’s collapse or knew someone affected. The question of juror bias was so serious that the U.S. Supreme Court agreed to hear Skilling’s appeal based partially on this argument. Although the Court eventually found that Skilling’s jury was adequately impa rtial, Justice Sotomayor noted in a Saylor URL: http://www.saylor.org/books Saylor.org 83 dissenting opinion that the “deep seated animosity that pervaded the community at large” caused her great concern. [1] Another problem arises from the burdens placed on jurors’ personal lives through their service. While most states have laws that prevent an employer from firing a worker or taking any negative work action, such as demotion, against the worker for being on jury duty, there is no legal requirement that an employer continue to pay a worker on jury duty. The court system does not pay juries for their services either (although some court systems pay a small amount, typically less than twenty dollars per day, to cover food and transportation costs). Some citizens, such as those who are self -employed, are therefo re at great risk for losing personal income by serving on juries. Imagine being on the O. J. Simpson criminal trial jury, for example —that trial lasted ten months. The effects of jury service on a juror’s personal life can be staggering. Another potential problem arises in the makeup of the jury itself. To provide a fair jury, courts attempt to draw from a cross -section of society to reflect the diversity of the surrounding community. Local court rules typically allow judges to excuse potential jurors for h ardship or extreme inconvenience. If these rules are too generous, then the only citizens left may be those without full – time employment, such as students or retirees. Such a narrow cross -section of society would tend to skew the reliability and trust of t he jury system, and judges across the country are becoming increasingly intolerant of attempts to evade jury service. The only professions that automatically exempt citizens from jury duty are active -duty soldiers, police officers and firefighters, and pub lic officers. In spite of these administrative problems, our jury system remains a cornerstone of litigation and is often openly admired. In South Korea, for example, attempts to create a more open and responsive democracy resulted in a novel and wholesale revision to the country’s court system: the adoption of citizen juries. Hyperlink: Korea Adopts Jury System http://www.nytimes.com/2008/07/07/world/asia/07iht -jury.2.14299454.html Saylor URL: http://www.saylor.org/books Saylor.org 84 In 2007, with little public debate or preparation, South Korea adopted a jury system in certain criminal and civil trials. For now, the jury’s decision is only advisory, and the court is free to reject it. The result has been some confusion about the role of citizens in the legal system, some concern about the methodology employed to implement the jury system, and an increase in transparency and greater citizen participation in governme nt affairs. K E Y T A K E A W A Y S The federal rules of civil procedure make it easy for parties in a lawsuit to identify and join other relevant parties and to make legal claims against each other. The goal of civil litigation is to find the truth. Litigants typic ally rely on lawyers to assist them in litigation. An attorney’s highest duty is to the administration of justice. Lawyers are ethically bound to represent their clients with zealous advocacy. A grand jury acts as a body of citizens to prevent abuse of dis cretion by prosecutors. A petit jury sits in trials as the trier of fact to ascertain the truth through their observations of the presented evidence. E X E R C I S E S 1. Can you think of a situation where an in -house attorney may advise you to retain your own counsel? 2. Most rules of legal professional conduct are drafted and enforced by the bar itself, but the Sarbanes -Oxley Act (passed in reaction to the Enron accounting scandal) imposed a legal duty on lawyers to report acts of misconduct in publicly traded co rporations. Do you believe that the bar does an effective job of policing itself, or do you think external government agencies should be more involved? 3. Read the legal documents available for the Lynne Stewart case at Note 3.28 “Hyperlink: The Lynne Stewart Case” . Do you think that the U.S. government should be able to curb the attorney -client privilege when the client is a convicted terrorist? Or a suspected terrorist? 4. How aggressive should a lawyer be in representing his or her client “zealously”? Read the rest of Judge Land’s order in Note 3.31 “Hyperlink: A Question of Ethics” . Do you think Orly Taitz’s conduct warranted a twenty -thousand -dollar fine? 5. Do you think that juries can be trusted to always arrive at the truth? Why or why not? 6. Do you think the U .S. jury system should be adopted by other countries? What factors do you think should affect a country’s decision to adopt a jury system? Saylor URL: http://www.saylor.org/books Saylor.org 85 [1] Skilling v. United States , 561 U.S. ___ (2010), http://www.supremecourt.gov/opinions/09pdf/08 – 1394.pdf (accessed October 2, 2010). Saylor URL: http://www.saylor.org/books Saylor.org 86 3.2 Standing and Personal Jurisdiction L E A R N I N G O B J E C T I V E S 1. Explore the standing requirement. 2. Understand how a court obtains personal jurisdiction over the parties. Before a case can be litigated, parties have to demonstrate that they meet two pretrial requirements: standing and personal jurisdiction. Standing is a constitutional requi rement. Article III of the Constitution grants the judiciary the power to hear “cases” and “controversies.” This means actual cases and controversies, not merely hypothetical ones. Unlike some other jurisdictions, the standing requirement means that courts are unable to give advisory opinions. Let’s say, for example, Congress is considering whether or not to pass a law and would like to know whether the law is constitutional. Standing prevents this question from being litigated, because it’s not yet an actu al case or controversy. Standing, therefore, is a doctrine that limits judicial overreach by circumscribing the types of cases that are litigated in our courts. To demonstrate standing, a party has to prove first that it has an actual case to proceed. This is a procedural matter, and it requires the case to be brought at the right time. If a case is brought too early, it’s not yet ripe . If it’s brought too late, then the case is moot . For example, assume that a state is debating whether or not to pass a law that would require thirty hours of financial management classes before anyone is allowed to form his or her own company. If an entrepreneur who wishes to form her own company but doesn’t want to take the thirty hours of classes sues the state for an uncon stitutional law, that lawsuit would be dismissed for being brought too early —it is not ripe since the law hasn’t been passed yet. Now let’s assume that the law has been passed, and the entrepreneur, who has abandoned her plans and is now working for someon e else, sues the state anyway. That lawsuit would also be dismissed since it is now moot. Even if the entrepreneur won the case and the law was overturned, the remedy would be meaningless to her since she does not plan to take the class anyway. Saylor URL: http://www.saylor.org/books Saylor.org 87 In addition to being brought at the right time, the case has to be brought by the right person. To show standing, a plaintiff has to demonstrate that he has an actual stake in the litigation, or something of value that would be lost if he loses the case. Of course, i f a plaintiff has lost money in a contract dispute or has been injured in a tort case, that is sufficient legal injury. Let’s say, for example, that your roommate is the victim of Internet fraud when she does not receive the goods that she paid for online. She would rather move on and forget the whole episode, but you are outraged and decide to sue the perpetrator in court. Even if the perpetrator admitted that it committed fraud, you would still lose the case because you’re not the right plaintiff here; yo ur roommate is. Cases that don’t involve monetary damages are sometimes more difficult to call. For example, what if a constitutional right is at stake? What standing does a citizen have to prove to file a lawsuit? Courts have generally held that merely be ing a taxpayer does not give standing to challenge government expenditures. So, for example, a citizen cannot sue the government to stop the war in Afghanistan just because he pays his taxes. If taxpayers don’t have standing to challenge government action, then who does? In 2007 Massachusetts, along with eleven other states, sued the Environmental Protection Agency (EPA) to force the agency to regulate carbon dioxide as a pollutant. For years, the EPA had argued that carbon dioxide is not a pollutant and th erefore could not be regulated. In response to the suit, the EPA argued that the states lacked standing since they couldn’t prove they had been harmed by excess carbon dioxide in the air. In a major decision, [1] the Supreme Court ruled that the states had standing because they had suffered environmental degradation as a result of global warming brought about by excess carbon dioxide and that therefore the EPA has jurisdiction over carbon dioxide as a pollutant. Th is decision, along with the election of President Obama, led to a major policy reversal at the EPA, which is now aggressively pursuing the regulation of carbon pollution to combat global warming. Another high -profile case on standing involves the Pledge of Allegiance. In 2000 a California attorney and physician sued the government because his daughter attended a school where the Pledge of Allegiance was recited every morning. The plaintiff, Michael Newdow, claimed that the Saylor URL: http://www.saylor.org/books Saylor.org 88 pledge is unconstitutional under t he First Amendment because it contains the words “under God.” In 2002 the Ninth Circuit Court of Appeals agreed with Newdow, ruling that the pledge is indeed unconstitutional. On appeal to the Supreme Court, the Court ducked the question of whether the ple dge is unconstitutional. [2] Instead, the Court held that Newdow lacked standing to bring the lawsuit in the first place since he is a noncustodial parent. Only his wife, who had custody of the daughter, could bring the lawsuit. It’s important to note that standing doesn’t have anything to do with the merits of the case. Being able to prove standing doesn’t mean that you can win the case at hand. It only means that you’ve been able to clear a procedural bar toward proceeding with litigation. Another procedur al bar before a plaintiff can proceed is personal jurisdiction . Personal jurisdiction is different from subject matter jurisdiction, which is the power of a court to hear a case. Personal jurisdiction is the power of a court over specific litigants, and it requires litigants to have some form of minimum contacts with the state where the case is filed. Personal jurisdiction seeks to avoid inconvenient litigation, even if the case has actual merit. If you’ve never been to Nebraska, for example, and don’t have any connections to Nebraska, then you might be very surprised to find that you’re being sued in a Nebraska state court. In addition to that, you’d have to go to Nebraska to answer the lawsuit, hire local lawyers to assist you, and spend a lot of time and money in a state you have nothing to do with. A court obtains personal jurisdiction over the plaintiff when the plaintiff files its lawsuit. Obtaining personal jurisdiction over the defendant can be a little trickier. Typically, there has to be some sort o f connection between the defendant and the state where the court is located. For example, living in the state would create personal jurisdiction. Residency for purposes of personal jurisdiction is different from residency for other legal requirements such as voting and driving. Even temporary residency, such as a college student studying out of state, creates residency for personal jurisdiction purposes. Moreover, merely being in the state temporarily creates personal jurisdiction. If you’re driving through Nebraska, for example, and you’re speeding on a local highway, Nebraska courts have jurisdiction to hear a speeding ticket issued against you. Owning property in a state also creates Saylor URL: http://www.saylor.org/books Saylor.org 89 jurisdiction. For corporations, courts generally hold that personal juri sdiction is proper in the state of incorporation as well as in any state the corporation does business. Personal jurisdiction, like standing, is a constitutional requirement. The due process clause of the Fourteenth Amendment requires government processes to be carried out fairly. In 1980, the Supreme Court heard an important case on personal jurisdiction involving a car crash in Oklahoma. [3] The plaintiff purchased the car in New York and filed a lawsuit against the manufacturer (Volkswagen) and the distr ibutor and retailer (car dealer). The distributor and the retailer moved to dismiss the case for lack of personal jurisdiction, arguing that they had no business in Oklahoma, had no employees or property there, and did not target citizens of Oklahoma to pu rchase vehicles from them in New York. The Supreme Court held in favor of the distributor and car dealer, finding that neither had “purposefully availed” themselves of the privileges that come from doing business in Oklahoma. The Court noted that for perso nal jurisdiction to attach, “substantial notions of fair play and justice” cannot be offended. Today, most states have written these concepts into laws known as long -arm statutes . These statutes set forth the procedure by which out -of-state defendants can be required to appear before a local court. The statutes provide for how service of process can occur. Service of process is the process by which any defendant (both local and out -of-state) is notified that it is being sued. Service of process typically re quires a copy of the summons (notice to appear before a court) to be personally delivered to the defendant or the defendant’s agent. In the case of companies and other nonhuman entities, service of process is usually easy since they are required to have a registered agent as part of the process of forming an organization. Service can be more challenging with an individual, since some defendants know that litigation can be held up while service is attempted and therefore choose to avoid being served at all c osts. While the best service is personal delivery of the summons, some states prescribe alternative methods such as leaving a copy with a family member while also mailing a copy. The Internet era has raised some interesting personal jurisdiction issues. Do es creating a Web site, for example, subject you to personal jurisdiction in all states where the Web site is accessible? Courts Saylor URL: http://www.saylor.org/books Saylor.org 90 have ruled that the answer depends on what kind of Web site you have created. If it is a general informational Web site that de scribes a product, then there are insufficient minimum contacts to create personal jurisdiction. If, on the other hand, the Web site reaches out to specific customers and urges them to make a purchase, either through a shopping cart function or by calling the seller, then there are minimum contacts to justify jurisdiction. K E Y T A K E A W A Y S Standing is a constitutional requirement that requires a plaintiff prove that he or she is the right person to bring a lawsuit and that he or she is bringing the lawsuit at the right time. Taxpayers lack standing to sue the government just by being taxpayers. Legal injury does not have to be monetary based; environmental harm, for example, may be sufficient to demonstrate standing. Standing has nothing to do with the merits of the underlying case. Courts must have personal jurisdiction over a defendant before litigation can proceed. Personal jurisdiction, a constitutional requirement, requires minimum contacts with the state such that substantial notions of fair play and justi ce are not offended. Once personal jurisdiction is established, service of process can occur, where a copy of the summons is delivered to the defendant. If the defendant lives out of state, a long -arm statute prescribes the method for service to occur. A W eb site creates personal jurisdiction in any state where it reaches out for customers through a shopping cart function. E X E R C I S E S 1. When President Obama nominated Hillary Clinton as secretary of state in 2008, several constitutional scholars observed that it may be unconstitutional for her to assume the post due to an often -ignored section of the Constitution. What procedural bar stopped citizens from challenging the nomination? 2. Do you believe the Supreme Court acted properly by finding that states with env ironmental damage from global warming had standing to challenge the federal government? 3. In the Volkswagen car crash case, the manufacturer (Volkswagen, a German company) and the importer did not contest personal jurisdiction of Oklahoma state courts. Why d o you think they submitted to jurisdiction so readily? 4. If a car dealer in a neighboring state runs advertisements in your state claiming that its deals are better than those of in -state dealers, does that out -of-state car dealer create personal jurisdictio n in your state? Saylor URL: http://www.saylor.org/books Saylor.org 91 5. If you sell something on eBay, do you create personal jurisdiction in the buyer’s state? Why or why not? 6. If you commit a tort on the Internet, do you create personal jurisdiction in the victim’s state? For example, if you defamed someone w ho lives out of state on Facebook, have you created jurisdiction in that foreign state? [1] Massachusetts v. EPA , 549 U.S. 497 (2007). [2] Elk Grove Unified School District v. Newdow , 542 U.S. 1 (2004). [3] World -Wide Volkswagen v. Woodson , 444 U.S. 286 (1980). Saylor URL: http://www.saylor.org/books Saylor.org 92 3.3 Pretrial Procedures L E A R N I N G O B J E C T I V E S 1. Explore pretrial procedures such as pleadings, discovery, and motions. 2. Find out how class -action lawsuits are organized and prosecuted. 3. Learn about issues and challenges facing parties during discovery. After issues related to subject matter jurisdiction, standing, and personal jurisdiction are sorted out and parties have hired counsel to represent them, then a dispute can proceed to the pretrial stage. In civil cases, litigation begins with th e filing of a complaint by the plaintiff. The complaint is a simple document setting forth who the parties are, the facts of the case, and what specific laws the defendant has violated. (Each of these is a claim.) The complaint ends with a prayer for relie f. The plaintiff may be seeking damages (money), specific performance in certain kinds of contract cases, or a temporary or permanent injunction . It is much easier to get a temporary injunction in the early stages of litigation, because courts don’t want to see the defendant take some action that may result in irreparable harm . For example, if a real estate development company wants to tear down an old shopping mall to build a new skyscraper, and one of the tenants in the old mall claims it still has a rig ht to be there, the tenant may be able to obtain a temporary injunction stopping the demolition until the lease issues are sorted out. If the demolition is allowed to continue and the tenant later turns out to be the winner, it will be too late to grant th e tenant any meaningful remedy. Citizen advocacy groups with an antilitigation public policy agenda often complain about frivolous lawsuits being filed in court. Most court systems have rules to prevent the filing of frivolous suits. In the federal system, the rules state that all claims must be signed by a lawyer certifying that to the “best of the person’s knowledge,” formed after “an inquiry reasonable under the circumstances,” the claim is not being presented for an unlawful purpose such as harassment a nd that the claims are either “warranted by existing law” or a nonfrivolous argument for modifying existing law. In practice, this standard is quite easy to meet, and it’s hard to think of a factual scenario —other than the most absurd —that would rise to th e level of being legally frivolous. Saylor URL: http://www.saylor.org/books Saylor.org 93 The complaint is filed with the clerk of the court where the suit is to be heard. Every court has a clerk’s office to handle administrative matters relating to litigation. Even though the court system is a public service , there is usually a fee associated with filing a complaint to cover some of the court’s costs. The clerk will next issue a summons to the defendant, along with a copy of the complaint. The summons is sent to a process server to effect service on the defen dant. When the defendant is served, it is very important for the defendant to respond to the complaint in a timely manner. Ignoring the complaint, even if the defendant believes the complaint is devoid of any merit, is a fatal error. If the defendant does not reply to the complaint, the plaintiff can ask the court to issue a default judgment against the defendant, including granting all the relief the plaintiff is asking for. In certain types of cases, there may be a large number of plaintiffs injured by a defendant’s actions. This may happen in a product liability lawsuit where a product is purchased by many thousands of consumers, all of whom experience the same product failure. The batteries for Apple’s popular iPod, for example, had a high failure rate, leading to a large number of consumer claims. There also may be a large number of plaintiffs in financial services cases, where a financial institution or investment firm defrauds a large number of investors. In these cases, several lead plaintiffs may att empt to form a class in a class -action lawsuit against the defendants. Under federal civil procedure rules, class actions may be granted when there are so many plaintiffs that it is impractical for them to file separate lawsuits, there are questions of law or fact that are common to members of the class, and the lead plaintiffs will fairly and adequately protect the interests of the class. The defendant must file an answer to the complaint within a specified period of time, typically thirty days. The answer is a paragraph -by -paragraph response to the complaint, admitting certain paragraphs and denying others. The answer may also contain an affirmative defense (self -defense in an assault charge, for example) the defendant wishes to pursue. Taken together, the complaint and answer are known as the pleadings . The answer may admit, for example, noncontroversial claims by the plaintiff such as the defendant’s name, address, and the nature of the defendant’s relationship with the plaintiff. Each time the defendant d enies a plaintiff’s claim in the complaint, that sets up a Saylor URL: http://www.saylor.org/books Saylor.org 94 controversy or argument that must be litigated. Reducing the number of claims to be resolved before an actual trial begins makes the trial shorter. For example, in many civil cases, the plaintiff w ill make claims about liability and damages. A defendant may be willing to admit that it is liable but may argue about the plaintiff’s claims for damages. This can sometimes lead to bifurcated trials, where the issues of liability and damages are litigated separately. At any point in litigation, either party may file motions with the court. The motions are designed to short -circuit the litigation and lead to an early end to the lawsuit. Litigation is so time consuming and expensive that either party would b e gratified if the judge would simply cut the lawsuit short and declare a winner. One such motion is the motion to dismiss for failure to state a cause of action. In this motion, the defendant argues that even if it admits everything in the complaint is fa ctually true, that doesn’t lead to any legal liability. In other words, the defendant’s conduct has not broken any laws. A similar motion is the motion for judgment on the pleadings. In this motion, one party asks the judge to decide the case based simply on the answer and complaint. If a long period of time has passed since the incident in question and the filing of the lawsuit, a defendant may file a motion to dismiss based on the statute of limitations. Every civil and criminal action has a statute of limitations , which states that any claim or prosecution under the statute must be brought within a specified period of time or it will be dismissed. Only a few crimes are exempt from the statute of limitations and can be prosecuted at any time: murder (in mo st states) and rape (in many states). The statute of limitations exists to encourage aggrieved parties to file their lawsuits quickly, while evidence is still fresh and relevant people have memories of what occurred. As time passes, evidence may become sta le, witnesses may die or move away, and those that can be located can’t remember what they saw or heard. In other words, the quicker a suit is filed, the more likely that the real truth will be discovered by litigation. For businesses, a statute of limitat ions also allows it to “close the books” on past liabilities, such as accounts payable or tax payments, knowing that too much time has passed for anyone to come collecting on those monies. It is possible, though, in many cases to toll the statute of limita tions. If an accountant commits fraud, for example, and a criminal complaint is filed but the accountant flees overseas for many years, the statute of limitations does not run while the suspect is hiding. Saylor URL: http://www.saylor.org/books Saylor.org 95 In support of any motion, a party may submit an aff idavit . Affidavits play an important role in pretrial procedure because they are an effective way for parties to tell their side of the story to the judge. They are limited, however, because even though they are given under oath, they may raise more questi ons and are not subject to examination by the other side. After pleadings are filed, the litigation moves into the discovery phase. Discovery is a process in which each side finds out information about the other’s case. Let’s assume, for example, that you buy a new car and within a few weeks, a tire falls off suddenly while you’re driving. You would rightly conclude that there’s something wrong with the car, so you sue the manufacturer. At this point, you have no idea what’s wrong with the vehicle. Was the design flawed? Was there something wrong with the manufacturing of your specific vehicle? All you know is that new cars should not experience this sort of failure. After you file a lawsuit against the manufacturer, discovery allows you to find out more inf ormation about the vehicle so that you can effectively proceed with the lawsuit. You could find out what engineers did when they designed the vehicle and review records of similar accidents or factory records from the day your vehicle was produced. Discove ry is designed to prevent trial by surprise, where either side may suddenly produce a damning piece of evidence that allows it to win the trial. Since trials are based on the discovery of truth, they should be tried on the merits of the case rather than a party’s deceit. In that spirit, the rules of discovery are written broadly to cover scope and obligation. In scope, any piece of evidence that may be relevant to the trial is discoverable. Even if evidence may be ruled later to be inadmissible for a legal reason, it is discoverable during discovery. In obligation, both parties are obligated to turn over material that supports their own case, without demand from the other side. If the material harms their own case, they have to turn it over if the other side asks for it. There are four types of discovery. The simplest (and least expensive) is an interrogatory . These are written questions addressed to the other party. The questions tend to be simple and straightforward, dealing with uncontroversial matters such as a company’s structure or the names and addresses of relevant witnesses. Saylor URL: http://www.saylor.org/books Saylor.org 96 A second type is a request for production. Using this form of deposition, a party can request the other party to produce written communications such as internal company reports, e -mails, product manuals, and engineering specifications. In some cases physical evidence may also be produced. If you sued a vehicle manufacturer because your tire fell off while driving, for example, the manufacturer may ask you to produce your vehicle so that its engineers can inspect it. Failure to preserve and produce key evidence in litigation can lead to charges of spoliation , which may result in severe sanctions against the offending party. A third form of discovery is a request for admission . Remembe r that a complaint contains a series of claims the plaintiff is making against the defendant, and the answer is mainly a series of denials of those claims. As each party finds more information about the other’s case in discovery, one party may ask the othe r to admit that one of the contested claims is true. Doing so narrows the issues for trial because it is one less thing that the jury has to decide. Asking a party to give up a contested claim can be done at any time during litigation. If not done as a for mal method of discovery, it may be done as a stipulation instead. For example, in your trial against the vehicle manufacturer, you may ask the manufacturer to admit that your specific vehicle was manufactured on a specific date at a specific factory. Final ly, discovery can take the form of a deposition . A deposition is a sworn oral statement, in response to questions, given by a potential witness in a trial to the attorneys in the case. A deposition hearing is attended by the witness being deposed and lawye rs from both side, as well as a court reporter who keeps a written transcript of the entire deposition. In your product liability suit against your vehicle’s manufacturer, for example, you might want to depose the safety engineer who designed the car’s tir e and braking systems. There is no judge present, so there is great latitude for parties to ask questions, even if those questions may result in testimony that is later inadmissible in court. Depositions serve to allow attorneys to prepare for trial by kno wing everything a witness may say in court. They also serve to pin down a witness’s testimony, since a witness who changes testimony between a deposition and trial can be easily impeached . Depositions are easily the most expensive form of discovery, someti mes requiring weeks or months of advance planning, travel, extra Saylor URL: http://www.saylor.org/books Saylor.org 97 costs, and lost work time from witnesses being deposed. In some cases they can degenerate without the presence of a judge, as Note 3.72 “Video Clip: A Deposition Goes Awry” shows. Video Clip: A Deposition Goes Awry Although the policy behind liberal rules of discovery is to permit both sides to prepare adequately for trial, in effect discovery is an expensive phase of litigation. With most lawyers charging by the hour, responding to discovery requests can quickly rack up daunting legal bills. Discovery can also drag out litigation to many months or years. Most large corporations find they must dedicate entire in -house staffs of attorneys, paralegals, and support staff to respond exclusively to discovery requests. The judge assigned to the case is supposed to supervise discovery and ensure that the parties respond in a timely manner, as well as make rulings on specific discovery requests and objections. Theoretically, a judge has the power to san ction parties for abusive discovery, up to and including ordering a default judgment against the offending party. There are, however, few meaningful sanctions that can be levied against parties that abuse discovery, and plaintiffs in particular have a vest ed interest in making discovery last longer than the price of a sought -after settlement. These issues are magnified in e-discovery , when mountains of electronic data have to be sifted through to find relevant discoverable material. Objections to turning ov er material that may be proprietary, privileged, or the result of the work product doctrine also become more time consuming when parties are engaged in e – discovery. During or after discovery, parties typically make a motion for summary judgment . This motion is designed to cut the trial short by asking the judge to decide based on the information discovered so far in the case. In essence, the party making the motion is saying, “Why have a trial?” since the evidence would lead any reasonable jury to the same an d inevitable conclusion. K E Y T A K E A W A Y S Litigation commences with the filing of a complaint by the plaintiff. If the plaintiff wishes to represent many others with the same claim against the same defendants, the plaintiff may try to certify the lawsuit as a class -action suit. Frivolous cases are prohibited in litigation, but it is relatively easy to argue that a case is not frivolous. The defendant files an answer to the complaint or risks a default judgment. Most civil Saylor URL: http://www.saylor.org/books Saylor.org 98 and criminal cases must be brought wit hin the prescribed statute of limitations. During the discovery phase of litigation, parties share and exchange information about each other’s cases so that neither side is surprised during the trial. There are four methods for conducting discovery: interr ogatories, requests for production, requests for admissions, and depositions. E X E R C I S E S 1. During the Catholic priest sex scandal, many potential plaintiffs who were abused as children found that their lawsuits against the church and individual priests were barred by the statute of limitations because the abuse happened so many years ago. Do you believe that these lawsuits were rightfully barred? Why or why not? Should the statute be changed in sexual misconduct cases? 2. Do you think there are too many frivolou s cases filed? If you answered yes, how would you revise the federal rules of civil procedure to raise the standard on what constitutes a frivolous case? 3. Look at a sample interrogatory at http://www.justice.gov/atr/foia/frito -lay/8 -16 -96.htm . This interrogatory was issued by the U.S. Department of Justice in an antitrust investigation against Frito -Lay for possible violations of the Sherman Antitrust Act. What do you notice ab out the questions? How long do you think it would take to compile a response to these questions? If you were the defendant, would you object to any of them? If so, on what grounds? Saylor URL: http://www.saylor.org/books Saylor.org 99 3.4 The Trial and Appeal L E A R N I N G O B J E C T I V E S 1. Learn about jury selection. 2. Follow a trial from opening statement to closing arguments. 3. Explore the public policy rationale for the trial system. After discovery is finally completed, and assuming that neither side has been successful in short – circuiting litigation through motions, the case is finally scheduled for a trial. In civil litigation, this is a most unusual development, for well over 90 percent of cases filed are resolved or settled before a trial. If a case actually goes to trial, it means there are genuine issues of fact that the parties cannot resolve, and both sides are determined to see their side win. Remember that a trial is a fact -finding process, through which the trier of fact (the jury in most cases or the judge in a bench trial) attempts to determine what happene d. The trier of fact applies the facts to applicable law as instructed by the judge and determines guilt or innocence in a criminal case, or liability or no liability in a civil case. The first step in this process is to seat a jury. At any given day in a courthouse, several citizens may be called by a judge as potential jurors in a case. If a jury needs twelve members, it’s not unusual for a judge to begin with a pool of more than fifty or sixty potential jurors to narrow down to a dozen. The process of se lecting a petit jury is called voir dire . Voir dire typically begins with the jurors filling out a written questionnaire. The questionnaire asks the jurors to identify their occupation, any work or occupational conflicts, and any potential conflicts of int erest with the case. The process then continues with attorneys quizzing each potential juror in turn. During this questioning, attorneys ask each juror if he or she has any biases against upholding the law and whether he or she can keep an open mind during the trial. If an attorney does not like a juror’s response, that juror may be excused. There are two types of challenges to a potential juror: peremptory or for cause. A party can make a for cause challenge if it can demonstrate to the judge that there is a good reason to excuse the juror, such as the juror’s Saylor URL: http://www.saylor.org/books Saylor.org 100 personal relationship with one of the parties, or the juror’s stated unwillingness to be unbiased. Since these excuses are for a good reason, each side is allowed an unlimited number of for cause chal lenges. A party can also make a peremptory challenge against a juror, without giving any reason for the challenge. Since these challenges are unsupported by rationale or reason, each side is given a limited number of peremptory challenges. A party may make a peremptory challenge based on a juror’s perceived bias because of that juror’s occupation or life background but may not make a peremptory challenge because of the juror’s race [1] or gender. After a jury has been selected and sworn in, the trial begins. The plaintiff or prosecution begins by delivering an opening statement . The opening statement is a preview of the trial. In it, the attorneys explain the facts of the case to the jury and indicate what witnesses they will be calling and what the witnesses will say. Attorneys do not make any arguments during the opening statement; they simply lay out what jurors can expect from the trial ahead. In a trial against your vehicle’s manufacturer, your attorney may begin by telling the jury to expect testimony fr om you about your car accident, from your doctor about the injuries you suffered, and perhaps from an expert witness who has examined your vehicle and believes it was manufactured defectively. Once the plaintiff has delivered an opening statement, the defe ndant will deliver the defense opening statement. In a criminal case, the defense has the right to reserve delivering the opening statement until after the prosecution has rested its case (concluded presenting all the witnesses). After opening statements, the trial moves into the examination phase. Jurors are presented with witnesses, called by each side, to give evidence. The plaintiff begins by calling its witnesses. The attorney will guide the witness in delivering testimony by a series of short open -end ed questions during the direct examination . Leading questions (questions that call for a yes or no answer) are not permitted during direct examination. As the questioning proceeds, a court reporter maintains a record of all the words spoken in case there is an appeal. The opposing side may raise objections during the examination, which the judge will rule on. These rulings can also form the basis for a later appeal. Saylor URL: http://www.saylor.org/books Saylor.org 101 All the evidence in a trial must be introduced in this manner (questioning a live witness). I f one side wants to introduce videotape into evidence, for example, it has to call the person who took the footage or was in charge of running the camera to testify about his or her personal knowledge of where the camera footage came from before the jury c an watch the video. In a criminal case, if the prosecution wants to introduce the murder weapon into evidence, it must first call the detective or police officer who found the weapon to testify about where he or she found it and where it has been since the n. Hyperlink: O. J. Simpson Tries on Gloves http://video.google.com/videoplay?docid= -7472594685651342793# O. J. Simpson’s criminal murder trial was probably the most -watched courtroom proceeding in history. During the trial, the prosecution sought to introduce a pair of gloves into evidence. The prosecution claimed the gloves contained blood from the victims. In this scene, the defendant, O. J. Simpson, is asked to try on the gloves so that the jury can see for themselves whether or not the gloves might belong to him. The fact that the gloves appear too small for his hands later becomes fertile ground for the defense attorneys to argue that reasonable doubt exists as to his guilt. After direct examination, the other side has the right to conduct a cross -examination . During the cross -examination, the attorney will try to discredit the witness to convince the jury that the witness is not credible. The attorney may pro be into any potential biases the witness may have or try to prove that the witness’s recollection of events may not be as clear or certain as the witness believes. During cross -examination, attorneys frequently engage in asking leading questions, which is permitted. Once the prosecution or plaintiff has called all its witnesses, and the witnesses have undergone direct and cross -examination, then the prosecution or plaintiff will rest its case. The defendant may make a motion for a directed verdict , arguing that no reasonable juror could possibly find in favor of the prosecution or plaintiff after hearing the evidence presented so far. This motion can be made anytime during the trial before the jury returns a verdict. The motion is typically denied, and the t rial Saylor URL: http://www.saylor.org/books Saylor.org 102 moves on to the defense phase. The defense will then present its witnesses, who are led through direct and cross -examination. After the defense has rested its case, the attorneys once again address the jury in closing arguments . Here, the attorneys su mmarize the case for the jury. They address what witnesses were called and what the witnesses said. During closing arguments, the attorneys are permitted to be much more persuasive and argumentative than during the opening statement. They appeal to the jur y’s emotions and argue how the jury should interpret the evidence before them. Video Clip: Johnnie Cochran Delivers Closing Arguments After closing arguments are made, the judge in the case charges the jury by giving the jury its instructions. The instruct ions acquaint the jury with the relevant law. The jury then retires to deliberate. During deliberations, the jury will decide first what facts it believes to be true. Then it will apply those facts to the law as outlined in the jury instructions. In a tria l against your vehicle’s manufacturer, for example, the judge may explain to the jury what is legally required for a product to be considered defective so that the jury can make a determination, based on the evidence presented, whether or not there is any liability. Central to the jury’s deliberations is the burden of proof applicable to the case. In criminal trials, the prosecution always carries the burden of proof. That burden is to prove the defendant committed all the elements required in the crime bey ond a reasonable doubt . If any member of the jury has any reasonable doubts about the defendant’s guilt or innocence, then the only appropriate verdict is not guilty. Many people confuse the burden with “without a doubt.” Jurors may have doubts, but the only question for the jurors is whether they have any reasonable doubts. This standard is deliberately set high because of the severe sanctions and penalties that follow a criminal conviction. In a criminal trial, the defense only has to prove reasonable d oubt exists and has no burden of proof at all. That is why in criminal trials, the defense may strategically decide to not call any witnesses and to rest its case strictly on creating doubt by cross -examining the prosecution’s witnesses. Saylor URL: http://www.saylor.org/books Saylor.org 103 In civil cases the burden of proof is preponderance of the evidence . This standard requires the scales of justice to tilt ever so slightly toward one party to declare that party the winner. If the jury believes one side is 51 percent correct and the other is 49 percent corr ect, that is enough to declare a winner. It is a much easier standard to win, because it only requires a party to prove that its side is more likely than not telling the truth. In a civil liability suit against your vehicle’s manufacturer, your burden is t o convince the jury that more likely than not, your vehicle was somehow defective. Sometimes it’s possible for a jury in a criminal trial to find the defendant not guilty, while a separate jury in a civil case applying a lower burden of proof finds the def endant liable for the same act. This is what happened to O. J. Simpson when he was tried for the murder of his wife. During jury deliberations, the jurors are permitted to ask the judge for clarification about the law and to request to see the evidence aga in. If the jury is unable to come to a verdict, the jury is said to be deadlocked, and a mistrial results. Since trials are expensive and time consuming, the judge will usually instruct the jury to try its best before giving up. If the jury does arrive at a decision, it is called a verdict . Once the jury delivers its verdict, the losing side typically makes a motion for judgment notwithstanding the verdict . In this motion, the party is arguing that the jury arrived at the wrong verdict and that no reasonable jury could have arrived at that verdict. The judge typically will not grant this verdict. Even if the judge believes that the jury arrived at the wrong factual conclusion, the judge is not permitted to substitute his or her judgment for that of the jury. If, however, the jury clearly ignored the law in arriving at its verdict in a criminal case, the judge may overrule the jury. This phenomenon is known as jury nullification . If the judge denies the motion for judgment notwithstanding the verdict, then the judge enters the jury’s verdict as a judgment . After that, the losing party has the right to file an appeal. Remember that on appeal, the appellate court is only reviewing the record for legal error and cannot call new witnesses or substitute its judgment on the facts for the jury’s. In the following