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Business Law Today 8th Edition by Miller- TB
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Chapter 2

 

 

Constitutional Law

 

 

 

 

N.B.:  TYPE indicates that a question is new, modified, or unchanged, as follows.

 

N       A question new to this edition of the Test Bank.

+       A question modified from the previous edition of the Test Bank,

=       A question included in the previous edition of the Test Bank.

 

true/false questions

 

  1. A federal form of government is one in which sovereign power is vested entirely in a central governing authority.

 

ANSWER:    F                              PAGE:     36                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Critical Thinking

 

  1. Under the Constitution, the judicial branch enforces the laws.

 

answer:    F                              PAGE:     36                             type:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. The courts can hold acts of the legislative and executive branches unconstitutional.

 

ANSWER:    T                              PAGE:     36                             TYPE:      +

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. The state governments retain all powers not specifically delegated to the federal government.

 

answer:    T                              PAGE:     36                             type:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. The Constitution provides for three branches of government.

 

ANSWER:    T                              PAGE:     36                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

  1. The federal government cannot regulate commerce within a state, even if the commerce concerns more than one state.

 

ANSWER:    F                              PAGE:     38                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Critical Thinking

 

  1. Congress may regulate any activity that substan­tially af­fects interstate commerce.

 

ANSWER:    T                              PAGE:     38                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Critical Thinking

 

  1. State police powers relate solely to criminal law enforcement.

 

ANSWER:    F                              PAGE:     39                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Critical Thinking

 

  1. Local governments, including cities, can exercise police powers.

 

ANSWER:    T                              PAGE:     39                             TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Critical Thinking

 

  1. When state regulations impinge on interstate commerce, commerce must yield to the regulations.

 

ANSWER:    F                              PAGE:     41                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Critical Thinking

 

  1. Under the supremacy clause, when there is a direct conflict between a federal and a state law, both laws are given equal effect.

 

ANSWER:    F                              PAGE:     41                             TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. 12. Whether the federal government has preempted a certain area is always clear.

 

answer:    F                              PAGE:     41                             type:      N

NAT: AACSB Analytic                           LOC:  AICPA Critical Thinking

 

  1. The Bill of Rights protects individuals against various types of interference by the federal government.

 

ANSWER:    T                              PAGE:     42                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Some constitutional protections apply to business entities.

 

ANSWER:    T                              PAGE:     42                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Critical Thinking

 

  1. The federal government retains all powers not specifically delegated to the states.

 

ANSWER:    F                              PAGE:     42                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. The Bill of Rights confers absolute rights, not subject to interpretation by the United States Supreme Court.

 

ANSWER:    F                              PAGE:     42                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Critical Thinking

 

  1. The Bill of Rights protects individuals against various types of interfer­ence by the states.

 

ANSWER:    T                              PAGE:     42                             TYPE:      +

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. The First Amendment protects symbolic speech.

 

ANSWER:    T                              PAGE:     43                             TYPE:      +

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

  1. Expression of all kinds is subject to reasonable restrictions.

 

ANSWER:    T                              PAGE:     43                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. The First Amendment does not protect commercial speech as extensively as noncommercial speech.

 

answer:    T                              PAGE:     44                             type:      +

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

  1. A restriction on commercial speech that implements a substantial government interest may be valid.

 

ANSWER:    T                              PAGE:     44                             TYPE:      +

NAT: AACSB Analytic                           LOC:  AICPA Critical Thinking

 

  1. Political speech that would otherwise be protected by the First Amendment is prohibited if its source is a corporation.

 

ANSWER:    F                              PAGE:     44                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

  1. The First Amendment protects obscene speech.

 

ANSWER:    F                              PAGE:     44                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

  1. A federal law that promotes a religion is unconstitutional.

 

ANSWER:    T                              PAGE:     47                             TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. The First Amendment requires a complete separation of church and state.

 

ANSWER:    F                              PAGE:     47                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

  1. A state law that places a significant burden on religion is unconstitutional.

 

ANSWER:    T                              PAGE:     47                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

  1. Procedural due process requires that any taking of a person’s life, liberty, or property by government must be made fairly.

 

ANSWER:    T                              PAGE:     52                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A law that restricts a fundamental right does not violate substantive due process if it promotes a compelling state interest.

 

ANSWER:    T                              PAGE:     53                             TYPE:      +

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A law that restricts a fundamental right violates substantive due process regardless of the type of state interest that the law “promotes.”

 

ANSWER:    F                              PAGE:     53                             TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A law that distinguishes between or among individuals violates the equal protection clause.

 

ANSWER:    F                              PAGE:     53                             TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Critical Thinking

 

  1. The terms “procedural due process” and “equal protection” mean the same thing.

 

ANSWER:    F                              PAGE:     53                             TYPE:      +

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Equal protection means that the government must treat similarly situated individuals in a similar manner.

 

ANSWER:    T                              PAGE:     53                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. State laws often significantly protect individuals’ privacy rights.

 

answer:    T                              PAGE:     55                             type:      N

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

  1. The Constitution specifically guarantees a right to privacy.

 

ANSWER:    F                              PAGE:     56                             TYPE:      +

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

  1. Any person can ask for copies of any information on that person contained in federal government files.

 

answer:    T                              PAGE:     57                             type:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

 

MULTIPLE-CHOICE questions

 

  1. Under the U.S. Constitution

 

  1. neither the national government nor the states have sovereign power.
  2. the national government and the states share sovereign power.
  3. the national government exercises all sovereign power.
  4. the states exercise all sovereign power.

 

answer:    B                              PAGE:     36                             type:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

  1. Under the U.S. Constitution, the legislative branch of the government

 

  1. administers the laws.
  2. enforces the laws.
  3. interprets the laws.
  4. makes the laws.

 

ANSWER:    D                              PAGE:     36                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. The U.S. Constitution sets out the authority and the limits of the branches of the government. The term checks and balances means that

 

  1. Congress writes checks and the president balances the budget.
  2. each branch of government has some power to limit the actions of the other branches.
  3. each branch of government may exercise the authority of the other branches.
  4. the president “checks” the courts, which “balance” the laws.

 

ANSWER:    B                              PAGE:     36                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Household Furnishings, Inc., distributes its merchandise on an inter­state basis. Under the commerce clause, Congress has the power to regulate

 

  1. any commercial activity in the United States that substantially affects interstate commerce.
  2. only activities that are in intrastate commerce.
  3. only activities that are in local commerce.
  4. only activities that are not in commerce.

 

answer:    A                              PAGE:     36                             type:      +

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Wisconsin, like other states, may regulate private activities to protect or promote the public order, health, safety, and general welfare under its

 

  1. police powers.
  2. taxing powers.
  3. spending powers.
  4. supreme powers.

 

ANSWER:    A                              PAGE:     39                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. The Michigan state legislature enacts a transportation statute that impinges on interstate commerce. The courts will

 

  1. balance the burden the law imposes on the state against the merit and purpose of interstate commerce.
  2. balance the state’s interest in regulating the subject of the law against the burden the law imposes on interstate commerce.
  3. strike down the law.
  4. uphold the law.

 

ANSWER:    B                              PAGE:     41                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Tom files a suit against the state of Utah, claiming that a Utah state law violates the commerce clause. The court will agree if the statute

 

  1. imposes a substantial burden on interstate commerce.
  2. promotes the public order, health, safety, morals, or general welfare.
  3. regulates activities within Utah’s borders.
  4. regulates private activities.

 

answer:    A                              PAGE:     41                             type:      +

NAT: AACSB Reflective                        LOC:  AICPA Decision Modeling

 

  1. If there is a direct conflict between a federal law and an Alaska state law

 

  1. Alaska’s law takes precedence.
  2. both laws are invalid.
  3. both laws govern concurrently.
  4. the federal law takes precedence.

 

ANSWER:    D                              PAGE:     41                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. A New Hampshire state law that directly conflicts with a federal law is invalid under

 

  1. the commerce clause.
  2. the equal protection clause.
  3. the establishment clause.
  4. the supremacy clause.

 

            ANSWER:    D                              PAGE:     41                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. When there is a direct conflict between a decision by a federal Environmental Protection Agency (EPA) administrator on a matter that comes within the EPA’s jurisdiction and a Hawaii state law

 

  1. Hawaii’s law takes precedence.
  2. both the decision and the law are invalid.
  3. both the decision and the law apply concurrently.
  4. the EPA’s decision takes precedence.

 

ANSWER:    D                              PAGE:     41                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Mike, an advocate of a certain religion, publishes an article in New Times magazine insisting that Congress base all federal law on his religion’s principles. The First Amendment guarantees Mike’s freedom of

 

  1. religion only.
  2. speech only.
  3. the press only.
  4. religion, speech, and the press.

 

ANSWER:    D                              PAGE:     42                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Dian, a U.S. citizen, is the owner of Eagle, Inc. The Bill of Rights embod­ies a series of protections for Dian against various types of interference by

 

  1. business entities only.
  2. private individuals only.
  3. the government only.
  4. business entities, private individuals, and the government.

 

answer:    C                              PAGE:     42                             type:      +

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. The police obtain a search warrant and search Dave’s apartment. After yelling obscenities at the officers, Dave confesses to a crime and impli­cates his friends. The Constitution protects against

 

  1. obscene speech only.
  2. implication of others only.
  3. unreasonable searches only.
  4. obscene speech, implication of others, and unreasonable searches.

 

answer:    C                              PAGE:     42                             type:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Gabe, the president of Hot Sales Company, claims that certain actions by the federal government and by the state of Idaho infringe on rights guar­anteed by the Bill of Rights. All of these rights limit

 

  1. neither the state government nor the federal government.
  2. the federal government only.
  3. the state government and the federal government.
  4. the state government only.

 

ANSWER:    B                              PAGE:     42                             TYPE:      +

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

  1. Fred, the president of Good Retail Corporation, claims that certain ac­tions by the federal government and the state of Hawaii infringe on rights guar­anteed by the Bill of Rights. Most of these rights limit

 

  1. neither the state government nor the federal government.
  2. the federal government only.
  3. the state government and the federal government.
  4. the state government only.

 

answer:    C                              PAGE:     42                             type:      N

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

  1. An Alabama state statute prohibits business entities from using bill inserts to express controversial views. A court would likely hold this law to be

 

  1. an unconstitutional restriction of speech.
  2. constitutional under the First Amendment.
  3. justified by the need to protect individual rights.
  4. necessary to protect state interests.

