Each of the 50 United States has a state constitution as does the US government. The US Constitution (and all federal law) is the Supreme law of the land and has higher precedence then state law or state constitutions. Given this, locate (via Lexis Nexis), read and write a brief (Appendix A in the back of your text book explains how to write a brief) on the US Supreme Court case of Gonzales v. Raich, 545 US 1 (2005) . Make sure to explain whether you agree or disagree with the highest court's ruling. Explain how interstate vs intrastate jurisdiction works and its impact on all businesses throughout the US. Explain why the landscape of our country has changed significantly since Gonzales was argued. Remember to use quotes when quoting the case or any primary legal reference.
Courts and Alternative Dispute Resolution
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The six Focus Questions below are designed to help improve your understanding. After reading this chapter, you should be able to answer the following questions:
What is judicial review? How and when was the power of judicial review established?
How are the courts applying traditional jurisdictional concepts to cases involving Internet transactions?
What is the difference between the focus of a trial court and that of an appellate court?
What is discovery, and how does electronic discovery differ from traditional discovery?
What is an electronic court filing system?
What are three alternative methods of resolving disputes?
“An eye for an eye will make the whole world blind.”
Mahatma Gandhi 1869–1948 (Indian political and spiritual leader)
Every society needs to have an established method for resolving disputes. Without one, as Mahatma Gandhi implied in the chapter-opening quotation, the biblical “eye for an eye” would lead to anarchy. This is particularly true in the business world—almost all businesspersons will face a lawsuit at some time in their careers. For this reason, anyone involved in business needs to have an understanding of court systems in the United States, as well as the various methods of dispute resolution that can be pursued outside the courts.
Assume that QuickDoor, a food delivery service, is entangled in a labor dispute with 5,000 workers who feel they are owed back pay. If an individual worker were to go to court and win, the award would be about two thousand dollars—not enough to interest most labor lawyers. So the workers would like to combine their grievances into a single, multi-million-dollar class action lawsuit. QuickDoor’s employment contract, however, prohibits such lawsuits. Instead, it requires an alternative dispute resolution method called arbitration to settle any labor disagreements between the workers and the company.
This contract provision means that QuickDoor might have to engage in 5,000 separate arbitration hearings, costing the company about $12 million, an amount greater than the cost of the underlying dispute. Which would be most fair for all concerned? Requiring QuickDoor and its workers to engage in thousands of alternative dispute resolution hearings? Or allowing a single class action lawsuit, despite the contracts? In this chapter, we will discuss how such legal disagreements are resolved, along with the benefits and drawbacks of the various methods of resolving them.
4–1. The Judiciary’s Role in American Government
The body of American law includes the federal and state constitutions, statutes passed by legislative bodies, administrative law, and the case decisions and legal principles that form the common law. These laws would be meaningless, however, without the courts to interpret and apply them. This is the essential role of the judiciary—the courts—in the American governmental system: to interpret and apply the law.
4–1a. Judicial Review
As the branch of government entrusted with interpreting the laws, the judiciary can decide, among other things, whether the laws or actions of the other two branches are constitutional. The process for making such a determination is known as judicial review.
The power of judicial review enables the judicial branch to act as a check on the other two branches of government, in line with the checks-and-balances system established by the U.S. Constitution. (Today, nearly all nations with constitutional democracies, including Canada, France, and Germany, have some form of judicial review.)
4–1b. The Origins of Judicial Review in the United States
What is judicial review? How and when was the power of judicial review established?
The U.S. Constitution does not mention judicial review (although many constitutional scholars believe that the founders intended the judiciary to have this power). How was the doctrine of judicial review established? See this chapter’s Landmark in the Law feature for the answer.
Landmark in the Law
Marbury v. Madison (1803)
The power of judicial review was established in the Supreme Court’s decision in the case of Marbury v. Madison.* Although the decision is widely viewed as a cornerstone of constitutional law, the case had its origins in early U.S. politics.
When Thomas Jefferson defeated the incumbent president, John Adams, in the presidential elections of 1800, Adams feared the Jeffersonians’ antipathy toward business and toward a strong national government. Adams thus rushed to “pack” the judiciary with loyal Federalists (those who believed in a strong national government) by appointing what came to be called “midnight judges” just before he left office.