excerpt, Supreme Court Justice Ruth Bader Ginsburg uses the trial record to make a point in her dissenting opinion in an important employment discrimination case involving gender discrimination. Although hers w as a Saylor URL: http://www.saylor.org/books Saylor.org 104 dissenting opinion and the plaintiff lost her case, Congress reacted to the decision by passing the Lily Ledbetter Fair Pay Act, the first law signed by President Obama after he assumed office. Hyperlink: Justice Ginsburg Reviews an Employment Discrim ination Case http://www.law.cornell.edu/supct/html/05 -1074.ZD.html From 1979 to 1998, Lilly Ledbetter worked as a supervisor at Goodyear’s plant in Gadsden, Alabama. Over the course of her career, her pay slipped when compared to the pay of men of equal experience and seniority. She sued the company, alleging pay discrimination on the basis of her gender under Title VII of the 1964 Civil Rights Act. The law states that any law suit must be initiated within 180 days of the unlawful discriminatory act occurring. Ledbetter argued that each paycheck she received was an unlawful discriminatory act, so the fact that she filed her lawsuit within 180 days of her last paycheck means her lawsuit is within the time limit. Goodyear argued that the discriminatory act was the decision to pay her less, which took place many years ago and that therefore her lawsuit is too late. In a 5 –4 decision, the Supreme Court ruled in Goodyear’s favor. In h er dissent, Justice Ginsburg returns to the trial record to make her point that Ledbetter is the victim of unlawful discrimination. The following is from the dissenting opinion: Specifically, Ledbetter’s evidence demonstrated that her current pay was discriminatorily low due to a long series of decisions reflecting Goodyear’s pervasive discrimination against women managers in general and Ledbetter in particular. Ledbetter’s former supervisor, for example, admitted to the jury that Ledbetter’s pay, duri ng a particular one -year period, fell below Goodyear’s minimum threshold for her position. Although Goodyear claimed the pay disparity was due to poor performance, the supervisor acknowledged that Ledbetter received a “Top Performance Award” in 1996. The jury also heard testimony that another supervisor —who evaluated Ledbetter in 1997 and whose evaluation led to her most recent raise denial —was openly biased against women. And two women who had previously worked as managers at the plant told the jury they had been subject to pervasive discrimination and were paid less than their male counterparts. One was paid less than the men she supervised. Ledbetter herself testified about the discriminatory animus conveyed to her by plant officials. Toward the end of he r career, Saylor URL: http://www.saylor.org/books Saylor.org 105 for instance, the plant manager told Ledbetter that the “plant did not need women, that [women] didn’t help it, [and] caused problems.” After weighing all the evidence, the jury found for Ledbetter, concluding that the pay disparity was due to intentional discrimination. Once all appeals are exhausted, the winner in litigation can finally collect whatever damages it is entitled to. This process is called execution . If the loser is unable or unwilling to pay the judgment, the winner can petition th e court to use its full legal resources, including asking the sheriff to seize the loser’s assets for sale, to satisfy the judgment. The winner can also ask that the loser’s wages be garnished until the judgment is satisfied. The loser in litigation cannot refile a civil lawsuit once it has been decided under the doctrine of res judicata . Just like criminal cases cannot be retried after acquittal under the double jeopardy clause of the Constitution, res judicata operates as a bar to relitigation. K E Y T A K E A W A Y S The process of selecting a jury is called voir dire. Each side is permitted to question a potential juror and excuse that juror for any reason through a peremptory challenge or for a good reason through a for cause challenge. A trial begins with opening statements where the parties lay out the essential facts of their case. Next, witnesses are called to provide testimonial evidence. The side calling the witness conducts a direct examination, while the opposing side conducts a cross -examination. Af ter all witnesses are called, the parties make closing arguments to the jury, which then deliberates and applies the law as outlined in the jury instructions. The burden of proof in a criminal case is “beyond a reasonable doubt,” while the burden of proof in a civil case is “preponderance of evidence.” A jury’s verdict must be converted into a legal judgment by the trial judge. Once all appeals are settled, res judicata prevents the case from being tried again. E X E R C I S E S 1. Why would a jury engage in jury nullification? If a jury cannot engage in nullification, what are its alternatives to express a similar view? 2. One of President Obama’s first acts as president was to sign into law a statute aimed at overturning the Ledbetter decision. How can Congress over turn the Supreme Court in this instance? Saylor URL: http://www.saylor.org/books Saylor.org 106 3. Although litigation is rightfully criticized as slow and expensive, res judicata means the parties have only one chance to “get it right.” Do you think relaxing the rules of res judicata would help with the expense and time involved in litigating cases? [1] Batson v. Kentucky , 476 U.S. 79 (1986). Saylor URL: http://www.saylor.org/books Saylor.org 107 3.5 Concluding Thoughts The litigation system, publicly financed, is an important dispute -resolution mechanism that processes millions of cases in both state and federal courts every year. The system permits parties to air their grievances against each other in an open and transparent manner and is typically very effective at finding the truth. The jury system, in particular, is largely admired for its ability to involve ordinary citizens in an important form of civil service. For many businesses, however, litigation can be a vexing and distracting problem. The extraordinarily high costs associated with complex litigation, along with pressure from stakeholders to settle ca ses rather than litigate them fully, means that most businesses would prefer to avoid litigation whenever possible. These problems have led many courts to experiment with various levels of reform, from mandatory pretrial settlement attempts to mandatory me diation to jury selection and management reforms. These reforms are aimed at maintaining the vitality and usefulness of the litigation system, which can be a trusted and valuable resource for all citizens and corporations. Saylor URL: http://www.saylor.org/books Saylor.org 108 Chapter 4 Alternative Dispute Resolution L E A R N I N G O B J E C T I V E S After reading this chapter, you should understand alternative dispute resolution (ADR) options, including the benefits and drawbacks to different methods of dispute resolution. You will know the legal basis for mandatory arb itration, as well as why parties enter into voluntary ADR methods. You will understand current debates regarding the fairness of ADR. Additionally, you should be able to answer the following questions: 1. What are the benefits and drawbacks of ADR as compared to litigation? 2. What legal basis supports the use of ADR rather than litigation? 3. What unique challenges exist in ADR efforts among B2B (business to business), B2C (business to consumer), and B2E (business to employees)? 4. What are the ethical implications of ADR between parties that are unequal in power? Imagine that you’ve been wronged by a supplier, by your employer, or by a business where you are a customer. You’ve correctly determined that you have an actionable legal claim. What are you going to do? You probably won’t run to the courthouse to file a formal complaint to initiate litigation. This is because litigation is very expensive and time consuming. Besides, you may wish to continue doing business with the supplier, employer, or business. Perhaps the matter is of a private nature, and you do not want to engage in a public process to determine the outcome. You would like the dispute to be resolved, but you do not want to engage in public, time -consuming, expensive litigation to do it. A common method of dispute resolution that avoids many of the challenges associated with litigation is alternative dispute resolution. Alternative dispute resolution (ADR) is a term that encompasses many different methods of dispute resolution other than litigation. ADR inv olves resolving disputes outside of the judicial process, though the judiciary can require parties to participate in specific types of ADR, such as arbitration, for some types of conflicts. Moreover, some ADR methods vest power to resolve the dispute in a neutral party, while other strategies vest that power in the parties Saylor URL: http://www.saylor.org/books Saylor.org 109 themselves. See Figure 4.1 “A Continuum of Different ADR Methods” for a continuum of different ADR methods based on where power to solve the dispute is vested. Figure 4.1 A Continuum of Different ADR Methods Source: Adapted from New York State Unified Court System ,http://www.nycourts.gov/ip/adr/images/continuum2.jpg . Common methods of ADR include negotiati on, mediation, and arbitration. Lesser used methods of ADR include minitrials, hybrid forms of mediation -arbitration (with elements of both), and collaborative goal -oriented processes. ADR is often used to resolve disputes among businesses, employers and e mployees, and businesses and consumers. ADR can also be used in many other types of conflicts. For instance, ADR strategies can be used in domestic law cases, such as divorce, or in international legal issues, such as issues relating to transboundary pollu tion. This chapter limits its Saylor URL: http://www.saylor.org/books Saylor.org 110 focus to the use of ADR methods in business. Particularly, we will examine the common methods of ADR, including the benefits and drawbacks to each. We will also examine potential consequences to parties that have unequal barga ining power. Additionally, we will examine the use of ADR methods in situations where ADR may not be the most appropriate method of dispute resolution, such as civil rights violations. ADR methods are used outside of the courtroom, but that does not mean t hat they are outside of the interests of our legal system. Participation in ADR has important legal consequences. For instance, parties that have agreed by contract to be subject to binding arbitration give up their constitutional right to bring their comp laint to court. The Federal Arbitration Act (FAA) is a federal statute under which parties are required to participate in arbitration when they have agreed by contract to do so, even in state court matters. Indeed, the FAA is a national policy favoring arbitration. [1] The Southland Corp. Court said that “in enacting…[the FAA], Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting partie s agreed to resolve by arbitration.” This is an example of federal preemption exercised through the Supremacy Clause in the U.S. Constitution. There is a very good chance that you will —or already have —signed a contract that contains a mandatory arbitration clause. This means that if a dispute arises under that contract, then you will be required to arbitrate your claim rather than going straight to court. Under a binding arbitration clause, you will have waived your constitutional rights to go to court. Eve n if you have never signed such a contract and never will, there is still a good likelihood that you will be involved in a commercial dispute at some point in your life. Because of this, it’s important to understand the ADR process, situations in which lit igation is a better choice than ADR, and special issues that arise when parties have unequal bargaining power. Key Takeaways Alternative dispute resolution (ADR) is a body of dispute -resolution methods outside of the litigation process. ADR is often faster , less expensive, and more private than litigation. For this reason, ADR can be the preferred dispute -resolution method, particularly when an ongoing relationship between disputants is Saylor URL: http://www.saylor.org/books Saylor.org 111 desired. However, some types of disputes might be best resolved through litigation, such as in cases where parties have unequal power or resources or in civil rights violations. Common methods of dispute resolution are negotiation, mediation, and arbitration. Mandatory arbitration clauses are common in contracts, and such cla uses are enforceable against the parties even if they wish to litigate their claims. [1] Southland Corp. v. Keating , 465 U.S. 1 (1984). Saylor URL: http://www.saylor.org/books Saylor.org 112 4.1 Negotiation L E A R N I N G O B J E C T I V E S 1. Understand the role of negotiation in avoiding and settling disputes. 2. Explore negotiation as it is commonly employed in business. 3. Understand the implications of bargaining power during negotiation. 4. Become familiar with the benefits and drawbacks of negotiation as a form of alternative dispute resolution (ADR). Imagine that you are a tent manufacturer. Your supplier of tent fabric routinely supplies you with appropriate water -resistant fabric to construct your tents, so that you can produce your products and bring them to market. After many years of a good working relationship, your f abric supplier delivered nonconforming goods . Specifically, the fabric delivered was not water -resistant, despite your need for water -resistant fabric to produce your tents. However, on your notifying the supplier of the problem, the supplier denied that t he fabric was nonconforming to your order. You refused to pay for the goods. The fabric supplier insisted on payment before future delivery of any additional fabric. Without water -resistant fabric, you cannot continue to produce your tents. This is an exam ple of a business to business ( B2B ) dispute. Despite the problem, you will likely wish to continue working with this supplier, since you have a good, long -standing relationship with it. This problem seems to be a “hiccup” in your regular business relations hip. Accordingly, you will probably want to resolve this dispute quickly and without hard feelings. It is very unlikely that you will immediately hire an attorney to file a formal complaint against your supplier. However, that does not change the fact that there is a dispute that needs to be resolved. One of the first strategies that you and your supplier are likely to employ is negotiation. Negotiation is a method of alternative dispute resolution (ADR) that retains power to resolve the dispute to the part ies involved. No outside party is vested with authoritative decision -making power concerning the resolution of the dispute. Negotiation requires the parties to define the conflicts and agree to an outcome to resolve those conflicts. Often, this can take th e form of a compromise. Note that a compromise does not mean that anyone “loses.” Indeed, if both parties are satisfied with the result of Saylor URL: http://www.saylor.org/books Saylor.org 113 the negotiation and the business relationship can continue moving forward, then both parties will be very likely to c onsider this as a “winning” situation. Benefits to negotiation as a method of ADR include its potential for a speedy resolution, the inexpensive nature of participation, and the fact that parties participate voluntarily. Drawbacks include the fact that the re are no set rules, and either party may bargain badly or even unethically, if they choose to do so. In a negotiation, there is no neutral party charged with ensuring that rules are followed, that the negotiation strategy is fair, or that the overall outc ome is sound. Moreover, any party can walk away whenever it wishes. There is no guarantee of resolution through this method. The result may not be “win -win” or “win -lose,” but no resolution at all. Also, generally speaking, attorneys are not involved in ma ny negotiations. This last point may be seen as a drawback or a benefit, depending on the circumstances of the negotiation. Though our example involves B2B, the parties may or may not have equal bargaining power . If your business and your supplier are both dependent on each other for roughly equal portions of the respective businesses, then they are most likely relatively equal with respect to bargaining power. However, in our example, if your business is a very small business but your supplier is a very lar ge business —perhaps with a patent protecting the rights to the specialty fabric that you need —then we might say that the B2B negotiation is potentially unbalanced, since one party has a much more powerful bargaining position than the other. Specifically, y our business needs that particular type of fabric, which is only available from one supplier. But your supplier does not need your business because it has a legal monopoly in the form of a patent for its product, and it probably sells to many manufacturers . This would be an example of unequal bargaining power . When the negotiation occurs as a result of a dispute, but not a legal dispute per se, then the party with the weakest bargaining position may be in a very vulnerable spot. This is illustrated in Note 4.13 “Hyperlink: Rubbermaid’s Unequal Bargaining Power” . When Rubbermaid’s raw materials price for resin increased, it needed to raise its prices. However, Wal -Mart refused to accept the necessary price increase for Rubbermaid products. This refusal had a s ubstantial negative impact on Saylor URL: http://www.saylor.org/books Saylor.org 114 Rubbermaid’s business, since Wal -Mart was its main customer. In short, Rubbermaid needed Wal – Mart, but Wal -Mart did not need Rubbermaid. Hyperlink: Rubbermaid’s Unequal Bargaining Power A Question of Ethics http://www.pbs.org/wgbh/pages/frontline/video/flv/generic.html?s=frol02s48aq71&continuous=1 Watch “Muscling Manufacturers,” a clip from Is Wal -Mart Good for America? to see how unequal bargaining power can affect the least powerful party in a negotiation. As economist Brink Lindsey from the Cato Institute commented, “We’ve definitely seen a shift in the balance of bargaining power between ma nufacturers and retailers…Back in the old days, manufacturing was a high -productivity endeavor; retailing and distribution was fairly low -productivity…And so manufacturers called the shots.” [1] That doesn’t appear to be the case anymore. Negotiation is a skill often developed by people who are charged with settling existing disputes or with creating new agreements. Since we are focusing on dispute resolution in this chapter, we will limit our discussion to the resolution of disputes rather than the negotia tion of new contract terms, but keep in mind that these activities essentially draw on the same skills. In Getting to Yes , written by members of the Harvard Program on Negotiation, the goal of negotiation is viewed as “win -win.” [2] Note that this is a sub stantially different goal from litigation. Our adversarial legal system requires one party to “win” and the other party to “lose.” Getting to Yes focuses on principled negotiation, and it sets forth specific steps and discusses strategies to allow particip ants to achieve the “win -win” goal. This book’s popularity perhaps suggests that people have a real interest in learning about ADR, avoiding litigation, and ensuring that all parties leave the resolution process as “winners.” Some concepts common in negoti ation include the BATNA, WATNA, and the bargaining zone. For example, the authors of Getting to Yes encourage negotiators to know their best alternative to a negotiated agreement ( BATNA ). This ensures that unfavorable Saylor URL: http://www.saylor.org/books Saylor.org 115 terms will not be accepted and terms consistent with a negotiator’s interests won’t be rejected. [3] Likewise, the worst alternative to a negotiated agreement ( WATNA ) is a concept used by some negotiators prior to entering negotiations. The bargaining zone is the area in which parties to a ne gotiation are willing to trade, barter, or negotiate their positions, within which parties can find an acceptable agreement. If you think of a Venn diagram, the bargaining zone would be where the two ovals overlap. The reservation point is essentially a par ty’s “bottom line,” beyond which it will not agree to terms. Let’s go back to our example. Imagine that after negotiating with your fabric supplier, the following facts emerged: The fabric supplier believed that it sent the correct fabric to you, because o ne of your new employees inadvertently ordered the wrong fabric. You reviewed your business records and determined that this allegation was true. This sounds like a misunderstanding that would be easy to clear up in negotiation, doesn’t it? Imagine the emb arrassment and hard feelings that would have been caused by immediately filing a formal complaint in court, not to mention the great expense that both parties would have incurred. Through negotiation, chances are very good that this misunderstanding will b e resolved in a win -win outcome and that you will be able to continue your working relationship with your supplier. K E Y T A K E A W A Y S Negotiation is a method of alternative dispute resolution (ADR) in which the parties retain power to decide on a resolution of the issue themselves, without relying on a neutral decision maker. Negotiation is also used between parties entering into agreements, when there is no legal dispute. Negotiation is often the first method of dispute resolution attempted, because it is inex pensive and relatively fast. Additionally, parties that wish to continue working together in the future often employ negotiation as a friendly method to resolve disputes. Negotiation between parties with unequal bargaining power can result in the stronger party being heavy -handed at the negotiation table, which can result in unfair outcomes for the weaker party. Since negotiation does not follow an externally imposed set of rules, parties may negotiate as their conscience dictates. However, negotiation is o ften considered a dispute -resolution option that can result in a win -win situation for all parties, as illustrated by the popular book Getting to Yes , in which negotiation strategies are set forth in detail. Saylor URL: http://www.saylor.org/books Saylor.org 116 E X E R C I S E S 1. Visit http://www.sfhgroup.com/ca/training/online -training/test -your -skills.php and click “Negotiate with Bill” under “Online Negotiation Course.” This is a free in teractive negotiation exercise. After completing the negotiation, answer the following questions: How far did you get? (If you did not get to level three, go back and try it again. See if you can get all the way through to level three.) What negotiation st rategies did you learn? In other words, what works? What doesn’t work? 2. What are the benefits of negotiation as a dispute -resolution method? What are the drawbacks? 3. How can parties that have unequal bargaining power negotiate meaningfully, without one party taking advantage of the other? Have you ever negotiated with someone who had more bargaining power than you? What were your strategies during the negotiation? Did you obtain your goal by the conclusion of the negotiation? 4. Watch the video in Note 4.13 “Hyp erlink: Rubbermaid’s Unequal Bargaining Power” . If you were a manufacturer and you had to raise prices due to an increase in price for your raw materials, and if Wal – Mart was your most important customer, what strategies would you employ so that both parti es would have a chance to have a “win -win” outcome? [1] Hedrick Smith, “Who Calls the Shots in the Global Economy?” PBS , November 16, 2004, http://www.pbs.org/wgbh/pages/frontline/shows/walmart/secrets/shots.html (accessed on August 23, 2010). [2] Roger Fisher, William Ury, and Bruce Patton, Getting to Yes (New York: Penguin Books, 1991). [3] Roger Fisher, William Ury, and Bruce Patton, Gettin g to Yes (New York: Penguin Books, 1991), 100. Saylor URL: http://www.saylor.org/books Saylor.org 117 4.2 Mediation L E A R N I N G O B J E C T I V E S 1. Learn what mediation is. 2. Explore the process of mediation as an alternative dispute resolution (ADR) strategy. 3. Identify disputes suitable to mediation as a form of ADR. 4. Become familiar with the benefits and drawbacks of mediation as a form of ADR. Mediation is a method of ADR in which parties work to form a mutually acceptable agreement. Like negotiation, parties in mediation do not vest authority to decide the dispute in a neutral third party. Instead, this authority remains with the parties themselves, who are free to terminate mediation if they believe it is not working. Often, when parties terminate mediation, they pursue another form of ADR, such as arbitration, or th ey choose to litigate their claims in court. Mediation is appropriate only for parties who are willing to participate in the process. Like negotiation, mediation seeks a “win -win” outcome for the parties involved. Additionally, mediation is confidential, w hich can be an attractive attribute for people who wish to avoid the public nature of litigation. The mediation process is usually much faster than litigation, and the associated costs can be substantially less expensive than litigation. Unlike in many neg otiations, a third party is involved in mediation. Indeed, a neutral mediator is crucial to the mediation process. Mediators act as a go -between for the parties, seeking to facilitate the agreement. Requirements to be a mediator vary by state. See Note 4.2 3 “Hyperlink: Mediators” to compare the requirements between states. There are no uniform licensing requirements, but some states require specific training or qualifications for a person to be certified as a mediator. Mediators do not provide advice on the subject matter of the dispute. In fact, the mediators may not possess any subject -matter expertise concerning the nature of the dispute. However, many mediators are trained in conflict resolution, and this allows them to employ methods to discover common goals or objectives, set aside issues that are not relevant, and facilitate an agreement into which the parties will voluntarily enter. Mediators try to find common ground by Saylor URL: http://www.saylor.org/books Saylor.org 118 identifying common goals or objectives and by asking parties to set aside the som etimes emotionally laden obstacles that are not relevant to the sought -after agreement itself. Hyperlink: Mediators http://www.mediationworks.com/medcert3/staterequirements.htm Visit this site to see the various requirements and qualifications to become a mediator in the different states. Disputants choose their mediator. This choice is often made based on the mediator’ s reputation as a skilled conflict resolution expert, professional background, training, experience, cost, and availability. After a mediator is chosen, the parties prepare for mediation. For instance, prior to the mediation process, the mediator typically asks the parties to sign a mediation agreement. This agreement may embody the parties’ commitments to proceed in good faith, understanding of the voluntary nature of the process, commitments to confidentiality, and recognition of the mediator’s role of ne utrality rather than one of legal counsel. At the outset, the mediator typically explains the process that the mediation will observe. The parties then proceed according to that plan, which may include opening statements, face -to-face communication, or ind irect communication through the mediator. The mediator may suggest options for resolution and, depending on his or her skill, may be able to suggest alternatives not previously considered by the disputants. Mediation is often an option for parties who cann ot negotiate with each other but who could reach a mutually beneficial or mutually acceptable resolution with the assistance of a neutral party to help sort out the issues to find a resolution that achieves the parties’ objectives. Sometimes parties in med iation retain attorneys, but this is not required. If parties do retain counsel, their costs for participating in the mediation will obviously increase. In business, mediation is often the method of ADR used in disputes between employers and employees abou t topics such as workplace conditions, wrongful discharge, or advancement grievances. Mediation is used in disputes between businesses, such as in contract disputes. Saylor URL: http://www.saylor.org/books Saylor.org 119 Mediation is also used for disputes arising between businesses and consumers, such as in m edical malpractice cases or health care disputes. Like other forms of dispute resolution, mediation has benefits and drawbacks. Benefits are many. They include the relative expediency of reaching a resolution, the reduced costs as compared to litigation, t he ability for parties that are unable to communicate with each other to resolve their dispute using a nonadversarial process, the imposition of rules on the process by the mediator to keep parties “within bounds” of the process, confidentiality, and the v oluntary nature of participation. Of course, the potential for a “win -win” outcome is a benefit. Attorneys may or may not be involved, and this can be viewed as either a benefit or a drawback, depending on the circumstances. Drawbacks to mediation also exi st. For example, if disputants are not willing to participate in the mediation process, the mediation will not work. This is because mediation requires voluntary participation between willing parties to reach a mutually agreeable resolution. Additionally, even after considerable effort by the parties in dispute, the mediation may fail. This means that the resolution of the problem may have to be postponed until another form of ADR is used, or until the parties litigate their case in court. Since mediators a re individuals, they have different levels of expertise in conflict resolution, and they possess different backgrounds and worldviews that might influence the manner in which they conduct mediation. Parties may be satisfied with one mediator but not satisf ied in subsequent mediations with a different mediator. Even if an agreement is reached, the mediation itself is usually not binding. Parties can later become dissatisfied with the agreement reached during mediation and choose to pursue the dispute through other ADR methods or through litigation. For this reason, parties often enter into a legally binding contract that embodies the terms of the resolution of the mediation immediately on conclusion of the successful mediation. Therefore, the terms of the med iation can become binding if they are reduced to such a contract, and some parties may find this to be disadvantageous to their interests. Of course, any party that signs such an agreement would do so voluntarily. However, in some cases, if legal counsel is not involved, parties may not fully understand the implications of the agreement that they are signing. Saylor URL: http://www.saylor.org/books Saylor.org 120 K E Y T A K E A W A Y S Mediation is a method of ADR in which the parties retain power to decide the issue themselves without vesting that power in an outside d ecision maker. However, mediation relies on neutral mediators who facilitate the mediation process to assist the parties in achieving an acceptable, voluntary agreement. Mediation is more formal than negotiation but less formal than arbitration or litigati on. Mediation is relatively inexpensive, fast, and confidential, unlike litigation. Though nonbinding mediation resolutions are not binding on the parties, these resolution agreements may be incorporated into a legally binding contract, which is binding on the parties who execute the contract. Mediation does not follow a uniform set of rules, though mediators typically set forth rules that the mediation will observe at the outset of the process. Successful mediation often reflects not only the parties’ will ingness to participate but also the mediator’s skill. There is no uniform set of rules for mediators to become licensed, and rules vary by state regarding requirements for mediator certification. E X E R C I S E S 1. Visit the link in Note 4.23 “Hyperlink: Mediators” and find your state’s requirements and qualifications for mediators. What would it take for you to become a mediator in your state? Do you think that your state requirements ensure that only qualified mediators practice? Why or why not? 2. Identify a situation in which you would choose mediation as your preferred method of dispute resolution. Why is mediation the best method in this situation? What are the potential benefits and drawbacks of mediation in this situation? 3. Should mediators be required to be licensed, like attorneys or physicians, before practicing? Why or why not? 4. Visit http://www.sfhgroup.com/ca/training/online -training/test -your -skills .php and scroll down to Mediation game. Click on “play game” under “The Angry Neighbours.” This is a free interactive mediation exercise. After completing the mediation, answer the following questions: Were you able to successfully mediate this dispute? If you did not reach a successful resolution, go back and try it again. See if you can reach a successful resolution. What mediation strategies did you learn? What works? What doesn’t work? Saylor URL: http://www.saylor.org/books Saylor.org 121 4.3 Arbitration L E A R N I N G O B J E C T I V E S 1. Explore the option of arbitration as an alternative dispute resolution (ADR) strategy. 2. Explore contemporary issues of fairness in arbitration. 3. Determine when arbitration is a viable option for dispute resolution. 4. Examine the benefits and drawbacks of arbitration as a form of AD R. Arbitration is a method of ADR in which parties vest authority in a third -party neutral decision maker who will hear their case and issue a decision, which is called an arbitration award . An arbitrator presides over arbitration proceedings. Arbitrators are neutral decision makers who are often experts in the law and subject matter at issue in the dispute. Their decisions do not form binding precedent. Arbitrators may be members of the judiciary, but in arbitrations they are not judges. Arbitrators act in an analogous capacity to judges in trials. For instance, they determine which evidence can be introduced, hear the parties’ cases, and issue decisions. They may be certified by the state in which they arbitrate, and they may arbitrate only certain types o f claims. For instance, the Better Business Bureau trains its own arbitrators to hear common complaints between businesses and consumers (B2C). Participation in the arbitration proceeding is sometimes mandatory. Mandatory arbitration results when disputes arise out of a legally binding contract involving commerce in which the parties agreed to submit to mandatory arbitration. Arbitration is also mandatory when state law requires parties to enter into mandatory arbitration. Although perhaps not obvious, fede ral law lies at the heart of mandatory arbitration clauses in contracts. Specifically, Congress enacted the Federal Arbitration Act (FAA) [1] through its Commerce Clause powers. This act requires parties to engage in arbitration when those parties have ent ered into legally binding contracts with a mandatory arbitration clause , providing the subject of those contracts involves commerce. [2] In Southland Park v. Keating , the U.S. Supreme Court interpreted this federal statute to apply to matters of both feder al and state court jurisdiction. Saylor URL: http://www.saylor.org/books Saylor.org 122 Indeed, the Court held that the FAA created a national policy in favor of arbitration. It also held that the FAA preempts state power to create a judicial forum for disputes arising under contracts with mandatory arbitratio n clauses. [3] In a later decision, the Court held that the FAA encompasses transactions within the broadest permissible exercise of congressional power under the Commerce Clause. [4]This means that the FAA requires mandatory arbitration clauses to be enfo rceable for virtually any transaction involving interstate commerce, very broadly construed. Some states require mandatory arbitration for certain types of disputes. For instance, in Oregon, the state courts require mandatory arbitration for civil suits wh ere the prayer for damages is less than $50,000, excluding attorney fees and costs. [5] Many parties accept the arbitration award without appeal. However, when state law requires mandatory arbitration of certain types of disputes, parties are permitted to appeal because the arbitration is nonbinding. In nonbinding arbitration, the parties may choose to resolve their dispute through litigation if the arbitration award is rejected by a party. However, some states have statutory requirements that, in practice, create a chilling effect on appealing an arbitration award. For example, in the state of Washington, if the appealing party from a nonbinding mandatory arbitration does not do better at trial than the original award issued by the arbitrator, then that par ty will incur liability not only for its own expenses but also for those of the opposing side. [6]In nonbinding arbitration, this is a powerful incentive for parties to accept the arbitration award without appealing to the judicial system. Voluntary arbitration also exists, and it is frequently used in business disputes. Sometimes parties simply agree that they do not want to litigate a dispute because they believe that the benefits of arbitration outweigh the costs of litigation, so they choose volun tary arbitration in hopes of a speedy and relatively inexpensive outcome. Other times, parties are not certain how strong their case is. In such cases, arbitration can seem much more attractive than litigation. Arbitration awards can be binding or nonbindi ng . Some states, like Washington State, have codified the rule that arbitration decisions are binding when parties voluntary submit to the arbitration procedure. [7] In binding arbitration, the arbitration award is final; therefore, appealing an arbitratio n award to the judicial system is not available. In many states, an arbitration awards is converted to Saylor URL: http://www.saylor.org/books Saylor.org 123 a judgment by the court, thereby creating the legal mechanism through which the judgment holder can pursue collection activities. This process, called confirmation , is contemplated by the FAA and often included in arbitration agreements. But even if the FAA does not apply, most states have enacted versions of either the Uniform Arbitration Act or the Revised Uniform Arbitration Act . These state laws allow confirmation of arbitration awards into judgments as well. Like any other form of dispute resolution, arbitration has certain benefits and drawbacks. Arbitration is an adversarial process like a trial, and it will produce a “winner” and a “loser.” Arbitrat ion is more formal than negotiation and mediation and, in many ways, it resembles a trial. Parties present their cases to the arbitrator by introducing evidence. After both sides have presented their cases, the arbitrator issues an arbitration award. Rules related to arbitration differ by state. The rules of procedure that apply to litigation in a trial do not typically apply to arbitration. Specifically, the rules are often less formal or less restrictive on the presentation of evidence and the arbitration procedure. Arbitrators decide which evidence to allow, and they are not required to follow precedents or to provide their reasoning in the final award. In short, arbitrations adhere to rules, but those rules are not the same as rules of procedure for liti gation. Regardless of which rules are followed, arbitrations proceed under a set of external rules known to all parties involved in any given arbitration. Arbitration can be more expensive than negotiation or mediation, but it is often less expensive than litigation. In Circuit City Stores Inc. v. Adams , the U.S. Supreme Court noted that avoiding the cost of litigation was a real benefit of arbitration. [8] The costly discovery phase of a trial is nonexistent or sharply reduced in arbitration. However, arbitration is not necessarily inexpensive. Parties must bear the costs of the arbitrator, and they typically retain counsel to represent them. Additionally, i n mandatory arbitration clause cases, the arbitration may be required to take place in a distant city from one of the disputants. This means that the party will have to pay travel costs and associated expenses during the arbitration proceeding. The Circuit City Court also noted that mandatory arbitration clauses avoid difficult choice -of-law problems that litigants often face, particularly in employment law cases. Saylor URL: http://www.saylor.org/books Saylor.org 124 Arbitration is faster than litigation, but it is not as private as negotiation or mediation. U nlike mediators, arbitrators are often subject -matter experts in the legal area of dispute. However, as is true for mediators, much depends on the arbitrator’s skill and judgment. A common issue that arises is whether mandatory arbitration is fair in certa in circumstances. It’s easy to imagine that arbitration is fair when both parties are equally situated. For example, business to business ( B2B ) arbitrations are often perceived as fair, especially if businesses are roughly the same size or have roughly equ al bargaining power. This is because they will be able to devote approximately the same amount of resources to a dispute resolution, and they both understand the subject under dispute, whatever the commercial issue may be. Moreover, in B2B disputes, the su bjects of disputes are commercial issues, which may not implicate deeper social and ethical questions. For example, contract disputes between businesses might involve whether goods are conforming goods or nonconforming goods under the Uniform Commercial Co de (UCC). No powerful social or ethical questions arise in such disputes. Indeed, resolving such disputes might be seen as “business as usual” to many commercial enterprises. However, issues of fairness often arise in business to employee ( B2E ) and busines s to consumer (B2C ) situations, particularly where parties with unequal bargaining power have entered into a contract that contains a mandatory arbitration clause. In such cases, the weaker party has no real negotiating power to modify or to delete the man datory arbitration clause, so that party is required to agree to such a clause if it wants to engage in certain types of transactions. For example, almost all credit card contracts contain mandatory arbitration clauses. This means that if a consumer wishes to have a credit card account, he will agree to waive his constitutional rights to a trial by signing the credit card contract. As we know, the FAA will require parties to adhere to the mandatory arbitration agreed to in such a contract, in the event that a dispute arises under that contract. In such cases, questions regarding whether consent was actually given may legitimately be raised. However, the U.S. Supreme Court has held that in B2E contexts, unequal bargaining power alone is not a sufficient reaso n to hold that arbitration agreements are unenforceable, [9] and it is not sufficient to preclude arbitration. [10] Saylor URL: http://www.saylor.org/books Saylor.org 125 Additionally, concerns about fairness do not end at contract formation. If a dispute arises and mandatory arbitration is commenced, the uneq ual power between parties will continue to be an important issue. In the case between a credit card company and an average consumer debtor, the credit card company would clearly be in a more powerful position vis -à-vis the debtor by virtue of the company’s financial strength and all that comes with it, such as experienced attorneys on staff, dispute -resolution experience, and contractual terms that favor it, rather than the consumer debtor. In such cases, if the consumer debtor is the aggrieved party, he ma y very well decide to drop the matter, especially if the arbitration clause requires arbitration proceedings to occur in a distant city. The credit card company will have vast financial resources as compared to the consumer debtor. Moreover, in this exampl e the credit card company’s legal counsel will know how to navigate the arbitration process and will have experience in dispute resolution, processes that often confound people who are not trained in law. Additionally, the list of arbitrators may include p eople who are dependent on repeat business from the credit card company for their own livelihoods, thereby creating —or at least suggesting —an inherent conflict of interest. Many mandatory arbitration clauses create binding awards on one party while reservi ng the right to bring a claim in court to the other party. That is, a mandatory arbitration clause may allow the credit card company to appeal an arbitrator’s award but to render an award binding on the consumer debtor. Obviously, this would allow the cred it card company to appeal an unfavorable ruling, while requiring the consumer debtor to abide by an arbitrator’s unfavorable ruling. To a consumer debtor, the arbitration experience can seem like a game played on the credit card company’s home court —daunti ng, feckless, and intimidating. Additionally, some types of disputes that have been subjected to mandatory arbitration raise serious questions about the appropriateness of ADR, due to the nature of the underlying dispute. For example, in some recent B2E di sputes, claims relating to sexual assault have been subjected to mandatory arbitration when the employee signed an employment contract with a mandatory arbitration clause. Tracy Barker, for example, was reportedly sexually assaulted by a State Department e mployee in Iraq while she was employed as a civilian contractor by KBR Inc., a former Halliburton subsidiary. When she tried to bring her claim in court, the judge dismissed the claim, Saylor URL: http://www.saylor.org/books Saylor.org 126 citing the mandatory arbitration clause in her employment contract. Aft er arbitration, she won a three -million -dollar arbitration award. As KBR Inc. noted, this “decision validates what KBR has maintained all along; that the arbitration process is truly neutral and works in the best interest of the parties involved.” Despite this statement, KBR Inc. has filed a motion to modify the award. [11] In a similar case, employee Jamie Leigh Jones worked for KBR Inc. in Iraq when she was drugged and gang raped. She was initially prohibited from suing KBR Inc. in court because her emplo yment contract contained a mandatory arbitration clause. However, when considering this case, the Fifth Circuit Court of Appeals ruled that sexual assault cases may, in fact, be brought in court rather than being subjected to mandatory arbitration, despite the contract language requiring mandatory arbitration. [12] Jones’s claims were beyond the scope of the arbitration clause, because sexual assault is not within the scope of employment. Moreover, under Senator Al Franken’s lead, the Senate took action to prohibit the Department of Defense from contracting with defense contractors that require mandatory arbitration for sexual assault claims. If such action is passed, it would essentially allow the Fifth Circuit’s holding to apply in all federal jurisdiction s rather than just in the Fifth Circuit. Check out Note 4.44 “Video Clip: Al Franken” to hear the details of Senator Franken’s work on this matter. One might think that passing such a law would be a “no brainer” to lawmakers. However, some Senators voted against the measure, arguing that the federal government should not insert itself into rewriting contracts. Instead, some argued that the use of arbitration and mediation should be expanded for such cases. Video Clip: Al Franken Watch Senator Al Franken discuss the facts of the Jamie Leigh Jones case here: In B2C cases, different issues of fairness exist. As noted previously, when the disputants possess unequal power, these issues can be magnified. Public Citizen, a nonprofit organization that represents consumer interests in Congress, released a report concerning arbitration in B2C disputes. Specifically, the report argued that arbitration is unfair to consumers in B2C disputes and that consumers fare better in litigation than in arbitration. According to the report, incentives exist to favor businesses over consumers in the arbitration process. It pointed to the lack of appeal rights, Saylor URL: http://www.saylor.org/books Saylor.org 127 lack of requirement to follow precedents or established law, limits on consumers’ remedies, prohibitions against class -act ion suits, limitations on access to jury trials, limitations on abilities to collect evidence, and greater expense as additional factors speaking to the unfairness of arbitration over litigation in B2C disputes. Check out Note 4.45 “Hyperlink: Arbitration” for the full report. Hyperlink: Arbitration http://www.citizen.org/documents/ArbitrationDebateTrap(Final).pdf Check out this Public Citizen report, The Arbitrati on Debate Trap: How Opponents of Corporate Accountability Distort the Debate on Arbitration , which argues arbitration is bad for consumers in B2C disputes. Importantly, and despite the FAA’s broad interpretation, not all binding arbitration clauses have be en upheld by courts in B2C cases. In 2007, the Ninth Circuit Court of Appeals ruled that AT&T’s binding arbitration clause for wireless customers is unenforceable under California state law. [13] The court further noted that the relevant state law is not preempted by the FAA, because the FAA does not prevent the courts from applying state law. In this case, that law involved unconscionability of contract terms. As noted previously, the FAA requires parties to submit to mandatory arbitration when they agree to do so in a legally binding contract, and it preempts state powers to provide a judicial forum in those matters. However, the Ninth Circuit’s holding in this case underscores the fact that state contract law is not circumvented by the federal statute. Arbitration is a widely used form of ADR, but important questions have been raised about its appropriateness in certain types of disputes. Before signing a mandatory arbitration agreement, it’s important to realize that under current law, your opportunity t o bring your claim in court will be severely restricted or entirely precluded. Moreover, if you sign such an agreement with a party who holds inherently greater power than you, such as your employer, then you may find yourself at an extreme disadvantage in an arbitration proceeding. K E Y T A K E A W A Y S Saylor URL: http://www.saylor.org/books Saylor.org 128 Arbitration is a form of ADR in which parties vest authority to decide a dispute with a third -party arbitrator, who hears the evidence and issues an arbitration award. Arbitration may be binding or nonbinding, and it may be mandatory or voluntary. Arbitration awards issued by arbitrators can be confirmed to judgments by judges. Issues of fairness arise in arbitration when disputants possess unequal power, such as arbitration in employment or consumer disputes. Quest ions concerning the appropriateness of mandatory arbitration arise in cases involving issues of civil rights violations. The Federal Arbitration Act requires enforcement of mandatory arbitration clauses in contract disputes involving commerce where mandato ry arbitration clauses exist. The Arbitration Fairness Act of 2009 would resolve several issues of unfairness, but this act has not yet been passed in to law. E X E R C I S E S 1. Check out Jon Stewart’s perspective on Senator Franken’s proposed measure to prevent the Department of Defense from contracting with defense contractors that require mandatory arbitration for disputes arising from sexual assaults at http://www.theda ilyshow.com/watch/wed -october -14 -2009/rape -nuts . Does the comedian accurately portray this issue? What role does popular culture have in shaping our opinions and conceptions of our legal system? 