 

ANSWER:    A                              PAGE:     44                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Alpha Corporation regularly expresses opinions on political issues. Under the First Amendment, corporate political speech is given

 

  1. little protection.
  2. no protection.
  3. significant protection.
  4. total protection.

 

ANSWER:    C                              PAGE:     44                             TYPE:      +

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

  1. Indiana enacts a statute that bans the distribution of anonymous politi­cal leaflets. A court would likely hold this to be

 

  1. an unconstitutional restriction of speech.
  2. constitutional under the First Amendment.
  3. justified by the need to protect individual rights.
  4. necessary to protect state interests.

 

answer:    A                              PAGE:     44                             type:      N

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

  1. A Minnesota state statute restricts certain kinds of advertising to protect consumers from being misled. A court would likely hold this statute to be

 

  1. an unconstitutional restriction of speech.
  2. constitutional under the First Amendment.
  3. justified by the need to protect individual rights.
  4. necessary to protect state interests.

 

ANSWER:    B                              PAGE:     44                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Decision Modeling

 

  1. Cordial Drinks, Inc., markets alcoholic beverages. A federal regulation bans the disclosure of the alcohol content of liquor on Cordial’s labels and those of other marketers. A court would likely hold this regulation to be

 

  1. an unconstitutional restriction of speech.
  2. constitutional under the First Amendment.
  3. justified by the need to protect individual rights.
  4. necessary to protect national interests.

 

ANSWER:    A                              PAGE:     44                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Congress enacts the Tight Money Act (TMA) of 2009 to prohibit “major busi­ness entities” from making political contri­bu­tions that individuals can make. A court would likely hold the TMA to be

 

  1. an unconstitutional restriction of speech.
  2. constitutional under the First Amendment.
  3. justified by the need to protect individual rights.
  4. necessary to protect national interests.

 

ANSWER:    A                              PAGE:     44                             TYPE:      +

NAT: AACSB Reflective                        LOC:  AICPA Decision Modeling

 

  1. Best Sales Corporation regularly advertises its products. Under the First Amendment, these ads and other commercial speech are given

 

  1. less protection than noncommercial speech.
  2. more protection than noncommercial speech.
  3. no protection.
  4. the same protection as noncommercial speech.

 

ANSWER:    A                              PAGE:     44                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

  1. California enacts a statute to ban advertising in “bad taste.” This stat­ute would likely be held by a court to be

 

  1. an unconstitutional restriction of speech.
  2. constitutional under the First Amendment.
  3. justified by the need to protect individual rights.
  4. necessary to protect state interests.

 

answer:    A                              PAGE:     44                             type:      +

NAT: AACSB Reflective                        LOC:  AICPA Decision Modeling

 

  1. In 2009, Congress enacts the Act to Restrict Commercial Speech (ARCS). The ARCS will be considered valid

 

  1. if it directly advances a substantial government interest but goes no further than necessary.
  2. if it directly advances a substantial government interest regard­less of how “far” it goes.
  3. under any circumstances.
  4. under no circumstances.

 

answer:    A                              PAGE:     44                             type:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. The First Amendment protects Gail and other individuals who engage in speech that harms others’ good reputations

 

  1. all of the time.
  2. none of the time.
  3. only if it is commercial speech.
  4. only if it is political speech.

 

ANSWER:    B                              PAGE:     44                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

  1. Xtreme Publications, Inc., disseminates obscene materials. Under nu­mer­ous state and federal statutes, this is

 

  1. a crime.
  2. a privilege.

c          a right under the commerce clause.

  1. a right under the First Amendment.

 

answer:    A                              PAGE:     44                             type:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. The First Amendment protects Ira and other individuals who engage in speech that violates state criminal laws

 

  1. all of the time.
  2. none of the time.
  3. only if it is commercial speech.
  4. only if it is political speech.

 

ANSWER:    B                              PAGE:     44                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Oklahoma enacts a law requiring all businesses in the state to donate 10 per­cent of their profits to Protestant churches that provide certain services to persons whose income is below the poverty level. PriceLess Stores files a suit to block the law’s enforcement. The court would likely hold that this law violates

 

  1. no provision in the U.S. Constitution.
  2. the full faith and credit clause.
  3. the First Amendment.
  4. the supremacy clause.

 

answer:    C                              PAGE:     48                             type:      N

NAT: AACSB Reflective                        LOC:  AICPA Decision Modeling

 

  1. The requirement that no person be deprived of “life, liberty, or property without due process of law” is found in

 

  1. the First Amendment only.
  2. the Fifth Amendment only.
  3. the Fourteenth Amendment only.
  4. the Fifth Amendment and the Fourteenth Amendment.

 

ANSWER:    D                              PAGE:     52                             TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Mary claims that a Nebraska state statute infringes on her “procedural due process” rights. This claim focuses on

 

  1. procedures used in making decisions to take life, liberty, or property.
  2. the content of the statute.
  3. the similarity of the treatment of similarly situated individuals.
  4. the steps to be taken to protect Mary’s privacy.

 

ANSWER:    A                              PAGE:     52                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. A Rhode Island state statute imposes a prison term, without a trial, on all street vendors who operate in certain areas. A court would likely hold this statute to be

 

  1. constitutional under the due process clause.
  2. constitutional under the equal protection clause.
  3. unconstitutional under the due process clause.
  4. unconstitutional under the equal protection clause.

 

ANSWER:    C                              PAGE:     52                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Owen claims that a Pennsylvania state statute infringes on his “substantive due process” rights. This claim focuses on

 

  1. procedures used to make decisions to take life, liberty, or property.
  2. the content of the statute.
  3. the similarity of the treatment of similarly situated individuals.
  4. the steps to be taken to protect Owen’s privacy.

 

ANSWER:    B                              PAGE:     53                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Colorado enacts a statute that limits the liberty of all persons, including corporations, to broadcast “annoying” radio commercials. This may violate

 

  1. equal protection.
  2. procedural due process.
  3. substantive due process.
  4. the right to privacy.

 

answer:    C                              PAGE:     53                             type:      N

NAT: AACSB Reflective                        LOC:  AICPA Risk Analysis

 

  1. A law that limits the liberty of all persons to do something may violate

 

  1. equal protection.
  2. procedural due process.
  3. substantive due process.
  4. none of the choices.

 

ANSWER:    C                              PAGE:     53                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. A Metro City ordinance allows only a few street vendors to operate in certain areas, for the purpose of reducing traffic. A court would likely hold this ordinance to be

 

  1. constitutional under the due process clause.
  2. constitutional under the equal protection clause.
  3. unconstitutional under the due process clause.
  4. unconstitutional under the equal protection clause.

 

ANSWER:    B                              PAGE:     54                             TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

 

ESSAY questions

 

  1. Ann operates Ann’s Fruits & Vegetables, a small market stocked entirely with produce grown on her adjacent farm. Under what clause of the Constitution can the federal government regulate Ann’s activities? What is Ann’s best argument against federal regulation of her farm and business?

 

ANSWER:    Under the commerce clause, according to earlier decisions by the United States Supreme Court, Congress has the power to regulate any activity—interstate or intrastate—that affects interstate commerce. Thus, under that clause, it could be argued that a farmer’s growing and selling of produce are subject to federal regulation because these activities affect interstate commerce. The farmer-vendor’s best argument against federal regulation of her farm and business is that in her case, these ac­tivities and their effects are purely local. Because these activities are economic in nature and hence, de­spite their local character, have an effect on interstate commerce, it is unlikely that a court would accept this ar­gu­ment, however.

 

PAGES:         36–39                                                 type:            =

NAT: AACSB Reflective                        LOC:  AICPA Decision Modeling

 

  1. Acorn Brewery, Inc., makes and sells alcoholic beverages with labels that display a drawing of a squirrel making the gesture generally known as “giving the finger.” Acorn applies to the Ohio State Liquor Authority (OSLA) for brand-label approval to sell the beer in Ohio. Without consid­er­ing alternatives, OSLA denies approval because “the label could ap­pear in grocery stores, with obvious exposure on the shelf to children of tender age.” Why would a court hold that the denial of Acorn’s applica­tion vio­lates the First Amendment?

 

ANSWER:    A court would most likely reason that OSLA’s ban on the use of the labels lacks a “reasonable fit” with the state’s interest in shielding minors from vulgarity, and OSLA did not adequately consider alterna­tives to the ban. The First Amendment protects commercial speech. Commercial speech is not as protected as much as noncommercial speech, however, so states can place some restraints on the former. For example, to protect con­sumers, a state may ban certain kinds of marketing practices, such as de­ceptive or misleading advertising. Generally, a restriction on commercial speech will be considered valid as long as it (1) seeks to implement a sub­stantial government interest, (2) directly advances that interest, and (3) goes no further than necessary to accomplish the objective. The interest of OSLA, as a state agency, in pro­tecting children from vulgar advertising is “substantial.” The question is whether banning Acorn’s labels “directly ad­vances” that interest. A court might reason that barring the label at issue in this problem can­not realis­tically be expected to reduce children’s expo­sure to such dis­plays to any significant degree, considering such displays’ wide cur­rency in society.  Also, as to whether the ban on the labels is more exten­sive than necessary to serve such an interest, a court would likely point out that there may be many, less intrusive alternatives.  For example, OSLA might restrict the locations where Acorn’s products may be dis­played in stores.

 

            PAGE:            44                                                        TYPE:            N

NAT: AACSB Reflective                        LOC:  AICPA Decision Modeling

 

Chapter 4

 

 

Torts and Cyber Torts

 

 

 

 

N.B.:  TYPE indicates that a question is new, modified, or unchanged, as follows.

 

N       A question new to this edition of the Test Bank.

+       A question modified from the previous edition of the Test Bank,

=       A question included in the previous edition of the Test Bank.

 

true/false questions

 

  1. Tort law provides legal remedies for property damage.

 

ANSWER:    T                              PAGE:     104                          TYPE:      +

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Punitive damages are intended to punish a wrongdoer and deter others.

 

answer:    T                              PAGE:     105                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A person may commit an intentional tort if he or she acts knowing with substantial certainty that certain consequences will result.

 

ANSWER:    T                              PAGE:     107                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. To commit an intentional tort, a person must act with a harmful motive.

 

answer:    F                              PAGE:     107                          TYPE:      +

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. The apprehension that an assault will occur need not be reasonable.