But Adams’s secretary of state (John Marshall) was able to deliver only forty-two of the fifty-nine judicial appointment letters by the time Jefferson took over as president. Jefferson refused to order his secretary of state, James Madison, to deliver the remaining commissions.
William Marbury and three others to whom the commissions had not been delivered sought a writ of mandamus (an order directing a government official to fulfill a duty) from the United States Supreme Court, as authorized by the Judiciary Act in 1789.
As fate would have it, John Marshall had just been appointed as chief justice of the Supreme Court. Marshall faced a dilemma: If he ordered the commissions delivered, the new secretary of state (Madison) could simply refuse to deliver them—and the Court had no way to compel him to act. At the same time, if Marshall simply allowed the new administration to do as it wished, the Court’s power would be severely eroded.
Marshall masterfully fashioned his decision to enlarge the power of the Supreme Court by affirming the Court’s power of judicial review. He stated, “It is emphatically the province and duty of the Judicial Department to say what the law is. . . . If two laws conflict with each other, the Courts must decide on the operation of each. . . . [I]f both [a] law and the Constitution apply to a particular case, . . .the Court must determine which of these conflicting rules governs the case.”
Marshall’s decision did not require anyone to do anything. He concluded that the highest court did not have the power to issue a writ of mandamus in this particular case. Although the Judiciary Act specified that the Supreme Court could issue writs of mandamus as part of its original jurisdiction, Article III of the Constitution, which spelled out the Court’s original jurisdiction, did not mention such writs. Because Congress did not have the right to expand the Supreme Court’s jurisdiction, this section of the Judiciary Act was unconstitutional—and thus void. The Marbury decision stands to this day as a judicial and political masterpiece.
Application to Today’s World
Since the Marbury v. Madison decision, the power of judicial review has remained unchallenged and today is exercised by both federal and state courts. If the courts did not have the power of judicial review, the constitutionality of Congress’s acts could not be challenged in court—a congressional statute would remain law unless changed by Congress. The courts of other countries that have adopted a constitutional democracy often cite this decision as a justification for judicial review.
4–2. Basic Judicial Requirements
Before a court can hear a lawsuit, certain requirements must be met. These requirements relate to jurisdiction, venue, and standing to sue. We examine each of these important concepts here. 4–2a. Jurisdiction
In Latin, juris means “law,” and diction means “to speak.” Thus, “the power to speak the law” is the literal meaning of the term jurisdiction. Before any court can hear a case, it must have jurisdiction over the person or company against whom the suit is brought (the defendant) or over the property involved in the suit. The court must also have jurisdiction over the subject matter of the dispute.
Jurisdiction over Persons or Property
Generally, a court with jurisdiction over a particular geographic area can exercise personal jurisdiction (in personam jurisdiction) over any person or business that resides in that area. A state trial court, for instance, normally has jurisdictional authority over residents (including businesses) in a particular area of the state, such as a county or district. A state’s highest court (often called the state supreme court)* has jurisdiction over all residents of that state.
A court can also exercise jurisdiction over property that is located within its boundaries. This kind of jurisdiction is known as in rem jurisdiction, or “jurisdiction over the thing.”
A dispute arises over the ownership of a boat in dry dock in Fort Lauderdale, Florida. The boat is owned by an Ohio resident, over whom a Florida court normally cannot exercise personal jurisdiction. The other party to the dispute is a resident of Nebraska. In this situation, because the boat is in Florida, a lawsuit concerning the boat could be brought in a Florida state court on the basis of the court’s in rem jurisdiction.
LONG ARM STATUTES.Under the authority of a state long arm statute, a court can exercise personal jurisdiction over certain out-of-state defendants based on activities that took place within the state. Before exercising long arm jurisdiction over a nonresident, however, the court must be convinced that the defendant had sufficient contacts, or minimum contacts, with the state to justify the jurisdiction.* Generally, this means that the defendant must have enough of a connection to the state for the judge to conclude that it is fair for the state to exercise power over the defendant.
If an out-of-state defendant caused an automobile accident or sold defective goods within the state, for instance, a court will usually find that minimum contacts exist to exercise jurisdiction over that defendant.
Spotlight Case Example 4.2.