2. In the Barker v. Halliburton Inc . case, does the three -million -dollar arbitration award in favor of the sexual assault victim prove that arbitration works, even in violations of civil rights disputes? Why or why not? 3. Choose one argument in The Arbitration Debate Trap: How Opponents of Corporate Accountab ility Distort the Debate on Arbitration in Note 4.45 “Hyperlink: Arbitration” and develop a counterargument to support the contention that arbitration is good in B2C disputes. Compare your argument with the argument in the report. Which side is the most pe rsuasive? After completing this exercise, do you believe that arbitration is good or bad for consumers in B2C disputes? Why? 4. Bank of America announced that it would no longer require mandatory arbitration in disputes arising between it and consumer credit card account holders. Review the story here: http://www.reuters.com/article/idUSTRE57D03E20090814 . What are the benefits and drawbacks to Bank of America’s credit card account customers with respect to this change? Saylor URL: http://www.saylor.org/books Saylor.org 129 5. In what contexts have you entered into an arbitration agreement (e.g., home purchase, credit card agreement, cell phone agreement)? Write a short essay discussing the implications of entering into that agreement. [1] 9 U.S.C. §1 et seq. [2] 9 U.S.C. §2. [3] Southland Corp. v. Keating , 465 U.S. 1 (1984). [4] Citizens Bank v. Alafabco, Inc. , 539 U.S. 52 (2003). [5] ORS 36.405. [6] Washington State Court Rules of Procedure, Superior Court Mandatory Arbitration Rules 7.3. [7] Uniform Arbitration Act, RCW 7.04. [8] Circuit City Stores, Inc., v. Adams , 532 U.S. 105 (2001). [9] Gilmer v. Interstate/Johnson Lane Corp. , 500 U.S. 20 (1991). [10] Lozano v. AT & T Wireless , 504 F.3d 718 (9th Cir. 2007). [11] Juan A. Lozano, “Woman Awarded $3M in Assault Claim against KBR,” AP News , November 19, 2009, http://www.thefreelibrary.com/Woman+awarded+%243M+in+ assa ult+claim+against+KBR – a01612064743 (accessed September 24, 2010). [12] Jones v. Halliburton Co. , 583 F.3d 228 (5th Cir. 2009). [13] Lozano v. AT & T Wireless , 504 F.3d 718 (9th Cir. 2007). Saylor URL: http://www.saylor.org/books Saylor.org 130 4.4 Other Methods of Alternative Dispute Resolution L E A R N I N G O B J E C T I V E S 1. Learn about in -house dispute -resolution methods, med -arb, private judging, minitrials, and summary jury trials. 2. Explore the benefits and drawbacks to forms of alternative dispute resolution (ADR) discussed in this section. Remember that ADR is a broad term used to denote methods to resolve disputes outside of litigation. This can really be any method, whether or not it bears a specific label or adheres to a particular procedure. For instance, negotiation might be a quick meeting in the hallway be tween disputants, or it might involve a formal round of negotiations where all parties are represented by legal counsel. However, when parties are attempting to resolve a dispute, it makes sense for them to agree to a specific procedure for doing so beforehand, so that each party understands how to proceed. Negotiation, mediation, and arbitration are the most common forms of ADR. However, these methods might not be appropriate for every dispute. Other forms of ADR exist, ranging from in – house programs to very formal external processes. This section briefly discusses commonly used alternatives to resolving disputes besides negotiation, mediation, arbitration, or litigation. Some ADR processes or programs are available only to certain groups of people, s uch as members of a particular organization. For instance, some organizations, like Boeing, have an internal ethics hotline . This hotline is available for employees to report perceived ethics violation that they have observed. Ethics advisors answer employ ees’ questions and follow up on reports that need further investigation. One major benefit is that reporting parties generally (but not always) remain anonymous. Another benefit is that the company has time to redress problems that could give rise to dispu tes of much greater magnitude if left unaddressed. An open -door policy is an in -house program that allows company employees to go directly to any level of management to file a complaint or grievance, without threat of retaliation for their reporting. In theory, this policy creates an open atmosphere of trust, and it breaks down class barriers between Saylor URL: http://www.saylor.org/books Saylor.org 131 groups of employees. However, many employees may not feel comfortable in making a complaint about a manager’s decision. Moreover, supervisors may not be comfor table with their employees bypassing them to file complaints. Open -door policies sound very good in theory, but they may not work as well in practice. Another type of in -house program is an ombudsmen’s office. These stations generally hear complaints from stakeholders, such as employees or customers. Ombudsmen try to troubleshoot these complaints by investigating and attempting to resolve the issues before they escalate into more formal complaints. More formal methods of ADR include mediation -arbitration (me d-arb) , which is essentially a mediation followed by an arbitration. If the mediation does not produce a satisfactory outcome, then the parties submit to arbitration. The neutral party mediating the dispute also serves as the arbitrator if the dispute -reso lution process goes that far. Med -arb has the same benefits and drawbacks as mediation and arbitration alone, with some important differences. For instance, parties in a med -arb know that their dispute will be resolved. This is unlike mediation alone, wher e parties may walk away if they do not think that the mediation is serving their interests. Moreover, the parties in med -arb have an opportunity to reach a win -win outcome as in mediation. However, if they do not reach a satisfactory outcome, then one part y will “win” and one party will “lose” during the arbitration phase. The knowledge that an arbitration will definitely follow a failed mediation can be a strong incentive to ensure that the mediation phase of a med -arb works. Private judging , contemplated by many state statutes, is a process in which active or retired judges may be hired for private trials. Private judging is essentially private litigation. The hired judge can preside over a private trial that is not truncated by limits on discovery or abbr eviated rules of procedure, as would be the case in arbitration. Additionally, the judge who oversees the process is highly experienced in such matters as evidence and decision rendering. Moreover, the parties who can afford to pay for this service have a substantial benefit in not having to wait to have their cases heard in the public court. The private trial is also private rather than public, which may be important to parties who require confidentiality. In states where statutes permit hiring a judge for such matters, Saylor URL: http://www.saylor.org/books Saylor.org 132 the parties’ ability to appeal is often preserved. Drawbacks include the sometimes questionable nature of enforceability of judgments rendered, though some state statutes allow enforceability of those judgments as if they were issued in publ ic court. Moreover, this system may benefit those who can afford to pay for this service, while others must wait for their case to appear on the docket in public court. This raises questions of fairness. See Note 4.54 “Hyperlink: Private Judges” for one state’s frequently asked questions (FAQ) regarding private judges. Hyperlink: Private Judges http://www.in.gov/judiciary/admin/private -judges/faq.html Check out Indiana Courts’ Web page with frequently asked questions about private judges. Does your state permit private judging? A minitrial is a procedure that allows the parties to present their case to decision makers on both sides of the dispute, following discovery. Th is is a private affair. After the cases are presented, the parties enter into mediation or negotiation to resolve their dispute. A summary jury trial is a mock trial presented to a jury whose verdict is nonbinding. The presentation is brief and succinct, a nd it follows a discovery period. The jury does not know that its verdict will be advisory only. This process allows parties to measure the strengths and weaknesses of their cases prior to engaging in litigation, which presumably saves both time and money. After the minitrial, parties are in a better position to negotiate or mediate an outcome that fairly represents their positions. K E Y T A K E A W A Y S Methods of ADR other than negotiation, mediation, and arbitration are available to disputants. For example, minitrials, med -arb, private judging, and summary jury trials are common alternatives, as are in – house programs like ombudsmen, anonymous ethics hotlines, and open -door policies. Benefits and drawbacks to these methods exist relative to other methods of AD R and to litigation. E X E R C I S E S Saylor URL: http://www.saylor.org/books Saylor.org 133 1. Visit Boeing’s Ethics Line Web page: http://www.boeing.com/companyoffices/aboutus/ethics/hotline.html . Do you think this program can address all disputes before they get out of hand? Why or why not? What type of dispute might not be appropriate to bring to an ethics hotline program? 2. Locate two “ethics hotline” programs from an online search. Compare these programs. What are the benefit s and drawbacks to each? 3. Check out Note 4.54 “Hyperlink: Private Judges” . Do you think that people should be permitted to hire judges to preside over private trials if they can afford to do so? What benefits to litigants in a private trial have over litiga nts in a public trial? What ethical issues exist with respect to private judges? 4. Why would a party choose med -arb over mediation or arbitration alone? Saylor URL: http://www.saylor.org/books Saylor.org 134 4.5 Public Policy, Legislation, and Alternative Dispute Resolution L E A R N I N G O B J E C T I V E S 1. Explore potential restrictions upon ADR. 2. Review points of access to government to change public policy. 3. Examine the Arbitration Fairness Act Bill. Alternative dispute resolution can be a very useful alternative to litigation. There are many advantages to disputant s, such as expediency, cost savings, and greater privacy than litigation. In business to business (B2B) disputes, alternative dispute resolution (ADR) often makes sense. The Federal Arbitration Act (FAA) is a federal statute that the U.S. Supreme Court interpreted as a national policy favoring arbitration in Southland Corp. v. Keating . [1] According to the Southland Corp Court, state power to create judicial forums to resolve claims when contracting parties enter into a mandatory arbitration agreement ha s been preempted by the FAA. However, not all disputes are well suited for ADR. This is an area in which Congress could make substantial changes in public policy through the creation of new law, to ensure fairness between unequal parties and to ensure the protection of civil rights. Congress could do this by making ADR optional, rather than mandatory, for some types of disputes. It could exclude certain types of disputes from being bound to arbitration through mandatory arbitration clauses. For example, the proposed Arbitration Fairness Act of 2009 (AFA) would invalidate mandatory arbitration clauses in employment and consumer disputes, as well as in disputes arising from civil rights violations. See Note 4.63 “Hyperlink: Arbitration Fairness Act Bill” . The AFA is a proposed bill to amend the FAA. Under the Commerce Clause, Congress has the power to limit the use of mandatory arbitration, just as it has the power to enforce mandatory arbitration clauses under the Commerce Clause through the existing FAA. By p assing a new law that excludes certain types of disputes from being subjected to mandatory arbitration, Congress could set new policy regarding fairness in dispute resolution. Likewise, if it fails to act, Congress is also acceding to the U.S. Supreme Cour t’s broad interpretation of the FAA as a national policy favoring arbitration. Either Saylor URL: http://www.saylor.org/books Saylor.org 135 way, policy regarding mandatory arbitration exists, and Congress has a central role in defining that policy. Hyperlink: Arbitration Fairness Act Bill http://thomas.loc.gov/cgi -bin/query/z?c111:H.R.1020 Review the Arbitration Fairness Act Bill, which would amend the Federal Arbitration Act. In 1925, when the FAA was originally passed, records indicate that Congress intended that mandatory arbitration clauses be enforced in contracts between merchants, rather than between businesses and consumers or between employers and employees. In the latter relationships, the parties have va stly unequal power. Moreover, despite the existence of mandatory arbitration clauses in contracts, the FAA was not contemplated as a means to preempt state power to provide judicial forums for certain types of disputes. [2] However, the U.S. Supreme Court has greatly expanded the FAA’s applicability since then. If Congress passed the AFA, this would be an example of one branch of government “checking” another branch’s power as contemplated by the U.S. Constitution. Specifically, the legislative branch would be checking the judicial branch’s power by passing a law to counteract the U.S. Supreme Court’s broad interpretation of the FAA in Southland Corp. v. Keating . This is how our government is supposed to work. One branch checks another branch’s power. This “checking” of power maintains relative balance among the branches. Because people have different points of entry into the lawmaking process, this system ultimately balances the many special interests of the American people. For example, some businesses and employers that do not wish the AFA to pass may wonder what recourse they have. After all, the U.S. Supreme Court’s interpretation of the FAA currently favors their interests. Since the AFA has not yet passed, they could lobby lawmakers against its passage. Note too that if the AFA becomes law, these interest groups are not simply shut out of the government’s lawmaking process. They continue to have access to lawmaking. One point of entry is through the legislative branch. For instance, they could return to Congress and ask it to pass a new law to counteract the AFA, or to repeal the AFA altogether. They also have a Saylor URL: http://www.saylor.org/books Saylor.org 136 point of entry to the lawmaking process through the judicial branch. Specifically, once a case or controversy arose under the AFA in which they h ad standing, they could ask the courts to interpret the statute narrowly, or they could ask the courts to strike down the statute altogether. On the other side of the issue, consumers and employees who do not like the FAA’s current broad interpretation can work within our government system to change the law. For instance, they can ask Congress to pass a new law, such as the AFA. They could ask Congress to repeal the FAA. They could also wait for another case to arise under the FAA to try to get the relevant holding in the Southland Corp. case overturned. This is perhaps more difficult than the first two options, because any U.S. Supreme Court case produces many progeny at the circuit court level. Each decision at the circuit court level also produces binding precedent within that jurisdiction. It is very difficult to get a case before the U.S. Supreme Court. Even if that happened, there would be no guarantee that the Court would overturn a prior opinion. In fact, the opposite is usually true. Precedent is most often followed rather than overturned. In the United States, the policy process is open for participation, though changes often take much work and time. People with special interests tend to coalesce and press for changes in the law to reflect those posit ions. This appears to be what is happening in the world of ADR now. After many years of mandatory arbitration requirements that have yielded perhaps unfair processes or results, groups that believe they should not be forced into ADR by mandatory arbitratio n clauses are building momentum for their position in Congress. If the AFA passes, that will not be the end of the story, however. New interest groups may form to support the previous law, or a new law altogether. K E Y T A K E A W A Y S Public policy regarding arbi tration has been codified in the FAA and expanded by the U.S. Supreme Court. To change public policy, interest groups can access the government lawmaking power through several points, including through the legislative branch and through the judicial branch . To change public policy regarding mandatory arbitration clauses, for instance, Congress could amend or repeal the FAA. Additionally, given another dispute arising under the FAA concerning its scope, the U.S. Supreme Court could overturn prior decisions t hat broadly interpret the FAA’s reach. Our government’s structure allows several points of access for those who would protect the status quo of public policy and for those who Saylor URL: http://www.saylor.org/books Saylor.org 137 seek to change it. The U.S. government is a dynamic system that provides opportu nities for special interests to coalesce and change the law and public policy. E X E R C I S E S 1. How many points of entry are there into lawmaking processes? Which point would be the easiest to access if you wanted to change the law? Why? 2. Check out Note 4.63 “Hyperlink: Arbitration Fairness Act Bill” . Do you think that the AFA will solve the issue of perceived unfairness in dispute resolution? Why or why not? Are there any additions that you can make to this bill to make it more likely to achieve the goal of g reater fairness in dispute resolution, if passed? [1] Southland Corp. v. Keating , 465 U.S. 1 (1984). [2] Margaret L. Moses, Statutory Misconstruction: How the Supreme Court Created a Federal Arbitration Law Never Enacted by Congress , 34 Fla. St. U.L. Rev . 99 (2006). Saylor URL: http://www.saylor.org/books Saylor.org 138 4.6 Concluding Thoughts Alternative dispute resolution (ADR) is a popular and common group of methods to resolve disputes in many different contexts. In business, ADR is commonly used in business to business (B2B), business to consumer (B2C), and business to employee (B2E) disputes. Several methods of ADR exist. The most commonly employed methods include negotiation, mediation, and arbitration. Under federal law, national policy favors arbitration. Sometimes ADR is perceived as unfair, b ecause parties have unequal power relative to each other or because the subject matter of the dispute is not considered suitable for ADR. Like other areas of law and public policy, ADR is dynamic and subject to change, particularly when special interest gr oups coalesce successfully and create momentum for change within our legal system. Currently, there is a nascent movement to exclude certain types of disputes from ADR by amending the federal law that requires mandatory arbitration when parties have contra ctually consented to it. Saylor URL: http://www.saylor.org/books Saylor.org 139 Chapter 5 The Constitution L E A R N I N G O B J E C T I V E S In this chapter, we will discuss the federal U.S. Constitution and how it affects businesses. Specifically, you should be able to answer the following questions: 1. What are the main purposes of the U.S. Constitution? 2. How does the Constitution grant authority to the government to regulate business? 3. How does the Bill of Rights provide basic civil liberties to all persons in the United States? 4. How do due process and equal protection oper ate to constrain governments from acting unfairly? Video Clip: Schoolhouse Rock, the Preamble The Constitution is not the first constitution adopted by the original thirteen colonies. During the time of the Revolutionary War against Great Britain, the states were governed by the Articles of Confederation . The articles granted limited authority to a federal government, including the power to wage wars, conduct foreign policy, and resolve issues regarding claims by the states on western lands. Many leadin g scholars and statesmen at the time, known as Federalists, thought that the articles created a federal government that was too weak to survive. The lack of power to tax, for example, meant that the federal government was frequently near bankruptcy in spit e of its repeated requests to the states to put forth more money to the federal government. Larger states resented the structure under the articles, which gave small states an equal vote to larger states. Finally, the articles reserved the power to regulat e commerce to the states, meaning each pursued its own trade and tariff policy with other states and with foreign nations. In 1786, work began in a series of conventions to rewrite the articles, resulting in the adoption of the U.S. Constitution in Philade lphia in 1787. In this chapter we explore the Constitution in depth. We’ll examine how the Constitution sought to rectify the weaknesses in the articles, especially in commerce. We go beyond the meaning of the words and explain how judicial interpretation of the Constitution, while still evolving, has forever changed its original place in U.S. political economy. We’ll explore the first ten amendments to the Saylor URL: http://www.saylor.org/books Saylor.org 140 Constitution, the Bill of Rights , and look at how many of the key civil liberties contained in the Bi ll of Rights also affect businesses. By the end of the chapter, you should have a solid grasp on why the Constitution remains an enduring document and why it’s important for business professionals to be able to speak on it with authority. Key Takeaways The Articles of Confederation established the United States of America. It provided a central federal government with limited powers, including the power to wage war. The articles ultimately failed because the federal government lacked the power to raise its own taxes or to regulate commerce. In 1787, the Philadelphia Convention adopted a new Constitution to replace the articles. Saylor URL: http://www.saylor.org/books Saylor.org 141 5.1 Federalism and Preemption L E A R N I N G O B J E C T I V E S 1. Explore how the Constitution creates a limited government through the separatio n of powers and through checks and balances among the three branches of government. 2. Learn how the Constitution resolves conflicts between state and federal laws. 3. Understand the rules surrounding preemption. Have you ever read the Constitution from beginning to end? Look at the text of the Constitution. It’s remarkably short —shorter than many people realize. Historically, it is the shortest and oldest written constitution still in force. Ironically, the Constitution’s brevity may be one of the reason s that it endures to this day, as judicial interpretation has kept its meaning relevant for modern times. Much of its content deals with the allocation of power among three separate and coequal branches of government. Substantively, much more attention is paid to the limitations on the power given to each of the three branches than to any positive grant of rights. Indeed, while many Americans believe that it is their “constitutional right” to be free, many of those freedoms are actually contained in the Bil l of Rights, which are amendments to the Constitution. In contrast, the main body of the Constitution is concerned primarily with structure. In other words, the Constitution is a document of prohibition, outlining what government cannot do as opposed to wh at government must do. As a result of this structure, the Constitution is rarely the right place to deal with contemporary political issues, no matter how important. At the state level, many states permit frequent amendments to their constitutions to refle ct contemporary public policy, from school funding to gambling to gay marriage. There is often support among many people for constitutional amendments to ban flag burning, permit prayer in school, ban gay marriage, or ban abortion. At the federal level, ho wever, these issues are rarely resolved at the constitutional level. There is a practical bar, of course, given how difficult it is to amend the Constitution. Even if it were easier to amend, however, the Constitution remains very much a document of struct ure rather than substantive law. Saylor URL: http://www.saylor.org/books Saylor.org 142 During his confirmation hearings, Chief Justice John Roberts spoke of his role as an umpire calling the balls and strikes and not pitching or batting. If judges are umpires, then the Constitution sets forth the rules of the game. The biggest rule laid down in the Constitution is the separation of powers . Fundamentally, the separation of powers requires that each branch of government play its own role in governing the people. The judicial branch plays a critical role in inter preting the Constitution and outlining the powers of the legislature and executive branches. The interplay between Article I (legislative) and Article II (executive) is no less important. Although more than two centuries have passed since the first Congres s and the first president served, the limits of power between these two branches continue to be redefined, especially in the wake of the September 11 terrorist attacks. Article I of the Constitution establishes the legislative branch through a bicameral leg islature . The lower House of Representatives, with frequent elections (every even -numbered year), has 435 members, with representation spread proportionately to a state’s population as determined by a census every decade. The most populous state, Californi a, has fifty -three members, while several states are so small that they have only one representative (Alaska, Delaware, Montana, North Dakota, South Dakota, Vermont, and Wyoming). The House is led by the Speaker of the House , typically from the party that holds the majority in the House. The House is generally thought to represent the most contemporary views of the American public, with its large body of members and frequent elections. As a check on the majority will, and on the power of larger states, the Senate is a smaller body with one hundred members (two from each state) and with less frequent elections (every six years). The Senate is meant to be a more deliberative body and to ensure a wider level of debate before impassioned legislation is hastily r ushed into law. The makeup of the Senate means that citizens from smaller states, representing much fewer people, can often frustrate the will of the majority of Americans. The Constitution places the power to legislate with both chambers, but the House re tains the exclusive right to originate bills raising revenue (taxation), while the Senate maintains the exclusive right to provide advice and consent to the president, where advice and consent are Saylor URL: http://www.saylor.org/books Saylor.org 143 required. Additionally, while the House retains the right t oimpeach officials for “high crimes and misdemeanors,” the Senate tries such impeached officials. Article II of the Constitution establishes the executive branch of government. While the Constitution was being drafted, the delegates knew that they wanted G eorge Washington to be president. Washington was in retirement in Mount Vernon at the time, after successfully leading the colonies in the Revolutionary War. Since the delegates knew Washington would be president, they spent remarkably little time in writi ng Article II, which is very short. Washington was elected to both his first and second terms with 100 percent of the Electoral College vote, something no other president has since done. While Article II sets forth some of the mechanisms for becoming presi dent —and is the only place in the Constitution that prescribes a specific oath of office —when the Constitution was drafted, little was known about what the president’s role would be. Article II grants the president an almost total power over foreign affair s, including the power to make treaties and appoint ambassadors. He is commander -in-chief of the armed forces. The president is also responsible for executing, or enforcing, the laws of the country. While Congress can pass any legislation it wants to, ulti mately legislation is meaningless unless there are sanctions for violating the law. Through the prosecutorial and police functions, the president ensures that the will of the people, as expressed through Congress, is carried out. The Constitution’s deliber ate ambiguity on the powers of the president left much room for debate on how strong the executive branch should be. After the September 11 attacks, many in the George W. Bush administration argued for a strong unitary executive theory. Bush administration lawyers reasoned that only a strong executive could effectively wage war with Al -Qaeda. Under a congressional authorization, the administration embarked on a program to capture and kill terrorists around the world and to gather as much information about t errorist activities as possible. Many in Congress believed, however, that the executive branch overstepped its authority in pursuing these goals, leaving Congress behind. For example, to collect intelligence on suspected terrorists in the United States, Co ngress passed a law, the Foreign Intelligence Surveillance Act, in 1978. FISA, as the law is known, requires federal Saylor URL: http://www.saylor.org/books Saylor.org 144 law enforcement officials to seek a search warrant from a secret court before carrying out surveillance or wiretapping. The Bush administra tion routinely carried out surveillance on persons in the United States without this judicial oversight, arguing that it was part of the unitary executive theory to do so. In another program, the Bush administration allegedly captured suspected terrorists abroad and moved them to secret prisons outside the jurisdiction of the United States for interrogation, a practice known as extraordinary rendition . In late 2009, an Italian court convicted twenty -three American officials, including members of the Central Intelligence Agency (CIA), of extraordinary rendition in the case of a Muslim cleric kidnapped from Milan. The officials were convicted in their absence and have not been extradited to Italy. Extraordinary rendition is likely illegal under U.S. and intern ational law, but lawsuits attempting to find out more information about the program have been thwarted by the executive branch’s claim of the state secrets doctrine. Congress and the president have also clashed over the treatment of suspected terrorists. Ar ticle I, Section 9 of the Constitution states that “The Privilege of the Writ of Habeas Corpus shall not be suspended, unless when in Cases of Rebellion or Invasion the public Safety may require it.” The right of habeas corpus is a fundamentally important right, appearing first in the Magna Carta and considered so important by Constitutional delegates that it was inserted into the text of the Constitution itself, not in the Bill of Rights. When the Bush administration began imprisoning suspected terrorists at the military base in Guantanamo Bay, Cuba, the administration took a series of unprecedented positions on the legal status of those detainees, including the position that the detainees did not have the right to seek habeas relief. Federal courts, includ ing the Supreme Court, gradually overturned most of these positions, and the detainees are now being tried by either military tribunals or civilian courts. Another controversial position adopted by the administration was on the use of enhanced, or aggressi ve, interrogation methods. Critics claimed these techniques amounted to torture (which is banned by U.S. law as passed by Congress) and may be unconstitutional under the Eighth Amendment, which prohibits cruel or unusual punishment. Video Clip: “Mancow” Wa terboarded Saylor URL: http://www.saylor.org/books Saylor.org 145 Another aspect of the separation of powers that is less obvious is the separation of power between the federal and state governments, known as federalism . You already know that state and federal governments sometimes share power and that the rul es of subject matter jurisdiction determine which legal system has jurisdiction over a particular matter or controversy. In some areas, such as family or property law, the states have near exclusive jurisdiction. In other areas, such as negotiating treatie s with foreign countries or operating airports and licensing airlines, the federal government has near exclusive authority. In the middle, however, is a large area of subject matter where both state and federal governments may potentially have jurisdiction . What happens if state and federal laws exist on the same subject matter, or worse, what happens if they directly contradict each other? Legal rules of preemption seek to provide an answer to these questions. Under the Constitution’s Supremacy Clause (Art icle VI, Section 2), the Constitution and federal laws and treaties are the “supreme law of the land” and judges in every state “shall be bound” by those laws. Let’s say, for example, that Congress sets the minimum wage at $7.25 an hour. A state that passe s a law making the minimum wage lower than that would immediately see the law challenged in federal court as unconstitutional under preemption and Supremacy Clause principles, and the state law would be overturned. Hyperlink: Medical Marijuana in the States http://www.npr.org/templates/story/story.php?storyId=113924395 Under the federal Food and Drug Act, marijuana is classified as a Schedule I drug under the Con trolled Substances Act, meaning it is restricted just like cocaine or heroin. Fourteen states have passed laws that permit marijuana to be grown, sold, and used for medicinal purposes, such as treating nausea and stimulating hunger in cancer patients. The federal government aggressively prosecuted medicinal use of marijuana, and in 2005 the Supreme Court ruled that the federal law trumps state laws, [1] meaning that local growers could be arrested and prosecuted under federal law even if what they were doing was perfectly legal and authorized under state law. In 2009 the Obama administration announced a change in policy. Listen to this National Public Radio story about what this change means for the medicinal use of marijuana in the states. Saylor URL: http://www.saylor.org/books Saylor.org 146 When there is no direct conflict between state and federal law, then the rules of preemption state that courts must look to whether or not Congress intended to preempt the state law when it passed the federal statute. If there is no clear statement by Congress that it wishes to preempt state law, or if it is unclear what Congress meant to do, then the state law will survive if possible (i.e., there is a presumption against preemption). Even if there is no statement by Congress on preemption, however, if Congress so comp letely regulates a particular subject area that there is “no room” left for states to regulate, then preemption exists. For example, after September 11, Michigan passed a law requiring student pilots in Michigan to pass a Federal Bureau of Investigation (F BI) background check. The Federal Aviation Administration, which sets forth pilot qualifications and licensing, has no such requirement, and since the federal government regulates the aviation industry completely (from airports to pilots to airlines to tra ining standards), Michigan’s law is preempted. Hyperlink: Can States Regulate Car Safety Standards? http://www.nhtsa.dot.gov/cars/rules/import/fmvss/index.html Sometime s it’s not clear whether or not a state law is preempted, and the courts must undertake a searching inquiry to determine congressional intent. In Geier v. Honda , [2] for example, a teenager filed a tort lawsuit against Honda for injuries she suffered durin g a car accident. Her lawsuit claimed that her 1987 Honda Accord was defective because it didn’t have any airbags. Airbag technology, which existed at the time but was used primarily in expensive luxury cars, would have minimized her injuries. If she had won her state lawsuit in the District of Columbia, then in effect all 1987 Honda Accords sold in the District of Columbia would have to be equipped with airbags to avoid tort liability. Honda’s defense was preemption. Under a federal regulatory scheme known as the Federal Motor Vehicle Safety Standards (FMVSS), the federal government sets forth safety standards that cars must meet to be sold in the United States. FMVSS 208 sets the standard for seat belts, and in 1987 manufacturers were required to install either airbags or passive (motorized) seat belts. A rule that required manufacturers to install airbags exclusively would directly contradict FMVSS 208, so the Supreme Court ruled that FMVSS preempted any state attempts to regulate motor vehicle safety stan dards. Saylor URL: http://www.saylor.org/books Saylor.org 147 When the Supreme Court found preemption in the Honda case, many in the business community wondered if a new era of preemption might have arrived. Federal regulation would in effect provide a shield against liability lawsuits. These hopes were short lived, as the Supreme Court continues to hold a presumption against preemption. The drug industry, in particular, would like preemption to end tort litigation. Hyperlink: If the FDA Approves a Drug Label, Can Patients Still Sue Drug Manufacturers? http://www.npr.org/templates/story/story.php?storyId=101465350 Wyeth Pharmaceuticals manufacturers an antinausea drug called Phenergan, which was approved by the U.S. Food a nd Drug Administration (FDA) in 1955. Under federal law, the FDA must approve the wording on labels and documentation accompanying regulated drugs. The FDA -approved label contained warnings against “intra -arterial” injection, which carried the risk of irre versible gangrene. The plaintiff in the case, Vermont musician Diana Levine, went to a clinic for treatment and ended up losing her arm when Phenergan was incorrectly administered to her. She sued Wyeth, arguing that the warning label on the drug didn’t pr ohibit the type of injection that led to her injuries. A jury awarded her more than six million dollars in damages. On appeal to the Supreme Court, Wyeth argued that since the FDA approved the label, lawsuits arguing that the label was inadequate were pree mpted. The Supreme Court examined the history of the Food and Drug Act and ruled for Diana Levine, holding that when Congress wrote the law, it never meant to preempt state laws. In fact, the Supreme Court found that Congress meant for state lawsuits to wo rk alongside the Food and Drug Act to ensure drug safety for consumers. K E Y T A K E A W A Y S The Constitution is mainly a structural document, setting forth the allocation of power among the three branches of government and the limitations on that power. It is concerned mainly with what the government cannot do, as opposed to what the government must do. At the federal level, constitutional amendments are rarely used to carry out social policy. Article I of the Constitution establishes a bicameral legislature, w ith a House of Representatives and a smaller, more deliberative Senate. Both chambers must agree before legislation can be passed. Article II of the Constitution establishes the executive power in the Saylor URL: http://www.saylor.org/books Saylor.org 148 president, who must execute the laws passed by Congress . The balance of power between Congress and the president is subject to much interpretation and change throughout history, including the post – September 11 era. Power is also divided between state and federal governments under federalism. The Supremacy Clau se states that when there is a conflict between state and federal law, federal law wins. If there is no direct conflict, the state law survives unless Congress expressly preempts state law. E X E R C I S E S 1. One of the attempts to use the Constitution to achieve a social policy was Prohibition. Review the twenty – seven amendments to the Constitution. Other than the Bill of Rights, can you identify other amendments used to achieve social policy? 2. Can you name your representatives in the House of Representatives and t he Senate? Who is the current Speaker of the House and the Senate Majority Leader? 3. Can you think of current examples where legislation that is popular with the majority of Americans is held up in the Senate, especially by Senators from smaller states? 4. Do y ou believe that the United States is better served by a strong or weak unitary executive? Explain your answer. 5. Where should the balance of power lie between Congress and the president in prosecuting the war on terror? If the president believes enhanced int errogation such as waterboarding is necessary to obtain necessary intelligence, should Congress attempt to intervene? 