 

answer:    f                              PAGE:     108                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

  1. A battery occurs only if the victim suffers actual physical harm.

 

ANSWER:    F                              PAGE:     108                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. False imprisonment is a tort only if the confinement or restraint is justified.

 

ANSWER:    F                              PAGE:     109                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A store manager may delay a suspected shoplifter if the manager has probable cause to justify delaying the suspect.

 

ANSWER:    T                              PAGE:     109                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Slander involves the oral communication of defamatory language.

 

answer:    t                              PAGE:     109                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Defamation involves wrongfully hurting a person’s good reputation.

 

answer:    t                              PAGE:     109                          TYPE:      +

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A written defamatory statement must be communicated to a third party to be actionable.

 

ANSWER:    T                              PAGE:     110                          TYPE:      +

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. An unauthorized scan of a bank account cannot be an invasion of privacy.

 

answer:    F                              PAGE:     113                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. An illegal search can be an invasion of privacy.

 

ANSWER:    T                              PAGE:     113                          TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Unintentionally causing a party to break a contract may constitute wrong­ful interference with a contractual relationship.

 

answer:    F                              PAGE:     114                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

  1. Puffery is fraud.

 

ANSWER:    F                              PAGE:     114                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Bona fide competitive behavior can constitute wrongful interference with a contractual relationship.

 

answer:    F                              PAGE:     116                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. To commit the tort of trespass to land, a person must harm the land.

 

ANSWER:    F                              PAGE:     117                          TYPE:      +

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. An artisan’s lien is a defense to a charge of trespass to personal property.

 

answer:    t                              PAGE:     118                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Conversion is wrongfully taking or retaining an individual’s personal property and placing it in the service of another.

 

ANSWER:    T                              PAGE:     118                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. There is no defense (except innocence) to a charge of conversion.

 

answer:    F                              PAGE:     118                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Publishing false information about another’s product is trade libel.

 

answer:    t                              PAGE:     119                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. An ordinary person standard determines whether allegedly negligent con­duct resulted in a breach of a duty of care.

 

answer:    F                              PAGE:     120                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Business owners have no duty to exercise reasonable care to protect invitees.

 

answer:    F                              PAGE:     121                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

  1. The degree of care to be exercised in a situation can vary with a person’s profession or occupation.

 

answer:    T                              PAGE:     122                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

  1. If a person breaches a duty of care and another person suffers an injury, causation is established.

 

answer:    F                              PAGE:     123                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. In theory, causation in fact is limitless.

 

answer:    T                              PAGE:     123                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Critical Thinking

 

  1. A person assumes all risks associated with any activity in which he or she participates.

 

answer:    F                              PAGE:     123                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. An assumption of risk defense does not require knowledge of the risk.

 

answer:    f                              PAGE:     123                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A superseding cause is an intervening event that imposes liability on a de­fendant for injuries caused by the intervening event.

 

answer:    F                              PAGE:     125                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. The doctrine of res ipsa loquitur applies if an event causing harm does not normally occur in the absence of negligence.

 

answer:    T                              PAGE:     125                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Negligence per se may occur on the violation of a statute.

 

answer:    T                              PAGE:     126                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A defendant is strictly liable for the results of his or her acts only if he or she in­tended those results.

 

answer:    F                              PAGE:     127                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. One of the requirements for a suit based on strict liability is a failure to ex­ercise due care.

 

answer:    F                              PAGE:     127                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. An Internet service provider (ISP) is not normally liable for its users’ defamatory remarks.

 

ANSWER:    T                              PAGE:     128                          TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. There are no statutes regulating the use of spam.

 

ANSWER:    F                              PAGE:     130                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

 

MULTIPLE-CHOICE questions

 

  1. Olga believes that Phil is about to hit her. To prevent harmful contact in this situation, Olga may use

 

  1. any force.
  2. any force, except force that is likely to cause death.
  3. force that is reasonably necessary.
  4. no force.

 

ANSWER:    C                              PAGE:     108                          TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Louie files a suit against Myra for assault and battery. Myra can raise the defense of property as a defense to the charge of

 

  1. assault only.
  2. assault or battery.
  3. battery only.
  4. neither assault nor battery.

 

            ANSWER:    B                              PAGE:     108                          TYPE:      +

NAT: AACSB Reflective                        LOC:  AICPA Legal

  1. At Sea Food Cafe, Tom believes that he was overcharged and shoves Wally, a waiter. Wally sues Tom, alleging that the shove was a battery. Tom is liable if

 

  1. Sea Food did not overcharge Tom.
  2. the shove was offensive.
  3. Tom acted out of malice.
  4. Wally did not wait on Tom.

 

ANSWER:    B                              PAGE:     108                          TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Lon trespasses on Mega Corporation’s property. Through the use of rea­son­able force, Mega’s security guard Ned detains Lon until the police ar­rive. Mega is liable for

 

  1. assault and battery.
  2. false imprisonment.
  3. intentional infliction of emotional distress.
  4. none of the choices.

 

answer:    D                              PAGE:     108                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Ron, the manager of Sav-Mart Discount Store, suspects Tina of shoplifting and detains her. Tina sues Ron, alleging that the detention was false imprisonment. Ron is liable if Tina

 

  1. did not actually shoplift.
  2. had not shoplifted in the past.
  3. had probable cause to leave the premises.
  4. was detained for an unreasonably long time.

 

ANSWER:    D                              PAGE:     109                          TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Dale hears Ed falsely accuse Flo of stealing from Great Warehouse, Inc., their employer. Ed’s statement is defamatory

 

  1. because Dale heard it.
  2. only if Ed made the statement loudly.
  3. only if Ed’s statement is also published in the Dispatch, a local paper.
  4. only if Flo suffers emotional distress.

 

            ANSWER:    A                              PAGE:     110                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Todd files a suit against United Media Corporation for defamation. Actual malice must be shown for recovery of damages if Todd is

 

  1. a corporate officer.
  2. a non-citizen.
  3. a private individual.
  4. a public figure.

 

ANSWER:    D                              PAGE:     111                          TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Ultimate Corporation uses, in its radio ads, a recording by Vicky, who owns the rights, without paying for the use. Over time, the song comes to be asso­ci­ated with Ultimate’s products. Vicky sues Ultimate. Ultimate is most likely liable to Vicky for

 

  1. appropriation.
  2. conversion.
  3. wrongful interference with a customary relationship.
  4. none of the choices.

 

answer:    A                              PAGE:     112                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Kelly is an appliance salesperson. Kelly commits fraud if, to make a sale, she

 

  1. discloses the truth.
  2. represents as a fact something that she knows is untrue.
  3. states an opinion concerning something that she knows nothing about.
  4. uses puffery.

 

ANSWER:    B                              PAGE:     113                          TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Kai files a suit against Lana based on one of Lana’s statements that Kai alleges is fraudulent. To give rise to fraud, the statement must be one of

 

  1. delusion.
  2. fact.
  3. illusion.
  4. opinion.

 

answer:    B                              PAGE:     113                          TYPE:      +

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Acme Computers, a computer store, takes unethical steps to divert the customers of Cyber Goods, an adjacent competing store. Acme may be liable for

 

  1. appropriation.
  2. wrongful interference with a business relationship.
  3. wrongful interference with a contractual relationship.
  4. none of the choices.

 

ANSWER:    B                              PAGE:     116                          TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Curt, a dairy goods salesperson, follows Dona, a competitor’s salesperson, as she visits convenience stores to make sales. Curt solicits each of Dona’s customers. Curt is likely liable for

 

  1. conversion.
  2. trespass to personal property.
  3. wrongful interference with a business relationship.
  4. wrongful interference with a contractual relationship.

 

ANSWER:    C                              PAGE:     116                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Polly invites Quinn onto her land. Quinn commits trespass if

 

  1. Polly asks Quinn to leave and Quinn refuses.
  2. Quinn enters the property in the evening.
  3. Quinn makes disparaging remarks about Polly to third parties.
  4. the property is damaged during the visit.

 

ANSWER:    A                              PAGE:     117                          TYPE:      +

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Bill enters onto Cindy’s property to help Donna, who is in danger. Cindy charges Bill with trespass to land. Bill has

 

  1. a complete defense.
  2. a partial defense.
  3. a possible defense.
  4. no defense.

 

ANSWER:    A                              PAGE:     117                          TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Ned leaves his car with OK Car Shop to have it repaired. After the car is fixed, OK keeps it. OK is not liable for trespass to personal property if

 

  1. Ned refuses to pay for the repair.
  2. Ned thinks his car is a “joke.”
  3. OK is keeping the car as a “joke.”
  4. OK received payment for the repair.

 

ANSWER:    A                              PAGE:     118                          TYPE:      =

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Ollie, a clerk at PC Computer Store, takes a computer from the store without PC’s permission. Ollie is liable for conversion

 

  1. if he damages the computer.
  2. if he does not have a good reason for taking the computer.
  3. if he fails to prevent a theft of the computer from his possession.
  4. under any circumstances.

 

answer:    D                              PAGE:     118                          TYPE:      +

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Axel steals a business law textbook from Bernie. Curt, who does not know that the book is stolen, buys it from Axel. Curt has committed

 

  1. conversion.
  2. disparagement of property.
  3. no tort.
  4. wrongful interference with a business relationship.

 

ANSWER:    A                              PAGE:     118                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Steve, a television news reporter, knowingly broadcasts an untrue story claiming that Medi-Drugs, Inc., mar­kets a medicine for children that con­tains highly addictive drugs. Steve is liable for

 

  1. slander of quality.
  2. slander of title.
  3. wrongful interference with a business relationship.
  4. none of the choices.

 

answer:    A                              PAGE:     119                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Jay drops a bowling ball on Kyla’s foot. Jay is liable for negligence if he acted

 

  1. unrealistically.

b          unreasonably.

  1. unrecognizably.
  2. unreliably.

 

answer:    B                              PAGE:     120                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. To protect its customers and other business invitees, Supreme Retail Corporation must warn them of

 

  1. all dangers.
  2. concealed dangers.
  3. open dangers.
  4. no dangers.

 

answer:    B                              PAGE:     122                          TYPE:      +

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Lola files a suit against Mac, a medical doctor, alleging negligence. As a physician, Mac is held to the standard of

 

  1. an average human being.
  2. a reasonable person.
  3. a reasonable physician.
  4. a typical professional.

