QuickMBA / Business Law / American Legal System

The American Legal System

Sources of Law
  • Constitutional Law is based on a formal document that defines broad powers. Federal constitutional law originates from the U.S. constitution. State constitutional law originates from the individual state constitutions.

  • Statutes and Ordinances are legislation passed on the federal, state, or local levels.

  • Common Law is based on the concept of precedence - on how the courts have interpreted the law. Under common law, the facts of a particular case are determined and compared to previous cases having similar facts in order to reach a decision by analogy. Common law applies mostly at the state level. It originated in the 13th century when royal judges began recording their decisions and the reasoning behind the decisions.

  • Administrative Law - federal, state, and local level. Administrative law is made by administrative agencies that define the intent of the legislative body that passed the law.

The sources of law have both vertical and horizontal dimensions. Vertical dimensions include federal authority, state authority, and concurrent authority. Federalism refers to this form of government, in which there is national and local authority. Federal authority covers laws related to patents, pensions and profit sharing, and labor issues. State authority covers business association, contracts, and trade secrets. Concurrent authority covers security law, tax law, and employment law. Note that employment law refers to non-union relationships; labor law refers to union relationships.

The horizontal dimension is related to the separation of power between the executive branch, which creates administrative law, the legislative branch, which creates statutes, and the judicial branch, which creates common law. The judicial system in the U.S. has a pyramid structure consisting of fewer higher level courts and more lower level courts:

-- Supreme Court --
--------- Appellate Courts ---------
-------------------- Trial Courts ---------------------

Actually, there are two pyramid structures - one for federal courts and one for state courts. State courts may use different terminology; for example, trial courts may be called courts of common plea, appellate courts may be called superior courts or commonwealth courts.

Classifications of Law

Substantive law vs. procedural law:  Substantive law creates, defines, and regulates legal rights and obligations. Procedural law defines the rules that are used to enforce substantive law.

Common law vs. statutory law:  Common law is defined by judges. Statutory law is passed by legislatures. For example, the Securities Act of 1933 is statutory law.

Criminal law vs. civil law:  Criminal law is between private parties and society. Civil law is between private parties only.


Jurisdiction is the power of a court to hear a particular case. In order for a court to have jurisdiction, it must have both subject matter jurisdiction (the power to hear the type of claim being asserted) and personal jurisdiction (power over the person).

Subject Matter Jurisdiction
Article III of the U.S. constitution states that federal courts have only certain types of subject matter jurisdiction. To satisfy subject matter jurisdiction, a federal court must have either:

1. Federal question jurisdiction - federal courts have federal question jurisdiction in cases involving the federal constitution, federal statutes, or federal treaties.


2. Diversity jurisdiction - diversity jurisdiction requires both a) $75,000 or more at issue, and b) the parties must be residents of different states. Diversity jurisdiction applies for example, to a case in which a traveler passing through a different state from his/her home state is accused of a serious offense, and in which the plaintiff, attorneys, and judge may all be close friends.


3. suit by or against the U.S. government,


4. Miscellaneous - certain types of cases such as those related to patents, bankruptcy, admirality (maritime cases), trademarks and copyrights, etc.
Items 1) and 2) can be tried in either state or federal courts (concurrent state/federal jurisdiction). Items 3) and 4) may be heard only by federal courts.
Personal Jurisdiction
Types of personal jurisdiction:

1. in personam - court has power over a particular person - in personam applies if minimum contact is established. For non-residents of a state, a state court may still have jurisdiction if the person travels regularly to the state on business or has a post office box in the state. Each state has its own definition of what constitutes doing business in the state, as determined by common law.

2. in Rem - a court has power if a particular piece of property is in the state.

3. consent - when a contract specifies in which state any disputes are settled. The contract can specify a third state in which neither party does business.

Just because a case is heard by a particular state court does not mean that that state's laws apply. The states whose laws are used can be specified in the contract. One state's court can hear a case under another state's laws.

Lifecycle of a Lawsuit

In the beginning phase of a lawsuit, there is a complaint, followed by the defendant's answer in which he or she tries to counter everything in the claim. The defendant then may file a counterclaim. Counterclaims are lawsuits within a lawsuit in which the defendant files a claim against the plaintiff. There then may be a preliminary motion, of which the outcome can be dismissal due to no legal claim based on reading the complaint, or a summary judgement in which a decision can be based on the facts of the case that are not in dispute.

The middle phase of a lawsuit is the discovery phase, in which each side attempts to determine how strong their case is. The discovery phase consists of interrogatories, depositions, and admissions. By this point, most cases are settled.

The end phase of a lawsuit is the trial, beginning with a pre-trial conference in which the parties attempt to settle in front of a judge without going to court. The trial then proceeds with the evidence and then a judgement and possibly a post-judgement. The post-judgement may be that a new trial is necessary, such as in cases of mistrial.

The defendant usually has the right to one appeal within a certain period of time. An appeal is filed with the appellate court, there are briefs, oral arguments, and then a decision.

The judgement is enforced by first obtaining an execution that freezes the defendant's assets. The defendant is served and the assets are levied. The defendant, however, may choose to file for bankruptcy protection, in which case all creditors are stopped, including court judgements.


There are two types of remedies: legal and equitable. Legal remedies are money-based and seek to financially compensate one for the damage that has occurred. Equitable remedies require a specific performance. Examples of equitable remedies are injunctions, restitution, and reformation. In cases where damages are difficult to quantify, equitable remedies may be more appropriate.

Legal Case Study

When attempting to understand how courts interpret the law, it is worthwhile to study past cases of similar legal issues. Past legal cases provide the opportunity to understand the law by studying well-argued positions from both sides. When studying a case, the following points should be identified:

  1. Facts. One should identify which facts are important and which are not.
  2. Issue. One should isolate the specific legal issue relevant to the case.
  3. Court holding (ruling)
  4. Reasoning (why the court decided as it did).

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