6. In 2007 five victims of extraordinary rendition filed suit against Jeppesen Dataplan Inc. (a Boeing subsidiary), claiming that Jeppesen pr ovided logistical support to the CIA’s extraordinary rendition program. The government has so far successfully kept the case from going to trial, arguing that doing so would endanger government secrets. Do you believe that someone who has been subject to e xtraordinary rendition should be able to sue the government, or private companies, for what happened to them? Why or why not? 7. In the Geier case, the Supreme Court held that states may not regulate motor vehicle safety standards. How do you think states lik e California and Massachusetts can impose stricter emission controls on motor vehicles than the federal standard? [1] Gonzalez v. Raich , 545 U.S. 1 (2005). Saylor URL: http://www.saylor.org/books Saylor.org 149 [2] Geier v. American Honda Motor Company , 529 U.S. 861 (2000). Saylor URL: http://www.saylor.org/books Saylor.org 150 5.2 The Commerce, Taxing, and Spending Clauses L E A R N I N G O B J E C T I V E S 1. Explore how the Constitution grants the power to regulate commerce to the federal government. 2. Understand how the meaning of the Commerce Clause has expanded greatly. 3. Learn about state police powers and the limitations o n those powers. 4. Learn about the power given to Congress to tax and spend money. Hyperlink: The Powers of Congress http://topics.law.cornell.edu/constitution/arti clei#section8 Members of the Constitutional Convention were divided about how powerful the new central government should be. To avoid the rise of tyrannical government, the Constitution carefully grants certain powers to Congress, reserving all other powers to the states. These powers are listed in Article I, Section 8. Look at this section in Note 5.25 “Hyperlink: The Powers of Congress” and notice how detailed these powers are. The list begins with monetary matters, an issue of great concern at the time because the prior government was bankrupt and states regulated their own money supply. The Congress therefore has the power to borrow money, lay and collect taxes, regulate commerce (the Commerce Clause ), establish a uniform law on bankruptcy and natu ralization , make money (currency) and establish its value, punish the counterfeiting of U.S. money, and establish a uniform system of weights and measures. The list then moves on to aspirational ideals for the young new country to strive toward. Congress h as the power to establish post offices and post roads and to protect intellectual property in copyrights and patents. Next, the list turns to Congress’s adjudicative powers: to create lower courts under the Supreme Court created in Article III and to defin e crimes committed on the “high seas” and against the “law of nations.” Congress is also given fiscal responsibility over the armed forces and navy (note there is, of course, no mention of an air force) and the power to provide oversight to the militia. Th en, to help Congress with carrying out these powers, Article I, Section 8 provides that Saylor URL: http://www.saylor.org/books Saylor.org 151 the states may cede to Congress a district, not to exceed ten square miles, that will become the seat of government, and to exercise exclusive legislative authority ove r this district. The scope of power granted under Article I, Section 8 is the subject of much debate among legal scholars. The clause granting Congress the power to regulate commerce is particularly troublesome. There is very little debate about the power of Congress to regulate foreign trade. This power is explicit, total, and exclusive. If Congress wanted to ban all imports and exports into and out of the United States, for example, it could legitimately do so. Indeed, Congress routinely uses economic tra de sanctions against “rogue” nations such as Cuba and North Korea as a means of economic warfare to try to bring about regime change. Even in the case of friendly allies such as Canada, Mexico, and the European Union, Congress routinely engages in trade re gulations that restrict or distort foreign trade. Since this power is exclusive to Congress, state attempts to regulate foreign commerce are invalid. Oregon, for example, cannot ban Oregon companies from exporting to Mexico or establish a free trade zone w ith duty -free imports with China. There is more disagreement about Congress’s power to regulate domestic commerce. Notice how Article I, Section 8 is structured. Many scholars believe that this list is complete and exhaustive, since it lists all the powers the Founding Fathers wanted to give Congress at the time. The idea, they argue, was to create powerful and limited government, leaving the states room to govern in all other areas. As evidence, these scholars point to the structure of the list and the hig h level of detail provided (such as specific crimes to be made punishable and the square mile limitation for the seat of government). Other scholars believe that the list should be interpreted more broadly and that the language granting Congress the power to “make all laws necessary and proper” to carry out the enumerated powers demonstrates the Founding Fathers’ desire for a more flexible interpretation, to allow Congress the power to react to needs and challenges not foreseeable at the time the clause was drafted. In the early part of the country’s history, the first view held firm sway, and together courts and Congress carefully observed the constitutional limits to the growth of federal government power. If you consider our modern federal government, how ever, it’s obvious that the second view is now Saylor URL: http://www.saylor.org/books Saylor.org 152 more prevalent. Today, the federal government does a lot more than what is enumerated on the list in Article I, Section 8. From regulating educational standards, to defining clean air and water, to outlawing w orkplace discrimination, to licensing portions of the electromagnetic spectrum for cell phone and digital television providers to use, it’s clear that if a member of the Constitutional Convention were to travel forward in time, he would be shocked at both the pace of progress and the size and power of the federal government. How did our country’s view of congressional power evolve over time? The answer can be traced to the Great Depression. In response to unprecedented economic distress, President Roosevelt sought to redefine the very nature of the employer/employee relationship. He, along with Congress, enacted legislation that established a minimum hourly wage, set maximum weekly working hours, established workplace safety rules, outlawed child labor, and provided for a safety net to protect older and disabled workers. These laws initially ran into stiff opposition at the Supreme Court. The justices at the time clung to a more formalistic reading of Article I, Section 8 and saw the employer/employee relatio nship as one governed by freedom of contract. In this view, if a worker wanted to work and an employer was willing to provide that work, then the government should not interfere with that contract. Thus, early portions of the New Deal were struck down as unconstitutional under the Commerce Clause. After President Roosevelt proposed his court -packing plan, leading one of the swing votes on the Supreme Court to change his vote to begin upholding the New Deal, the barriers surrounding the interpretation of the Commerce Clause came crashing down. Courts have now adopted a very flexible reading of the Commerce Clause. As long as Congress makes reasonable findings that a certain activity has some sort of effect on interstate commerce, Congress can regulate that ac tivity. This broad interpretation of the Commerce Clause has been challenged repeatedly. In 1964, for example, Congress passed a broad and sweeping Civil Rights Act, prohibiting discrimination against citizens on the basis of race, color, national origin, and sex. Congress relied on its power under the Commerce Clause to pass this legislation. That same year, the Heart of Atlanta Motel in Georgia (Figure 5.3 “Heart of Atlanta Motel” ) filed a federal lawsuit seeking to overturn the Civil Rights Act Saylor URL: http://www.saylor.org/books Saylor.org 153 as uncons titutional, arguing that Congress lacked the authority under the Commerce Clause to pass the law. The Supreme Court held the law to be constitutional, finding that since 75 percent of the motel’s clients came from out of state and since the motel was locat ed near Interstates 75 and 85, the business had an “effect” on interstate commerce. [1]Subsequent civil rights legislation, including the important Americans with Disabilities Act, is also grounded in congressional authority to regulate interstate commerce . Figure 5.3 Heart of Atlanta Motel Source: Photo courtesy of Georgia State University, Special Collections of the University Library, http://tarlton.law.utexas.edu/clark/heart_long.html . In the late 1990s, several curious decisions by the conservative wing of the Supreme Court led some observers to wonder if the days of virtually unfettered authority by Congress to regulate under the Com merce Clause were coming to an end. Judicial conservatives, especially the late Chief Justice Rehnquist, have always been somewhat uncomfortable with the broad reading of the Commerce Clause, worried that it has led to a runaway federal government many tim es bigger than what the Saylor URL: http://www.saylor.org/books Saylor.org 154 Founding Fathers intended. In a 1995 case, the Supreme Court held that the 1990 Gun -Free School Zones Act was unconstitutional. The law prohibited the possession of weapons in schools and was based on a congressional finding that po ssession of firearms in educational settings would lead to violent crime, which in turn affects general economic conditions by causing damage and raising insurance costs and by limiting travel to and through unsafe areas. Students intimidated by a violent educational setting would also be affected, learning less and leading to a weaker educational system and economy. By a 5 –4 margin, the Supreme Court found these arguments unpersuasive and overturned the law, holding that Congress lacked authority under the Commerce Clause to regulate the carrying of handguns into schools. [2] Then, five years later, the Supreme Court overturned a portion of the 1994 Violence Against Women Act, which gave a woman the right to sue her attacker in federal court for civil damages, holding that the effects of violence against women were too “attenuated” to be valid under the Commerce Clause. [3] Any expected revolution in the scope of Congress’s authority failed to materialize, however, and these two cases are probably aberr ations rather than predictors of where the Court is heading on this topic. While the Constitution limits the federal government’s powers to those enumerated in Article I, Section 8, the states also have broad lawmaking authority. These powers stem from the states’ police power , which permits states to regulate broadly to protect and promote the public order, health, safety, morals, and general welfare. You’ve probably experienced this yourself. Different states have different speed limits, for example. Some states permit the sale of alcohol on Sundays, while others prohibit it. Some states permit casino gambling, while others do not. A few states permit same -sex marriage, while many do not. Some states prohibit smoking in bars and restaurants, including Nort h Carolina, home to the nation’s tobacco industry. In California, an attempt to rein in obesity resulted in a state law to require calorie counts on restaurant menus and a ban on the use of trans fats. In Texas, teenagers must have parental permission to u se tanning beds at a salon. Massachusetts bans dog racing. Many states are implementing bans on texting while driving. Hyperlink: How Assisted Suicide Ruling Affects Doctors’ Work http://www.npr.org/templates/story/story.php?storyId=5160904 Saylor URL: http://www.saylor.org/books Saylor.org 155 In 1994 Oregon voters approved the country’s first physician -assisted suicide law, the Oregon Death with Dignity Act. The law permits certain patients to voluntarily hasten death by taking a lethal dose of prescription medication. To meet the law’s require ments, the patient must be terminally ill with less than six months to live, must be informed and voluntarily request the medication, must be able to consume the medication by himself or herself, must be referred to counseling, and must have the terminal d iagnosis confirmed by a second doctor. Many patients, fearing a painful or torturous natural death, obtain the medication and never take it, but some do. In 2001 Attorney General John Ashcroft issued a rule interpreting the federal Controlled Substances Ac t as prohibiting any physician from prescribing medication under the Death with Dignity Act, subjecting any doctor who did so to federal prosecution. In a 6 –3 decision, the Supreme Court decided that the Controlled Substances Act did not grant the attorney general the authority to override a state standard for regulating medicine. [4] In doing so, the Court held that the state police power is entitled to greater deference, in this case, than Congress’s powers under the Commerce Clause. Listen to the National Public Radio story for one physician’s account of how the Death with Dignity Act has affected his practice. The Oregon Death with Dignity Act case illustrates how a state, in exercising its police power, can actually grant more civil rights to its citizens than the federal government does or wishes to. Similarly, states that have legalized same -sex marriage have done so under their police powers, which is permissible as long as the exercise of police power does not violate the federal Constitution. Generally, this means the state legislation must be reasonable and applied fairly rather than arbitrarily. Additionally, a critical limitation on the state police power is that it cannot interfere with Congress’s power to regulate interstate commerce. This concept is known as the dormant commerce clause because it restricts the states’ abilities to regulate commerce, rather than the federal government’s. A state law that discriminates against out -of-state commerce, or places an undue burden on interstate co mmerce, would violate the dormant commerce clause. For example, if a state required out -of-state corporations to pay a higher tax or fee than an in -state corporation, that would be unconstitutional. A state that required health and safety inspections of ou t-of-state, but not in -state, produce or goods would be unconstitutional. In 2005 the Supreme Court held that state restrictions prohibiting out -of- Saylor URL: http://www.saylor.org/books Saylor.org 156 state wineries from selling directly to consumers in -state was unconstitutional. [5] Federal courts have rep eatedly held that state attempts to regulate Internet content (typically to prevent pornography) are unduly burdensome on interstate commerce and therefore unconstitutional. Note, however, that this prohibition against out -of-state discrimination does not prevent a state from exercising its police power to protect state citizens, as long as the power is exercised evenly and equally. If a state wanted to weigh trucks on highways to ensure they did not exceed maximum weight rules, for example, that action wou ld be permissible even if the trucks came from out of state, as long as the requirement applied equally to all trucks on that state’s highways. In addition to the power to regulate commerce, the Constitution places two critical powers with Congress: the taxing power and the power to spend the taxes it collects. The taxing power is a broad one, and the Supreme Court has not overturned a tax passed by Congress in nearly a century. As long as the tax bears some reasonable relationship to generating revenue, th e tax is valid. States are also permitted to tax, but only if the activity taxed has a nexus to the state. A transaction (such as a sale) that takes place inside the state would create a nexus for sales tax to attach. Working typically creates a nexus for state or local income tax to apply, and owning real property creates a nexus for real estate tax to apply. What happens, however, if a state’s citizen purchases goods from a seller out of state? Traditionally, buyers do not pay sales tax to the government directly —rather, they pay the sales tax to the seller, who collects the tax on behalf of the government and turns it over to the government at regular intervals. In the past, mail -order catalog sellers from out of state would not collect sales tax in state s where they don’t have a physical presence. As the popularity of e – commerce has skyrocketed, more and more states are reexamining how to tax transactions from out – of-state sellers by compelling those sellers to collect the applicable sales tax. Some state s are so desperate they are starting to look for a nexus anywhere they can. In New York, for example, the legislature passed a law requiring Amazon.com to collect sales tax from New York residents based on the presence of New York citizens who link to Amaz on’s Web site in turn for a commission generated by those links. Saylor URL: http://www.saylor.org/books Saylor.org 157 Congress also has the power to “pay the debts and provide for the common defense and general welfare.” This spending power is considered very broad. Courts have interpreted this power to mean that Congress can spend money not only to carry out its powers under Article I, Section 8 but also to promote any other objective, as long as it does not violate the Constitution or Bill of Rights. For example, in 1984 Congress passed the National Minimum Drinking Age Act, which required states to adopt a minimum age of twenty -one for the purchase and possession of alcohol. If a state did not adopt the age -twenty -one requirement, Congress would withhold federal highway funds from that state to repair and b uild new roads. One by one, states began adopting age twenty -one as the minimum drinking age, even though the age requirement would typically be a matter of state police power. In a challenge by South Dakota, which wanted to keep nineteen as the minimum dr inking age, the Supreme Court upheld Congress’s use of withholding funds to force the states to raise the minimum drinking age. [6] Congress has used the spending power to coerce states to adopt a fifty – five -mile -per -hour speed limit (rescinded by the Clin ton administration) and to lower the driving under the influence (DUI) blood alcohol level limit from 0.10 in most states to 0.08. K E Y T A K E A W A Y S Article I, Section 8 of the Constitution grants certain specific powers to Congress. The power to regulate commerce is one of these powers, and the power of foreign commerce is explicit, total, and exclusive. During the Great Depression, the Supreme Court greatly expanded the interpretation of Congress’s ability to regulate domestic interstate commerce, and this expansion led to congressional authority to regulate virtually all human activity within the United States, with very few limited exceptions. This authority extends to civil rights, where Congress has passed several key pieces of legislation, including the Civil Rights Act of 1964 and the Americans with Disabilities Act, under the Commerce Clause. Attempts by judicial conservatives to circumscribe th e power of the Commerce Clause appear to have failed for now. Unlike the federal government, states have broad police powers to regulate for the health, safety, and moral well -being of their citizens. The exercise of these police powers cannot violate the federal Constitution and, importantly, cannot violate the dormant commerce clause by discriminating against or placing an undue burden on interstate commerce. The power to tax is broad, and as long as a tax bears a reasonable relationship to raising revenu e, the tax is upheld as constitutional. The power to spend is similarly broad, and Congress can spend funds to achieve broad objectives beyond its enumerated powers. Saylor URL: http://www.saylor.org/books Saylor.org 158 E X E R C I S E S 1. Article I, Section 8 of the Constitution establishes the seat of government, which today is Washington, DC. Residents of Washington, DC, have no representation in Congress other than a nonvoting delegate. Should Washington, DC, residents be granted more representation? What are the legal impediments toward such a move? What would b e the political repercussions? 2. Today the United States is one of the few remaining countries to refuse the adoption of the metric system for weights and measures. Would the decision to “go metric” be within the powers of Congress? For more information on t his topic, explore the National Institute of Standards and Technology athttp://www.nist.gov . 3. Congressional authority to regulate foreign trade extends to the use of economic sanctions against rogue foreign n ations. How effective have these sanctions been in the past? Do you believe it is more effective for Congress to ban trade with a foreign nation to encourage its citizens to overthrow hostile governments or for Congress to encourage trade so that those cit izens may prosper economically? 4. If states are prohibited by the dormant commerce clause from discriminating against out -of-state commerce, how can state universities charge a lower tuition rate to in -state residents? Can you distinguish the role the state is playing when it does so, between that of a spender and that of a collector of monies? 5. Read the New York Times article on Amazon.com and its efforts to avoid a nexus to collect sales tax, athttp://www.nytimes.com/2009/12/27/business/27digi.html . Amazon.com generates more than twenty billion dollars in sales annually but only collects sales taxes in five states, where it is headquartered and where it has facilities. Through a process called “entity isolation,” the company has created methods that allow it to avoid creating a nexus even in states where it has employees and facilities. What are the implications of this behavior? 6. In 2005, in an effort to coerce states to tighten up standards for issuing identity cards and driver licenses in the fight against terrorism, Congress passed the REAL ID Act stipulating certain requirements for state – issued identification. States that failed to comply would be punished by its citizens be ing denied access to federally run facilities including airports. How is this an exercise of the spending power? Do you believe Congress should have the ability to stipulate who can use federally funded airports? [1] Heart of Atlanta Motel v. United Stat es, 379 U.S. 241 (1964). Saylor URL: http://www.saylor.org/books Saylor.org 159 [2] United States v. Lopez , 514 U.S. 549 (1995). [3] United States v. Morris , 529 U.S. 598 (2000). [4] Gonzalez v. Oregon , 546 U.S. 243 (2006). [5] Granholm v. Heald , 544 U.S. 460 (2005). [6] South Dakota v. Dole , 483 U.S. 203 (1987). Saylor URL: http://www.saylor.org/books Saylor.org 160 5.3 Business and the Bill of Rights L E A R N I N G O B J E C T I V E S 1. Learn how the Constitution protects the civil liberties of business entities. 2. Explore how the First Amendment protects a company’s right to speak. 3. Discuss how the due process clause protects companies from arbitrary government action. 4. Learn how the equal protection clause protects companies from government discrimination. The ink on the Constitution was barely dry when the first Congress began turning its attention to amending it. Dur ing the debate surrounding the Constitution, there was much discussion about whether or not an explicit protection of civil liberty was necessary. Some believed that the British common -law system implicitly protected civil liberties, so a written declarati on of rights wasn’t necessary. Others believed that the Constitution created a strong federal government and that a written declaration of rights was therefore critically necessary. In 1789, the same year the Constitution went into effect, Congress propose d ten amendments to the Constitution, a package that became known as the Bill of Rights . Within two years, the Bill of Rights had garnered the necessary votes to become law. When we speak of civil liberties protected in the Constitution, we often think of how these liberties apply to people. Although the Constitution does not contain the word “corporation,” corporations have some characteristics of being a “person,” so various courts have held that several of these civil rights also apply to business entiti es. In this section we’ll take a closer look at how these rights apply to businesses. In particular, we’ll examine the First, Fifth, and Fourteenth amendments. Before we begin, it’s worth making some observations about civil liberties generally. First, the re are no absolute rights, in spite of the wording of any specific amendment. For example, the First Amendment states that “Congress shall make no law abridging the freedom of speech.” In fact, there are many laws that limit the freedom of speech. You aren ’t allowed to libel or slander someone, for example, or incite a crowd into a riot. Instead of absolute rights, courts have to constantly balance competing interests in deciding where the limits of our rights lie. The right of the public to know Saylor URL: http://www.saylor.org/books Saylor.org 161 informatio n about the lives of politicians and other high -profile figures, for example, must often be balanced by the right those citizens have to their own privacy. Second, it’s fair to say that while the Constitution sets up a system of government based on princip les of representative democracy, the Bill of Rights exists to protect the minority, not the majority. The vast majority of Americans will go through life without ever having their constitutional rights trampled on. It is for the very small minority of Amer icans that find themselves victims of constitutional violations that we find the greatest strength of the Bill of Rights. For this reason, many issues raised by civil liberties generally rise above the political process, where the majority generally prevai ls. For example, public opinion polls show that well over 95 percent of Americans feel that burning the American flag should be illegal. When such an overwhelming majority agrees on something, in a democracy the majority should prevail. In our democracy, h owever, the Supreme Court has stepped in and decided that the First Amendment will protect the very tiny percentage of the American population that wishes to burn the flag as a display of political opposition. Additionally, it’s important to note that the only reason those of us in the majority know where the boundaries of our civil liberties lie is because of that tiny minority. If Americans weren’t willing to test the boundaries by burning the flag or joining the Communist Party or refusing to take loyalt y oaths or refusing to send their Amish children to public schools, then our civil liberties would remain theoretical ideals rather than concrete rights. Finally, note that other than the right to vote, the civil liberties protected by the Constitution ext end to all persons physically on U.S. soil, not just citizens or legal immigrants. Persons visiting the United States temporarily, such as tourists and students, as well as undocumented aliens, are all entitled to the full protections of the U.S. Constitut ion while subject to U.S. law. Third, the extent of our civil liberties protections vary from time to time. Society evolves with progress and challenges, and with that evolution, different needs arise in the realm of civil liberties. The Founding Fathers c ould not contemplate a digital world where an act of defamation on Facebook can spread to millions of people in a matter of hours, or imagine a society as pluralistic and diverse as ours has become. One constitutional amendment, the Eighth, illustrates how time shifts the meaning and application of civil liberty. The Eighth Amendment prohibits “cruel and unusual” Saylor URL: http://www.saylor.org/books Saylor.org 162 punishment. The Supreme Court, in defining what “cruel and unusual” is, looks to “evolving standards of decency” in making the determination —in ot her words, what is cruel and unusual today may have been normal in years past. Finally, major portions of the Bill of Rights apply equally to the states as they do the federal government. When adopted, the amendments were meant to restrict the federal gove rnment only (for example, “Congress shall make no law respecting an establishment of religion.”). States were not similarly restricted, and many states did in fact establish official state churches in the early days of the United States. After the Civil Wa r, the Constitution was amended to include the Fourteenth Amendment, which prevents any state from depriving citizens of their rights without “due process of law.” Gradually, throughout the twentieth century, the Supreme Court developed a doctrine called incorporation , by which the limitations on government behavior in the Bill of Rights were extended to apply to the states as well. While many portions of the Bill of Rights apply to the states, not all of it does. There is no requirement, for example, that states use a grand jury system to indict criminals. There is also no requirement that states provide juries in civil trials. Hyperlink: Does the Second Amendment Apply to the States? http://www.npr.org/templates/story/story.php?storyId=128182208 In 2008 the Supreme Court handed down a major victory for gun owners and gun rights advocates by declari ng that a ban on handguns in the District of Columbia was unconstitutional under the Second Amendment, which the Court held protected an individual’s right to possess a firearm in private homes in Washington, DC, and other federal territories. [1] Soon after the case was decided, several lawsuits were filed across the nation, challenging similar bans on handguns in various states. In 2010 the Supreme Court decided that the Second Amendment is indeed incorporated against the states, meaning that state law s banning the possession of handguns in private homes are unconstitutional. [2] We turn our attention first to the First Amendment. The First Amendment contains several important clauses pertaining to speech and religion. The two different clauses on relig ion are designed to be almost always in conflict with each other. On the one hand, the First Amendment Saylor URL: http://www.saylor.org/books Saylor.org 163 prohibits the government from establishing any religion —this is called the Establishment Clause . On the other hand, the First Amendment prohibits the gov ernment from restricting the free exercise of religion —this is called the Free Exercise Clause . The conflict arises when some segments of society believe that the Free Exercise Clause means that they can practice their religion freely and openly, such as i n a public school or city hall. Those who believe in what Thomas Jefferson called a “wall of separation ” between church and state, on the other hand, believe that the Free Exercise Clause must be subservient to the Establishment Clause, which would strictl y prohibit such public displays of religious life. As is often true in Bill of Rights cases, courts have had to fashion a test to draw the lines between these two competing visions of the Establishment and Free Exercise clauses. Generally speaking, the use of public funds for religious purposes and the public display of religious life are generally acceptable as long as the primary motivation is not to advance a specific religion. A city that wishes to display a Christmas tree or nativity scene, for example , would be permitted to do so as part of a general holiday -themed cultural display that also included a menorah and Rudolph, while a public high school that wished to have a public prayer before a football game would be prohibited. Several evangelical Chri stian groups have campaigned hard to de -emphasize teaching evolution in public high schools, replacing it with an alternative theory called intelligent design , which states that the universe is so complex that it is impossible to be explained by random nat ure and, therefore, an intelligent entity designed it. In one high -profile trial involving a lawsuit against a school board for adopting intelligent design, a Republican -appointed federal judge found intelligent design to be a thin disguise for the teachin g of Bible -based creationism, a violation of the Establishment Clause. [3] On the other hand, the Supreme Court has found that the use of public funds to display the Ten Commandments on public lands such as parks is not automatically an Establishment Claus e violation, depending on the context in which the monument or statue was erected. [4] The First Amendment also protects the right to freedom of speech. While many nations believe in the right of citizens to think and speak freely, the United States is fai rly unique in enshrining those principles into constitutional law. As is true in most Bill of Rights cases, the cases that test the limits of the First Amendment tend to be ones that involve the most unpopular, even heinous, speech. For Saylor URL: http://www.saylor.org/books Saylor.org 164 example, after Worl d War II many European nations outlawed the Nazi Party along with any Nazi propaganda material, as well as neofascist ideology. As a result, many pro -Nazi and white supremacist Web sites, books, catalogs, and music are hosted in the United States, where th e First Amendment protects even hateful speech. Not all speech is protected by the First Amendment; the type of speech very much drives the level of protection afforded it under the First Amendment. Courts generally recognize political speech as speech mos t deserving of protection. Political dissent, displeasure with the government, forced loyalty oaths, restrictions on party membership, and even speech advocating the overthrow of government, all deserve extraordinary protection under the First Amendment. P olitical speech isn’t always written or uttered —it can sometimes take place through symbolic speech . The Supreme Court has held, for example, that burning the U.S. flag as a form of protest against U.S. government policy is symbolic speech, and therefore attempts to criminalize flag burning are unconstitutional restrictions on political speech. [5] On the other end of the spectrum is speech that deserves no protection under the First Amendment at all, such as speech that incites a panic (yelling “Fire” in a crowded theater when there is no fire, for example). Defamation is another type of speech that falls into this category, and both libel and slander are actionable torts. Obscene speech is also not subject to any protection under the First Amendment. Defi ning what is obscene has always vexed courts. The best test courts have developed is called the Miller test. [6] Under the Miller test, material is considered obscene if when applying contemporary community standards, the work, taken as a whole, appeals to a prurient interest in sex; portrays sexual conduct as specifically defined by applicable state law; and lacks serious literary, artistic, political, or scientific value. It’s important to keep in mind, however, that even obscene and defamatory speech is subject to the doctrine of prior restraint . Attempts to shut down the speech before it is uttered are considered unconstitutional. Hyperlink: Fleeting Expletives http://www.npr.org/templates/story/story.php?storyId=10741235 Saylor URL: http://www.saylor.org/books Saylor.org 165 Although the First Amendment generally prevents the U.S. government from engaging in censorship, an exception exists for broadcast radio and television. Unlike cable and satellite programming, w hich requires viewers and listeners to “opt in” with a paid subscription to access content, broadcast radio and television use the public airwaves to carry transmissions that are readily accessible for free by anyone with a television or a radio. In 1973, in a case involving comedian George Carlin’s “Dirty Words” monologue, the Supreme Court held that although the monologue wasn’t obscene, the government (through the Federal Communications Commission, or FCC) could nonetheless regulate indecent material whe n vulnerable listeners, such as children, may be listening. [7]Under this authority, the FCC enforces the “fleeting expletives” rule, which fines broadcasters for airing even momentary exclamations of profanity during live broadcasts. In 2010, after severa l rounds of litigation, the Second Circuit Court of Appeals held the FCC’s policy was unconstitutionally vague. One area of First Amendment law that remains unsettled is what rights corporations have to speak, also known as commercial speech . In the early part of the twentieth century, the Supreme Court found that corporations had virtually no protection under the First Amendment. This view gradually evolved as the role and influence of companies grew. Today, corporations engage not just in purely commercia l speech such as product advertising but also in matters of public policy, from globalization to human rights to environmental protection and global warming. In 2002 it looked like the Supreme Court would finally issue some guidance on this issue. [8] In C alifornia, Nike Inc. was under fire from labor activists for allegedly engaging in sweatshop conditions in its foreign factories, including hiring child labor. In response to these allegations, Nike issued a series of press releases and denials, the “speec h” in this case. Several activists filed lawsuits against Nike, claiming that these press releases and denials constituted false advertising by a company, which is against California law. Nike’s defense was that the press releases were more like political speech and were therefore protected by the First Amendment. Nike lost the argument in California state courts, and when the U.S. Supreme Court agreed to hear the case, the parties settled before the case could proceed any further. In early 2010, however, t he Supreme Court handed down another important decision on the rights of corporations to speak. [9] In striking down federal and twenty -two state restrictions on corporate Saylor URL: http://www.saylor.org/books Saylor.org 166 spending on political campaigns, the Supreme Court held that corporations are person s and therefore entitled to engage in political speech. Since corporations are unable to literally “speak,” they speak through spending money, and thus restrictions on how corporations may spend money during political campaigns are unconstitutional. The fo ur dissenting justices worried about the implications of this ruling. If corporations aren’t allowed to vote, then why should corporations be allowed to spend freely to drown out the voices of real voters, who have no hopes of matching corporate spending o n issue advertisements? Similarly, foreign persons have the same rights as U.S. citizens in making speeches on U.S. soil. If corporations are persons for purposes of speech, then it stands to reason that foreign corporations operating in the United States are entitled to the same protections and can also spend freely to influence U.S. elections. The implications of this ruling will likely be felt for many years to come. Not all protected speech is protected all the time in all places. The government is perm itted to place reasonable time, place, and manner restrictions on speech to maintain important governmental functions. These restrictions are generally upheld if they further an important or substantial governmental interest, they are unrelated to the supp ression of free expression (in other words, are content neutral), and any restriction on First Amendment freedoms is no greater than that necessary to further governmental interests (the restriction is not overbreadth ). Thus, for example, courts have uphel d restrictions on posting signs on city -owned utility poles and picketing or protest permit requirements. On the other hand, when Congress tried to make it illegal for commercial Web sites to allow minors to access “harmful” content on the Internet in the Child Online Protection Act (COPA), the Supreme Court held the Act unconstitutional because of the overbreadth doctrine. [10] The Court found there were less restrictive alternatives than the Act, such as blocking and filtering software, and therefore the burdens placed by COPA on the First Amendment, by sweeping both legal as well as illegal behavior, were too heavy to be constitutional. Figure 5.4 Joseph Frederick and Bong Hits 4 Jesus Saylor URL: http://www.saylor.org/books Saylor.org 167 Source: Photo courtesy of Clay Good / Zuma Press, http://en.wikipedia.org/wiki/File:Bh4j.jpg . Does this doctrine permit school officials to curb the free speech rights of high school students, who otherwise have rights outside of school hours? In 2002 an eighteen -year -old high school senior was suspended after he (with help from some friends) unfurled a banner during the Olympic torch relay through his town. The student, Joseph Frederick, was not in school that day and was standing across the street from the school when he unfurled the banner ( Figure 5.4 “Joseph Frederick and Bong Hits 4 Jesus” ). When asked later what the banner meant, Frederick replied that it was a nonsensical phrase he saw on a sticker while snowboarding. Frederick sued his high school principal for violating his First Amendment rights and won in the lower courts. On appeal, however, by a 5 –4 decision the Supreme Court held that the school, which has a zero -tolerance policy on drug use, could restrict a student’s prodrug message even in these circumstances. [11] Another important restriction on governmental authority actually appears twice in the Constitution. The due process clause appears in both the Fifth Amendment (“No person shall…be deprived of life, liberty or prop erty without due process of law”) and the Fourteenth Amendment (“Nor shall any State deprive any person of life, liberty, or property, without due process of law”). The Fifth Amendment applies to the federal government, and after the Civil War, the Fourtee nth Amendment made due process applicable to the states as well. At its core, due process means “fundamental fairness and decency.” The clause requires that all government action that involves the taking of life, Saylor URL: http://www.saylor.org/books Saylor.org 168 liberty, or property be done fairly and for fair reasons. Notice that the due process clause applies only to government action —it does not apply to the actions of private citizens or entities such as corporations or, for that matter, to actions of private universities and colleges. As interpreted b y the courts, the due process clause contains two components. The first is called procedural due process . Procedural due process requires that any government action that takes away life, liberty, or property must be made fairly and using fair procedures. I n criminal cases, this means that before a government can move to take away life, liberty, or property, the defendant is entitled to at least adequate notice, a hearing, and a neutral judge. For example, in 2009 the Supreme Court held that a state Supreme Court judge’s refusal to remove himself from a case involving a big campaign donor violated the procedural due process clause promise for a neutral judge. Hyperlink: The Biased Judge http://www.npr.org/templates/story/story.php?storyId=105143851 Hugh Caperton, a small coal mine operator in West Virginia, sued the giant Massey Coal Company, alleging that Massey used illegal tactics to force him out of business. A jury awarded Caperton more than fifty million dollars in damages. When Massey appealed the case to the West Virginia Supreme Court, he spent more than three million dollars on a campaign to defeat an incumbent judge and promote another judge, who then refused to excuse himself from the appeal and ended up casting the swing vote in a 3 –2 decision to overturn the fifty -million -dollar award. On appeal to the Supreme Court, the Court held that the judge’s actions violated procedural due process. The second component of the due process clause is substantive due process . Substantive due process focuses on the content of government legislation itself. Generally speaking, government regulation is just ified whenever the government can articulate a rational reason for the regulation. In certain categories, however, the government must articulate a compelling reason for the regulation. This is the case when the regulation affects a fundamental right, whic h is a right deeply rooted in American history and implicit in the concept of ordered liberty. The government must also set forth compelling Saylor URL: http://www.saylor.org/books Saylor.org 169 reasons for restricting the right to vote or the right to travel. Since substantive due process is a fairly amorpho us concept, it is often used as a general basis for any lawsuit challenging government procedures or laws that affect an individual’s or company’s civil liberties. Hyperlink: A Question of Ethics When Can a State Force Sterilization? http://www.usatoday.com/news/health/2009 -06 -23 -eugenics -carrie -buck_N.htm In the early 1920s, the state of Virginia experimented with a eugenics program in an attempt to improv e the human race by eliminating “defects” from the human gene pool. As part of this program, Virginia approved a law that would allow the forced sterilization of inmates in state institutions. Eighteen -year -old Carrie Buck became the first woman sterilized under this program. Buck, who had been raped by a nephew, was committed to the Virginia State Colony for Epileptics and Feeble -minded in Lynchburg, Virginia. Her birth mother was also committed, as was her daughter. When Buck challenged Virginia’s law at the Supreme Court, Justice Oliver Wendell Holmes overruled her due process objections, holding that “it is better for all the world, if instead of waiting to execute degenerate offspring for crime, or to let them starve for their imbecility, society can pr event those who are manifestly unfit from continuing their kind…Three generations of imbeciles are enough.” [12] Buck became the first of tens of thousands of Americans forced to undergo sterilization as part of a general belief in eugenics, a belief appar ently shared by members of the Supreme Court. Read the linked article to learn more about Carrie Buck, including the total lack of any evidence of mental defect when she was sterilized. Businesses have used the substantive due process clause to limit the a ward of punitive damages in tort cases. They argue that a startlingly high punitive damage award is a state -sanctioned deprivation of property, which means the due process clause is implicated. Furthermore, if the award is grossly excessive, then