 

answer:    C                              PAGE:     122                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Lana hires Mike, an architect, to design a warehouse. When she reviews Mike’s design, Lana is dissatis­fied with the look of the new building and sues Mike, alleging negligence. Mike can successfully defend against the suit by proving that

 

  1. he is not familiar with every principle of art.
  2. his design is as attractive as an ordinary person’s.
  3. Lana could not have designed a more attractive building.
  4. Lana was not injured in any way.

 

answer:    D                              PAGE:     122                          TYPE:      +

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Kit carelessly bumps into Luke, knocking him to the ground. Kit has committed the tort of negligence

 

  1. only if Luke is injured.
  2. only if Luke is not injured.
  3. under any circumstances.
  4. under no circumstances.

 

ANSWER:    A                              PAGE:     122                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Pat files a successful suit against Quality Stores based on Quality’s neg­li­gence. Normally, an award in such a suit consists of

 

  1. comparative damages.
  2. compensatory damages.
  3. contributory damages.
  4. punitive damages.

 

answer:    B                              PAGE:     122                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Driving his sport utility vehicle negligently, Bart crashes into a streetlight. The streetlight falls, smashing through the roof of a house, killing Chris. But for Bart’s negligence, Chris would not have died. Regarding the death, the crash is the

 

  1. cause in fact.

b          intervening cause.

  1. proximate cause.
  2. superseding cause.

 

answer:    A                              PAGE:     123                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Dirk is driving a sport utility vehicle in which Elin is a passenger when they are involved in a traffic accident, and Elin is injured. Liability may be imposed on Dirk for Elin’s injury if Dirk’s driving is

 

  1. neither the causation in fact nor the proximate cause of the injury.
  2. only the causation in fact of the injury.
  3. only the proximate cause of the injury.
  4. the causation in fact and the proximate cause of the injury.

 

ANSWER:    D                              PAGE:     123                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Molly shoots Norm with Opal’s pistol. The proximate cause of Norm be­ing shot is most likely attributable to

 

  1. Molly and Opal.
  2. Molly only.
  3. Opal only.
  4. neither Molly nor Opal.

 

answer:    B                              PAGE:     123                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Clyde enters the Desert Decathlon, an athletic competition in which Clyde has often competed. Regarding the risk of injury, Clyde assumes the risks

 

  1. attributable to the Decathlon in any way.
  2. different from the risks normally associated with the Decathlon.
  3. greater than the risks normally associated with the Decathlon.
  4. normally associated with the Decathlon.

 

ANSWER:    D                              PAGE:     123                          TYPE:      +

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Eve is injured when she slips and falls in Finest Discount Warehouse. Eve files a suit against Finest for $50,000. Under a “pure” comparative negli­gence rule, Eve could recover damages from Finest

 

  1. only if Eve and Finest were equally at fault.
  2. only if Eve was less at fault than Finest.
  3. only if Eve was more at fault than Finest.
  4. whether Eve was less, more, or equally at fault.

 

answer:    D                              PAGE:     125                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. A state statute requires machinery in food processing plants to include automatic shut-off switches that are accessible to each employee working on the ma­chine. Fruit Company’s (FC’s) equipment does not have the switches. Greg, an FC employee, suffers an injury that an accessible shut-off switch would have prevented. Greg’s best ground for recovery is that FC committed

 

  1. a dram shop act.
  2. a violation of the “danger invites rescue” doctrine.
  3. negligence per se.
  4. res ipsa loquitur.

 

answer:    C                              PAGE:     126                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

  1. Amber pushes Brad into the path of an oncoming car driven by Carol. Don tries to rescue Brad, but the car hits both of them. Amber is liable for the injuries of

 

  1. Brad and Don.
  2. Brad only.
  3. Don only.
  4. neither Brad nor Don.

 

answer:    A                              PAGE:     126                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. In an emergency situation, Lori renders aid to Mike, who needs help. Mike would most likely be prohibited from suing Lori for negligence under

 

  1. any circumstances.
  2. a Good Samaritan statute.
  3. a social host statute.
  4. no circumstances.

 

ANSWER:    B                              PAGE:     126                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Eve owns First-Rate Salvage, a demolition company. A demolition by a First-Rate crew injures Glen, a passerby. Under the theory of strict li­abil­ity, Eve must pay for Glen’s injury

 

  1. only if Glen’s injury was not reasonably foreseeable.

b          only if Glen’s injury was reasonably foreseeable.

  1. only if the First-Rate crew was at fault.
  2. whether or not the First-Rate crew was at fault.

 

answer:    D                              PAGE:     127                          TYPE:      +

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Gary is standing on a defective stool when it collapses, causing Gary to fall and suffer an injury. Gary files a suit against Interstate Stools, Inc., the manufacturer. A significant appli­cation of the doctrine of strict liabil­ity is in the area of

 

  1. constitutional law.
  2. ethics.
  3. negligence.
  4. product liability.

 

answer:    D                              PAGE:     127                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Critical Thinking

  1. General Construction Company engages in blasting in its operations. This is subject to strict liability because

 

  1. blasting is an abnormally dangerous activity.
  2. blasting is a negligent activity.
  3. construction can be done without blasting.
  4. General is a construction company.

 

answer:    A                              PAGE:     127                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Critical Thinking

 

 

ESSAY questions

 

  1. Eagle Engineering, Inc., and Fast Code Corporation market competing software products. Eagle launches a series of ads claiming that Fast Code, instead of testing its software before it is marketed, has its customers “test” the software by using it. Fast Code knows this is not true but begins to lose sales to Eagle. On what grounds could Fast Code sue Eagle for the harm to Fast Code’s reputation?

 

ANSWER:    Fast Code could sue Eagle for the harm Eagle is causing to Fast Code’s reputation on the ground of defamation. Defamation occurs when a party makes a false statement that injures another’s reputation. In this problem, any defamatory statements likely take the form of libel (defamatory statements in written or printed form). To bring a suit on this ground, Fast Code would have to show that Eagle published false in­formation—that is, that the information was communicated to a third party. If Fast Code is con­sidered a public figure, it will also need to prove that Eagle made its statements with actual malice—that is, with ei­ther knowledge of their falsity or a reckless disregard for the truth. Publication of false informa­tion about another’s product, alleging that it is not what its seller claims, also constitutes the tort of slander of quality, or trade libel.  To bring a suit on this theory successfully, Fast Code would have to show not only that a third person refrained from dealing with it because of the improper pub­lication but also that there were associated damages. Fast Code might also include a claim based on the tort of misrepresentation, or fraud. Misrep­resentation leads another to believe in a condition that is different from the one that actually exists. This tort requires several elements: (1) mis­representation of facts or conditions with knowledge that they are false or with reck­less disregard for the truth, (2) intent to induce another to rely on the misrepresentation, (3) justifiable reliance by the deceived party, (4) damages suffered as a result of the re­li­ance, and (5) a causal connection between the misrepresentation and the injury.

 

PAGES:         109–112                                            type:            N

NAT: AACSB Reflective                        LOC:  AICPA Decision Modeling

  1. A water pipe bursts, flooding a General Business Company (GBC) utility room and tripping the circuit breakers on a panel in the room. GBC con­tacts Hal, a licensed electrician with ten years of experience, to investi­gate the damage and turn the breakers “on.” Hal attempts to turn on one of the breakers without testing for short circuits, which he knows should be done. Hal is electrocuted, and files a suit against GBC for damages, al­leging neg­ligence. How might GBC defend itself?

 

ANSWER:    GBC might defend against this claim by asserting the de­fense of assumption of risk. GBC could claim that it had no duty to warn Hal of a dangerous risk of which he should have been aware. Given the common knowledge of the accepted practices in the field in which Hal practiced his trade and his level of training and experience, a court might agree that there was no need on the part of GBC to warn Hal of this dan­ger, and that Hal voluntarily entered the risky situation, know­ing the risk involved. GBC might also raise comparative negligence as a defense. All individuals are expected to exercise a reasonable degree of care in looking out for them­selves. Both parties’ negligence—if, indeed, GBC was negli­gent at all—can be computed and the liability distributed accordingly. GBC might also plead assumption of risk, claiming that Hal voluntarily entered into a risky situation, knowing the risk involved.

 

PAGES:         123 & 125                                         type:            N

NAT: AACSB Reflective                        LOC:  AICPA Decision Modeling

 

Chapter 11

 

 

Capacity and Legality

 

 

 

 

N.B.:  TYPE indicates that a question is new, modified, or unchanged, as follows.

 

N       A question new to this edition of the Test Bank.

+       A question modified from the previous edition of the Test Bank,

=       A question included in the previous edition of the Test Bank.

 

TRUE/FALSE questions

 

  1. Some states provide for the termination of minority status on marriage.

 

answer:    T                              PAGE:     287                          TYPE:      N

                  NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. In general, minors are not held personally liable for their contracts.

 

            ANSWER:    F                              PAGE:     287                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A minor can disaffirm a contract only after reach­ing the age of majority.

 

            ANSWER:    F                              PAGE:     288                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A minor may accept and validate a contract with an adult.

 

answer:    t                              PAGE:     288                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. An adult may disaffirm a contract entered into with a minor.

 

ANSWER:    F                              PAGE:     288                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. If a minor disaffirms a contract, he or she must disaffirm the entire contract.

 

answer:    t                              PAGE:     288                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Disaffirmance is the legal avoidance of a contractual obligation.

 

ANSWER:    T                              PAGE:     288                          TYPE:      N

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A minor who affirmatively misrepresents himself or herself to be an adult will not be able to disaffirm a contract in most states.

 

ANSWER:    F                              PAGE:     289                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Food is the only thing that courts have been willing to de­fine as “necessary.”

 

answer:    f                              PAGE:     289                          TYPE:      N

NAT: AACSB Reflective                        LOC:  AICPA Legal

 

  1. Parents are required by law to provide necessaries for their minor children.

 

ANSWER:    T                              PAGE:     289                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A minor’s failure to perform an executory contract within a reasonable time after reaching the age of majority implies disaffirmance.

 

ANSWER:    T                              PAGE:     290                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. Parents are ordinarily liable for the contracts made by their minor children, whether or not the children acted on their own.

 

ANSWER:    F                              PAGE:     292                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A person who enters into a contract when he or she is intoxicated can void the contract if he or she did not comprehend the legal consequences.