An Xbox game system caught fire in Bonnie Broquet’s home in Texas and caused substantial personal injuries. Broquet filed a lawsuit in a Texas court against Ji-Haw Industrial Company, a nonresident company that made the Xbox components. Broquet alleged that Ji-Haw’s components were defective and had caused the fire. Ji-Haw argued that the Texas court lacked jurisdiction over it, but a state appellate court held that the Texas long arm statute authorized the exercise of jurisdiction over the out-of-state defendant.*
Similarly, a state may exercise personal jurisdiction over a nonresident defendant who is sued for breaching a contract that was formed within the state. This is true even when that contract was negotiated over the phone or through online correspondence.
CORPORATE CONTACTS.Because corporations are considered legal persons, courts use the same principles to determine whether it is fair to exercise jurisdiction over a corporation. A corporation normally is subject to personal jurisdiction in the state in which it is incorporated, has its principal office, and is doing business. Courts apply the minimum-contacts test to determine if they can exercise jurisdiction over out-of-state corporations.
In the past, corporations were usually subject to jurisdiction in states in which they were doing business, such as advertising or selling products. The United States Supreme Court decided that this situation made questions of jurisdiction too unpredictable. After all, many corporations do business in multiple states, and the Court concluded that it was unfair to expose them to costly legal proceedings in numerous different locations. Now, a corporation is subject to jurisdiction only in states where it does such substantial and continuous business that it is “at home” in that state.* The courts look at the amount of business the corporation does within the state relative to the amount it does elsewhere.
Case Example 4.3.
Norfolk Southern Railway Company is a Virginia corporation. Russell Parker, a resident of Indiana and a former employee of Norfolk, filed a lawsuit against the railroad in Missouri. Parker claimed that while working for Norfolk in Indiana he had sustained a cumulative injury. Norfolk argued that Missouri courts did not have jurisdiction over the company. The Supreme Court of Missouri agreed. Simply having train tracks running through Missouri was not enough to meet the minimum-contacts requirement. Norfolk also had tracks and operations in twenty-one other states. The plaintiff worked and was allegedly injured in Indiana, not Missouri. Even though Norfolk did register its corporation in Missouri, the amount of business that it did in Missouri was not so substantial that it was “at home” in that state.*
Is the presence of a railroad company’s tracks in one state enough to satisfy the minimum-contacts requirement?
Jurisdiction over Subject Matter
Jurisdiction over subject matter is a limitation on the types of cases a court can hear. In both the federal and the state court systems, there are courts of general (unlimited) jurisdiction and courts of limited jurisdiction. An example of a court of general jurisdiction is a state trial court or a federal district court.
An example of a state court of limited jurisdiction is a probate court. Probate courts are state courts that handle only matters relating to the transfer of a person’s assets and obligations after that person’s death, including matters relating to the custody and guardianship of children and incompetent adults. An example of a federal court of limited subject-matter jurisdiction is a bankruptcy court. Bankruptcy courts handle only bankruptcy proceedings, which are governed by federal bankruptcy law.
A court’s jurisdiction over subject matter is usually defined in the statute or constitution creating the court. In both the federal and the state court systems, a court’s subject-matter jurisdiction can be limited by any of the following:
The subject of the lawsuit.
The sum in controversy.
Whether the case involves a felony (a more serious type of crime) or a misdemeanor (a less serious type of crime).
Whether the proceeding is a trial or an appeal.
Original and Appellate Jurisdiction
The distinction between courts of original jurisdiction and courts of appellate jurisdiction normally lies in whether the case is being heard for the first time. Courts having original jurisdiction are courts of the first instance, or trial courts—that is, courts in which lawsuits begin, trials take place, and evidence is presented. In the federal court system, the district courts are trial courts. In the various state court systems, the trial courts are known by various names, as will be discussed shortly.
The key point here is that any court having original jurisdiction is normally known as a trial court. Courts having appellate jurisdiction act as reviewing courts, or appellate courts. In general, cases can be brought before appellate courts only on appeal from an order or a judgment of a trial court or other lower court.
Jurisdiction of the Federal Courts
Because the federal government is a government of limited powers, the jurisdiction of the federal courts is limited. Federal courts have subject-matter jurisdiction in two situations: those involving federal questions and diversity of citizenship.
FEDERAL QUESTIONS.Article III of the U.S. Constitution establishes the boundaries of federal judicial power. Section 2 of Article III states that “[t]he judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority.” This clause means that whenever a plaintiff’s cause of action is based, at least in part, on the U.S. Constitution, a treaty, or a federal law, then a federal question arises, and the federal courts have jurisdiction.