due process is violated. In 1996 the Supreme Court heard an appeal from German automobile manufacturer BMW arising from a case from Alabama. [13] The plaintiff argued that although he bought his car new, it had in fact suffered some paint damage while in transi t to the dealer, and the damage was not disclosed to him. When he found out about the prior damage, he Saylor URL: http://www.saylor.org/books Saylor.org 170 sued BMW, arguing that BMW’s policy (which is that if damage to new cars can be repaired for 3 percent of the car’s value or less, then the car can be re paired and sold as new) damaged the resale value of his car. It cost six hundred dollars to fix the actual damage to his car, and the jury awarded him four thousand dollars in compensatory damages for the lost resale value on his car. The jury then awarded him four million dollars in punitive damages, which the Alabama Supreme Court reduced to two million. The Supreme Court found the punitive damages award unconstitutional under the due process clause. In its holding, the Court said that there are three fac tors that determine if a punitive damage award is too high. First is the degree of reprehensibility of the defendant’s conduct. Second is the ratio between the compensatory and punitive damage award; generally, this ratio should be less than ten. Finally, courts should compare the punitive damage award with civil or criminal penalties awarded for similar misconduct. The Court reiterated its holding again in a case involving a $145 million punitive damage award against State Farm in a case where the compensa tory award was one million dollars. [14] Interestingly, Justices Scalia and Thomas, both conservative and generally seen as friendly to business interests, dissent from this view, finding that nothing in the due process clause prevents high punitive damage awards. The final constitutional protection we’ll consider here is the Equal Protection Clause of the Fourteenth Amendment. The clause states that “No state shall deny to any person within its jurisdiction the equal protection of the laws.” As discussed p reviously, this clause incorporates Constitutional protections against the states in addition to the federal government. Although drafted and adopted in response to resistance to efforts at integration of African Americans in the South after the Civil War, the promise of the Equal Protection Clause (enshrined at the Supreme Court building, Figure 5.5 “U.S. Supreme Court Building” ) continues to find application in all manner of American public life where discrimination is an issue. Figure 5.5 U.S. Supreme Court Building Saylor URL: http://www.saylor.org/books Saylor.org 171 Source: Photo courtesy of UpstateNYer, http://en.wikipedia.org/wiki/File:CourtEqualJustice.JPG . The Equal Protection Clause is implicated anytime a law limi ts the liberty of some people but not others. In other words, it operates to scrutinize government -sponsored discrimination. While the word “discrimination” has a negative connotation, in legal terms not all discrimination is illegal. A criminal law might discriminate against those who steal, for example, in favor of those who don’t steal. The Equal Protection Clause seeks to determine what forms of discrimination are permissible. To establish a guideline for courts to use in answering equal protection case s, the Supreme Court has established three standards of review when examining statutes that discriminate. The three standards are known as minimal scrutiny, intermediate scrutiny, and strict scrutiny. In the minimal scrutiny test, think of the courts turning on a twenty -watt lightbulb to look at the statute. There’s enough light to see the statute, but the light is so dim that the judges won’t examine the statute in great detail. Under this standard, government needs to put forth only a rational basis for the law —the law simply has to be reasonably related to some legitimate government interest. If the judge is satisfied that the law is based on some rational basis (keeping in mind that with the twenty -watt lightbulb, the inquiry isn’t very deep), then the law passes equal protection. Thus, a law that imprisons thieves easily passes minimal scrutiny, since there are many rational reasons to imprison thieves. As a matter of course, the vast majority of cases that are scrutinized under minimal Saylor URL: http://www.saylor.org/books Saylor.org 172 scrutiny eas ily pass review. Most laws fall into this category of scrutiny by default —courts apply heightened scrutiny only in special circumstances. Even under this low standard, however, governments must be able to articulate a rational basis for the law. For exampl e, in 1995 Colorado approved a state constitutional amendment that would have prevented any city, town, or county in Colorado from recognizing homosexuals as a protected class of citizens. The Supreme Court struck down the constitutional amendment, finding there was no rational basis for it and that it was in fact motivated by a “bare desire to harm a politically unpopular group.” [15] The intermediate scrutiny test is reserved for cases where the government discriminates on the basis of sex or gender. Under this test, the government has to prove that the law in question is substantially related to an important government interest. Think of the courts turning on a sixty -watt lightbulb in this test, because they’re expecting the government to provide more than just a rational justification for the law. Using this test, courts have invalidated gender restrictions on admissions to nursing school, laws that state only wives can receive alimony, and a higher minimum drinking age for men. In one important case, the Supreme Court held that the system for single -sex education at the Virginia Military Institute violated the Equal Protection Clause. [16] On the other hand, courts have been willing to tolerate gender discrimination in the male -only Selective Service (mili tary draft) system. The strict scrutiny test is used when the government discriminates against a suspect class. Under this test, the government has to prove that the law is justified by a compelling governmental interest, that the law is narrowly tailored to achieve that goal or interest, and that the law is the least restrictive means to achieve that interest. Here, the courts are turning on a one -hundred -watt lightbulb in examining the law, so they can examine the law in great detail to find justification . The standard is reserved for only a few classifications: laws that affect “fundamental rights” such as the rights in the Bill of Rights and any government discrimination that affects a “suspect classification” such as race or national origin. In practice , when courts find that strict scrutiny applies, a law is very often struck down as unconstitutional because it’s so hard for government to pass this standard of review. Certainly, most laws that discriminate on the basis of race are struck down on this ba sis. There are a few exceptions, however, where the Supreme Court has held that racial discrimination may be Saylor URL: http://www.saylor.org/books Saylor.org 173 permissible even under strict scrutiny. The first case rose in the height of World War II, when the federal government sought to intern Japanese Am ericans into camps on the basis that they may pose a national security risk. Fred Korematsu sued the federal government under the equal protection clause, arguing that as an American citizen the government was unfairly discriminating against him on the bas is of race, especially in light of the fact that Americans of Italian and German descent were not treated similarly. In a 6 –3 decision, the Supreme Court sided with the government. [17] Although that decision has never been overturned, the U.S. government officially apologized for the internment camps in the 1980s, paid many millions of dollars in reparations , and eventually awarded Fred Korematsu the Presidential Medal of Freedom. A second case involving the use of racial discrimination surrounds the issue of affirmative action in higher education. Many elite colleges and universities would have no problem filling their entire entering class with stellar academic students with high grade point averages and standardized testing scores. If they did this, howe ver, their classrooms would generally look quite similar, as these students tend to come from a largely white, upper -middle -class socioeconomic profile. In a belief that diversity adds value to the classroom learning experience, the University of Michigan added “points” to an applicant’s profile if the applicant was a student athlete, from a diverse racial background, or from a rural area in Michigan. When this practice was challenged, the Supreme Court found that this point system operated too much like a race quota, which has been illegal since the 1970s, and overturned the system. [18] In a challenge by a law school applicant denied admission, however, the Supreme Court upheld the law school’s system, which rather than assigning a mathematical formula, us ed a system where race was only a “potential plus factor” to be considered with many other factors. [19] After extensive briefing, including a record number of amicus briefs, the Court found that diversity in higher education is a compelling enough state i nterest that schools could consider race in deciding whether or not to admit students. The Court did caution, however, that schools should move toward race -neutral systems and that affirmative action should not last more than twenty -five more years. K E Y T A K E A W A Y S Saylor URL: http://www.saylor.org/books Saylor.org 174 The Bill of Rights provides key civil liberties to all Americans and persons on U.S. soil. These liberties are never absolute, subject to competing interests that courts must balance in making their decisions. These rights also vary from time to time and a re generally designed to protect the weakest in society rather than the strongest. Many, but not all, of the restrictions on government activity found in the Bill of Rights also apply to the states through incorporation. The First Amendment prohibits the g overnment from establishing religion and from restricting the free exercise thereof. The First Amendment also prohibits the government from restricting the freedom of speech. Political speech is protected to the fullest extent by the First Amendment, while obscene and defamatory speech is not protected at all but subject to the doctrine of prior restraint. Corporations have some free speech rights under the corporate speech doctrine. Generally speaking, states may impose reasonable time, place, and manner r estrictions on the delivery of speech. Procedural due process requires that the government use fair procedures anytime it seeks to deprive a citizen of life, liberty, or property. Substantive due process requires the government to articulate a rational bas is for passing laws or, when fundamental rights are involved, to articulate a compelling reason to do so. Substantive due process has been used by the Supreme Court to limit punitive damage amounts. Equal protection requires the government to justify discr imination. In cases of racial discrimination, courts apply strict scrutiny to the law. In cases involving sex or gender discrimination, the courts apply an intermediate level of scrutiny, and in all other cases, courts apply a minimal basis of scrutiny. E X E R C I S E S 1. Although the First Amendment prohibits the government from establishing religion, there is no prohibition on spending money to support religious life generally. For example, the White House Office of Faith -based and Neighborhood Partnerships prov ides funding to several religious organizations, including organizations that maintain discriminatory policies toward gays and lesbians and routinely engage in proselytizing activity. Do you believe that public money should be used to fund these groups? Wh y or why not? 2. In 2006 Ohio passed a law requiring all public schools that receive a donation of a plaque or poster with Ohio’s state motto, “In God We Trust,” to display the donation prominently in a school cafeteria or classroom. Do you believe this law i s a violation of the First Amendment? Why or why not? Saylor URL: http://www.saylor.org/books Saylor.org 175 3. During the 2004 Super Bowl halftime show, a performance by Janet Jackson and Justin Timberlake ended in a “wardrobe malfunction” when Janet Jackson’s breast was exposed for a split second. CBS was fined more than half a million dollars for this violation after a record number of complaints were filed with the FCC. Do you believe that the government’s action was fair? 4. In 1969 the Supreme Court ruled that school officials could not restrict students from w earing black armbands as a peace sign protesting the U.S. involvement in the Vietnam War, ruling that students do not shed their constitutional rights at the schoolhouse gates. [20] In 2007 the Supreme Court held that school officials could restrict studen ts from engaging in speech that might undermine the school’s zero -tolerance policy on drug use. What factors do you think might explain the Court’s decisions in these two cases? 5. Try to find out if the Supreme Court has ever overturned Buck v. Bell . Do you believe that an attempt by the state to force sterilization on mentally disabled women would survive a due process challenge today? If the government is permitted to force sterilization, does that mean that the government also has the power to force women to have children if it can articulate compelling enough reasons to do so? 6. Laws discriminating on the basis of age fall into the minimal basis scrutiny category. A state that wishes to raise the drinking age to twenty -five or the driving age to twenty, for example, needs to put forward only a rational basis for that law. Do you believe that age should fall into this category or into one of the other two categories for heightened review?? 7. Do you believe that public universities should be able to consider race as a factor in deciding whether or not to admit a student? If a university is unable to consider race, how else might it design an admissions program to achieve a diverse classroom? What would have been the impact if the Grutter case had been decided in f avor of the plaintiff? [1] District of Columbia v. Heller , 554 U.S. ___ (2008), http://www.law.cornell.edu/supct/html/07 – 290.ZS.html (accessed October 2, 2010). [2] McDonald v. Chicago , 561 U.S. ___ (2010), http://www.supremecourt.gov/opinions/09pdf/08 – 1521.pdf (accessed October 2, 2010). [3] Kitzmiller v. Dover Area School District , 400 F. Supp. 2d 707 (M.D. Pa. 2005). [4] Van Orden v. Perry , 545 U.S. 677 (2005). [5] Texas v. Johnson , 491 U.S. 397 (1989). Saylor URL: http://www.saylor.org/books Saylor.org 176 [6] Miller v. California , 413 U.S. 15 (1973). [7] F.C.C. v. Pacifica , 438 U.S. 726 (1978). [8] Nike v. Kasky , 539 U.S. 654 (2003). [9] Citizens United v. Federal Election Commission , 558 U.S. ___ (2010), http://www.fec.gov/ law/litigation/cu_sc08_opinion.pdf (accessed October 2, 2010). [10] ACLU v. Ashcroft , 535 U.S . 564 (2002). [11] Morse v. Frederick , 551 U.S. 393 (2007). [12] Buck v. Bell , 274 U.S. 200 (1927). [13] BMW of North America Inc. v. Gore , 517 U.S. 559 (1996). [14] State Farm Mut. Automobile Ins. Co. v. Campbell , 538 U.S. 408 (2003). [15] Romer v. Evans , 517 U.S. 620 (1996). [16] United States v. Virginia , 518 U.S. 515 (1996). [17] Korematsu v. United States , 323 U.S. 214 (1944). [18] Gratz v. Bollinger , 539 U.S. 244 (2003). [19] Grutter v. Bollinger , 539 U.S. 306 (2003). [20] Tinker v. Des Moines Indepen dent Community School District , 393 U.S. 503 (1969). Saylor URL: http://www.saylor.org/books Saylor.org 177 5.4 Concluding Thoughts For being such a short document, the Constitution can be complex to interpret. The needs of a varied and diverse nation, as well as corporate enterprises, all demand a constitutional framework that is rigid enough to provide strict checks against tyranny by the majority, while flexible enough to adapt to new changing societal values and mores, as well as rapidly changing business conditions. Understanding the framework o f government established by the Constitution, the powers of each branch of government, and the substantive rights afforded to individuals and companies is a critical part of being an informed citizen. As our nation faces a new century with both uncertain c urrents and a future brighter than the Founding Fathers could have envisioned, the Constitution will continue to provide bedrock principles to ensure the “blessings of liberty” to all. Saylor URL: http://www.saylor.org/books Saylor.org 178 Chapter 6 Contracts L E A R N I N G O B J E C T I V E S After reading this chapter, you should understand what a contract is, how a contract is formed, the types of law that govern contracts, the elements of common -law contract formation, and defenses to contracts. You will learn about performance and discharge, breach, and remedies. You will also understand important differences between common -law contracts and contracts between merchants under the Uniform Commercial Code (UCC). You will recognize commonly used clauses in contracts and their importance. You will also learn about assignme nt, delegation, and parol evidence. At the conclusion of this chapter, you should be able to answer the following questions: 1. What is a contract? 2. How is a contract formed? 3. When does common law govern contract formation, and when is the UCC relevant? 4. What ar e the defenses to performance of a contract? 5. What does it mean to breach a contract, and what are the consequences of breach? 6. What are remedies for breach of contract? 7. What common clauses can be used to accomplish certain goals, such as ensuring expediency, limiting liability, or restricting assignment? Clint Eastwood had a long -term relationship with Sondra Locke. Sadly, the relationship deteriorated and, allegedly, ended on unfriendly terms. The couple never married, but they shared a household for many years, and they worked on many professional projects together. When the relationship ended, Locke sued Eastwood for various causes of action. To settle the case, Eastwood proposed, among other things, that if Locke dropped the lawsuit against him, he would secure a development deal for Locke at Warner Bros. Inc. Locke was not only an actress; she was also a director. No doubt assuming that this deal would advance her professional interests and, at the same time, bring a long – standing personal dispu te to an end, Locke agreed. Locke entered into a settlement agreement with Eastwood, and as promised, she contemporaneously entered into an agreement with Warner Bros. Saylor URL: http://www.saylor.org/books Saylor.org 179 The agreement with Warner Bros. had two components. First, it required Locke to submit w ork that she was interested in developing, before she submitted it elsewhere. Warner Bros. was to accept or reject the work within thirty days. For this part of the contract, Locke would receive $250,000 per year for three years. Second, the contract was a $750,000 “pay or play” deal, which gave Warner Bros. a choice between using Locke’s services as a director and paying Locke a fee. Though Locke did not know this, Eastwood agreed to reimburse Warner Bros. for the cost of this contract if she did not have success in developing her projects or using her director services. Warner Bros. paid the $1.5 million contemplated under the contract, but it did not develop any of Locke’s thirty proposed projects, and it did not hire her to direct any films. Locke argued that the agreement had been a sham, because Warner Bros. had never intended to make films with her. She also argued that its only motivation for entering into the contract with her was to help Eastwood in settling her earlier claims against him. Locke sue d Warner Bros. for a number of claims, including a breach of the implied covenant of good faith and fair dealing, and fraud. She alleged that she was deprived of the benefit of the bargain and that Warner Bros. had no intention of honoring its agreement with her. Warner Bros. won at trial, and Locke appealed. The California Court of Appeals found that while the creative decisions of Warner Bros. were not appropriate for judicial review, acting in bad faith by refusing to consider the merits of Locke’s pro posals was a matter for the courts. The court also noted that even though the contractual sum of money was paid, that alone did not constitute performance under the contract. Part of the value of the contract for Locke was the opportunity to work on projec ts that would earn additional money and promote and enhance Locke’s career. Moreover, the appellate court found that if Warner Bros. never intended to work with Locke but had entered into the contract solely to accommodate Eastwood, then a lack of good fai th might be inferred. [1] What do you think about this case? After all, Locke was compensated the amount of money explicitly contemplated under the contract. Should it matter whether one party acts in good faith or not? We might say that this contract cont ains all necessary elements to be enforceable, and it looks on its face Saylor URL: http://www.saylor.org/books Saylor.org 180 as if it has been performed. However, a lack of good faith by one party could lead to damages. After the court’s decision, the parties settled for an undisclosed amount. Contracts are a fundamental part of doing business. A contract is a legally enforceable promise. As you know, breaking promises is a big deal. Ethical questions arise when promises are broken. For example, what if you promised to mow your elderly neighbor’s lawn because you wanted to help him, but then you never got around to doing it? Wouldn’t you feel guilty about watching his grass grow into tall weeds? When the promise is a legally enforceable promise, feeling guilty about breaking the promise is not the only fallout . When a legally enforceable promise is broken, the injured party can seek damages . In contracts, this usually means that the party who breaches the contract must pay the injured party an amount that would make that party whole again. Also, some people dis agree about whether breaching a legally enforceable promise —that is, a contract —carries any ethical implications. For instance, if a company decides that it is less expensive to pay damages than fulfill its promise by performing under a contract, it might make the decision to breach based on rational decision making. That is, since it will be less expensive to breach , it makes sense to breach. Others disagree with this approach, pointing out that reliance on promises is an important part of business that pr ovides necessary stability, regardless of whether keeping the promise makes economic sense or not. If you had a business, would you breach a contract to save money? Why or why not? Contracts are agreements between two or more parties. Generally speaking, c ontracts are a form of private law , because the terms of the contract are binding on those parties but not on everyone. The contract represents mutual assent to a bargained -for exchange between parties. Generally speaking, in the United States parties may e nter into contracts for whatever they wish and under any terms that they agree on. In other words, parties may assent to agreements even if those agreements represent bad bargains. However, there are certain external restrictions on our abilities Saylor URL: http://www.saylor.org/books Saylor.org 181 to form c ontracts. Additionally, certain internal (to the contract) restrictions may exist on our abilities to exercise rights or to engage in other contracts. Legal restrictions, external to the contract, limit our ability to bargain. For example, if you wanted to hire someone to work for your company, you could not contract with that person to work one – hundred -hour workweeks at twenty -five cents per hour. Even if you could find someone to work under those conditions and even if you both agreed to those terms of th e contract, our statutory and regulatory laws prohibit you from entering into a contract with those terms. Such wages would violate minimum wage laws. There may also be restrictions that are internal to the contract. Imagine that you entered into an employ ment contract with a company to work for $55,000 per year, plus benefits, and for a term of two years. You might be pretty happy about that. But what if, one month later, another company offered you the same position at its company, but for a salary of $65 ,000 per year, plus benefits. The better offer does not invalidate your first contract. In fact, in such a case, your first contract would probably contain a noncompete clause that would prohibit you from working in a similar capacity for a specified lengt h of time and geographic area. So even if you decided to breach your first contract to enter into the second, you would be prohibited from doing so under the noncompete clause. Key Takeaways Contracts are legally enforceable promises that, if breached, res ult in compensable damages. Contracts are a fundamental part of doing business, which require not only performance of the terms of the contract but also good faith in dealing. Parties may enter into a contract for any agreement with terms, providing the ag reement is legal. Also, restrictions on ability to contract may be external, such as those imposed by law, or they may be internal, such as those imposed by clauses like noncompete agreements. [1] Locke v. Warner Bros. Inc ., 57 Cal. App. 4th 354 (1997). Saylor URL: http://www.saylor.org/books Saylor.org 182 6.1 Formation L E A R N I N G O B J E C T I V E S 1. Find out when the Uniform Commercial Code (UCC) is the appropriate law to apply and when the common law is the appropriate law. 2. Learn the elements of common -law contracts. 3. Identify the difference between common -law cont racts and contracts between merchants. A contract is a legally enforceable promise. Therefore, it is important to know whether promises made are legally enforceable. You certainly have made many promises in your life. You have probably broken a few promise s, too. For example, if you promised your best friend that you would be best friends forever, but then your relationship changed, we might say that is a broken promise. However, you would not be held legally liable to pay damages for breaking that promise. On the other hand, if you promised your bank that you would make payments to it in exchange for the bank loaning money to you to purchase a car, and if you broke that promise by failing to pay as scheduled, then you have broken a legally enforceable promi se. The bank could seek damages from you to make itself whole again. What is the difference between these two promises? Why would you have to pay damages to the bank but not to your former best friend? More specifically, why is one considered a breach of c ontract and the other simply a broken promise? This section explores contract formation . We can examine the elements of formation to determine whether the contract is valid or whether it suffers some deficiency that renders it not legally enforceable. In the United States, two primary sources of law govern our contracts: the common law and the Uniform Commercial Code. The Uniform Commercial Code (UCC) article 2 governs contracts between a merchant and the sale of goods. Essentially, the UCC contains two se ts of rules for contracts. One set involves rules for everyone, and the other set involves rules for merchants. In this section, we will explore the UCC as it applies to merchants. Chiefly, we will examine how the UCC requirements differ from common law in contract formation Saylor URL: http://www.saylor.org/books Saylor.org 183 However, we will first address common -law contracts. Common law governs contracts for services as well as contracts not otherwise governed by the UCC. It is important to recognize the elements of common -law contract formation because th ey are more stringent than the requirements for formation between merchants under the UCC. If all elements of common -law contract formation do not exist, then the contract may be void or voidable . The elements of common -law contract formation include offer , acceptance , and consideration . Offer and acceptance together form mutual assent. Additionally, to be enforceable, the contract must be for a legal purpose and parties to the contract must have capacity to enter into the contract. An offer gives power of acceptance to another party, and it includes the agreement’s essential elements, which must be definite and certain. For example, if an offeror says to you, “I offer to sell you my scooter for four hundred dollars,” then that offer is valid. It contains th e price, the person to whom the offer is made, and the object of the offer (i.e., the scooter). It creates a power of acceptance in you, the offeree. Importantly, in common -law contracts, the acceptance must be a mirror image of the offer to constitute vali d acceptance. This means that the acceptance must be precisely the same as the offer. If the acceptance is not precisely the same, then it will fail to meet the requirements of an acceptance, and it will not constitute a valid element of formation in contr act. To accept the offer, the offeree could say something like this: “I agree to buy your scooter for four hundred dollars.” If a counteroffer is made, then that would not be acceptance, because the counteroffer would not be a mirror image of the offer its elf. So, for example, if the offeree said, “I agree to buy your scooter for three hundred dollars,” that would not be an acceptance. In fact, a counteroffer is a rejection of the offer. Once an offeree rejects an offer —either outright (e.g., by declining t o accept) or through counteroffer, the offeror is free to walk away from the failed negotiation. In this example, he no longer has to sell his scooter at all, not even if the offeree changes his mind and agrees to pay four hundred dollars. Likewise, if the offeror revokes an offer before the offeree accepts, then the power of acceptance has been withdrawn by that revocation . The offeror would no longer have to sell the item originally offered. If the offeror wished to limit the time that an offer was valid, he could do so by Saylor URL: http://www.saylor.org/books Saylor.org 184 limiting the time that the offer may be accepted. If the offer is not accepted during that time, then the offeror is not required to honor any acceptance that is made after expiration of the offer. What if you saw an advertisement for a scooter for sale at a local shop? Perhaps the advertisement looked like this: Do you think that this advertisement should create the power of acceptance in you, a potential customer? The fact is that an advertisement is not an offer. It is simply an invita tion to bargain . Advertisements are requests for people to make offers. This places the power of acceptance on the merchant, who is free to reject offers or to choose to whom he sells. Of course, certain statutory protections exist today to protect consume rs against unscrupulous merchants who might engage in unethical behavior, such as bait -and -switch or false advertising, or race -based denial of services or refusal to contract. Specifically, consumer protection statutes and civil rights statutes, respectiv ely, would protect consumers in such circumstances. If an offer is valid, then the acceptance must be a mirror image, as mentioned previously. A bilateral contract is a contract in which both parties make a promise. The previous example is an example of a bilateral contract. The following is a promise for a promise: The offeror says, “I offer to sell you my scooter for four hundred dollars.” The offeree replies, “I agree to buy your scooter for four hundred dollars.” Specifically, it is a promise to sell the scooter in exchange for a promise to buy the scooter for four hundred dollars. Since this is a promise for a promise, then this is a bilateral contract. A unilateral contract is one in which the accepting party may only accept through an action. Here i s an example: The offeror says, “I will sell this scooter to the first person who puts four hundred dollars cash in my hands.” The offeree says nothing but places four hundred dollars cash into the offeror’s hands. Saylor URL: http://www.saylor.org/books Saylor.org 185 This is a promise for an action. Specific ally, it is a promise to sell the scooter in exchange for the action of placing four hundred dollars cash into the offeror’s hands. Common -law contracts can be either bilateral or unilateral. Additionally, all common -law contracts must contain valid consid eration. This means that there must be a bargained -for exchange of acts or promises, and both parties must incur new legal detriment or obligations as a result of the contract. Imagine that you have accepted a new position with a company. You have a valid employment contract that you’ve successfully negotiated prior to beginning work. All terms of the contract are valid, and both parties are bound to the contract. Basically, this means that you have agreed to work for a specified period of time, and your em ployer has agreed to compensate you with a specified salary and benefits in exchange for your work. So far, so good, right? Now, imagine that during your first week, your boss appears in your office and asks you to sign a new contract that, in essence, is a noncompete agreement . This means that your employer now wants you to sign a new contract agreeing not to compete with the company if you decide to terminate your employment arrangement. The employer wants you to make this promise, but the employer does n ot offer anything additional in return. For the purposes of this example, let’s say that you sign the new agreement. Is this new agreement valid and binding on you? Probably not. Why? Because the company has not suffered any new legal detriment or obligati on as a result of the contract. You have agreed to refrain from competing with the company if you leave, but the company itself has not given you anything in return for your promise. To make this contract binding against you, your employer should have prov ided consideration. For example, it could have asked you to sign the noncompete agreement in consideration of an additional one thousand dollars of salary per year. Then, the contract would have consideration and it would have a much greater chance of bein g found to be valid. Better yet, the company should have negotiated the noncompete agreement along with your original contract before you assumed your new position. Let’s continue our example of an offeror who offers to sell his scooter for four hundred do llars. He says, “I offer to sell you my scooter for four hundred dollars.” If you reply, “I agree to buy your Saylor URL: http://www.saylor.org/books Saylor.org 186 scooter for four hundred dollars, if I don’t find one that I like more,” then that does not constitute valid consideration. This is because you ha ve placed a condition on the consideration. In essence, you have made what appears to be a promise to do something, but instead of being a promise, it is only an illusion of a promise. This is called an illusory promise , and it does not constitute valid co nsideration. There is no legal detriment to you here, because you might find a scooter that you like more than the one offered by the offeror. You have a way out. A legal detriment is a detriment (or burden or obligation) that is legally enforceable. You c annot “get out” of the promise without suffering legal detriment. The other party must be able to rely on the promise for it to constitute valid consideration. The thing bargained for can be an act or a promise (either to do something or to refrain from do ing something.) Additionally, for a contract to be valid, the subject matter of the contract must be for a legal purpose. If a distributor of illegal drugs hires a pilot to fly his illegal cargo to a particular place in exchange for payment, this is a cont ract for an illegal subject matter. If the drug dealer fails to honor his agreement to pay, or if the pilot fails to honor his agreement to transport the cargo, neither aggrieved party will find a remedy in our courts, even if the elements of contract are all present and perfectly formed. Moreover, the parties to contract must have capacity to enter into the contract for its terms to be enforceable against them. Adults of sound mind have capacity. Minors lack legal capacity, but they may enter into contract s that they may cancel at their sole option. In other words, a minor who enters into a contract with a party who has capacity may void the contract, but the other party may not. This means that any contract with a minor is voidable by the minor under the infancy doctrine . Let’s compare common -law contract formation with UCC contract formation. Recall that common law governs contracts for services and contracts not governed by the UCC. Article 2 of the UCC governs the sale of goods , which is defined by §2 -10 5 and includes things that are moveable, but not money or securities. It does not include land or houses. Contracts between merchants are also governed by article 2 of the UCC. Generally speaking, §2 -104 defines a merchant as a person who deals in goods or holds himself out as having special knowledge or skill regarding the practices or Saylor URL: http://www.saylor.org/books Saylor.org 187 goods that are the subject of the transaction. Since contracts law is a state law issue, each state can have different laws related to contracts. The UCC seeks to provide un iformity to contracts law among the different states. However, like other uniform laws, the UCC does not become a law until state legislatures adopt it as law. All fifty states have adopted some version of the UCC. As you can imagine, contracts between merchants do not always contain offers that include definite terms, and acceptances are not always mirror images. Merchants typically place a purchase order when they wish to purchase materials, and the seller often sends an invoice with the order when it ships. Merchants frequently use boilerplate language in their individual purchase orders and invoices. Obviously, not every merchant’s contract will contain the same language as those of other merchants. This can lead to discrepancies between terms that wo uld be fatal in common -law contract formation, otherwise known as battle of the forms . However, the UCC provides more flexibility in contract formation than exists in common -law contracts, thereby accommodating the reality of business practices. The requir ements for common -law contract formation would be too burdensome for merchants. Can you imagine if every merchant had to issue offers with definite terms and receive mirror image acceptances for every item that it sold or purchased to have valid, enforceab le contracts? Such a burden might cause commerce to come to a screeching halt. Or it might lead to many contracts disputes. The UCC also embodies some elements of the Statute of Frauds . The Statute of Frauds requires certain types of contracts to be in wri ting to be enforceable. Specifically, it requires contracts to be in writing for goods priced at five hundred dollars or more and signed by the defendant, for those contracts to be enforceable. Other important types of contracts relevant to business that must be in writing and signed by the defendant to be enforceable include contracts for any interest in land, promises to pay the debts of another, and contracts that cannot be performed within one year. The types of contracts that are contemplated by the S tatute of Frauds but are not captured by the UCC are often embodied in state statutes. The peculiar name —the Statute of Frauds —is derived from its early incarnation in seventeenth -century England, when a statute was passed by parliament to reduce or preven t fraud in property transactions and other important civil matters. Saylor URL: http://www.saylor.org/books Saylor.org 188 Of primary concern to students of business are the differences between common -law contracts and the UCC. When analyzing a contracts issue, identification of the type of law that governs th e contract should be addressed first. This is because you cannot know which rule applies unless you know which type of law is applicable. The primary differences between common -law contracts and the UCC are in the UCC’s relaxation of various common -law con tract formation requirements. See Table 6.1 “Differences between Contract Formations by Type of Law” for a comparison between common -law and UCC contract formation requirements. When a battle of the forms ensues between merchants, for example, the conflict ing terms are not fatal to the contract. This is a major departure from the mirror image rule required by common -law contracts. For the UCC, the primary issue is whether the parties intended to enter into a binding agreement. New or additional terms includ ed in an offer will become part of the contract on acceptance. Terms that conflict with each other will “fall out” of the contract and be replaced by UCC gap fillers , which can create the terms of the contract. Likewise, terms that are left open will be filled in. Gap fillers are terms provided by the UCC, and they can be inserted into a contract when those terms are not definite. While prices, delivery dates, warranties, and other terms can be “filled in” by the UCC gap fillers, quantity cannot. Quantity, therefore, is an essential term that must be specified in the contract for it to be binding. Table 6.1 Differences between Contract Formations by Type of Law UCC Common Law Any manner that shows agreement to contract (e.g., words, actions, writing) Mirror image acceptance required Quantity term required; other terms may be filled in with gap fillers Essential terms must be definite Contracts between merchants; contracts for sale of goods priced at $500 or more Contracts for services and for interest in real property K E Y T A K E A W A Y S A contract is a legally enforceable promise. Common law and the UCC are different sources of contract law. Common law is the appropriate type of law for service contracts and contracts that do not fall under Saylor URL: http://www.saylor.org/books Saylor.org 189 the UCC, like real estate contracts. The UCC governs contracts involving the sale of goods with a price of five hundred dollars or more and in contracts between merchants. Common -law contract formation requires a valid offer, acceptance, and consideration. The parties must have capacity, and the subject matter must be a legal purpose. The UCC relaxes formation requirements by allowing the use of gap fillers for undefined or conflicting terms and by allowing a contract to be formed by any manner that shows agreement to contra ct. Quantity is a required term for contracts governed by the UCC. E X E R C I S E S 1. If a contract was not entered in good faith, do you think that fact alone should matter? Consider Locke v. Warner Bros. Inc. , which was discussed in the introduction to this chapter. All essential elements of the contract appear to have existed, and the parties performed as required by the wording of the contract. How can lack of good faith be shown? 2. Has anyone ever broken a promise to you? Were those promises legally enforcea ble promises? Why or why not? Be sure to analyze the agreement by checking to see if all elements of contract formation were present. Remember to first determine whether the promise was one governed by the UCC or by common law. 3. What are the dangers inheren t to making a counteroffer? Imagine that you really wanted to sell your house. You receive an attractive offer, but you wondered whether you might be able to sell the house for a little more money. What types of things should you think about before submitt ing a counteroffer? Saylor URL: http://www.saylor.org/books Saylor.org 190 6.2 Performance and Discharge, Breach, Defenses, Equitable Remedies L E A R N I N G O B J E C T I V E S 1. Learn what constitutes performance. 2. Understand what it means to discharge obligations in a contract. 3. Explore different standards of performance. 4. Examine breach. 5. Explore defenses to breach. 