 

ANSWER:    T                              PAGE:     292                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A person who enters into a contract when he or she is intoxicated can void the contract only if the intoxication was involuntary.

 

ANSWER:    F                              PAGE:     292                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A person who enters into a contract when he or she is intoxicated can void the contract if the terms are obviously favorable to the other party.

 

ANSWER:    F                              PAGE:     292                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A guardian cannot enter into a legally binding contract on behalf of a men­tally incompetent person.

 

ANSWER:    F                              PAGE:     293                          TYPE:      =

NAT: AACSB Analytic                           LOC:  AICPA Legal

 

  1. A contract that calls for the performance of an illegal act is not enforceable.

 

answer:    t                              PAGE:     293                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A lender who makes a loan at a rate below the lawful maximum commits usury.

 

answer:    F                              PAGE:     294                          TYPE:      +

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. The maximum rate of interest is the same in every state.

 

answer:    F                              PAGE:     294                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. If the purpose of a licensing statute is to raise revenue, a con­tract with an unlicensed professional may be enforceable.

 

ANSWER:    T                              PAGE:     297                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A covenant not to compete is enforceable only if it is reasonable in duration and geographic area.

 

ANSWER:    T                              PAGE:     297                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. A contract with an unlicensed professional is always enforceable.

 

ANSWER:    F                              PAGE:     297                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. A covenant not to compete is never enforceable.

 

ANSWER:    F                              PAGE:     297                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A covenant not to compete between ongoing businesses is always enforceable.

 

ANSWER:    F                              PAGE:     297                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. A covenant not to compete that is part of an employment contract will gen­erally be struck down.

 

ANSWER:    F                              PAGE:     298                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. A contract in which the stronger party dictates the terms is an adhesion contract.

 

ANSWER:    T                              PAGE:     298                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. Most courts are usually very concerned about the fairness of contracts.

 

ANSWER:    F                              PAGE:     298                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. An exculpatory clause may viewed as unconscionable.

 

ANSWER:    T                              PAGE:     301                          TYPE:      N

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. An exculpatory clause in an employment contract is always enforceable.

 

ANSWER:    F                              PAGE:     301                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. An exculpatory clause in a residential property lease is always enforceable.

 

ANSWER:    F                              PAGE:     301                          TYPE:      +

NAT: AACSB Analytic                     LOC:  AICPA Legal

  1. An exculpatory clause on a ticket to a ride in an amusement park is never enforceable.

 

ANSWER:    F                              PAGE:     301                          TYPE:      +

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. If a contract is illegal, a court will not enforce it.

 

ANSWER:    T                              PAGE:     303                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. If an illegal contract is executory, either party can enforce it.

 

answer:    F                              PAGE:     303                          TYPE:      N

                        NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. An innocent party who has fully performed an illegal contract may some­times enforce it against a guilty party.

 

            ANSWER:    T                              PAGE:     303                          TYPE:      N

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. When a statute protects a certain class of people, a member of that class cannot enforce an illegal contract.

 

ANSWER:    F                              PAGE:     303                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

 

MULTIPLE-CHOICE questions

 

  1. Don enters into a contract with Emma, who does not have contractual ca­pacity. Don can enforce the contract only if Emma

 

  1. elects not to avoid the contract.
  2. is a minor.
  3. is intoxicated or men­tally incompetent.
  4. is a minor, intoxicated, or mentally incompetent.

 

answer:    A                              PAGE:     287                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Jill is fifteen. In most states, Jill would be considered a minor because she is under the age of

 

  1. sixteen.
  2. eighteen.
  3. twenty.
  4. twenty-one.

 

answer:    B                              PAGE:     287                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Chris, a minor, signs a contract to buy alcoholic beverages for Dine & Drink, his parents’ restaurant. The contract is

 

  1. valid but may be disaffirmed.
  2. valid but may not be disaffirmed.
  3. void as a matter of law.
  4. void unless it is also signed by Edie, the manager of Dine & Drink.

 

answer:    c                              PAGE:     287                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Marco convinces his parents to permit him to become an emancipated minor. On emancipation, Marco will acquire the right to

 

  1. buy alcoholic beverages only.
  2. buy alcoholic beverages and vote.
  3. neither buy alcoholic beverages nor vote.
  4. vote only.

 

ANSWER:    C                              PAGE:     287                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Fernando, a seventeen-year-old, signs a contract to sell his car to Gusto Used Autos. Fernando receives a better offer the next day from Hi-Valu Cars & Trucks, Inc., and accepts the new offer. Fernando is

 

  1. liable to Gusto and must sell it a car of comparable value.
  2. liable to Gusto and must sell it his car.
  3. not liable to Gusto because he is a minor.
  4. not liable to Gusto because the sale of the car disaffirmed their deal.

 

ANSWER:    D                              PAGE:     288                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. On Tad’s eighteenth birthday, he decides that he no longer wants to keep a car he bought from U-Pick Autos, Inc., when he was seventeen. His right to disaffirm the deal will depend on

 

  1. the car’s condition when Tad bought it.
  2. the car’s current condition.
  3. whether Tad acts within a reasonable period of time.
  4. whether U-Pick has the right to disaffirm.

 

ANSWER:    C                              PAGE:     288                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Nora signs a contract to buy a car just before reaching the age of major­ity. After reaching the age of majority, Nora does not take possession or make payments. Most courts would hold that she had

 

  1. disaffirmed the contract.
  2. executed the contract.
  3. ratified the contract.
  4. rescinded the contract.

 

            ANSWER:    A                              PAGE:     288                          TYPE:      N

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Clay, a minor, signs a contract to buy a car from Delta Motors by mis­repre­senting his age as twenty-one. Clay fails to make the pay­ments. Delta sues. In most states, Clay can

 

  1. not return the car nor avoid further liability.
  2. not return the car but can avoid further liability.
  3. return the car and avoid further liability.
  4. return the car but cannot avoid further liability.

 

answer:    C                              PAGE:     288                          TYPE:      +

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Betty, a minor, signs a contract to buy an SUV by misrepresenting her age to be twenty-one. In most states, Betty may

 

  1. disaffirm the contract.
  2. disaffirm the contract only if she first makes full payment.
  3. disaffirm the contract only if she returns the SUV in orig­inal condition.
  4. not disaffirm the contract.

 

answer:    A                              PAGE:     288                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

  1. Ruth, a minor, charges groceries at Sam’s Mart. Two days later, Ruth disaf­firms the purchase. Ruth owes Sam’s Mart

 

  1. the reasonable value of the groceries.
  2. the retail value of the groceries.
  3. the wholesale value of the groceries.
  4. nothing.

 

answer:    A                              PAGE:     289                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Gina, a minor, enters into a contract to buy a tractor from Herb, an adult. If the deal is set aside, restoring Gina and Herb to the positions they held be­fore the contract is required in

 

  1. all states.
  2. most states.
  3. no states.
  4. some states.

 

answer:    D                              PAGE:     289                          TYPE:      N

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Dudley, a minor who is under his parents’ care and control, signs a contract to rent an apartment from Ewan for one year. Before the end of the term, Dudley moves out. Ewan sues for the rent for the rest of the term. Dudley can

 

  1. avoid liability for the rent but not disaffirm the contract.
  2. disaffirm the contract and avoid liability for the rent.
  3. disaffirm the contract but not avoid liability for the rent.
  4. not disaffirm the contract nor avoid liability for the rent.

 

answer:    B                              PAGE:     289                          TYPE:      N

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Curt, a doctor, renders medical care to Dora, a minor. According to the rea­soning of the court in Case 11.1, Yale Diagnostic Radiology v. Estate of Harun, a contract between Curt and Dora is

 

  1. express.
  2. implied in fact.
  3. implied in law.
  4. non-existent.

 

ANSWER:    C                              PAGE:     290                          TYPE:      N

NAT: AACSB Communication       LOC:  AICPA Legal

  1. Garth, an emergency medical technician, renders medical care to Hyacinth, a mi­nor. Under the ruling of the court in Case 11.1, Yale Diagnostic Radiology v. Estate of Harun, Garth may recover the cost from

 

  1. Hyacinth only.
  2. Hyacinth or Hyacinth’s parent.
  3. Hyacinth’s parent only.
  4. no one.

 

ANSWER:    B                              PAGE:     290                          TYPE:      N

NAT: AACSB Communication       LOC:  AICPA Legal

 

  1. Jack, a minor, takes out an automobile insurance policy and pays a $1,000 pre­mi­um. If Jack disaffirms the contract, he can most likely recover

 

  1. $500.
  2. $1,000.
  3. $1,500.
  4. nothing.

 

answer:    b                              PAGE:     291                          TYPE:      N

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. While a minor, Jason buys a car that he continues to use and keep in re­pair after reaching the age of majority. Jason has

 

  1. disaffirmed the contract.
  2. ratified the contract.
  3. rejected the contract.
  4. rescinded the contract.

 

answer:    b                              PAGE:     291                          TYPE:      +

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Elle, a minor acting on her own, signs a contract to buy a horse from Field Equine Ranch. Later, Elle disaffirms the deal. Liability most likely rests with

 

  1. Elle and her parents.
  2. Elle only.
  3. Elle’s parents only.
  4. neither Elle nor her parents.

 

ANSWER:    D                              PAGE:     292                          TYPE:      N

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. While intoxicated, Tim contracts to buy a bicycle for double its normal price. The contract is

 

  1. enforceable even if Tim did not understand its legal consequences.
  2. enforceable only if Tim understood its legal consequences.
  3. unenforceable because it obviously favors the other party.
  4. unenforceable under any circumstances.

 

ANSWER:    B                              PAGE:     292                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. A court adjudicates Holly mentally incompetent and appoints a guardian. Holly subsequently signs a contract to sell her house. The contract is

 

  1. enforceable if Holly comprehended the consequences.
  2. enforceable if Holly knew she was entering into a contract.
  3. enforceable if the house was entirely paid for.
  4. void.

 

ANSWER:    D                              PAGE:     293                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Jay is mentally incompetent but has not been so adjudged by a court. Any contract Jay enters into is voidable

 

  1. only if he does not know he is entering into the contract.
  2. only if he lacks the mental capacity to comprehend the consequences.
  3. if he either does not know it is a contract or does not comprehend the consequences.
  4. none of the choices.