Any lawsuit involving a federal question, such as a person’s rights under the U.S. Constitution, can originate in a federal court. Note that in a case based on a federal question, a federal court will apply federal law.
DIVERSITY OF CITIZENSHIP.Federal district courts can also exercise original jurisdiction over cases involving diversity of citizenship. The most common type of diversity jurisdiction requires both of the following:*
The plaintiff and defendant must be residents of different states.
The dollar amount in controversy must exceed $75,000.
For purposes of diversity jurisdiction, a corporation is a citizen of both the state in which it is incorporated and the state in which its principal place of business is located. A case involving diversity of citizenship can be filed in the appropriate federal district court. If the case starts in a state court, it can sometimes be transferred, or “removed,” to a federal court. A large percentage of the cases filed in federal courts each year are based on diversity of citizenship.
The party seeking to move a case to federal court bears the burden of demonstrating that the grounds for diversity exist.
Case Example 4.4.
Elijah Ratcliff was involved in a civil lawsuit with Greyhound Bus Lines over luggage theft on one of the company’s busses. Greyhound is headquartered in Dallas, Texas. Ratcliff sought to have the civil trial removed to a federal court in New York. To do so, he needed to convince the federal court that he was a resident of New York so that the case would meet the requirements of diversity of jurisdiction.
The facts were not in his favor. First, he had filed a complaint against Greyhound in Texas. His mailing address was in Texas. The luggage was stolen on a return trip he took to Texas from New York. He indicated that voter registration forms and tax returns would prove his New York residency, but did not produce either. The U.S. district court concluded that Ratcliff was principally based in Texas and dismissed his case for lack of diversity jurisdiction. A federal appeals court affirmed.*
As noted, a federal court will apply federal law in cases involving federal questions. In a case based on diversity of citizenship, in contrast, a federal court will apply the relevant state law (which is often the law of the state in which the court sits).
Exclusive versus Concurrent Jurisdiction
When both federal and state courts have the power to hear a case, as is true in lawsuits involving diversity of citizenship, concurrent jurisdiction exists. When cases can be tried only in federal courts or only in state courts, exclusive jurisdiction exists.
Federal courts have exclusive jurisdiction in cases involving federal crimes, bankruptcy, most patent and copyright claims, suits against the United States, and some areas of admiralty law. State courts also have exclusive jurisdiction over certain subject matter—for instance, divorce and adoption.
When concurrent jurisdiction exists, a party may bring a suit in either a federal court or a state court. A number of factors can affect the decision of whether to litigate in a federal or a state court, such as the availability of different remedies, the distance to the respective courthouses, or the experience or reputation of a particular judge.
A resident of a state other than the one with jurisdiction might also choose a federal court over a state court if there is any concern that a state court might be biased against an out-of-state plaintiff. In contrast, a plaintiff might choose to litigate in a state court if it has a reputation for awarding substantial amounts of damages or if the judge is perceived as being pro-plaintiff. The concepts of exclusive and concurrent jurisdiction.
4–2b. Jurisdiction in Cyberspace
How are the courts applying traditional jurisdictional concepts to cases involving Internet transactions?
The Internet’s capacity to bypass political and geographic boundaries undercuts the traditional basis on which courts assert personal jurisdiction. As already discussed, for a court to compel a defendant to come before it, there must be at least minimum contacts—the presence of a salesperson within the state, for example. Today, however, courts frequently have to decide what constitutes sufficient minimum contacts when a defendant’s only connection to a jurisdiction is through an ad on a website.
The “Sliding-Scale” Standard
The courts have developed a standard—called a “sliding-scale” standard—for determining when the exercise of jurisdiction over an out-of-state defendant is proper. The sliding-scale standard identifies three types of Internet business contacts and outlines the following rules of jurisdiction:
When the defendant conducts substantial business over the Internet (such as contracts and sales), jurisdiction is proper. This is true whether the business is conducted with traditional computers, smartphones, or other means of Internet access.
When there is some interactivity through a website, jurisdiction may be proper, depending on the circumstances. It is up to the courts to decide how much online interactivity is enough to satisfy the minimum-contacts requirement.
Case Example 4.5.