6. Learn about equitable remedies. A contract is an enforceable promise. When the promise is fulfilled, then the contract terms have been satisfied. This means that the parties are discharged from the contract, beca use they have already fulfilled their legal duties under it. That is, they have satisfactorily performed their obligations under the contract. Performance simply means undertaking the legal duties imposed on us by the terms of the contract. This is certain ly what parties hope for when they enter into a contract —the successful execution of the terms of the contract and subsequent discharge from it. But how do we know whether the contract terms have been performed? Sometimes it’s easy to determine. For instan ce, if I offer to sell you my scooter for four hundred dollars, you agree to buy my scooter for four hundred dollars, and we exchange those items, then we have fulfilled our obligations under the terms of the contract. We formed a contract, we fully perfor med our obligations under it (known as complete performance ), and we are subsequently discharged from further duties arising under that contract. In other cases, whether a party has performed can be trickier to determine. For example, imagine that you hire a builder to construct a new home for you. You specify all dimensions of the home, as well as your chosen building materials. Certainly this would be a very detailed contract. Imagine that all essential elements have been determined and that the contract is valid. In short, the builder agrees to build your specified home, and you agree to pay the builder the agreed on price. Imagine that everything goes according to plan. When your home has been constructed, you visit it for the Saylor URL: http://www.saylor.org/books Saylor.org 191 first time. To your dismay, you see that the foyer has been tiled in red ceramic, even though you clearly specified —and the contract clearly reflected —that the foyer should be tiled in blue ceramic. However, on your further inspection, every other item specified in the contract has been completely performed. Would we say that the builder has performed his duties under this contract? The item at issue is the problem with the foyer tile. Does this error rise to breach? More importantly, does this excuse your obligations under the contr act to pay the builder for his work? When a party fails to perform under the terms of the contract without a legally justifiable reason, the party is said to be in breach of the contract. However, in a service contract —such as a service to build a house —the standard of performance is substantial performance . This means that the performing party acted in good faith and conveyed enough benefit of the contract to the other party so that the other party can use the benefit for its intended purpose, and the defe cts arising under the contract may be remedied by money damages. A material breach in a service contract is when a party has not substantially performed under the terms of the contract. A minor breach is when the party has substantially performed but has n ot strictly performed. In our example, installation of the red tile in the foyer would not rise to material breach, because presumably the builder acted in good faith, he produced a house that is capable of being used for its intended purpose, and the defects (the red tile) can be remedied through monetary damages. They simply need to be replaced by blue tiles. This was a minor breach. If this were your contract, you would have to pay the builder as required under the contract, less the cost of replacin g the tile. Consider the firing of Texas Tech’s head football coach, Mike Leach, in Note 6.47 “Hyperlink: Coach Mike Leach” to practice your analytical skills. Try to identify what additional information you would need to determine whether substantial perf ormance exists, or whether the contract has been materially breached. Sometimes, substantial performance is not adequate. Adherence to a strict performance standard requires express terms in the contract to that effect and circumstances where such a high s tandard is reasonable. In our scooter example, if you tried to give the offeror three hundred dollars in cash and one hundred dollars in postage stamps, then that would most likely not satisfy the terms of the Saylor URL: http://www.saylor.org/books Saylor.org 192 contract. You might recall that the contract w as a bargain for a scooter in exchange for four hundred dollars. Here, strict performance makes sense and is reasonable. Performance to the standard of personal satisfaction can be enforced if the contract expressly requires it. This means that the perform ance under the contract is scrutinized subjectively, either by one party to the contract or by a third -party beneficiary specified in the contract. If the subject of the contract is something for which approval is dependent on someone’s subjective opinion, like personal taste, then assessment can be made on a subjective standard providing this standard is clearly specified in the contract. For example, if you owned a piano bar, and you wished to hire a truly inspired pianist for entertainment, you might ent er into a contract with a pianist subject to a personal satisfaction standard. Even if that person could tickle the ivory flawlessly, you might decide that his or her music is technically accurate but not truly inspired. Providing that your contract with t he pianist allows for personal satisfaction to be the standard of performance, you may terminate that contract based on his or her failure to meet the personal satisfaction standard. This standard is unlike the substantial performance standard, which requi res an objective assessment based on the reasonable person standard . Referring again to Note 6.47 “Hyperlink: Coach Mike Leach” , which standard appears to be controlling Texas Tech’s decision to terminate Coach Leach’s contract — personal satisfaction or sub stantial performance? Which standard is appropriate for a contract for coaching services? Hyperlink: Coach Mike Leach Head football coach Mike Leach of Texas Tech was fired for breach of contract. He had recently signed a $12.7 million contract for five years, and he had been named by the Associated Press as the Big XII Coach of the Year in 2008. However, that didn’t stop Texas Tech from firing him, citing breach of performance as the reason for the termination. Under the terms of his contract, he was to “assure the fair and responsible treatment of student -athletes in relation to their health, welfare, and discipline.” Allegedly, Coach Leach forced a student athlete to stand in a shed after the athlete was diagnosed with a mild concussion. Leach’s support ers argue that the “shed” was a comfortable garage -like room with a cooler and a fan and that Coach Leach was simply having the player stand inside, out of the sun, in accordance with medical orders. Others argue that this was a sadistic punishment that wa s inappropriately levied Saylor URL: http://www.saylor.org/books Saylor.org 193 against an injured player. Was Leach being cruel, or was he being protective of his charge in accordance with his contract terms? Underlying this controversy are allegations that the firing occurred because Leach interviewed with another university unbeknownst to Texas Tech and because he has a colorful personality that might offend some people. For instance, he allegedly blamed his players’ “fat little girlfriends” for distracting them to their defeat against Texas A&M. Coach Leach was fired just before receiving an alleged $800,000 contractual bonus. Check out the story here: http://www.cnn.com/2009/US/12/31/texas.tech.leach/inde x.html?iref=allsearch Check out the video of the story here: http://sports.espn.go.com/ncf/bowls09/news/story?id=4781981 Watch Coach Leach here: http://sports.espn.go.com/ncf/bowls09/news/story?id=4781981 Watch speculation about Coach Leach’s likelihood of being hired here: http://sports.espn.go.com/ncf/bowls09/news/story?id=4781981 See the exercises in this section for related questions and discussion. As mentioned previously, when the promises in a contract have been fulfilled based on the appropriate standard —substantial performance, strict performance, or personal satisfaction —then the parties are discharged. However, when a material breach occurs, the injured party may bring a claim for damages. But that isn’t necessarily th e end of the story. The breaching party may have a valid reason for breaching the contract. These valid reasons are known as defenses to contract. These defenses include formation problems, lack of capacity, illegality of subject matter, impossibility, Saylor URL: http://www.saylor.org/books Saylor.org 194 dur ess, unconscionability, undue influence, violation of the Statute of Frauds requirement that certain types of contracts must be in writing to be enforceable against the defendant, exceeding the statute of limitations, mistake, misrepresentation, fraud, com mercial impracticability, and frustration of purpose. Bankruptcy discharge is a permanent legal excuse from performance, and it will discharge obligations that are dischargeable by law if the debtor successful fulfills his obligations under the bankruptcy. Obligations that are not dischargeable by law will not be permanently discharged by a bankruptcy. However, during the bankruptcy, the performance of contract terms requiring payment of debt incurred prior to filing the bankruptcy petition is suspended by the court until the bankruptcy is terminated either by successful completion of the bankruptcy or by dismissal of the case. Formation problems in common -law contracts relate to whether the offer, acceptance, and consideration were valid. For example, if th e offer did not contain the essential terms in definite and certain form, then that offer will not be valid. If I offered to sell you my house for a fair price, it would not be a sufficient offer because the price term is an essential element, and in this offer it is vague. To say that a house will be sold “for a fair price” is not specific. Likewise, in a common -law contract, if the acceptance is not a mirror image of the offer, then the acceptance will not be valid. Similarly, if consideration does not fi rmly commit the parties to the deal, then consideration will fail, as is the case with an illusory promise. For example, if I offered to sell you my house for $150,000, and you agreed to buy it “if you like it,” then that is not a firm commitment. Consider ation will fail, and the contract has not formed. As a practical matter, how can this defense be used? The defendant simply needs to show that the contract was never formed in the first place, due to one or more deficiencies in formation. Keep in mind, how ever, that if the Uniform Commercial Code (UCC) is the relevant type of law, formation is much simpler than in common law. For example, all essential elements do not need to be stated in definite and certain terms (but quantity must be stated), and accepta nce does not need to be a mirror image of the offer. Accordingly, in contracts in which the UCC is the relevant type of law, this defense can be more challenging to successfully mount. Sometimes when all elements of the contract are not present, the court will enforce the promise through an equitable remedy to avoid a perceived injustice that would occur if the contract failed Saylor URL: http://www.saylor.org/books Saylor.org 195 based on a formation defect. Quasi -contract and promissory estoppel are two types of equitable remedies that a court may impose. Whe n detrimental reliance is found, an equitable remedy can substitute for consideration. This allows the court to enforce the terms of the “contract,” even though, technically speaking, there was no contract to begin with. Quasi -contract is determined when o ne party will receive a benefit from the other unjustly (unjust enrichment ), and the party who tendered the benefit reasonably expected to be paid for it. The party who received the benefit knew that the other party reasonably expected to be paid. For exam ple, imagine that your neighbor hired painters to paint his house, but the painters accidentally appeared at your house to work. Instead of sending them away, you decided to let them paint your house, but you did not tell them that they were at the wrong h ouse. At the end of the job, they demanded payment. You point out that they never had a contract with you. While this would be true in fact, the issue is that you would be unjustly enriched by their painting of your house if you were not made to pay. Addit ionally, you knew that the painters would reasonably expect to be paid for their services, and you did nothing to stop them. This would be a good case for a court to impose the equitable remedy of quasi -contract. The damages awarded in such case are called quantum meruit , which means “as much as is deserved.” The painters will receive the value of their services in damages. Compare this situation with one in which you were on vacation when the painters painted your house. You knew nothing of their presence. In such a case, quasi -contract would not be imposed as an equitable remedy because you were not aware of their presence. In fact, you would have a potential claim against the painters for interfering with your property and entering your land without your permission. Promissory estoppel is another equitable remedy. It is imposed on parties when one party detrimentally relied on another’s promise, and to avoid injustice, the enforcement of the promise is required. Like quasi -contract, when promissory estoppe l is used, there is some formation problem with the contract so, technically speaking, no contract exists. The remaining defenses discussed in this chapter are relevant if the contract is valid. That is, there are no formation problems. For example, if a p arty lacks capacity to enter into a binding contract, that can be used as a defense. When people lack the mental ability to understand, they lack capacity. Sometimes, it may seem that someone understands, even though he or she might actually lack legal Saylor URL: http://www.saylor.org/books Saylor.org 196 cap acity. This is the case with minors. Though some may certainly understand the terms of a contract, they lack the legal capacity to be bound to it. That means that they can disaffirm the contract if they wish. Likewise, someone who suffers from a temporary or permanent cognitive defect lacks capacity to be bound to a contract. This may be the case with an infant, a person who suffers from dementia, or a person who has other profound cognitive or mental impairment. Use of alcohol or drugs may impair capacity, but the courts are reluctant to find this as a convincing defense, particularly if the person voluntarily imbibed in the alcohol or drug use themselves. If they were involuntarily drugged, however, then lack of capacity can be a good defense. If someone d oes not read or speak the language in which the contract is written, that can also indicate a lack of capacity. If the subject matter of a contract or the terms of the contract are illegal, then the contract may be void at the outset, or it may become void if the subject matter or the terms of the contract become illegal after the contract is formed. The former case can be illustrated by imagining a contract for the production of illegal drugs. A defense to performance is that the contract itself concerns a n illegal subject matter. A court will not step in to such a contract to enforce its promises. The latter case of illegality of the terms of the contract is an example of impossibility as a defense. Impossibility is a defense that can be used when performi ng the contract has become truly impossible. For example, if you entered into a contract to do business in a country that was subsequently placed on a no -trade list by the federal government, then you would be excused from performing your obligations under that contract, because it would violate federal law for you to perform as promised. It would be impossible, and impossibility would be a valid defense. Sometimes impossibility does not involve the legality of the subject matter or the terms of the contrac t. Instead, it might simply be a matter of the destruction of the subject matter of the contract. In our scooter example, imagine that before the transaction was completed, the scooter was crushed by the trash collector by accident. The subject matter of t he contract was destroyed, and so it would be impossible for the offeror to perform. The offeror would not need to find another scooter to sell to fulfill the obligations under the contract. Instead, he or she would use the defense of impossibility. Saylor URL: http://www.saylor.org/books Saylor.org 197 Anothe r defense to contract performance is duress. If a party suffers from duress when entering the contract, that party will have a valid defense. Duress means that the party had no other reasonable alternative but to enter into the contract. The party was coer ced into entering into the agreement. For example, imagine that you entered into a contract for automobile insurance. Part of your insurance contract requires your insurance company to defend you in the event of a lawsuit arising from a traffic accident. I magine that you are involved in a traffic accident and your insurance company refuses to defend you. This is bad news, because you will still need to mount a defense. You will probably expend a great deal of money defending yourself, not to mention trying to launch a complaint against your insurance company for breach of contract. After spending all of your savings and borrowing just to pay your bills, imagine that your insurance company comes to you with an offer to pay you fifty thousand dollars if you si gn a waiver that it has no liability to you. You will probably sign that waiver and take the money. Why? Because you have no reasonable alternative. This is an example of economic duress , and it is likely that no court would enforce the waiver for the benefit of the insurance company given such facts. The insurance company forced you into signing an agreement with it that you would not have signed if you had any other reasonable alternative. Unconscionability is a defense used when the contract contains markedly unfair terms against the party with less bargaining power or sophistication than the party who created the terms and induced the other party to sign it. For example, imagine a biotech company discovering a cure for cancer from a plant growing on the private lands of an indigenous people. Imagine that the indigenous people did not understand the importance of the discovery, and they did not understand the value of it. If the biotech company offered to pay for the absolute and complete rights to the plant with ten dollars and a bag of flour, that contract might be said to be unconscionable. Undue influence is a defense that can be used when one party ceases to be able to exercise his or her free will due to the superior power and influence exerted ov er that party by the other. For example, imagine an elderly person who is completely isolated from social contact due to poor health and remote living conditions. That person might be quite lonely and eager for company. Say that an unscrupulous person ente red that elderly person’s life and exerted influence over that person so that the elderly person really could not exercise his free will any longer. If, consequently, the elderly Saylor URL: http://www.saylor.org/books Saylor.org 198 person entered into a contract with the other party to transfer all of his we alth to that person, we might say that this is a case of undue influence. How might this happen? Maybe the unscrupulous intruder is the only human contact that the elderly person has, and maybe he or she led the wealthy elderly person to believe that the o nly way to salvation is by handing over his assets. Remember, too, that the Statute of Frauds requires certain contracts to be in writing and signed by the defendant to be enforceable against the defendant. If those types of contracts are not in writing, that can be used as a defense to performance. Contracts for any interest in land, in consideration of marriage, and to pay the debts of another that cannot be performed within one year and contracts for the sale of goods with a price of five hundred dollars or more are all examples of contracts that are required to be in writing to be enforceable according to the Statute of Frauds. If a contract exists for these items, but the contract is not in writing, it may be performed. However, if there is a dispute arising under the contract, it will not be enforced because it violates the Statute of Frauds requirement for a writing. The statute of limitations is an affirmative defense that can be raised by a defendant to argue that the complaint is being brought too late, by law, to do anything about it. This means that if a dispute arises under a contract, then the plaintiff must bring a complaint concerning that dispute within a certain time period. Every state has different statutes of limitations for different typ es of disputes. Contracts statutes of limitations range from three to ten years, depending on whether the contract was oral or written, and depending on the jurisdiction. Mistake is rarely a successful defense to contract, but it is a defense nonetheless. Mistake does not mean bad bargaining. After all, we have the freedom to bargain badly, and the courts will not step in to save us if we do so. For instance, if you agree to buy a house for $170,000, but the house is only worth $150,000, you may have bargai ned badly, particularly if the seller did not deceive you in any way. The court will not step in to rewrite the contract or allow you to use mistake as a defense to excuse your performance. Indeed, the court will enforce the terms of the contract if it is a valid contract. Mistake refers to something that is truly a mistake either by one party or by both. If the Saylor URL: http://www.saylor.org/books Saylor.org 199 parties to a contract truly make a mistake with respect to essential terms of the contract, then that can be used as a defense to performance. Misr epresentation and fraud are also defenses to contract. Misrepresentation is when a party makes a false statement that induces the other party to enter into the contract. Fraud is a closely related concept, and it simply means that one party has used decept ion to acquire money or property. Often, unscrupulous salespeople will commit fraud or misrepresent the subject matter of the contract in such a way that the other party will enter into the contract. However, fraud and misrepresentation both may be used as successful defenses in such circumstances. Commercial impracticability is a defense that can be used when fulfilling a contract has become extraordinarily difficult or unfair for one party. Frustration of purpose is when the contract has become essentiall y worthless to one party, though the event giving rise to that state was nonexistent or unknown to both parties to the contract at formation. Finally, sometimes a party to a contract files for bankruptcy protection. When that party is required to pay a deb t that was incurred before the bankruptcy was filed, that duty is suspended temporarily or permanently when the bankruptcy is filed through the court’s automatic stay . In other words, the debt does not have to be paid during the course of the bankruptcy. A t the conclusion of the bankruptcy, if the debtor is successful in bankruptcy and if the contract obligation is a dischargeable debt, then the debt will never have to be paid. The debt is, in fact, discharged. Bankruptcy is a defense to performance of cont ract for debtors who file for bankruptcy protection. Remedies for breach of contract are typically monetary damages. Expectation damages, including compensatory and consequential damages, can be recovered. However, consequential damages may not be speculat ive. Indeed, they must be foreseeable to both parties at the time of the contract formation to constitute damages by breach. Specific performance might be required under certain types of contracts, such as in contracts for land. For example, in contracts f or real property, the assumption is that land is unique. Therefore, monetary damages are not adequate, because Saylor URL: http://www.saylor.org/books Saylor.org 200 “replacement” land cannot be found that would be like the land that is the subject of the contract. Importantly, specific performance is not an a ppropriate remedy for service contracts, given the prohibition against involuntary servitude in the Thirteenth Amendment to the U.S. Constitution. Finally, it is important to note that on breach, the injured party has a duty to mitigate his damages. This m eans that he must avoid damages by making reasonable efforts to do so. If a tenant breaches a contract by moving out of his apartment before the lease is over, the landlord will be able to recover damages from that tenant for breaking the lease (i.e., brea ching the contract). However, the landlord also has a duty to mitigate those damages by trying to find another tenant. K E Y T A K E A W A Y S A contract is an enforceable promise. Parties to the contract must perform according to the relevant standard —substantial p erformance for most service contracts, personal satisfaction, complete performance, or strict performance. Once parties have performed, they are discharged from further obligations under the contract. Failure to perform according to the requisite standard is a breach, which is a compensable injury. A breach may be minor or major. Several defenses exist to breach of contract. E X E R C I S E S 1. Referring to Note 6.47 “Hyperlink: Coach Mike Leach” , what additional information would you need to determine whether Coach Leach’s services fell below substantial performance and were a material breach or whether he substantially performed his contract so that he did not materially breach it? Should coaching services be evaluated based on substantial performance or personal s atisfaction? Why? 2. In international business, it is very common for parties to contract not to read or speak the same language. If someone sought to enter into a contract with you, but that party could not read the language in which your contract was writte n, should you enter into that contract with that person? How can this problem be overcome so that both parties can form a legally binding contract with each other? Saylor URL: http://www.saylor.org/books Saylor.org 201 6.3 Assignment, Delegation, and Commonly Used Contracts Clauses L E A R N I N G O B J E C T I V E S 1. Learn about assignment and delegation. 2. Examine novation. 3. Explore restrictions on assignment, exculpatory clauses, noncompete clauses, mandatory arbitration clauses, acceleration clauses, and liquidated damages clauses. 4. Explore the parol evidence rule. What if y ou formed a contract with a rock ’n’ roll band for its services? Specifically, you wanted the band to play at your nightclub, because you thought that your customers would enjoy the band enough to pay to see it perform. You hired this specific band because you heard that it drew large crowds of paying customers. Imagine your surprise when, as you anticipate the band’s performance, you discover that another band —one you have never heard of —has come to play instead of the original contracting band. On inquiry , you learn that the original band transferred its duties to perform to a lesser known band. Can it do that? Contract elements —the terms of the contract —are important. They may, among other things, foreclose your ability to bring a complaint in court, they may render you unable to be hired in your profession (at least within certain boundaries), or they may limit liability to a party that had a role in causing injury to you. If you are not aware of these elements, then you may face an unpleasant surprise if you act in a way contrary to the restrictions imposed by those terms. Likewise, contracts possess certain qu alities that prohibit parties from acting in certain ways, unless those qualities are expressly waived. This section identifies common properties of contracts, as well as commonly used elements of contracts. If you are negotiating a contract and you do not like a term, then you should not agree to it. In law, there is a presumption that you have read, understood, and agreed to each and every term of any contract to which you are a party. Arguing that you did not understand or that you did not approve of a p articular term in the contract will not be a valid excuse to performance. You should know what you can expect when you enter into a contract. Are you getting the band that you Saylor URL: http://www.saylor.org/books Saylor.org 202 wanted to hire to play in your nightclub, or are you really getting any band tha t the original band happens to transfer its duties to? As a preliminary matter, it is important to realize that contracts are, by law, assignable and delegable. This means that the rights conveyed by the contract may be transferred to another party by assi gnment , unless an express restriction on assignment exists within the contract, or unless an assignment would violate public policy. Likewise, the duties imposed on a party may be transferred to another party by delegation , unless the contract expressly re stricts delegation, or there is a substantial interest in personal performance by the original party to the contract, or if delegation would violate public policy. In the case of a band hired to perform at a nightclub, an argument could be made that the or iginal band cannot delegate its duties under the contract because there was a substantial interest in personal performance by the original band. This would render the contract nondelegable. To be on the safe side, your contract with that band should have h ad a clause expressly prohibiting delegation. Many students have seen restrictions on assignment in the form of no -sublease clauses in leases with landlords. Do you have a no -sublease clause in your lease? If so, that is a restriction on assignment . This c lause is necessary to prevent you from assigning your rights under the lease —your rights to inhabit the premises —to another party. It is necessary for the landlord to include that provision expressly if she wishes to prevent you from subleasing the unit, b ecause there is a presumption in law that assignment is permitted unless it is expressly prohibited by the contract or unless the assignment would violate public policy. Since it is unlikely that letting someone else live in your housing unit in your absen ce would violate public policy, then the landlord must expressly prohibit the assignment within the original contract if she wishes to prevent tenants from subleasing. A landlord may have a very good reason to wish to prevent subleasing; she may wish to en sure that each tenant is creditworthy prior to allowing the tenant to live in the property. Note that in delegation and in assignment, the original contracting party is not “off the hook” if it transfers its duties or rights to another party. For instance, if subleasing was not prohibited, and the new tenant assumed the rights and duties imposed by the original contract, the original party to the Saylor URL: http://www.saylor.org/books Saylor.org 203 contract is still liable for the payment of rent. If the subleasing tenant does not pay the rent, the original p arty to the lease is still liable. The way to excuse oneself from this liability is to form a three -way novation with the original party and the new party, thereby excusing the exiting party from future liability arising under the contract. A novation is e ssentially a new contract that transfers all rights and duties to the new party to the contract and releases the previous party from any further obligation arising from the original contract. Restrictions on assignment or delegation are not the only common elements that can be found in contracts. For example, you have probably encountered exculpatory clauses. An exculpatory clause is an express limitation on potential or actual liability arising under the subject matter of the contract. In short, exculpator y clauses are often employed when risk of injury exists. They seek to limit one party’s liability to another. You most certainly have signed exculpatory agreements or contracts containing exculpatory clauses if you have participated in any potentially dang erous activity at a club or with an organized group that could incur liability from injuries suffered by its patrons or members. For example, if you join a kayaking club, you will most likely be asked to sign such an agreement to “hold harmless” the club i n the event of any accident or injury. However, despite the existence of an exculpatory clause, liability will not be limited (that is, the liability limitations will be unenforceable) when the party who would benefit from the limitation on liability acted with gross negligence, committed an intentional tort, or possessed greatly unequal bargaining power, or if the limitation on liability violates public policy. Imagine that you signed an agreement to engage in kayaking activities with a kayaking group, but the leader of the group battered you with her oar because she was angry with you for mishandling your kayak. Since battery is an intentional tort, the exculpatory clause will not protect the kayaking organization from liability it incurred through the act ions of its employee. Another common contract element that you may have encountered is a noncompete clause. A noncompete clause attempts to restrict competition for a specified period of time, within a certain geographic region, and for specified activitie s. Noncomplete clauses are generally valid against the party who signed it if the time, place, and scope are reasonable. These are very common clauses in Saylor URL: http://www.saylor.org/books Saylor.org 204 employment contracts, particularly where the duties involved in employment are likely to involve trade secrets or other proprietary information that the company wishes to protect. A mandatory arbitration clause is very common in consumer contracts and employment contracts. You have certainly subjected yourself to the restrictions imposed by these clauses if you have signed a contract for a credit card. Mandatory arbitration clauses require parties to a contract that contains such a clause to submit to mandatory arbitration in the event of a dispute arising under the contract. Mandatory arbitration clauses frequently foreclose any possibility of appealing arbitration awards in court. An acceleration clause commonly exists in contracts where periodic payments are contemplated by the agreement. For example, if you signed a lease for your housing unit, then you most likely pay rent on a month -to-month basis. If you breached your lease, you would still owe rent for each subsequent month contemplated by the lease agreement. This means that your landlord would have new injury every month that you did not pay. An ac celeration clause accelerates all payments due under the contract on breach. This allows the injured party —in this case, the landlord —to sue for all damages due for unpaid rent under that contract at once, rather than having to bring a new suit each month to seek monthly unpaid rent. A liquidated damages clause allows parties to set the amount of damages in the event of breach. Agreeing to a damage amount before any breach occurs can save money and time spent litigating. Providing that the liquidated damage s clause does not look like a penalty, the clause will be valid and enforced by a court that hears a dispute arising under the contract. For example, imagine that you entered into a contract for the sale of your car. If the liquidated damages clause provid ed for two thousand dollars of damages in the event of breach, that will probably be a valid liquidated damages clause, providing that your car is an “average” car. However, if the liquidated damages clause provided for one million dollars of damages payab le by the breaching party, then that would not be enforceable by the court because it looks like a penalty. The proposed liquidated damages far exceed the value of the car that is the subject of the agreement. Saylor URL: http://www.saylor.org/books Saylor.org 205 Of course, there are additional common element s to contracts. This is not an exhaustive study of possible provisions, though it is a list of commonly encountered elements. For example, time of performance is often included as a separate provision. However, time for performance is an essential element in common -law contract formation, and without it, the contract may fail due to lack of definite and certain terms in formation. A major assumption made about a written contract is that it is integrated , which means that it contains the entire expression of the parties’ agreement. That means that any statements made before the parties signed the contract are not part of the contract, unless those statements are memorialized in the contract itself. In fact, any statements or actions that are not captured with in the four corners of the contract are considered parol evidence , and they will not be used to interpret the meaning of the contract. K E Y T A K E A W A Y S Parties to contracts must not only take care to form the agreement so that it is legally enforceable, but they must also be aware of the properties of contracts in general, as well as specific provisions contained within contracts to which they are a party. Properties of contracts include ability to assign, delegate, and exclude parol evidence. Several types of contracts clauses are commonly used to restrict rights and limit liability. E X E R C I S E S 1. Think of an example of an exculpatory clause that you have signed. For what type of activity would you be unwilling to sign an exculpatory clause? If your refusal to sign the exculpatory clause or agreement prevented you from participating in that activity, would you still refuse to sign it? 2. Do you think that too many limitations and restrictions can be placed on parties in a contract? Should there be more government r egulation and standardization of contract terms between private parties? Why or why not? Saylor URL: http://www.saylor.org/books Saylor.org 206 6.4 Concluding Thoughts Contracts are an integral part of business. Without contracts, promises would not be enforceable, which would wreak havoc on our financial stability, both individually and professionally. The law presumes that people who sign contracts have read the contract and understood its terms. Of course, contract language includes many terms of art, and simply reading a contract alone may not be enough to fully understand its implications. Contracts for important matters should be reviewed and explained by attorneys, so that parties who enter into contracts do not do so without understanding the agreement. It’s important to understand the implications o f making promises. If those promises carry legal duties, then, barring a defense, the promise will need to be performed so that the obligation or duties arising under that promise can be discharged. If the promise is not performed, and if there are no defe nses, then the contract has been breached. Breach is an actionable claim, with the goal of recovering the loss and placing the nonbreaching party back to the position that he or she would have been in if the contract had not been breached. Recognizing fund amental elements of contracts and how to incorporate considerations important to you when entering into them can go far toward ensuring business success. Likewise, the failure to recognize the traps and tricks that can be incorporated into contracts can de rail a good business idea. Saylor URL: http://www.saylor.org/books Saylor.org 207 Chapter 7 Torts L E A R N I N G O B J E C T I V E S Whenever a company or individual acts unreasonably and causes injury, that person or company may be liable for a tort. In some cases it doesn’t matter how careful or reasonable the company or individual is — they may be liable for any injury resulting from their actions. Torts are an integral part of our civil law, and in this chapter, you’ll learn about what kinds of torts exist and how to defend yourself or your company from potential tort l iability. Specifically, you should be able to answer the following questions: 1. What are torts? 2. What are intentional torts, and how does one defend against an accusation of one? 3. What is negligence and how does it affect virtually all human activity? 4. What is strict liability and how does it affect businesses engaged in making and selling products? 5. What are the arguments for and against tort reform? Figure 7.1 A Typical Construction Site Look at the picture in Figure 7.1 “A Typical Construction Site” . You’ve probably seen a similar picture of a construction site near where you live, with multiple orange traffic cones (with reflective stripes so they can be seen at night) and a large sign warning vehicles not to attempt to drive on the road. Saylor URL: http://www.saylor.org/books Saylor.org 208 Now imagine the pic ture without the traffic cones, warning signs, or caution tape. If you were driving, would you still attempt to drive on this road? Most of us would probably answer no, since the road is obviously under construction and attempting to drive on it may result in severe damage to property (our vehicles) and personal injury. Similarly, pedestrians, skateboarders, and bicyclists will likely steer clear of this road even if it wasn’t clearly marked or roped off. So if the dangers associated with this construction are obvious, why would the construction workers go through the time and expense of setting up the traffic cones, sign, and tape? The answer has to do with tort law. A tort can be broadly defined as a civil wrong, other than breach of contract. In other wor ds, a tort is any legally recognizable injury arising from the conduct (or nonconduct, because in some cases failing to act may be a tort) of persons or corporations. The other area of civil law that corporations have to be concerned about is contract law. There are several key differences between torts and contracts. First is the realm of possible plaintiffs. In contract law, only persons that you have a contract with, or you are a third -party -beneficiary to (such as when you are named the beneficiary to a life insurance policy and the company refuses to pay the claim), can possibly sue you for breach of contract. In tort law, just about anyone can sue you, as long as they can establish that you owe them some sort of legally recognized duty. The second key difference is damages, or remedies. In contract law, damages are usually not difficult to calculate, as contract law seeks to place the parties in the same position as if the bargain had been performed (known as compensatory damages ). Compensatory damages also apply in tort law, but they are much more difficult to calculate. Since money cannot bring the dead back to life or regrow a limb, tort law seeks to find a suitable monetary equivalent to those losses, which as you can imagine is a very difficult thin g to do. Additionally, tort law generally allows for the award of punitive damages , something never permitted in contract law. There is also some intersection between tort law and criminal law. Often, the same conduct can be both a crime and a tort. If Cla ire punches Charlie in the gut, for example, without provocation and for no reason, then Claire has committed the tort of battery and the crime of battery. In the tort case, Charlie could sue Claire in civil court for money damages (typically for his pain, suffering, and Saylor URL: http://www.saylor.org/books Saylor.org 209 medical bills). That case would be tried based on the civil burden of proof —preponderance of the evidence. That same action, however, could also lead Charlie to file a criminal complaint with the prosecutor’s office. Society is harmed when citizens punch each other in the gut without provocation or justification, so the prosecutor may file a criminal case against Claire, where the people of the state would sue her for the crime of battery. If convicted beyond a reasonable doubt, Claire may h ave to pay a fine to the people (the government) and may lose her liberty. Charlie gets nothing specifically from Claire in the criminal case other than the general satisfaction of knowing that his attacker has been convicted of a crime. You might recall f rom Chapter 3 “Litigation” that the standard of proving a criminal case (beyond a reasonable doubt) is far higher than the standard for proving a civil case (a preponderance of evidence). Therefore, if someone is convicted of a crime, he or she is also aut omatically liable in civil tort law under the negligence per se doctrine. For that reason, criminal defendants who wish to avoid a criminal trial are permitted to plead “no contest” to the criminal charges, which permits the judge to sentence them as if th ey were guilty but preserves the right of the defendant to defend a civil tort suit. Perhaps more than any other area of law, tort law is a reflection of American societal values. Contracts are enforced because they protect our expectation that our promise s are enforced. Criminal law is the result of elected legislatures prohibiting behavior that the community finds offensive or immoral. Tort law, on the other hand, is generally not the result of legislative debate or committee reports. Each tort case arise s out of different factual situations, and a jury of peers is asked to decide whether or not the tortfeasor (the person committing the tort) has violated a certain societal norm. Additionally, we expect that when an employee is working for the employer’s b enefit and commits a tort, the employer should be liable. Under the respondeat superior doctrine, employers are indeed liable, unless they can demonstrate the employee was on a frolic and detour at the time he or she committed the tort. The norms that society protects make up the basis for tort law. For example, we have an expectation that we have the right to move freely without interference unless detained pursuant to law. If Saylor URL: http://www.saylor.org/books Saylor.org 210 someone interferes with that right, he or she commits the tort of false impr isonment. We have an expectation that if someone spills a jug of milk in a grocery store, the store owners will promptly warn other customers of a slippery floor and clean up the spill. Failure to do so might constitute the tort of negligence. Likewise, we expect that the products we purchase for everyday use won’t suddenly and without explanation injure us, and if that happens then a tort has taken place. It has been said many times that tort law is a unique feature of American law. In Asian countries that follow a Buddhist tradition, for example, many people have a belief that change is a constant part of life and to resist that change is to cause human suffering. Rather than seeking to blame someone else for change (such as an injury, death, or damage to personal property), a Buddhist may see it as part of that person’s or thing’s “nature” to change. In countries with an Islamic tradition, virtually all events are seen as the will of God, so an accident or tragedy that leads to injury or death is accepted as part of one’s submission to God. In the United States, however, the tradition is one of questioning and inquiry when accidents happen. Indeed, it can be said with some truth that many Americans believe there is no such thing as an accident —if someone is injured or killed unexpectedly, we almost immediately seek to explain what happened (and then often place blame). Torts can be broadly categorized into three categories, depending on the level of intent demonstrated by the tortfeasor. If the tortfeasor ac ted with intent to cause the damage or harm that results from his or her action, then an intentional tort has occurred. If the tortfeasor didn’t act intentionally but nonetheless failed to act in a way a reasonable person would have acted, then negligence has taken place. Finally, if the tortfeasor is engaged in certain activities and someone is injured or killed, then under strict liability the tortfeasor is held liable no matter how careful or careless he or she may have been. In this chapter, we’ll explo re these three areas of torts carefully so that by the end of the chapter, you’ll understand the responsibilities tort law imposes on both persons and corporations. The chapter concludes with a brief discussion of other issues that affect torts, including tort reform. Key Takeaways A tort is a civil wrong (other than breach of contract) arising out of conduct or nonconduct that violates societal norms as determined by the judicial system. Unlike contracts and crimes, torts do not require Saylor URL: http://www.saylor.org/books Saylor.org 211 legislative action. Torts protect certain expectations we cherish in a free society, such as the right to travel freely and to enjoy our property. There are three primary areas of tort law, classified depending on the level of intent demonstrated by the tortfeasor. Saylor URL: http://www.saylor.org/books Saylor.org 212 7.1 Int entional Torts L E A R N I N G O B J E C T I V E S 1. Explore what constitutes an intentional tort. 2. Study various intentional torts in detail. 