 

ANSWER:    C                              PAGE:     293                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Desiree and Eduardo decide to wager, in violation of a state statute, on the out­come of a soccer game. They each deposit money with Felipe, who agrees to pay the winner of the bet. Before the game begins, Eduardo tells Felipe that he has changed his mind about the bet. Eduardo can recover

 

  1. the amount of his bet and the amount of Desiree’s bet.
  2. the amount of his bet minus Felipe’s expenses.
  3. the amount of his bet only.
  4. nothing.

 

answer:    C                              PAGE:     294                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Edie obtains a consumer loan from First State Bank at an interest rate that exceeds the state’s maximum. First State has

 

  1. calculated the optimum rate that the market will bear.

b          engaged in a restraint of trade.

  1. underestimated the risk of the loan’s nonpayment.
  2. violated the usury laws.

 

ANSWER:    D                              PAGE:     294                          TYPE:      +

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Nick represents himself as a contractor in Ohio, but he is not licensed in that state. A contract between Pat and Nick by which Nick agrees to build a warehouse for Pat in Ohio is

 

  1. enforceable only if Pat does not object after learning of Nick’s status.
  2. enforceable only if Pat knows that Nick is unlicensed.
  3. enforceable only if the outcome is successful.
  4. not enforceable.

 

ANSWER:    D                              PAGE:     297                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Lara is a real estate broker licensed only in Minnesota. Lara concludes a sale in North Dakota. She can successfully sue to

 

  1. collect the commission only.
  2. collect the commission or keep it if it has already been paid.
  3. keep the commission if it has already been paid but not to collect it.
  4. neither collect the commission nor keep it.

 

ANSWER:    D                              PAGE:     297                          TYPE:      +

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Joy signs a contract with Kent, an unlicensed physician, to perform a medi­cal procedure. This contract is enforceable by

 

  1. Joy only.
  2. Joy or Kent.
  3. Kent only.
  4. no one.

 

ANSWER:    D                              PAGE:     297                          TYPE:      +

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. As part of a sale of a business, Lee signs a covenant not to compete that is unreasonable in its essential terms. To prevent undue hardship, a court will most likely

 

  1. enforce the covenant as written.
  2. enforce the covenant but evaluate its effects over time.
  3. reform the covenant’s terms.
  4. refuse to enforce the covenant without additional consideration.

 

answer:    C                              PAGE:     297                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. John agrees to sell his sports equipment store to Kay and, as part of the sale, promises not to open a similar store in the United States for twenty years. John’s promise is

 

  1. an unreasonable restraint of trade like all covenants not to compete.
  2. unreasonable in terms of geographic area and time.
  3. unreasonable in terms of Kay’s “goodwill” and “reputation.”
  4. valid and enforceable.

 

ANSWER:    B                              PAGE:     297                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. First National Bank signs an agreement not to compete with City Bank that will bar City Bank from continuing to operate in the state in which both banks do almost all of their business. The agreement is likely

 

  1. an unreasonable restraint of trade.
  2. enforceable.
  3. enforceable if it is ancillary to an agreement by the First National Bank to purchase all of the assets of the City Bank.
  4. none of the choices.

 

ANSWER:    C                              PAGE:     297                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Lora signs a covenant not to compete with her employer, Midstate Distribu­tion, Inc. The covenant will be enforced if it

 

  1. does not require either party to obtain a business license.
  2. is reasonable with respect to geographic area and time.
  3. is supported by consideration.
  4. none of the choices.

 

ANSWER:    B                              PAGE:     298                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

  1. Sam signs a covenant not to compete with his employer, Topp Sales Company. A court decides that the covenant is overly restrictive. The court will likely

 

  1. enforce it as written so as not to interfere with the parties’ freedom of contract.
  2. enforce it but evaluate its effects over time.
  3. reform its terms to prevent any undue burdens.
  4. refuse to enforce it unless Topp pays additional consideration.

 

ANSWER:    C                              PAGE:     298                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. A contract between Kim and Larry to lease real property contains an excul­patory clause. This clause is

 

  1. enforceable only if either party is in a business important to the pub­lic interest.
  2. enforceable only if the lease involves residential property.
  3. generally enforceable as a matter of public policy.
  4. generally unenforceable.

 

ANSWER:    D                              PAGE:     301                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Bret runs an illegal business and pays Cal, a law enforcement officer, not to interfere. The payments are discovered. Bret and Cal are sent to prison. Bret can successfully sue Cal for the return of

 

  1. all of the money paid to Cal.
  2. only the money paid to Cal that has been spent.
  3. only the money paid to Cal that has not been spent.
  4. none of the choices.

 

ANSWER:    D                              PAGE:     303                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. A contract between Lou and Mike requires a transfer of stolen goods for counterfeit currency. This contract is

 

  1. enforceable.
  2. void.
  3. voidable at the option of either party.
  4. voidable at the option of the party having less bargaining power.

 

ANSWER:    B                              PAGE:     303                          TYPE:      =

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

  1. National Insurance Company violates a statute when selling an insur­ance policy to Opal. The policy may be enforced by

 

  1. National Insurance only.
  2. National Insurance or Opal.
  3. no one.
  4. Opal only.

 

answer:    D                              PAGE:     303                          TYPE:      N

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

  1. Through fraudulent means, Roy induces Sal to sign a contract to in­vest with him her profits from Tasty Café. When Sal learns the truth, she may

 

  1. do nothing with respect to the contract.
  2. enforce the contract only.
  3. enforce the contract or recover the money paid.
  4. recover the money paid only.

 

answer:    C                              PAGE:     305                          TYPE:      N

NAT: AACSB Reflective                                                   LOC:  AICPA Legal

 

 

ESSAY questions

 

  1. Baby Products, Inc., hires Chewy to develop and implement an e-commerce strategy for marketing Baby’s products. Chewy signs a contract that in­cludes a clause prohibiting him from competing with Baby during and af­ter the employment. Before the strategy is implemented, Chewy resigns from Baby’s employ and opens a business to compete with Baby. In Baby’s suit against Chewy, to determine whether he may compete with Baby, what is the most important factor the court should consider? Is the clause likely to be enforced? Explain.

 

ANSWER:    In determining whether Chewy may compete with Baby, the court should consider, most importantly, whether the covenant not to compete is necessary to protect Baby’s legitimate business interests. A covenant not to compete can violate the public policy to promote competi­tion in the economy. If so, it would be an unreasonable restraint of trade. To be enforceable, a covenant not to compete should be ancillary to an oth­erwise enforceable contract, which, in this question, is the employ­ment contract. A covenant not to compete should contain reasonable re­stric­tions in terms of duration and geographic area. The covenant should not unreasonably burden the party who is prohibited from com­peting. If the restrictions are unreasonable, a court can void the cove­nant. Whether a party resigns under an employment contract does not affect the enforce­ability of a covenant not to compete. The terms of the covenant in this problem are likely unreasonable and would not be enforceable because they do not state any limits, reasonable or otherwise.

 

PAGE:           298                                                                             type:            N

NAT: AACSB Reflective                        LOC:  AICPA Decision Modeling

 

  1. Airway International, Inc., is a commercial passenger airline. Airway in­cludes on its tickets a clause that states the airline is not liable for any in­jury to, or the death of, any passenger caused by its, or its employees’, neg­ligence. An Airway flight from Boston to New York crashes into Long Island sound, resulting in the deaths of all passengers. The cause of the ac­cident is found to be due to Airway’s negligence. Based on the clause on its tickets, can Airway avoid liability?

 

ANSWER:    Airway cannot avoid liability for the deaths of the passen­gers in an accident that is found to be due to the airline’s negligence. Generally, an exculpatory clause—like the clause in this problem, at­tempting to absolve a party of negligence or some other wrong—is not en­forceable if the party seeking its en­forcement is in­volved in a business important to the public as a matter of practical necessity. Such busi­nesses include air­lines. Because of the essential nature of their ser­vices, airlines have an ad­vantage in bargaining strength and could insist that anyone contract­ing for their ser­vices agree not to hold them liable.

 

PAGES:         301–302                                                                    type:            N

NAT: AACSB Reflective                        LOC:  AICPA Decision Modeling

 

Chapter 21

 

 

Warranties and Product Liability

 

 

 

 

N.B.:  TYPE indicates that a question is new, modified, or unchanged, as follows.

 

N       A question new to this edition of the Test Bank.

+       A question modified from the previous edition of the Test Bank,

=       A question included in the previous edition of the Test Bank.

 

true/false questions

 

  1. In sales law, a warranty is an assurance by one party of the existence of a fact on which the other party can rely.

 

answer:    T                              PAGE:     498                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. Title warranties arise in a sales contract only if the seller ex­pressly de­clares that he or she possesses title to the goods.

 

answer:    F                              PAGE:     499                          TYPE:      N

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A warranty against infringement is a promise by the seller that the prod­uct was con­structed in a workmanlike manner.

 

answer:    f                              PAGE:     499                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A warranty of title cannot be disclaimed.

 

answer:    f                              PAGE:     499                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. Only a seller’s expression of opinion creates a warranty.

 

answer:    F                              PAGE:     500                          TYPE:      N

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. Advertisements can include express warranties.

 

answer:    T                              PAGE:     500                          TYPE:      N

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A descriptive label can create an ex­press warranty.

 

answer:    t                              PAGE:     500                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A seller must use a word such as “guarantee” to make an express warranty.

 

answer:    f                              PAGE:     500                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. Only a statement made after a contract is entered into can be an express warranty.

 

answer:    f                              PAGE:     500                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A product is unmerchantable if any accident could arise in connection with the goods.

 

answer:    f                              PAGE:     501                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. Merchants are required to warrant that the goods they sell are fit for their ordinary purpose.

 

answer:    t                              PAGE:     501                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. An implied warranty of merchantability arises in every sale or lease by a merchant who deals in goods of the kind sold or leased.

 

answer:    T                              PAGE:     501                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A contract cannot contain both a warranty of merchantability and a war­ranty of fit­ness for a particular purpose.

 

answer:    f                              PAGE:     506                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A contract can contain both an implied warranty and an express warranty.

 

answer:    T                              PAGE:     506                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. Express warranties displace inconsistent implied warranties except im­plied war­ranties of fitness for a particular purpose.

 

answer:    t                              PAGE:     506                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. An express warranty cannot be limited.

 

answer:    f                              PAGE:     506                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A merchant can disclaim an implied warranty of merchantability.

 

answer:    T                              PAGE:     507                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A manufacturer’s duty of care does not extend to the inspection and test­ing of products bought to incorporate in the final product.