Dr. Arthur Delahoussaye, a Louisiana resident, bought a special racing bicycle he saw listed on eBay from Frederick Boelter, who lived in Wisconsin. Later, while Delahoussaye was riding the bike, he had to “bunny hop” (jump) over a gap in the pavement. When he landed, the front wheel disconnected, pushing the forks of the bicycle into the ground and propelling him over the handlebars and onto the pavement. Delahoussaye suffered serious injuries. He sued Boelter in a Louisiana court, alleging that Boelter had negligently removed the secondary retention devices designed to prevent the detachment of the front wheel.
The Louisiana court ruled that the state did not have jurisdiction over Boelter, and a state appellate court affirmed. Boelter did not have any prior relationship with Delahoussaye, did not initiate communications with Delahoussaye, and discussed the transaction with Delahoussaye only over the Internet. Payment was made through an intermediary, PayPal, and Boelter shipped the bicycle to Louisiana. The sale of a single bicycle to Delahoussaye over eBay was not enough to give Louisiana state jurisdiction over Boelter, so the plaintiff’s case was dismissed.*
When a defendant merely engages in passive advertising on the Web, jurisdiction is never proper.*
International Jurisdictional Issues
Because the Internet is global in scope, it raises international jurisdictional issues. The world’s courts seem to be developing a standard that echoes the minimum-contacts requirement applied by U.S. courts.
Most courts are indicating that minimum contacts—doing business within the jurisdiction, for instance—are enough to compel a defendant to appear. The effect of this standard is that a business firm has to comply with the laws in any jurisdiction in which it targets customers for its products. This situation is complicated by the fact that many countries’ laws on particular issues—such as free speech—are very different from U.S. laws.
The following case illustrates how federal courts apply a sliding-scale standard to determine if they can exercise jurisdiction over a foreign defendant whose only contact with the United States is through a website.
Spotlight on Gucci: Case 4.1.Gucci America, Inc. v. Wang Huoqing
United States District Court, Northern District of California, 2011 WL 30972 (2011).
narvikk/iStock Unreleased/Getty Images
Gucci luxury leather products are often counterfeited. Can Gucci sue an Asian company in the United States for selling counterfeit goods?
Wang Huoqing, a resident of the People’s Republic of China, operated numerous websites. When Gucci discovered that Huoqing’s websites were selling counterfeit goods—products that carried Gucci’s trademarks but were not genuine Gucci articles—it hired a private investigator in San Jose, California, to buy goods from the websites. The investigator purchased a wallet that was labeled Gucci but was counterfeit.
Gucci filed a trademark infringement lawsuit against Huoqing in a federal district court in California seeking damages and an injunction to prevent further infringement. Huoqing was notified of the lawsuit via e-mail but did not appear in court. Gucci asked the court to enter a default judgment—that is, a judgment entered when the defendant fails to appear. The court first had to determine whether it had personal jurisdiction over Huoqing based on the Internet sales.
Could a U.S. federal court exercise personal jurisdiction over a resident of China whose only contact with the United States was through an interactive website that advertised and sold counterfeit goods?
Yes. The U.S. District Court for the Northern District of California held that it had personal jurisdiction over the foreign defendant, Huoqing. The court entered a default judgment against Huoqing and granted Gucci an injunction.
The court reasoned that the due process clause allows a federal court to exercise jurisdiction over a defendant who has had sufficient minimum contacts with the court’s forum—the place where the court exercises jurisdiction. Specifically, jurisdiction exists when
the nonresident defendant engages in some act or transaction with the forum “by which he purposefully avails himself of the privilege of conducting activities in the forum, thereby invoking the benefits and protections of its laws;
the claim [is] one which arises out of or results from the defendant’s forum-related activities; and
exercise of jurisdiction [is] reasonable.”
To determine whether Huoqing had purposefully conducted business activities in California, the court used a sliding-scale analysis. Under this analysis, passive websites do not create sufficient contacts for such a finding, but interactive sites may do so. Huoqing’s websites were fully interactive. In addition, Gucci presented evidence that Huoqing had advertised and sold the counterfeited goods within the court’s district, and that he had made one actual sale within the district—the sale to Gucci’s private investigator.
What If the Facts Were Different? Suppose that Gucci had not presented evidence that Huoqing made one actual sale through his website to a resident of the court’s district (the private investigator). Would the court still have found that it had personal jurisdiction over Huoqing? Why or why not?
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