3. Examine the defenses to intentional torts. Examine Figure 7.2 “A Coworker Attacks” . The office worker on the right has grabbed the office worker on the left and is strangling him. This conduct is clearly criminal, and it is also tortious. Since the tortfeasor here has acted intentionally by grabbing his colleague’s neck, the tort is considered intentional. (It is, in fact, likely assa ult and battery.) In an intentional tort, the tortfeasor intends the consequences of his or her act, or knew with substantial certainty that certain consequences would result from the act. This intent can be transferred. For example, if someone swings a ba seball bat at you, you see it coming and duck, and the baseball bat continues to travel and hits the person standing next to you, then the person hit is the victim of a tort even if the person swinging the bat had no intention of hitting the victim. In add ition to the physical pain that accompanies being strangled by a coworker, the victim may also feel a great deal of fear. That fear is something we expect to never have to feel, and that fear creates the basis for the tort of assault . An assault is an inte ntional, unexcused act that creates in another person a reasonable apprehension or fear of immediate harmful or offensive contact. Note that actual fear is not required for assault —mere apprehension is enough. For example, have you ever gone to sit down on a chair only to find out that one of your friends has pulled the chair away, and therefore you are about to fall down when you sit? That sense of apprehension is enough for assault. Similarly, a diminutive ninety -pound woman who attempts to hit a burly th ree -hundred -pound police officer with her bare fists is liable for assault if the police officer feels apprehension, even if fear is unlikely or not present. Physical injuries aren’t required for assault. It’s also not necessary for the tortfeasor to inten d to cause apprehension or fear. For example, if someone pointed a very realistic -looking toy pistol at a stranger and said “give me all your money” as a joke, it would still constitute assault if a reasonable person would have perceived fear or Saylor URL: http://www.saylor.org/books Saylor.org 213 apprehensi on in that situation. The intentional element of assault exists here, because the tortfeasor intended to point the realistic -looking toy pistol at the stranger. A battery is a completed assault. It is any unconsented touching, even if physical injuries are n’t present. In battery, the contact or touching doesn’t have to be in person. Grabbing someone’s clothing or cane, swinging a baseball bat at someone sitting in a car, or shooting a gun (or Nerf ball, for that matter, if it’s unconsented) at someone is co nsidered battery. Notice that assault and battery aren’t always present together. Shooting someone in the back usually results in battery but not assault since the victim didn’t see the bullet coming and therefore did not feel fear or apprehension. Similar ly, a surgeon who performs unwanted surgery or a dentist who molests a patient while the patient is sedated has committed battery but not assault. Sending someone poisoned brownies in the mail would be battery but not assault. On the other hand, spitting i n someone’s face, or leaning in for an unwanted kiss, would be assault and possibly battery if the spit hit the victim’s face, or the kiss connected with any part of the victim’s body. When someone is sued for assault or battery, several defenses are avail able. The first is consent. For example, players on a sports team or boxers in a ring are presumed to have consented to being battered. Self -defense and defense of others are also available defenses, bearing in mind that any self – defense must be proportion ate to the initial force. A battery must result in some form of physical touching of the plaintiff. When that physical touching is absent, courts sometimes permit another tort to be claimed instead, the tort of intentional infliction of emotional distress (IIED) . In a sense, IIED can be thought of as battery to emotions, but a great deal of caution is warranted here. Many people are battered emotionally every day to varying degrees. Someone may cut you off in traffic, leading you to curse at him or her in a nger. A stranger may cut in line in front of you, leading you to exclaim in indignation. A boyfriend or girlfriend may decide to break off a relationship with you, leading to hurt feelings and genuine grief or pain. None of these situations, nor any of the normal everyday stresses of day -to-day living, are meant to be actionable in tort law. The insults, indignities, annoyances, or even threats that we experience as part of living in modern society are to be expected. Instead, IIED is meant to protect only against the most extreme of behaviors. In fact, for a plaintiff to win an IIED case, the plaintiff has to demonstrate that the defendant Saylor URL: http://www.saylor.org/books Saylor.org 214 acted in such a manner that if the facts of the case were told to a reasonable member of the community, that community member would exclaim that the behavior is “outrageous.” Notice that the standard here is objective; it’s not enough for the plaintiff to feel that the defendant has acted outrageously. In some states, the concern that this tort could be abused and result i n frivolous litigation has led to the additional burden that the plaintiff must demonstrate some physical manifestation of the psychological harm (such as sleeplessness or depression) to win any recovery. Hyperlink: Does Picketing a Fallen Soldier’s Funera l Constitute IIED or Constitutionally Protected Speech? http://www.npr.org/templates/story/story.php?storyId=5192571 The Westboro Baptist Church is a small (approximately seventy -member) fundamentalist church based in Topeka, Kansas. Members of the church, led by their pastor, Fred Phelps, believe that American soldier deaths in Iraq and Afghanistan are punishment from G od for the country’s tolerance of homosexuality. Church members travel around the country to picket at the funerals of fallen soldiers with large bold signs. Some of the signs proclaim “Thank God for Dead Soldiers.” In 2006 members of the church picketed t he funeral of Marine Lance Corporal Matthew Snyder, and Snyder’s father sued Phelps and the church for IIED and other tort claims. The jury awarded Snyder’s family over $5 million in damages, but on appeal, the U.S. Court of Appeals for the Fourth Circuit overturned the verdict. The court found the speech “distasteful and repugnant” but pointed out that “judges defending the Constitution must sometimes share their foxhole with scoundrels of every sort, but to abandon the post because of the poor company is to sell freedom cheaply. It is a fair summary of history to say that the safeguards of liberty have often been forged in controversies involving not very nice people.” [1] Adding insult to injury, the Court of Appeals ordered Snyder’s family to pay over $1 6,000 in legal fees to the church, which led to an outpouring of support for Snyder on Facebook. [2]The U.S. Supreme Court has accepted the case. Although the standard for outrageous conduct is objective, the measurement is made against the particular sens itivities of the plaintiff. Exploiting a known sensitivity in a child, the elderly, or pregnant women can constitute IIED. A prank telephone call made by someone pretending to be from the army to a mother whose son was at war, telling the mother her son ha s been killed, would most certainly be IIED. Saylor URL: http://www.saylor.org/books Saylor.org 215 Companies must be careful when handling sensitive employment situations to avoid potential IIED liability. This is especially true when terminating or laying off employees. Such actions must be taken with care a nd civility. Similarly, companies involved in a lot of public interactions should be careful of this tort as well. Bill collectors and foreclosure agencies must be careful not to harass, intimidate, or threaten the people they deal with daily. In one forec losure case, for example, Bank of America was sued by a mortgage borrower when the bank’s local contractor entered the home of the borrower, cut off utilities, padlocked the door, and confiscated her pet parrot for more than a week, causing severe emotiona l distress. [3] In 2006, Walgreens was sued for IIED when pharmacists accidentally stapled a form to patient drugs that was not meant to be seen by patients. The form was supposed to annotate notes about patients, but some pharmacists filled in the form wi th comments such as “Crazy! She’s really a psycho! Do not say her name too loud; never mention her meds by name.” [4] Figure 7.3 Russell Christoff Source: http://www.sfgate.com/c/pictures/2005/02/02/mn_nestle_model2.jpg . Saylor URL: http://www.saylor.org/books Saylor.org 216 Another intentional tort is the invasion of privacy . There are several forms of this tort, with the most common being misappropriation . Misappropriation takes place when a person or company uses someone else’s name, likeness, or other identifying characteristic without permission. For example, in 1986 model Russell Christoff posed for a photo shoot for Nestlé Canada for Taster’s Choice coffee. He was paid $250 and promised $2,000 if Nestlé us ed his photo on its product. In 2002 he discovered Nestlé had indeed used his photo on Taster’s Choice coffee without his permission ( Figure 7.3 “Russell Christoff” ), and he sued Nestlé for misappropriation. A California jury awarded him over $15 million in damages. [5]Misappropriation can be a very broad tort because it covers more than just a photograph or drawing being used without permission —it covers any likeness or identifying characteristic. For example, in 1988 Ford Motor Company approached Bette M idler to sing a song for a commercial, which she declined to do. The company then hired someone who sounded just like Midler to sing one of Midler’s songs, and asked her to sound as much like Midler as possible. The company had legally obtained the copyrig ht permission to use the song, but Midler sued anyway, claiming that the company had committed misappropriation by using someone who sounded like her to perform the commercial. An appellate court held that while Ford did not commit copyright infringement, it had misappropriated Midler’s right to publicity by hiring the sound -alike, [6] and a jury awarded her over $400,000 in damages. In addition to someone’s voice, an identifying characteristic can be the basis for misappropriation. For example, Samsung Ele ctronics ran a series of print advertisements to demonstrate how long -lasting their products can be. The ads featured a common item from popular culture along with a humorous tagline. One of the ads featured a female robot dressed in a wig, gown, and jewel ry posed next to a game show board that looked exactly like the game show board from Wheel of Fortune ( Figure 7.4 “Samsung Advertisement” ). The tagline said, “Longest -running game show. 2012 A.D.” An appellate court held that Vanna White’s claim for misapp ropriation was valid, writing “the law protects the celebrity’s sole right to exploit [their identity] value whether the celebrity has achieved her fame out of rare ability, dumb luck, or a combination thereof.” [7]The lesson for companies is that in produ ct marketing, permission must be carefully obtained from all persons appearing in their marketing materials, as well as any persons who might have a claim to their likeness or identifying characteristic in the materials. Figure 7.4 Samsung Advertisement Saylor URL: http://www.saylor.org/books Saylor.org 217 Source: Photo courtesy of the U.S. federal government, http://commons.wikimedia.org/wiki/File:White -v-samsung – dissent -appendix -2.png . Video Clip: Is a Single Name a Likeness or Identifying Characteristic? Invasion of privacy can also take the form of an invasion of physical solitude. Actions such as window peeping, eavesdropping, and going through someone’s garbage to find confidential information such a s Saylor URL: http://www.saylor.org/books Saylor.org 218 bank or brokerage statements are all examples of this form of tort. Media that are overly aggressive in pursuing photos of private citizens may sometimes run afoul of this tort. Another important intentional tort for businesses is false imprisonment . Thi s tort takes place when someone intentionally confines or restrains another person’s movement or activities without justification. The interest being protected here is your right to travel and move about freely without impediment. This tort requires an act ual and present confinement. If your professor locks the doors to the classroom and declares no one may leave, that is false imprisonment. If the professor leaves the doors unlocked but declares that anyone who leaves will get an F in the course, that is n ot false imprisonment. On the other hand, a threat to detain personal property can be false imprisonment, such as if your professor grabs your laptop and says, “If you leave, I’ll keep your laptop.” Companies that engage in employee morale -building activit ies should bear in mind that forcing employees to do something they don’t want to do raises issues of false imprisonment. False imprisonment is especially troublesome for retailers and other businesses that interact regularly with the public, such as hotel s and restaurants. If such a business causes a customer to become arrested by the police, for example, it may lead to the tort of false imprisonment. In one case, a pharmacist who suspected a customer of forging a prescription deliberately caused the custo mer to be detained by the police. When the prescription was later validated, the pharmacist was sued for false imprisonment. Businesses confronted with potential thieves are permitted to detain suspects until police arrive at the establishment; this is kno wn as the shopkeeper’s privilege . The detention must be reasonable, however. Store employees must not use excessive force in detaining the suspect, and the grounds, manner, and time of the detention must be reasonable or the store may be liable for false imprisonment. Intentional torts can also be committed against property. Trespass to land occurs whenever someone enters onto, above, or below the surface of land owned by someone else without the owner’s permission. The trespass can be momentary or fleeting. Soot, smoke, noise, odor, or even a flying arrow or bullet can all become the basis for trespass. A particular trespass problem takes place in suburban neighborhoods without clearly marked property lines between homes. Children are often regular trespassers in this area, and even if they are trespassing, homeowners are under a reasonable duty of care to ensure they are not harmed. When there is an attractive nuisance on the property, homeowners must take care to both warn Saylor URL: http://www.saylor.org/books Saylor.org 219 children about the attrac tive nuisance and protect them from harm posed by the attractive nuisance. This doctrine can apply to pools, abandoned cars, refrigerators left out for collection, trampolines, piles of sand or lumber, or anything that might pose a danger to children and t hat they cannot understand or appreciate. There may be times, however, when trespass is justified. Obviously, someone invited by the owner is not a trespasser; such a person is considered an invitee until the owner asks him or her to leave. Someone may hav e a license to trespass, such as a meter reader or utility repair technician. There may also be times when it may be necessary to trespass —for example, to rescue someone in distress. Trespass to personal property is the unlawful taking or harming of anothe r’s personal property without the owner’s permission. If your roommate borrowed your vehicle without your permission, for example, it would be trespass to personal property. The tort of conversion takes place when someone takes your property permanently; i t is the civil equivalent to the crime of theft. If you gave your roommate permission to borrow your car for a day and he or she stole your car instead, it would be conversion rather than trespass. An employer who refuses to pay you for your work has commi tted conversion. Another intentional tort is defamation , which is the act of wrongfully hurting a living person’s good reputation. Oral defamation is considered slander , while written defamation is libel . To be liable for defamation, the words must be publ ished to a third party. There is no liability for defamatory words written in a secret diary, for example, but there is liability for defamatory remarks left on a Facebook wall. Issues sometimes arise with regard to celebrities and public figures, who ofte n believe they are defamed by sensationalist “news” organizations that cover celebrity gossip. The First Amendment provides strong protection for these news organizations, and courts have held that public figures must show actual malice before they can win a defamation lawsuit, which means they have to demonstrate the media outlet knew what it was publishing was false or published the information with reckless disregard for the truth. This is a much higher standard than that which applies to ordinary citize ns, so public figures typically have a difficult time winning defamation lawsuits. Of course, truth is a complete defense to defamation. Defamation can also take place against goods or products instead of people. In most states, injurious falsehood (or tra de disparagement) takes place when someone publishes false Saylor URL: http://www.saylor.org/books Saylor.org 220 information about another person’s product. For example, in 1988 the influential product testing magazine Consumer Reports published a test of the Suzuki Samurai small SUV, claiming that it “easily rolls over in turns.” Product sales dropped sharply, and Suzuki sued Consumers Union, the publisher, for trade disparagement. The case was settled nearly a decade later after a long and expensive legal battle. Businesses often make claims about their prod ucts in marketing their products to the public. If these claims are false, then the business may be liable for the tort of misrepresentation , known in some states as fraud . Fraud requires the tortfeasor to misrepresent facts (not opinions) with knowledge t hat they are false or with reckless disregard for the truth. An “innocent” misrepresentation, such as someone who lies without knowing he or she is lying, is not enough —the defendant must know he or she is lying. Fraud can arise in any number of business s ituations, such as lying on your résumé to gain employment, lying on a credit application to obtain credit or to rent an apartment, or in product marketing. Here, there is a fine line between puffery , or seller’s talk, and an actual lie. If an advertisement claims that a particular car is the “fastest new car you can buy,” then fraud liability arises if there is in fact a car that travels faster. On the other hand, an advertisement that promises “unparalleled luxury” is only puffery since it is opinion. Makers of various medicinal supplements and vitamins are often the target of fraud lawsuits for making false claims about their products. Finally, an important intentional tort to keep in mind is tortious interference . This tort, which varies widel y by state, prohibits the intentional interference with a valid and enforceable contract. If the defendant knew of the contract and then intentionally caused a party to break the contract, then the defendant may be liable. In 1983 oil giant Pennzoil made a bid for a smaller oil rival, Getty Oil. A competitor to Pennzoil, Texaco, found out about the deal and approached Getty with another bid for a higher amount, which Getty then accepted. Pennzoil sued Texaco, and a jury awarded over $10 billion in damages. K E Y T A K E A W A Y S Assault is any intentional act that creates in another person a reasonable fear or apprehension of harmful or offensive contact. A battery is a completed assault, when the harmful or offensive contact occurs. The intentional infliction of emo tional distress (IIED) is extreme and outrageous conduct that intentionally causes severe emotional distress to another person. In some states, IIED requires a demonstration of Saylor URL: http://www.saylor.org/books Saylor.org 221 physical harm such as sleeplessness or depression. This is a difficult tort to win because of its inherent clash with values embodied by the First Amendment. Misappropriation is the use of another person’s name, likeness, or other identifying characteristic without permission. False imprisonment occurs when someone intentionally conf ines or restrains another person’s movement without justification. Trespass is the entry onto land without the owner’s permission, while conversion is the civil equivalent of the theft crime. Defamation is the intentional harm to a living person’s reputati on, while trade disparagement takes place when someone publishes false information about someone else’s product. Fraudulent misrepresentation is any intentional lie involving facts. Tortious interference is the intentional act of causing someone to break a valid and enforceable contract. E X E R C I S E S 1. Members of the Westboro Baptist Church claim that the First Amendment protects them from IIED lawsuits since they are expressing a political opinion by picketing at soldier funerals. The pickets take place on public property and in compliance with local picketing laws. If the plaintiffs win the case, the church is unlikely to have the money to satisfy the judgment and may seek bankruptcy. Do you believe that this conduct is extreme and outrageous enough to cons titute a tort? Why or why not? 2. In 1983 Hustler magazine (owned by publisher Larry Flynt) ran a print advertisement patterned after a Campari liquor ad campaign. The real ad campaign featured celebrities “talking about their first time” in a question -and -an swer interview format, slowly revealing that the celebrities were speaking about their first time drinking Campari. The Hustler advertisement featured fundamentalist preacher Jerry Falwell, who was running a campaign against pornography at the time, and in sinuated that Falwell had lost his virginity to his mother. Falwell sued Flynt and the magazine, and a jury awarded Falwell $150,000 in damages. The Supreme Court overturned the verdict on appeal on grounds of the First Amendment, holding that as a public figure, Falwell had to endure the advertisement. [8] Do you believe that celebrities and public figures should have a harder time winning IIED lawsuits? Why or why not? 3. Do you believe that an “identifying characteristic” should be protected by the tort of misappropriation, or do you believe that society has gone too far in recognizing property rights? A First Amendment exception exists for comedians who engage in satire and comedy (think of Tina Fey’s impersonation of Sarah Palin Saylor URL: http://www.saylor.org/books Saylor.org 222 during the 2008 presidentia l campaign, for example). Does it make sense to you that comedians like Fey and John Stewart can make money through misappropriation, but other businesses cannot? 4. Look at the advertisement featured in Note 7.21 “Video Clip: Is a Single Name a Likeness or Identifying Characteristic?” . Do you think that the ad is referring to Lindsay Lohan? Has the name “Lindsay” become so linked to Lohan that companies run the risk of being sued if they use the name Lindsay in advertisements? What if the advertisement had us ed a name like “Oprah” or “Cher”? 5. Defamation law only protects the living. Some legal commentators believe that defamation should also protect the dead. See, for example, law professor Jonathan Turley’s opinion in the Washington Post here: http://www.washingtonpost.com/wp – dyn/content/article/2006/09/15/AR2006091500999_pf.html . Turley points out examples of how the dead have been defamed, such a s the character of William Murdoch in the 1997 movie Titanic , where he was portrayed as a murderous nut. In reality, survivors reported he took heroic actions to save passengers. Do you believe defamation should be extended to protect the dead as well as t he living? [1] Snyder v. Phelps , 580 F.3d 206 (4th Cir. 2009), http://pacer.ca4.uscourts.gov/opinion.pdf/081026.P.pdf (accessed September 27, 2010). [2] “I Support Al Snyder in His Fight against Westboro Baptist Church,” Facebook. http://www.facebook.com/group.php?v=wall&ref=ts&gid=355406162379 (accessed September 27, 2010). [3] James Hagerty, “Bank Sorry for Taking Parrot,” Wall Street Journal , March 11, 2010, A1. [4] “Walgreens Pharmacists Mock You behind Your Back,” The Consumerist , March 8, 2006, http://consumerist.com/2006/03/walgreens -pharmacists -mock -you -behind -your -back.html (accessed September 27, 2010). [5] Jaime Holguin, “$15.6M Award for Coffee ‘Mug,’” CBSnews.com , February 2, 2005, http://www.cbsnews.com/stories/2005/02/01/national/main670754.shtml (accessed September 27, 2010). [6] Midler v. Ford Motor Company , 849 F.3d 460 (9th Cir. 1988). [7] White v. Samsung Electronics America , 971 F.2d 1395 (9th Cir. 1992). [8] Hustler Magazine v. Falwell , 485 U.S. 46 (1988). Saylor URL: http://www.saylor.org/books Saylor.org 223 7.2 Negligence L E A R N I N G O B J E C T I V E S 1. Learn about whom we owe duties to under the tort of negligence. 2. Explore how those duties can be legally breached. 3. Discuss how causation, both actual and proximate, can affect liability. 4. Examine the requirement to demonstrate damages to win a negligence suit. 5. Understand various defenses to negligence. Video Clip: The Crash of Continental Flight 3407 Ordinarily, we don’t expect perfectly good airplanes to fall out of the sky for no reason. When it happens, and it turns out that the reason was carelessness or a failure to act reasonably, then the tort of negligence may apply. All persons, as estab lished by state tort law, have the duty to act reasonably and to exercise a reasonable amount of care in their dealings and interactions with others. Breach of that duty, which causes injury, is negligence. Negligence is distinguished from intentional tort s because there is a lack of intent to cause harm. If a pilot intentionally crashed an airplane and harmed others, for example, the tort committed may be assault or battery. When there is no intent to harm, then negligence may nonetheless apply and hold th e pilot or the airline liable, for being careless or failure to exercise due care. Note that the definition of negligence is purposefully broad. Negligence is about breaching the duty we owe others, as determined by state tort law. This duty is often broad er than the duties imposed by law. Colgan Air, for example, may have been fully compliant with applicable laws passed by Congress while still being negligent. In a way, the law of negligence is an expression of democracy at the community and local level, b ecause ultimately, citizen juries (as opposed to legislatures) decide what conduct leads to liability. To prove negligence, plaintiffs have to demonstrate four elements are present. First, they have to establish that the defendant owed a duty to the plaint iff. Second, the plaintiff has to demonstrate that the defendant breached that duty. Third, the plaintiff has to prove that the defendant’s conduct Saylor URL: http://www.saylor.org/books Saylor.org 224 caused the injury. Finally, the plaintiff has to demonstrate legally recognizable injuries. We’ll address ea ch of these elements in turn. First, the plaintiff has to demonstrate that the defendant owed it a duty of care. The general rule in our society is that people are free to act any way they want to, as long as they don’t infringe on the freedoms or interest s of others. That means that you don’t owe anyone a special duty to help them in any way. For example, if you’re driving along a deserted rural highway at night in a snowstorm, and you see a car ahead of you fishtail and drive into a ditch, you are entitle d to keep driving and do nothing, not even report the accident, because you don’t owe that driver any special duty. On the other hand, if you ran a stop sign, which then caused the other driver to drive into a ditch, you would owe that driver a duty of car e. Another way to look at duty is to consider whether or not the plaintiff is a foreseeable plaintiff. In other words, if the risk of harm is foreseeable, then the duty exists. Take, for instance, the act of littering with a banana peel. If you carelessly throw away a banana peel, then it is foreseeable that someone walking along may slip on it and fall, causing injuries. Under tort law, by throwing away the banana peel you now owe a duty to anyone who may be walking nearby who might walk on that banana pee l, because any of those persons might foreseeably step on the peel and slip. An emerging area in tort law is whether or not businesses have a duty to warn or protect customers for random crimes committed by other customers. By definition, crimes are random and therefore not foreseeable. However, some cases have determined that if a business knows about, or should know about, a high likelihood of crime occurring, then that business must warn or take steps to protect its customers. For example, in one case a state supreme court held that when a worker at Burger King ignored a group of boisterous and loud teenagers, Burger King was liable when those teenagers then assaulted other customers. [1] In another case, the Las Vegas Hilton was held liable for sexual as sault committed by a group of naval aviators because evidence at trial revealed that the hotel was aware of a history of sexual misconduct by the group involved. The concept of duty is broad and extends beyond those in immediate physical proximity. In a fa mous case from California, for example, a radio station with a large teenage audience held a contest with a Saylor URL: http://www.saylor.org/books Saylor.org 225 mobile DJ announcing clues to his locations as he moved around the city. The first listener to figure out his location and reach him earned a cash p rize. One particular listener, a minor, was rushing toward the DJ when the listener negligently caused a car accident, killing the other driver. During a negligence trial, the radio station argued that hindsight is not foreseeability and that the station therefore did not owe the dead driver a duty of care. The California Supreme Court held that when the radio station started the contest, it was foreseeable that a young and inexperienced driver may drive negligently to claim the prize and that therefore a d uty of care existed. [2] Radio stations should therefore be very careful when running promotional contests to ensure that foreseeable deaths or injuries are prevented. This lesson apparently eluded Sacramento station KDND, which in 2007 held a contest titled “Hold Your Wee for a Wii” where contestants were asked to drink a large amount of water without going to the bathroom for the chance of winning a game console. An otherwise healthy twenty -eight -year -old mother died of water intoxication hours after the contest, which led to a lawsuit and a $16 million jury verdict. The general rules surrounding when a duty exists can be modified in special situations. For example, landowners owe a duty to exercise reasonable care to protect persons on their property from foreseeable harm, even if those persons are trespassers. If you are aware of a weak step or a faucet that dispenses only scalding hot water, for example, you must take steps to warn guests about those known dangers. Businesses owe a duty to exercise a reasonable degree of care to protect the public from foreseeable risks that the owner knew or should have known about. There are many foreseeable ways for customers to be injured in retail stores, from falling objects improperly placed on high shelves, to light fixtures exploding or falling due to improper installation, to customers being injured by forklifts in so -called warehouse stores. One particular area of concern for businesses is liquid on walking surfaces, which can be very dangerous. Spilled prod uct (milk, orange juice, wine, etc.), melted ice or snow, or rain can cause slick situations, and if a store knows about such a condition, or should have known about it, then the store must quickly warn customers and remedy the situation. Saylor URL: http://www.saylor.org/books Saylor.org 226 Business professionals such as doctors, accountants, dentists, architects, and lawyers owe a special duty to act as a reasonable person in their profession. Professional negligence by these professionals is known as malpractice . The government estimates that betwee n forty -four thousand and ninety – eight thousand people die each year in hospitals due to medical mistakes, the vast majority of them preventable. [3] Once duty has been established, negligence plaintiffs have to demonstrate that the defendant breached that duty. A breach is demonstrated by showing the defendant failed to act reasonably, when compared with a reasonable person. It’s important to keep in mind that this reasonable person is hypothetical and does not actually exist. This reasonable person is nev er tired, sleepy, angry, or intoxicated. He or she is reasonably careful —not taking every single precaution to prevent accidents but considering his or her actions and consequences carefully before proceeding. In reality, once a duty has been established, the presence of injury or harm is usually enough to satisfy the “breach of duty” requirement. The third element of negligence is causation. In deciding whether there is causation, courts have to consider two questions. First, courts query as to whether the re is causation in fact, also known as but -for causation. This form of causation is fairly easy to prove. But for the defendant’s actions, would the plaintiff have been injured? If yes, then but -for causation is proven. For example, if you are texting whil e driving and you hit a pedestrian because your attention was diverted, then but -for causation is easily met, because “but for” your actions of texting while driving, you would not have hit the pedestrian. The second question is tougher to establish. It as ks whether the defendant’s actions were the proximate cause of the plaintiff’s injury. In asking this question, courts are expressing a concern that causation -in-fact can be taken to a logical but extreme conclusion. For example, if a speeding truck driver crashes his or her rig and causes the interstate highway to be shut down for several hours, causing you to become stuck in traffic and miss an important interview, you could argue that but for the truck driver’s negligence, you may have landed a new job. It would not be fair, however, to hold the truck driver liable for all the missed appointments and meetings caused by a subsequent traffic Saylor URL: http://www.saylor.org/books Saylor.org 227 jam after the crash. At some point, the law has to break the chain of causation. The truck driver may be liable for i njuries caused in the crash, but not beyond the crash. This is proximate causation . Video Clip: Palsgraf v. Long Island Railroad Company In determining whether proximate cause exists, we once again use the foreseeability test, already used for determining whether duty exists. If an injury is foreseeable, then proximate cause exists. If it is unforeseeable, then it does not. In some cases it can be difficult to pinpoint a particular source for a product, which then makes proving causation difficult. This is particularly true in mass tort cases where victims may have been exposed to dangerous substances from multiple sources over a number of years. For example, assume that you have been taking a vitamin supplement for a number of years, buying the supplement fr om different companies that sell it. After a while the government announces that this supplement can be harmful to health and orders sales to stop. You find out that your health has been affected by this supplement and decide to file a tort lawsuit. The pr oblem is that you don’t know which manufacturer’s supplement caused you to fall ill, so you cannot prove any specific manufacturer caused your illness. Under the doctrine of joint and several liability , however, you don’t have to identify the specific manu facturer that sold you the drug that made you ill. You can simply sue one, two, or all manufacturers of the supplement, and any of the defendants are then liable for the entirety of your damages if they are found liable. This doctrine has been used in case s involving asbestos production and distribution. The final element in negligence is legally recognizable injuries. If someone walks on a discarded banana peel and doesn’t slip or fall, for example, then there is no tort. If someone has been injured, then damages may be awarded to compensate for those injuries. These damages take the form of money, as there is nothing tort law can do to bring back the dead or regrow lost limbs, and tort law does not allow for incarceration. Money is therefore the only appro priate measure of damages, and it is left to the jury to decide how much money a plaintiff should be awarded. Saylor URL: http://www.saylor.org/books Saylor.org 228 There are two types of award damages in tort law. The first, compensatory damages, seeks to compensate the plaintiff for his or her injuries. Comp ensatory damages can be awarded for medical injuries, economic injuries (such as loss of a car, property, or income), and pain and suffering. They can also be awarded for past, present, and future losses. While medical and economic damages can be calculate d using available standards, pain and suffering is a far more nebulous concept. Juries are often left to their conscience to decide what amount of money can compensate for pain and suffering, based on the severity and duration of the pain as well as its im pacts on the plaintiff’s life. The second type of damage award is known as punitive damages . Here, the jury is awarded a sum of money not to compensate the plaintiff but to deter the defendant from ever engaging in similar conduct. The idea behind punitive damages is that compensatory damages may be inadequate to deter future bad conduct, so additional damages are necessary to ensure the defendant corrects its ways to prevent future injuries. Punitive damages are available in cases where the defendant acted with willful and wanton negligence, a higher level of negligence than ordinary negligence. Bear in mind, however, that there are constitutional limits to the award of punitive damages. A defendant being sued for negligence has three basic affirmative defe nses. An affirmative defense is one that is raised by the defendant essentially admitting that the four elements for negligence are present, but that the defendant is nonetheless not liable for the tort. The first defense is assumption of risk . If the plai ntiff knowingly and voluntarily assumes the risk of participating in a dangerous activity, then the defendant is not liable for injuries incurred. For example, if you decide to bungee jump, you assume the risk that you might be injured during the jump. It’ s common for bungee jumpers to experience burst blood vessels in the eye, soreness in the back and neck region, and twisted ankles, so these injuries are not compensable. On the other hand, you can only assume risks that you know about. When a person bunge e jumps, one of the first steps is for the jump operator to weigh the jumper, so that the length of the bungee can be adjusted accordingly. If this is not done properly, the jumper may overshoot or undershoot the expected bottom of the jump. While you can assume known risks from bungee jumping, you cannot assume unknown risks, such as the risk that a jump operator may negligently calculate the length of the bungee rope. Saylor URL: http://www.saylor.org/books Saylor.org 229 A related doctrine, the open and obvious doctrine, is used to defend against suits by persons injured while on someone else’s property. For example, if there is a spill on a store’s floor and the store owner has put up a sign that says “Caution —Slippery Floor,” yet someone decides to run through the spill anyway, then that person would lose a negligence lawsuit if he or she slips and falls because the spill was open and obvious. Use of the open and obvious doctrine varies widely by state, with some states allowing it to be used in a wide variety of premises liability cases and other states circumventing its usefulness. Both the assumption of risk and open and obvious defenses are not available to the defendant who caused a dangerous situation in the first place. For example, if you negligently start a house fire while playing with matches and evacuate the house with your roommates, if one of your roommates decides to reenter the burning house to rescue someone else, you cannot rely on assumption of risk as a defense since you started the fire. The second defense to negligence is to allege that the plaintiff’s own negligence contributed to his or her injuries. In a state that follows the contributory negligence rule, a plaintiff’s own negligence, no matter how minor, bars the plaintiff from any recovery. This is a fairly harsh rule, so most stat es follow the comparative negligence rule instead. Under this rule, the jury is asked to determine to what extent the plaintiff is at fault, and the plaintiff’s total recovery is then reduced by that percentage. For example, if you jaywalk across the stree t during a torrential thunderstorm and a speeding car strikes you, a jury may determine that you are 20 percent at fault for your injuries. If the jury decides that your total compensatory damage award is $1 million, then the award will be reduced by $200, 000 to account for your own negligence. Finally, in some situations, the Good Samaritan law may be a defense in a negligence suit. Good Samaritan statutes are designed to remove any hesitation a bystander in an accident may have to providing first aid or o ther assistance. They vary widely by state, but most provide immunity from negligent acts that take place while the defendant is rendering emergency medical assistance. Most states limit Good Samaritan laws to laypersons (i.e., police, emergency medical se rvice providers, and other first responders are still liable if they act negligently) and to medical actions only. Saylor URL: http://www.saylor.org/books Saylor.org 230 K E Y T A K E A W A Y S Negligence imposes a duty on all persons to act reasonably and to exercise due care in dealing and interacting with others. There are four elements to the tort of negligence. First, the plaintiff must demonstrate the defendant owed the plaintiff a duty. If the risk of injury is foreseeable, then the defendant owes the plaintiff a duty. Second, there must be a breach of that dut y. A breach occurs when the defendant fails to act like a reasonable person. Professional negligence is known as malpractice. Third, the plaintiff must demonstrate that the defendant caused the plaintiff’s injuries. Both causation -in-fact and proximate cau sation must be proven. Finally, the plaintiff must demonstrate legally recognizable injuries, which include past, present, and future economic, medical, and pain and suffering damages. Defendants can raise several affirmative defenses to negligence, includ ing assumption of risk, comparative or contributory negligence, and in some cases, Good Samaritan statutes. E X E R C I S E S 1. Does a private investigator owe a duty of care to potential victims of crime if their clients use information obtained by the investigato r to commit the crime? In 2003 a court held the answer is yes. In that case, an Internet -based investigative firm charged fees to a client to find out the Social Security number, place of employment, and home and work addresses of a third party. The client then used the information to stalk and kill the third party. The court held that since the risk of harm is foreseeable, the company owed the third party a duty of care. See Remsburg v. Docusearch, Inc. , 816 A.2d 1001 (N.H. 2003). 2. In January 2001 a New York man attended a family birthday party at a Benihana restaurant, where chefs, while cooking at the table, routinely throw pieces of food for diners to catch with their mouths. The man wrenched his neck while ducking a piece of flying shrimp, requiring t reatment by several doctors. By that summer, doctors determined surgery was necessary to treat numbness in his arm. Five months after surgery, he checked into the hospital with a high fever and died. The family sued Benihana for $10 million in damages, cla iming that the fever was the result of surgery, which in turn was the result of the chef’s actions in throwing food at diners. Do you believe that Benihana should be liable for the man’s death? Why or why not? 3. What kind of duty of care do cities that own a nd operate public transportation systems owe to the paying and traveling public? On February 4, 2010, Shaun Mills was traveling home on a public bus in Jacksonville Beach, Florida. He missed his regular stop, so he got off at the next stop. The sidewalk at this bus stop was Saylor URL: http://www.saylor.org/books Saylor.org 231 closed, so he crossed the street and was hit by a car. The remarkable accident was captured on video. See http://today.msnbc.msn.com/id/36310494 . Mills survived and is sui ng the bus company. In this case, what defenses are available to the defendant bus company? 4. Medical malpractice claims tens of thousands of lives per year, leaving victims and their families little recourse except through the tort system. Most doctors purc hase medical malpractice insurance policies to pay a claim in case they are sued, but in some cases these premiums can be exorbitantly high. The fear of medical malpractice suits also drives some doctors to practice “defensive medicine,” which further incr eases the price of health care for everyone. How do you think the legal system can best balance these two competing interests? [1] Iannelli v. Burger King Corp. , 145 N.H. 190 (2000). [2] Weirum v. RKO General , 15 Cal.3d 40 (1975). [3] U.S. Department of Health and Human Services, Agency for Healthcare Research and Quality, “Reducing Errors in Health Care: Translating Research Into Practice,” April 2000, http://www.ahrq.gov/qual/errors.htm (acc essed September 27, 2010). Saylor URL: http://www.saylor.org/books Saylor.org 232 7.3 Strict Liability L E A R N I N G O B J E C T I V E S 1. Explore what strict liability is and when it applies. 