 

answer:    f                              PAGE:     510                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A manufacturer may be liable for a failure to exercise due care to any person who sustains an injury caused by a defective product.

 

answer:    T                              PAGE:     510                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. Privity of contract between the plaintiff and the defendant is required to bring a product liability suit based on negligence.

 

answer:    F                              PAGE:     510                          TYPE:      +

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A product liability action may be based on warranty theory.

 

answer:    T                              PAGE:     510                          TYPE:      N

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. Strict product liability is liability without fault.

 

answer:    t                              PAGE:     511                          TYPE:      N

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. Only the manufacturer of a defective product can be strictly liable for an injury or damage caused by the product.

 

answer:    F                              PAGE:     511                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. One requirement for a product liability suit based on strict liability is an injury or damage.

 

answer:    t                              PAGE:     511                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. One requirement for a product liability suit based on strict liability is a failure to exercise reasonable care.

 

answer:    F                              PAGE:     511                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. To succeed in a product liability suit based on strict liability, a plaintiff does not need to prove why or in what manner a product became defective.

 

answer:    T                              PAGE:     511                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A plaintiff could succeed in a product liability suit based on strict liabil­ity by showing that a product was unreasonably dangerous due to a de­sign defect.

 

answer:    t                              PAGE:     511                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. To succeed in a product liability suit based on strict liability, a plaintiff must prove that a product was de­fective.

 

answer:    T                              PAGE:     512                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. To succeed in a strict product liability suit alleging a design defect, a plaintiff must show that there is a reasonable alternative design.

 

answer:    t                              PAGE:     512                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. To succeed in a product liability suit based on strict liability, a plaintiff must be more than a bystander.

 

answer:    F                              PAGE:     516                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. A statute of limitations may limit the time within which a plaintiff can file a product liability suit.

 

answer:    T                              PAGE:     516                          TYPE:      N

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. Assumption of risk is a defense that may be raised in a product liability suit.

 

answer:    t                              PAGE:     517                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. The use of a product for a purpose that was not intended is a defense to a suit for product liability if the use was not reasonably foreseeable.

 

answer:    T                              PAGE:     517                          TYPE:      N

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. In many states, the plaintiff’s negligence is a defense that may be raised in a product liability suit based on strict liability.

 

answer:    t                              PAGE:     518                          TYPE:      =

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

  1. No danger associated with any product is so commonly known that a manufacturer does not need to warn users of it.

 

answer:    F                              PAGE:     518                          TYPE:      N

NAT: AACSB Analytic                     LOC:  AICPA Legal

 

 

multiple-choice questions

 

  1. GR8 View Corporation sells high-definition televisions. Under most cir­cum­stances, GR8 View will be presumed to have warranted that its title to the TVs is

 

  1. bad.
  2. fair.
  3. good.
  4. the best that money can buy at the advertised price.

 

answer:    C                              PAGE:     499                          TYPE:      =

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Perky, a salesperson for Quality Textiles, Inc., shows Rosa, a fabric buyer for Style Clothing Company, samples of cloth, stating that any ship­ment will match the samples. This statement is

 

  1. an express warranty.
  2. an implied warranty.
  3. a warranty of title.
  4. puffing.

 

answer:    A                              PAGE:     500                          TYPE:      =

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Reggie buys a new sport utility vehicle (SUV) from Terrific Cars & Trucks, Inc. The most important factor in determining whether an ex­press war­ranty is created is whether

 

  1. Reggie expresses to Terrific what he wants warranted.
  2. Reggie’s desire for the SUV becomes part of his motivation to deal.
  3. Terrific expresses to Reggie what it expects of its customers.
  4. Terrific’s promise becomes part of the basis of the bargain.

 

answer:    D                              PAGE:     500                          TYPE:      =

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Salespersons of Home & Hearth Appliance tell potential customers that Home & Hearth prod­ucts are “excellent.” This is

 

  1. an express warranty.
  2. an implied warranty.
  3. a warranty of title.
  4. puffery.

 

answer:    D                              PAGE:     500                          TYPE:      =

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Lena visits Marvel-R-Us Cars, an auto dealer, and says she wants a hybrid car that can go thirty miles before using gas. Nip, a salesperson, recom­mends an Obie, which he says goes “at least forty gas-less miles.” This is

 

  1. an express warranty.
  2. an implied warranty of merchantability.
  3. an implied warranty of fitness for a particular purpose.
  4. a warranty of title.

 

answer:    A                              PAGE:     500                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Olga, a salesperson for Pre-owned Cars & Trucks, Inc., tells Quincy, “This is the best car I’ve ever seen.” This statement is

 

  1. an express warranty.
  2. an implied warranty.
  3. a warranty of title.
  4. puffing.

 

answer:    D                              PAGE:     500                          TYPE:      =

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

Fact Pattern 21-1 (Questions 7–8 apply)

Bret, a representative of Concrete Products, Inc., assures Durable Construction Company (DCC) that Concrete’s cement will not crack within a certain range of temperatures. DCC uses the product. When cracks develop within the stated temperature range, DCC files a suit against Concrete.

 

  1. Refer to Fact Pattern 21-1. The court is most likely to rule in favor of

 

  1. Concrete, because Bret’s statement was an expression of opinion.
  2. Concrete, because DCC chose Concrete’s product voluntarily.
  3. DCC, because Bret’s statement was an express warranty.
  4. DCC, because Concrete’s product is not fit for its purpose.

 

answer:    C                              PAGE:     500                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Refer to Fact Pattern 21-1. Suppose that the court rules against Concrete. The manufacturer might have avoided that result by

 

  1. making its cement fit for its particular purpose.
  2. making its cement merchantable for its intended use.
  3. not allowing Bret to express an opinion.
  4. not permitting Bret to make an express warranty.

 

answer:    D                              PAGE:     506                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. TalkTalk, Inc., makes and sells cell phones. In deciding whether the phones are merchantable, a court would focus on whether the phones are

 

  1. fit for the ordinary purpose for which such goods are used.
  2. made according to the best manufacturing methods.
  3. quality products.
  4. sold by merchants.

 

answer:    A                              PAGE:     501                          TYPE:      =

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Neil goes to Oil Shop to change the oil in his car. Pyle, the service tech­ni­cian, learns that Neil plans to take a trip and advises the use of a certain type of oil. The oil breaks down during the trip, damaging the car. Neil may recover from Oil Shop for breach of

 

  1. an express warranty.
  2. an implied warranty of fitness for a particular purpose.
  3. an implied warranty of merchantability.
  4. a warranty of title.

 

answer:    B                              PAGE:     505                          TYPE:      =

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Rite-Bilt Appliance Company markets its products through its own Rite-Bilt Appliance Stores. For Rite-Bilt’s written disclaimer to nullify any express war­ranties, it must be

 

  1. clear and conspicuous and called to a buyer’s attention.
  2. in smaller print than the rest of the sales contract.
  3. in the same print as the rest of the sales contract.
  4. presented to a buyer after a sales contract has been entered into.

 

answer:    A                              PAGE:     506                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Rapid Autos, Inc., sells cars to consumers. To avoid liability for oral ex­press warranties, each sales agreement should note that a car is sold

 

  1. as is.
  2. in perfect condition.
  3. subject to warranties included in the written contract only.
  4. with no known defects.

 

answer:    C                              PAGE:     506                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Import Carpet Store and Jeri enter into a contract for a sale of an Oriental rug. Import Carpet, a merchant who deals in goods of the kind sold, provides a general description of the rug, details its technical specifications, and shows a sample. Under the UCC, if these are inconsistent

 

  1. the general description displaces the sample.
  2. the general description displaces the technical specifications.
  3. the sample takes precedence over the general description.
  4. the sample takes precedence over the technical specifications.

 

answer:    C                              PAGE:     506                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Sierra Bikes, Inc., and Tess enter into a contract for the sale of a mountain bike. Sierra, a merchant who deals in goods of the kind sold, makes implied and express warranties in connection with the sale. The Magnuson-Moss Warranty Act, which applies to the warranty, attempts to prevent deception in warranties by

 

  1. displacing the UCC as the primary source of warranty rules.
  2. making warranties easier to understand.
  3. prohibiting disclaimers of warranties.
  4. requiring sellers to give written warranties for consumer goods.

 

answer:    B                              PAGE:     508                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Dripless Paint, Inc., sells paint and painting tools and supplies under “full” warranties. Under the Magnuson-Moss Warranty Act, this means that Dripless must provide

 

  1. a choice between a refund or replacement if a product cannot be fixed and repair or replacement of defective parts.
  2. neither a choice of a refund or replacement, or repair of defective parts.
  3. only a choice of a refund or replacement if a product cannot be fixed.
  4. only repair or replacement of defective parts.

 

answer:    A                              PAGE:     508                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

Fact Pattern 21-2 (Questions 16–17 apply)

Elsie buys a car under warranty from Ferb’s Auto Sales, Inc., in a state that has a lemon law.  General Vehicles Corporation (GVC) made the car. Its transmis­sion does not function properly, a defect that significantly affects its use and value.

 

  1. Refer to Fact Pattern 21-2. Under the lemon laws in most states, to re­solve the problem, Elsie must first

 

  1. complain to the arbitration program specified in GVC’s warranty.
  2. file a lawsuit.
  3. notify Ferb’s or GVC of the problem.
  4. none of the choices.

 

answer:    C                              PAGE:     509                          TYPE:      =

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Refer to Fact Pattern 21-2. If Elsie submits a complaint to an arbitra­tion program, any decision by the arbitrator is binding on

 

  1. Elsie only.
  2. GVC only.
  3. Elsie and GVC.
  4. none of the parties.

 

answer:    B                              PAGE:     509                          TYPE:      =

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Power Products, Inc. (PPI), manufactures construction equipment. Quid is injured while using a PPI nail driver and sues the company for product liability based on misrepresentation. To win, Quid must show that

 

  1. he was in privity of contract with PPI.
  2. PPI did not use due care with respect to the nail driver.
  3. PPI misrepresented a material fact on which Quid relied.
  4. Quid was experienced in the use of PPI nail drivers.

 

answer:    C                              PAGE:     510                          TYPE:      =

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Lawn & Garden Tool Company makes hedge trimmers. Mal is injured while using a Lawn & Garden trimmer and sues the company for product liability based on neg­ligence. To win, Mal must show that

 

  1. Lawn & Garden did not use due care with respect to the trimmer.
  2. Lawn & Garden misrepresented a material fact on which Mal relied.
  3. Mal was experienced in the use of Lawn & Garden trimmers.
  4. Mal was in privity of contract with Lawn & Garden.

 

answer:    A                              PAGE:     510                          TYPE:      =

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Omega Custom Tile Company designs and makes floor tiles. In a product liability suit based on negligence, Omega could be liable for vio­lating its duty of care with respect to

 

  1. neither the design nor the making of the tiles.
  2. the design and the making of the tiles.
  3. the design of the tiles only.
  4. the making of the tiles only.

 

answer:    B                              PAGE:     510                          TYPE:      +

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Farm Equipment, Inc., makes farm­ing machinery. Gail discovers that her Farm Equipment tractor is defective and sues the maker for product liability based on negligence. To win, Gail must show that

 

  1. Farm Equipment sold the tractor to Gail.
  2. Gail knew and appreciated the risk caused by the defect.
  3. Gail suffered an injury caused by the defect.
  4. the “defect” was a commonly known danger.

 

answer:    C                              PAGE:     510                          TYPE:      +

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Useful Tool Company makes and leases a backhoe to Vic. Due to a defect attributable to Useful’s negligence, Vic is injured in an accident in which Warren is also hurt. In a product liability suit based on negligence, Useful may be liable to

 

  1. no one.
  2. Vic and Warren.
  3. Vic only.
  4. Warren only.

 

answer:    B                              PAGE:     510                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Fun Toyz Corporation makes skateboards, which it sells to con­sumers, including Holly and Ira. Due to a defect, Holly is injured while using her new board. Ira’s board has the same defect, but he is not injured. In a product liability suit based on strict liabil­ity, Fun Toyz may be liable to

 

  1. Holly and Ira.
  2. Holly only.
  3. Ira only.
  4. no one.

 

answer:    B                              PAGE:     511                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. In-House Products Company makes convection ovens. Joy discovers that her In-House oven is defective and sues the maker for product liabil­ity based on strict liability. To win, Joy must show that

 

  1. In-House sold the oven to Joy.
  2. Joy knew and appreciated the risk caused by the defect.
  3. Joy suffered an injury caused by the defect.
  4. the “defect” was a commonly known danger.

 

answer:    C                              PAGE:     511                          TYPE:      +

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Cool Electronix makes DVD players. Edie is injured while using a Cool player, which also damages her house. She sues Cool for product liability based on strict liability. In most states, to recover damages, she must show

 

  1. in what manner and why the player became defective.
  2. in what manner but not why the player became defective.
  3. neither in what manner nor why the player became defective.
  4. why but not in what manner the player became defective.

 

answer:    C                              PAGE:     511                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Infinite Variety Corporation makes products that Jostle Sales Company sells to consumers online, through catalogs, and in retail outlets. Holding makers and sellers strictly liable for the cost of injuries to con­sumers from harmful or defective products is based in part on the policy that

 

  1. consumers are generally careful with the products that they buy.
  2. courts are the best forums to determine product liability.
  3. makers and sellers would not otherwise be interested in safety.
  4. prices can be increased to cover the cost.

 

answer:    D                              page:     511                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. High Bikes, Inc., makes bicycles. A defective High bike injures Ilsa when she rides it. Ilsa files a product liability suit against High. The maker can

 

  1. avoid li­ability be­cause Ilsa apparently misused the bike in some way.
  2. avoid li­ability be­cause Ilsa assumed the risk when she rode the bike.
  3. avoid li­ability be­cause Ilsa was obviously negligent in some way.
  4. not avoid liability.

 

answer:    D                              PAGE:     512                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

 

  1. Digital Systems, Inc. (DSI), makes storage media and other periph­eral computer products. A DSI product may be unreasonably danger­ous due to

 

  1. a defect in its design only.
  2. a defect in its design or an inadequate warning.
  3. an inadequate warning only.
  4. neither a defect in its design nor an inadequate warning.

 

answer:    B                              PAGE:     512                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Cellular Products Corporation (CPC) makes cell phones. Dina files a product liabil­ity suit against CPC, alleging a design defect. Under the Restate­ment (Third) of Torts: Products Liability, in deciding whether to hold CPC liable, the court may consider

 

  1. neither the advantages of an alternative design nor the magnitude of the foreseeable risks.
  2. only the advantages of an alternative design.
  3. only the magnitude of the foreseeable risks.
  4. the relative advantages and disadvantages of the product as designed and as it could have been designed, as well as the magnitude of foreseeable risks.

 

answer:    D                              PAGE:     513                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Safe-Rite Company makes electrical cords and other connectors for elec­tronic devices. Tina files a product liability suit against Safe-Rite, alleg­ing a warning defect. Under the Restate­ment (Third) of Torts: Products Liability, in deciding whether to hold Safe-Rite liable, the court may consider

 

  1. neither the characteristics of expected users nor the content of any warning.
  2. only the characteristics of expected users.
  3. only the content of any warning.
  4. the characteristics of expected users and the content of any warning.

 

answer:    D                              PAGE:     515                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

 

  1. Country Style, Inc., makes landscaping tools. Under the Restatement (Third) of Torts: Products Liability, Country could be liable for a warning defect if there is a foreseeable risk of harm posed by a product and

 

  1. the omission of a warning renders the product not reasonably safe.
  2. there is a reasonable alternative design.
  3. there is a lack of care in making of the product.
  4. none of the choices.

 

answer:    A                              PAGE:     515                          TYPE:      +

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Portia is driving a Quest motorcycle fifteen miles over the speed limit when, due to a defect, the rear tire spins off. Portia is injured in the ensuing accident. In her suit to recover from Quest for the injury, Quest’s best defense is that

 

  1. Portia assumed the risk of an accident when she bought the cycle.
  2. Portia was clearly a knowledgeable user of the cycle.
  3. Portia was comparatively negligent in exceeding the speed limit.
  4. motorcycle defects are commonly known dangers.

 

answer:    C                              PAGE:     517                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Flo buys a Go! battery that, if used in a Hi-Digital music player, which can be powered only by an IntraChemico battery, may cause the player to explode. Flo is not aware of the danger, Go!’s instructions do not warn of it, and Go! batteries are the same shape as IntraChemico batteries. Flo puts the Go! battery in a Hi-Digital player, which explodes, injuring Flo. Go!’s seller is most likely

 

  1. liable, because Flo’s misuse was not the use for which the Go! bat­tery was designed.
  2. liable, because Flo’s misuse was reasonably foreseeable.
  3. not liable, because Flo’s misuse was not the use for which the Go! battery was designed.
  4. not liable, because Flo’s misuse was reasonably foreseeable.

 

answer:    B                              PAGE:     517                          TYPE:      N

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

 

  1. Quantum Tools Corporation (QTC) makes hammers and other tools. Rita is injured while using a QTC hammer. She sues the company for product liability based on negligence. To defend successfully against the suit, QTC may show that

 

  1. QTC did not sell the hammer to Rita.
  2. Rita misused the hammer in a foreseeable way.
  3. Rita’s injury resulted from a commonly known danger.
  4. the hammer was not altered after QTC sold it.

 

answer:    C                              PAGE:     518                          TYPE:      =

NAT: AACSB Reflective                  LOC:  AICPA Legal

 

  1. Gina, an obese individual, files a suit against Hot n’ Tasty, Inc., alleging that its food is unhealthy because, as is well known, it contains high lev­els of salt and sugar. Gina’s suit is most likely to

 

  1. fail, because salt and sugar are not unhealthy ingredients in food.
  2. fail, because the danger is open and obvious to a reasonable consumer.
  3. succeed, because the danger is open and obvious to any consumer.
  4. succeed, because the food’s contents obviously caused Gina’s obesity.

 

answer:    B                              PAGE:     518                          TYPE:      N

NAT: AACSB Communication       LOC:  AICPA Legal

 

 

Essay Questions

 

  1. Adam steals from Business Resources, Inc., ten computer hard drives, which Adam sells to Computer Products Corporation (CPC). Unaware that the drives are stolen, CPC reconditions them and sells them to Direct Marketers, Inc. With the reconditioned drives, CPC gives Direct Marketers a written statement that disclaims “any and all warranties.” Business Resources learns that Direct Marketers has the drives and de­mands their return. Direct Marketers gives the equipment to Business Resources and files a suit against CPC. Will Direct Marketers succeed in its suit? Why or why not?

 

ANSWER:    Yes, Direct Marketers will succeed in its suit against CPC. Every contract for a sale of goods warrants that the title is good and its transfer is proper. This warranty of title arises automatically. The war­ranty can be excluded or modified only by a specific written statement or by circumstances that give the buyer reason to know that the transferor does not have title to the goods. A general disclaimer is not effective; the disclaimer must be specific. The transfer of the computers from CPC to Direct Marketers was a sale of goods. The warranty of title arose auto­matically. CPC’s disclaimer was in writing, but it was not specific—it did not specifically disclaim that the title was good and its transfer proper. Also, under the circumstances, Direct Marketers had no reason to know that CPC did not have good title to the drives. In this situation, CPC war­ranted the title, breached that warranty in the sale to Direct Marketers, and will lose the suit.

 

PAGE:           499                                                                             type:      N

NAT: AACSB Reflective                  LOC:  AICPA Decision Modeling

 

  1. General Construction Company (GCC) tells Industrial Supplies, Inc., that it needs an adhesive to do a particular job. Industrial provides a five-gallon bucket of a certain brand. When it does not perform to GCC’s speci­fications, GCC sues Industrial, which claims, “We didn’t expressly promise anything.” What should GCC argue?

 

ANSWER:    The buyer should argue that the seller breached an implied warranty of fitness for a particular pur­pose. An im­plied warranty of fit­ness for a particu­lar purpose arises when a seller knows a particu­lar purpose for which a buyer will use goods and that the buyer is re­lying on the seller’s skill and judgment to select suitable goods. When the buyer in this problem told the seller that the product was needed to do a particular task, the seller became aware of the buyer’s purpose for the goods and knew that the buyer was relying on the seller’s skill to choose and sell a product that would meet that specification. The seller did not make an express warranty, under these facts, but there did arise an implied war­ranty of fitness for a particular purpose.

 

PAGES:         505–506                                                                    type:      N

NAT: AACSB Reflective                  LOC:  AICPA Decision Modeling