2. Understand how a product may be unreasonably dangerous, triggering strict liability. 3. Learn about how a product’s warnings and labels are a part of a product’s safe design. 4. Examine defenses available to strict product liability. Intentional torts require some level of intent to be committed, such as the intent to batter someone. Negligence torts don’t require intent to harm but re quire some level of carelessness or neglect. Strict liability torts require neither intent nor carelessness. In fact, if strict liability applies, it is irrelevant how carelessly, or how carefully, the defendant acted. It doesn’t matter if the defendant took every precaution to avoid harm —if someone is harmed in a situation where strict liability applies, then the defendant is liable. Since this rule can have harsh consequences, it applies in a only few limited circumstances. One of those circumstances is w hen the defendant is engaged in an ultrahazardous activity . An ultrahazardous activity is one that is so inherently dangerous that the risk to human life is great if anything wrong happens, so the person carrying out the ultrahazardous activity is held str ictly liable for those activities. Transporting dangerous chemicals or nuclear waste, for example, is inherently dangerous. If the chemicals spill, it is very difficult, if not impossible, to prevent injury to property or persons. Similarly, businesses tha t use dynamite, such as building demolition crews, run the risk that no matter how careful they are, people or property could be damaged by intentionally igniting dynamite. There fore, strict liability applies. Strict liability also applies when restaurants, bars, and taverns serve alcohol to minors or visibly intoxicated persons. This activity is dangerous, and there is a high risk of probability that these patrons, if they drive, will injure others. Many states have dram shop acts that impose st rict liability in this circumstance. Saylor URL: http://www.saylor.org/books Saylor.org 233 You might wonder why defendants are held strictly liable if they are acting reasonably or are even being ultracautious. As with most issues in law, the answer lies in social policy. In essence, strict liability torts ex ist because businesses that engage in covered activities (such as transporting hazardous chemicals or operating bars) profit from those activities. They are also in the best position to ensure that every precaution can be taken to avoid an unexpected event , which may have catastrophic consequences. Victims of these events are often innocent members of the public who are not in any position to avoid being injured and therefore should not be denied a legal remedy simply because the defendant took prudent prec autions. This social policy concern is also expressed in the most important area of strict liability application, strict product liability . In strict product liability, any retailer, wholesaler, or manufacturer that sells an unreasonably dangerous product is strictly liable. For example, Toyota recently disclosed that it had manufactured and sold several vehicle models with faulty accelerators, leading to several cases of unintended acceleration and subsequent deaths. Vehicles that accelerate unintentionall y are clearly unreasonably dangerous. In this case, the manufacturer (Toyota Japan), the wholesaler or importer (Toyota’s U.S. sales company), and the retailer (local dealers) are all strictly liable for injuries caused by these faulty accelerators. Note, however, that strict liability applies only to commercial sellers. If a private citizen sold his or her Toyota on Craigslist, for example, he or she would not be strictly liable for selling an unreasonably dangerous product. To demonstrate that a product is unreasonably dangerous, plaintiffs have two theories available to them. First, they might allege that the product was defective because of a flaw in the manufacturing process. Under this theory, the vast majority of product s being produced turn out fine, but due to some sort of production defect, a few samples or a batch turns out defective. If these defective samples are sold to the public, the manufacturer or seller is strictly liable. A light bulb factory that manufacture s a million safe light bulbs, for example, and then manufacturers one that explodes when it is turned on due to some production defect, is strictly liable for the injuries caused. Similarly, a frozen pizza factory that produces thousands of pizzas without any trouble would be strictly liable if one frozen pizza is produced that contains foreign contaminants because of a production defect such as an inattentive worker or machine breakdown. Saylor URL: http://www.saylor.org/books Saylor.org 234 Second, a product may be defective because of a design defect. Here, there is nothing wrong with the manufacturing or production of the product. Rather, the product is defective because it was designed incorrectly or in a manner that causes the product to be unreasonably dangerous. Engineers continually work to design produ cts to be as safe as possible, but in some cases the product is nonetheless dangerous, and the manufacturer or seller is strictly liable. For example, starting in 1991 several Boeing 737 jetliners began experiencing unexpected movement in the rudder, leadi ng to several high -profile crashes including a USAir flight in Pittsburgh that killed 132 people. [1] During the course of investigation, the government discovered that the part that controls the rudder gets very cold in flight, and when it is injected wit h hot hydraulic fluid, the part can jam and move the rudder in the opposite direction of what the pilot is calling for. This design defect was eventually fixed by upgrading the rudder control systems on all existing Boeing 737s worldwide. Hyperlink: What’s Wrong with the Tire? http://www.time.com/time/business/article/0,8599,128198,00.html In 1999 Ford customers in the Middle East began experiencing tread separation problems on Ford Explorer SUVs. The tires would disintegrate, leading to a loss of control and often a rollover crash. The company initially believed that the problem was limited to the Middle East because of unique characteristics there such as extremely hot weather, lowered tire inflation pressures for driving in sand, and harsh operating environments. Soon, however, vehicles in the United States, especially in hotter regions of the country, began experiencing the same problems. The death toll mounted to over 170 deaths and over 700 injuries from these accidents. Ford’s investigation led the company to believe that certain fifteen -inch tires manufactured by Firestone were to blame; virtually all the accidents involved Firestone tires manufactured in one pl ant in Decatur, Illinois (now closed). Similar vehicles equipped with Goodyear tires rarely experienced tread separation problems. Firestone, on the other hand, blamed the Ford Explorer for being defectively designed. Firestone argued that the Explorer lac ked critical safety features to lower the center of gravity, reduce the propensity to roll over, and lessen the chance of underinflating the tires. Firestone pointed out that the same tires did not experience any problems when installed on GM vehicles. Whe ther the fault lay with a production defect in Firestone tires or design defect in Ford Explorers, both companies were strictly liable. Ford spent over $3 billion recalling the tires and Saylor URL: http://www.saylor.org/books Saylor.org 235 ended its one -hundred -year relationship with Firestone. Congress also responded, passing a federal law requiring all vehicles to be equipped with tire pressure monitoring systems. Many product liability cases arise from the defective design theory because courts have held that the warning labels on products, as well as acco mpanying literature, are all part of a product’s design. A product that might be dangerous if used in a particular way, therefore, must have a warning label or other caution on it, so that consumers are aware of the risk posed by that product. Manufacturer s must warn against a wide variety of possible dangers from using their products, as long as the injury is foreseeable. If consumer misuse is foreseeable, manufacturers must warn against that misuse as well. For these reasons, window blinds come with warni ngs about choking hazards posed by the rope used to raise and lower them, and hair dryers come with warnings about operating them in bathtubs and showers. While you may think that these warnings are a little silly, keep in mind that products can harm or ki ll people who don’t know how to use them correctly. For example, in one case, a woman traveling in the passenger seat of a GM SUV was killed in a low -speed collision in a parking lot when airbags deployed in a collision. The woman was killed because her se at was reclined and rather than being restrained by the seat and seatbelt, she “submarined” underneath the seat belt and hit the deploying airbag. When her family sued GM, the company argued that seats and seatbelts work only when the seat is in an upright position and that the owner’s manual warns not to recline the seat when the vehicle is in motion. The family argued successfully that this warning was not clear and conspicuous enough, and that as a result many people travel with their seat reclined. Do y ou believe the lack of a clear and conspicuous warning about the danger of traveling with the seat reclined makes a vehicle’s design defective? Hyperlink: A Near -Fatal Mistake Due to Labeling? http://www.usatoday.com/life/people/2007 -12-04 -quaid -lawsuit_N.htm Figure 7.9 Saylor URL: http://www.saylor.org/books Saylor.org 236 Should these labels be more distinctive to prevent mistakes? Source: http://www.steadyhealth.com/articles/What_do_Anticoagulants_do__a667.html . In November 2007 actor Dennis Quaid and his wife Kimberly were celebrating the bi rth of their newborn twins at Cedars -Sinai Medical Center in Los Angeles. The twins suffered a staph infection, and doctors prescribed a blood thinner to prevent blood clots. The blood thinner, Heparin, comes in two doses, with the heavier dose one thousan d times more potent than the lower dose. However, the two doses come in similar packaging with blue labels. Nurses at the hospital inadvertently gave the twins the higher dose, nearly killing the twins. In Indianapolis earlier that year, three premature in fants did in fact die from overdosing on Heparin. The Quaids are suing the manufacturer, arguing that the labels on the drug represent a design defect because it is too easy to confuse the two doses. The manufacturer, Baxter Healthcare, has since changed t he design to include a red warning label that must be torn off before the drug can be used. There are several defenses to strict product liability. Since product liability is strict liability, the plaintiff’s contributory or comparative negligence is not a defense. However, assumption of risk can be a defense. As in negligence, the user must know of the risk of harm and voluntarily assume that risk. For example, someone cutting carrots with a sharp knife voluntarily assumes the risk that the knife may slip and cut him or her, meaning he or she cannot sue the knife manufacturer. However, if Saylor URL: http://www.saylor.org/books Saylor.org 237 the knife blade unexpectedly detaches from the knife handle because of a design or production defect, and injures the user, then there is no assumption of risk since the u ser would not have known about that particular risk. Product misuse is another defense to strict product liability. If the consumer misuses the product in a way that is unforeseeable by the manufacturer, then strict liability does not apply. Modifying a lawn mower to operate as a go -kart, for instance, is product misuse. Note that manufacturers are still liable for any misuse that is foreseeable, and they must take steps to warn against that misuse. A related defense is known as the commonly known danger doctrine. If a manufacturer can convince a jury that the plaintiff’s injury resulted from a commonly known danger, then the defendant may escape liability. K E Y T A K E A W A Y S In areas where strict liability applies, the defendant is liable no matter how careful the defendant was in preventing harm. Carrying out ultrahazardous activities results in strict liability for defendants. Another area where strict liability applies is i n the serving of alcohol to minors or visibly intoxicated persons. A large area of strict liability applies to the manufacture, distribution, and sale of unreasonably dangerous products. Products can be unreasonably dangerous because of a production defect , design defect, or both. A product’s warnings and documentation are a part of a product’s design, and therefore inadequate warnings can be a basis for strict product liability. Assumption of risk, product misuse, and commonly known dangers are all defense s to strict product liability. E X E R C I S E S 1. Is the risk of death from smoking a commonly known danger? It may be today, but in the fifties and sixties, the tobacco industry undertook an extraordinary campaign to convince the public that there was no harm in smoking cigarettes, and even suggested that smoking may have health benefits. See http://tobacco.stanford.edu for a collection of some of the print advertising from this era. Should older plaintiffs who grew up viewing these advertisements be allowed to sue tobacco companies under strict product liability? Why or why not? 2. Is fast food or restaurant food an unreasonably dangerous product? Many nutritionists and doctors believe that excessive consumptio n of fast food and restaurant food can lead to obesity, high blood Saylor URL: http://www.saylor.org/books Saylor.org 238 pressure, heart disease, diabetes, and other health complications including premature death. You may be surprised at exactly how bad these food products can be for you. See http://www.youtube.com/watch?v=MtgOmChwAm4 for an example of how unhealthy eating out at Italian restaurants can be. Should these food producers therefore take steps to make their product less dangerous or to warn about the dangers of overconsumption? Should Congress pass legislation such as the Personal Responsibility in Food Consumption Act to immunize the food industry from product liability suits? 3. Stella Liebeck, an elderly grandmother, received thir d-degree burns when she spilled coffee purchased at a McDonald’s drive -through. At trial, experts testified that McDonald’s coffee was too hot to be consumed at the point of purchase, was hotter than any other restaurant’s coffee or coffee brewed at home, and was so hot that third -degree burns would result within three to five seconds of coming into contact with the skin. McDonald’s also conceded that the coffee was brewed extremely hot for commercial (profit) reasons, because most customers wanted coffee t o be hot throughout their commute. After finding the company liable, the jury awarded Mrs. Liebeck two days’ worth of coffee sales at McDonald’s, an amount equivalent to $2.7 million, in punitive damages. The award, although reduced to much less than that, set off a firestorm of criticism that has not died down to this day. Do you believe that it’s possible for coffee to be unreasonably dangerous? See http://www.hotcoffeethemovie.com for one filmm aker’s perspective on this case. [1] “When Jets Crash: How Boeing Fights to Limit Liability,” Seattle Times , October 30, 1996, http://seattletimes.nwsource.com/news/local/737/part04 (accessed September 27, 2010). Saylor URL: http://www.saylor.org/books Saylor.org 239 7.4 Concluding Thoughts Tort law is continually changing and adapting to societal expectations about the freedoms and interests we expect to protect. Although it has endured for many years, recent debates have sought to recast the viability of tort law in political terms. The Republican Party platform, for example, maintains that the rule of tort trial lawyers threatens America’s “global competitiveness, denies America ns access to the quality of justice they deserve, and puts every small business one lawsuit away from bankruptcy.” [1] Many businesses see tort lawsuits as a nuisance at best and ruinous at worst, and would like to see them disappear altogether. Consumer r ights activists, on the other hand (and often backed by plaintiff lawyer groups), believe that tort lawsuits are the most effective way to keep corporations honest and prevent them from putting profits before safety. This debate has led to several proposal s for tort reform among the various states, or by the federal government. These reforms can take several different forms. One common reform is to impose a statute of repose on product liability claims. These statutes function like a statute of limitations and bar plaintiffs from filing tort claims after a certain period of time has lapsed. For example, in 1994 President Clinton signed the General Aviation Revitalization Act into law, imposing an eighteen -year statute of repose on product liability claims br ought against general aviation aircraft manufacturers such as Cessna and Piper. The law allowed these manufacturers to once again launch new light aircraft production in the United States. Another popular tort reform is a cap on punitive damages. President George W. Bush supported a nationwide punitive damage cap of $250,000 for medical malpractice claims, but Congress did not pass any such law. Other reforms call for eliminating defective design as a basis for recovery, barring any claims if a product has been modified by the consumer in any way, and allowing for the state -of-the -art defense (if something was “state of the art” at the time it was produced then no strict liability can apply). Occasionally Congress passes legislation that provides industry -wi de tort lawsuit protection for certain industries. For example, in 2005 President George W. Bush signed the Protection of Lawful Commerce in Arms Act. The law shields firearm manufacturers and dealers from product liability lawsuits for crimes committed wi th their products. Many industries have tried to obtain this form of Saylor URL: http://www.saylor.org/books Saylor.org 240 industry -wide protection, either from Congress or from judicial rulings. Most recently, drug manufacturers hoped for industry -wide protection by arguing that if the Food and Drug Administ ration approved drug labels, labeling lawsuits would be preempted by the Constitution. The Supreme Court rejected this argument in 2009. [2] In spite of these efforts at tort reform, torts remain an important and viable part of civil law. All businesses, o f all sizes and across all industries, must maintain a keen understanding of the duties and responsibilities imposed by tort law. Being able to understand, and even embrace, these duties can help businesses thrive while keeping consumers and customers safe . [1] Republican National Committee, “2008 Republican Platform,” 2008, http://www.gop.com/2008Platform/Economy.htm#7 (accessed September 27, 2010). [2] Wyeth v. Levine , 555 U.S. ___ (2009), http://www.law.cornell.edu/supct/html/06 -1249.ZS.html (accessed October 2, 2010). Saylor URL: http://www.saylor.org/books Saylor.org 241 Chapter 8 The Property System L E A R N I N G O B J E C T I V E S After reading this chapter, you should understand different classifications of property, including personal property and real property, as well as different types of interests in real property. You will also learn about methods of acquisition and transfer of real property. A t the conclusion of this chapter, you should be able to answer the following questions: 1. What is the difference between real property and personal property? 2. How is ownership interest in personal property transferred? 3. What interests in real property exist? 4. How is real property acquired and transferred? 5. What legal relationships exist between landlord and tenants? The concepts of property and ownership are fundamental to any society. Property refers to tangible and intangible items that can be owned. Ownership is a concept that means the right to exclude others. Disputes over both have been at the root of conflicts and wars since time immemorial. Without laws to protect property ownership, the stability of our society would be seriously undermined. For example, if law did not protect ownership interests in property, then people would have to protect their property themselves. This means that people would have to hire their own security forces to protect their property, or they would have to stand guard over their property personally. It would be difficult to get anything else done. Such a system would likely result in the development of powerful factions. Those with the greatest power would dominate property ownership, and weaker members of society would be at the ir mercy. For example, one of the opening scenes of the movie Black Hawk Down illustrates a U.N. food distribution point in Mogadishu, Somalia. As depicted in that scene, people were waiting to receive the distribution of food, but a powerful, armed faction seized the cargo and opened fire on them. Obviously, such a system of proper ty ownership would prove to be very unsettling, and it would lead to great instability in our economic system. Saylor URL: http://www.saylor.org/books Saylor.org 242 Our legal system creates a peaceful means to acquire, retain, and divest of property, and to settle property disputes. It punishes those who operate outside of those rules. Indeed, those who do not acquire property lawfully or who do not settle property disputes within the confines of our legal system are subjected to criminal and civil penalties. In the United States, our legal system ensures the ability to own property to everyone that the system recognizes can own property. Of course, not everyone has always been able to own property. The history of the United States is replete with examples of exclusion from the property ownership system. Fo r example, at various times and in different ways, married women, African Americans, and people of Chinese and Japanese descent have been subject to restrictions regarding the ownership of real property. Because property law is a state law issue, those res trictions and exclusions varied from state to state. Today, no such restrictions exist. Indeed, even a nonhuman legal person , such as a corporation, can own property. However, some biological beings cannot own property. For example, nonhuman animals cannot own real or personal property in our legal system. This is because nonhuman animals are not legal persons. However, a nonhuman animal can be a beneficiary of a trust in many states. Moreover, not everything is subject to ownership. For instance, the human body cannot be owned by another, though historically, in legal systems that recognized slavery, certain human bodies could be owned. Today, public policy discourages the treatment of human body as personal property, rendering “gifts” of body parts to speci fic individuals largely suspect. For example, organ donees may have a need for an organ destined for transplant into their own bodies after the donor’s body dies, but they do not have a legal right to it. [1]Similarly, the question regarding whether human genes may be owned through patent is a hot topic. Check out Note 8.7 “Hyperlink: When DNA Is Isolated from the Human Body, Is It Subject to Ownership by Patent?” and consider whether the benefits of patentability of certain body parts, like genes, might ou tstrip the concerns surrounding ownership of the human body. Hyperlink: When DNA Is Isolated from the Human Body, Is It Subject to Ownership by Patent? Saylor URL: http://www.saylor.org/books Saylor.org 243 http://www.nytimes.co m/2010/03/30/business/30gene.html Before engaging in questions regarding the evolution of property ownership rights, it is necessary to lay the foundation for studying this fascinating area of law. It is this foundation to which we now turn. This chapter explores the differences between real and personal property, and the acquisition, transfer, and protection of real and personal property interests. Additionally, it examines different interests in real property. Key Takeaways The U.S. legal system protects the rights to own, acquire, protect, and divest of real and personal property. These protections are necessary for peaceful civil society. Historically, different groups of people have been subjected to discriminatory practices —both legal and illegal —rega rding property ownership. Today, legal persons can own, acquire, transfer, and sell property. However, not everything is subject to property ownership concepts. [1] Colavito v. New York Organ Donor Network , 2006 NY Slip Op. 09320 (NY App. Ct. 2006). Saylor URL: http://www.saylor.org/books Saylor.org 244 8.1 Personal Property L E A R N I N G O B J E C T I V E S 1. Distinguish between personal property and real property. 2. Understand classifications of property. 3. Examine methods of acquisition of personal property. 4. Understand the concept of bailment, and the legal duties associated with bailment. Let’s begin with an understanding of the differences between types of property. This is important, because different laws apply to different types of property. While it might be perfectly legal to destroy a piece of personal prope rty —like a chair —without obtaining permission from the government, destruction of real property is a different matter altogether. For example, the owner of an office building who wishes to demolish it would be subject to many local laws, such as requiremen ts to obtain the necessary permits. Such an activity might also be subject to further legal scrutiny, if the building in question holds particular historic value, for example. Let’s compare this to the destruction of a chair, which is personal property. Ev en if the chair is the chair that Abraham Lincoln sat in while drafting the Emancipation Proclamation, as long as the chair is owned by the person who wishes to destroy it, the owner may simply load it into his or her truck and haul it to the dump. No spec ial permission is required, because there are few legal restrictions to the destruction of private property. As you can see, property can be classified as real or personal. Real property is land, and certain things that are attached to it or associated wit h it. Real property is raw land, such as a forest or a field, as well as buildings, like a house, a condominium, or an office building. Additionally, things that are associated with land, like mineral rights, are also real property. People often talk about real property by using the term real estate , which reflects both the concept of real property and the ownership interest concept of estate . Many businesses, from grocery stores to coffee shops to hotels, rely on real property for customers or clients to v isit to conduct business. Today, many businesses are also conducted virtually, and have only virtual shops. Virtual stores, such as those found on eBay, are not forms of real property. Saylor URL: http://www.saylor.org/books Saylor.org 245 However, certain virtual real properties, such as those found on Second Life, are traded for real money. Check out the two links in Note 8.13 “Hyperlink: “Unreal” Property” to read about this “property” boom, where real business occurs over nonreal property. Hyperlink: “Unreal” Property http://realestate.msn.com/article.aspx?cp -documentid=13107800 http://secondlife.com/land Personal property is property that is not real property. Tangible property is something that can be touched. Moveable, tangible personal property is chattel . Many businesses exist to sell personal property. For example, the primary purpose of retailers such as Wal -Mart, Amazon.com, and Sears is to sell personal pr operty. Some property can also be described as fungible property. Property that can easily be substituted with identical property is said to be fungible. For example, if you bought a pound of sugar from a container containing ten pounds of sugar, you would n’t care which specific grains of sugar made up your purchase, because all the sugar in the container is fungible. Other types of fungible goods include juices, oil, metals such as steel or aluminum, and physical monetary currency. Some personal property i s intangible. Intangible property does not physically exist, but it is still subject to ownership principles, including acquisition, transfer, and sale. For instance, the right to payment under a contract, the right to exclude others from a patented produc t, and the right to prohibit others from using copyrighted materials are all examples of intangible property. Sounds simple, right? Your iPod, your flash drive, and your computer are all personal property. Your dorm room, apartment, or house is real proper ty. So far, so good. But imagine that you found a Jacuzzi for sale that you loved. You plunked down $5,000 to buy it, and you have it delivered to your house. You pay for construction of a deck to surround it and plumbing to service it. Is the Jacuzzi pers onal property or is it real property? This is an example of personal property that becomes attached to the land as a fixture . A fixture is something that used to be personal property, but it has become attached to the land so that it is legally a part of t he land. Fixtures are treated like real Saylor URL: http://www.saylor.org/books Saylor.org 246 property. Accordingly, when real property is transferred, fixtures are transferred as a part of the real property. In our example, if you move, you will have to leave your beloved Jacuzzi behind, unless you make expr ess provisions to remove it. What if you were just renting? Since removing a fixture would cause substantial harm to the property, that fixture remains with the land. The landlord might be very happy about that! Some things that are attached to the land ar e not fixtures but are part of the real property itself. Imagine a farm with one thousand acres planted in corn. Is the corn crop personal property, or is it real property? Or imagine a forest. Maybe the owner has been thinking about timbering the forest f or some extra money. Is the forest personal property, or is it real property? Both the corn crop and trees are examples of real property that can become personal property, if they are severed from the land. This means that when an ear of corn is picked fro m the stalk, the ear of corn becomes personal property, even though while it was growing and still attached the land, it was real property. Likewise, when a tree is felled, that tree is transformed from real property to personal property. Besides property types , property can be classified by ownership , too. Personal property and real property can be private or public. Private property is owned by someone or something that is not the government. Individuals, corporations, and partnerships, for instance, can own private property. Private property can include real property like land or buildings, and personal property, such as automobiles, furniture, and computers. Property that is owned by the government is public property . Yellowstone National Park and the Gi fford Pinchot National Forest are both examples of public property that is real property. Public property can also include personal property, such as automobiles, furniture, and computers owned by state or local governments. Methods of Acquisition of Perso nal Property Personal property may be acquired for ownership in several different ways. For example, if you produce something, then you may own it, unless you are producing it in the capacity of your work for someone else. If you buy four yards of wool fab ric and sew a coat out of it, then you own that coat by virtue of having produced it with your own materials. This is ownership by production . However, if you sew a coat as part of your job while working for your employer, then the employer will own the co at. Saylor URL: http://www.saylor.org/books Saylor.org 247 If you are in the business of producing coats to sell, then you may be a merchant, and the rules of the Uniform Commercial Code (UCC) would govern transactions involving the sale of goods and the purchase of supplies from other merchants. Regardless of whether someone is a merchant or not, purchase is a means of acquiring ownership. Indeed, in today’s world, purchase may be the most common method of acquiring property. Property may also be gifted. A gift is a voluntary transfer of property. Generally, th e donor of the gift must intend to gift the property, the donor must deliver the gift, and the gift must be accepted by the intended recipient, known as the donee . A conditional gift is a gift that requires a condition to be met before the gift will transf er. For example, if your parents said, “You can have a new car, if you graduate from school,” then that would be an example of a conditional gift. If you do not graduate from school, then you cannot have the gift of the car. What if you find something? Dat ing at least to the Institutes of Justinian in Roman law, the concept of “finders keepers” is one known to every preschooler: finders keepers, losers weepers . However, in law, things are not quite so simple. Property that someone finds can be classified in several ways. A finder of personal property may claim ownership of the property if it is abandoned . The owners of abandoned property must intend to relinquish ownership in it. For example, if you take your chair to the landfill, you have abandoned the cha ir. Someone may come along and take possession of it, which will place ownership of the chair in that person. If you change your mind later, that’s too bad. The chair now belongs to the new owner. However, if the property is simply lost or mislaid , then the finder must relinquish it once the rightful owner demands its return. If the finder refuses to return lost or mislaid property to its rightful owner, the owner can sue for conversion , which is a tort. Conversion is intentional, substantial interference with the chattel of another. Another classification of personal property applicable to found property is treasure trove. A treasure trove is money or precious metals, like gold, for which the concept of “finders keepers” sometimes is applicable. Imagine f inding the next -generation iPhone just lying on a bar stool. It has not been released yet, but there you are with an actual prototype in your hands! This is valuable property because it embodies the cutting -edge intellectual property of Apple, both in util ity and design. Brian Hogan found himself in this Saylor URL: http://www.saylor.org/books Saylor.org 248 position. Apparently, an Apple software engineer had accidentally left the prototype on a bar stool one evening. Hogan decided to sell the prototype to Gizmodo, a tech site, which was willing to pay for it so that it could write an early and exclusive review of this soon -to-be hot item on the market. Gizmodo subsequently discovered that Apple had lost an iPhone prototype and wanted it returned. Regardless of that fact, Gizmodo dismantled the prototype and pu blished photos on its Web site. Subsequently, it returned the property to Apple. [1] Was the prototype of the next -generation iPhone abandoned, lost, mislaid, or a treasure trove? If Apple filed a civil lawsuit against Gizmodo, what would the claim be and who should win? Since we know that Apple wanted the property back, we know that it had no intention of relinquishing ownership of it. Therefore, the property was not abandoned. Since a next -generation iPhone is not money or precious metals —even though it i s very valuable and worth a lot of money to Apple —the concept of treasure trove does not apply. A phone is not actual coin or cash. In this case, the property was either lost or mislaid, because it was unintentionally relinquished or set down for later ret rieval, but the owner had forgotten where it was placed. In either case, if the phone had not been returned, Apple could have brought a suit for conversion. A successful conversion claim would have awarded damages to Apple. Just like any successful convers ion claim, damages would not include a requirement to return the property itself. Incidentally, California has captured the duty to return lost or mislaid property in its criminal statutes, and the facts of this case are being investigated for possible the ft charges. Check out Note 8.32 “Hyperlink: Finders Keepers?” for this story and two additional cautionary tales about claiming found property. Hyperlink: Finders Keepers? Be careful what you wish for. These stories might seem like a miracle to the cash -strapped, but they are cautionary tales. Next -Generation iPhone Saylor URL: http://www.saylor.org/books Saylor.org 249 Gizmodo published the details of a found iPhone prototype here http://gizmodo.com/5520164/this -is- apples -next -iphone , but the prototype became the subject of law enforcement and an Apple complaint, as seen here: http://www.cnn.com/2010/TECH/04/30/wired.iphone.finder/index.html?iref=allsearch Cold Cash, Hot Lead This found “money” along an interstate might be abandoned, lost, or mislaid, but it is unlikely to be claimed by its rightful owner: http://www.cnn.com/video/#/video/us/2008/12/05/wa.found.money.KING?iref=allsearch A Renovator’s Fantasy This found money in the walls of a house might be an example of a treasure trove, but the treasure was quickly dissipated by legal troubles: http://www.cbsnews.com/stories/2007/12/13/eveningnews/main3617369.sh tml and the epilogue: http://www.nytimes.com/2008/11/09/us/09house.html Bailment Sometimes it is necessary to intentionally leave personal property with someone else. For example, imagine that you own a cat. If your cat, which is considered to be chattel, needs to have surgery, you will need to leave her at the veterinary hospital. Clearly, taking your cat to a veterinary hospital does not constitute abandonment. Likewise, you have not lost or mislaid your cat. And, precious though she may be, your cat is not subject to the concept of treasure trove. Instead, in this situation you will be known as bailor , and you will be seeking a bailment with your veterinarian. A bailor is someone in the rightful possession of personal property who gives the property to someone else to hold. A bailment is the arrangement in which when the rightful possessor (such as the owner) of personal property gives the property to someone else to hold. The hol ding party, known as the bailee , agrees to accept the property and has the duty to return it. The bailee is someone who is in possession of someone else’s property. In our example, you rightfully have possession of your cat because she is your personal pro perty. You give your cat to the veterinarian to hold, who has agreed to accept the cat. You also rightfully expect that the Saylor URL: http://www.saylor.org/books Saylor.org 250 cat will be returned to you on demand. Indeed, the veterinarian has a duty, by virtue of the bailment, to return the cat to you. Con sider Note 8.36 “Hyperlink: Lost Dog” , where Delta Airlines was the bailee of a dog, which it lost. Hyperlink: Lost Dog Check out this link. Do you think the remedy offered by Delta Airlines is adequate in this case? Why or why not? http://www.clickondetroit.com/news/23515167/detail.html The bailee has certain duties to the bailor. For example, a bailee has a duty to take reasonable care of the property while the property is in his or her possession. This means different things for different types of bailment. If the bailee is the only party who benefits from the bailment, then the bailee must take extraordinary care with the personal property. A common example of a bailee be ing the only party who benefits is where the owner of the property loans the property to someone for his or her use. For instance, if you loan your neighbor a snow shovel without asking for something in return, then your neighbor receives the sole benefit of the bailment. His or her duty of care is that he or she must take extraordinary care with the snow shovel. However, when both parties receive benefit from the bailment, such as when you rent a DVD from Blockbuster, only the duty of ordinary care is impo sed on the bailee. The bailee receives the DVD and Blockbuster receives a rental fee. When the benefit of the bailment exists for the benefit of the bailor only, then only minimum care is required. Gross negligence will give rise to liability, but there is no great duty for the bailee to be as careful as he or she would be if he or she were receiving some benefit. If someone asks you to hold his or her books while he or she jumps into a swimming pool, you would have a minimum duty of care. If you lost the b ooks, then you would not be liable. However, if you intentionally threw the books into the pool, then you would be grossly negligent and liable for damages. An involuntary bailment is created when someone finds lost or mislaid property. The finder may not destroy the property, though the duties that he or she owes regarding the property may vary from state to Saylor URL: http://www.saylor.org/books Saylor.org 251 state. A voluntary bailment is created when intention exists to create the bailment, as described in the previous paragraph. As you can imagine, bailment is common in business. Examples of bailment in business include placing packages or goods with common carriers for delivery, warehousing goods with a third party prior to sale or delivery, or taking clients’ or customers’ automobiles in a valet se rvice. Consider whether a business should be able to disclaim bailment (and the duties that go along with bailment). For example, if a hotel required its guests to sign a “no bailment created” clause on check -in, should that excuse the hotel from liability if the guests’ personal property is damaged while the property is left in the hotel? K E Y T A K E A W A Y S Property is classified as real property or personal property, tangible or intangible, and private or public. Personal property can be transformed into real property when it is affixed to the land. Real property can be transformed into personal property whe n it is severed from the land. Personal property can be acquired for ownership through production, purchase, or gift or, in certain circumstances, by finding it. Bailments are legal arrangements in which the rightful possessor of personal property leaves t he property with someone else who agrees to hold it and return it on demand. E X E R C I S E S 1. Classify the following as (1) personal property or real property, (2) tangible or intangible property, and (3) fungible property: a. A prosthetic device, for example, an artificial leg b. An expected inheritance of stock c. Draperies hanging in a dining room d. A bank account with a five -hundred -dollar balance e. A fictional story that you created f. A condominium on the thirty -second floor of a building in lower Manhattan g. The right to r eceive payment for your work (e.g., wages, salary) h. A wig that someone is wearing i. A silo filled with wheat Saylor URL: http://www.saylor.org/books Saylor.org 252 j. The wheat in a silo Would you be willing to pay real money for nonreal property in a virtual world like Second Life? Why or why not? What are people b uying when they buy virtual real property? How does this differ from buying actual real property, like land? If you found a prototype of the next -generation iPhone lying on a bar stool, what would you have done with it? What would be the consequences of yo ur chosen action? Think of an example of when you have asked for a bailment. Did you feel confident that you would receive your personal property when you demanded it? Did you worry that it would be damaged in any way? If it had been misdelivered, what wou ld your legal remedies be? Should bailees be permitted to disclaim liability for bailment agreements? Why or why not? At major league baseball games, who do you think owns the baseball when it is being played, and who owns it when the ball enters the stand s where members of the public sit? Who owns the ball if a member of the public picks it up? [1] Edward C. Baig, “Gizmodo: Lost Next -Gen iPhone Returned to Apple,” USA Today , April 21, 2010, http://www.usatoday.com/tech/products/2010 -04 -20 -iphone_N.htm (accessed September 27, 2010). Saylor URL: http://www.saylor.org/books Saylor.org 253 8.2 Real Property L E A R N I N G O B J E C T I V E S 1. Understand the concept of real property. 2. Examine methods of acquisition of real property. 3. Understand different interests in real property, including ownership interests and scope of interests. 4. Examine the landlord -tenant relationship. Real property is land, and certain things that are a ttached to it or associated with it. Real property includes undeveloped land, like a forest or a field, and it includes buildings, such as houses, condominiums, and office buildings. Real property also includes things associated with the land, like subsurf ace rights. Fixtures are personal property that have become attached to the land, and they are transferred with the land. Fixtures in a house include things like the lights affixed to the ceiling, the furnace, and the bathtub. Plants and trees that grow on the land are real property until they are severed from the land. For example, farmers’ crops are part of their real property until they are separated from the land, at which time they become personal property. Methods of Acquisition Real property may be acquired for ownership (the title may be obtained) in one of several ways. It may be purchased, inherited, gifted, or even acquired through adverse possession. Ownership rights are transferred by title . Ownership of real property means that the owner has t he right to possess the property, as well as the right to exclude others, within the boundaries of the law. If someone substantially interferes with your use and enjoyment of your real property, you may bring a claim in nuisance (a form of tort law). For e xample, if a neighbor decides to start burning tires on his property, the smell of the burning tires might substantially interfere with your use and enjoyment of your property, so you would have an actionable claim in nuisance. Similarly, if you own real p roperty, you might rightfully seek damages against those who enter your land without