• 07 May 2012

Business Courts and Interstate Competition

John F. Coyle

Introduction

Over the past twenty years, specialized trial courts with dockets comprised primarily or exclusively of business cases—commonly known as business courts—have been established in nineteen states across the United States.1 In these courts, cases are not subject to the master calendar system. Rather, a single judge will hear any qualifying case from start to finish. Policymakers and legal scholars who study business courts have advanced three primary rationales in support of their creation. First, such courts are said to result in higher-quality decisions in individual cases and to generate more and better-reasoned decisions in the fields of corporate and commercial law. Second, such courts are said to enhance the administrative efficiency of a state court system. Finally, business courts are said to facilitate the diversion of economic resources from one jurisdiction to another as part of a broader process of competition between the states. This Essay analyzes each of these rationales—with a particular emphasis on the third—and then draws upon this analysis to offer a number of suggestions as to how future business courts should be designed.

Quality of Decision-Making

With respect to the first rationale—that business courts render higher-quality decisions in business cases—the idea is that a specialized judge who hears only business cases is in a better position to resolve such disputes quickly and correctly than a generalist judge who may be unfamiliar with business concepts. Although it is always difficult to determine whether one court renders “better” decisions than another court in particular cases, there is some empirical support for the notion that business courts render more satisfying decisions in business cases. The Association of Corporate Counsel, a trade group for in-house lawyers, has taken the position that the use of business courts results in an “improvement in the quality of dispositions” in business litigation. Surveys of attorneys in Massachusetts and Philadelphia who have practiced before those states’ business courts reveal high levels of satisfaction with the courts. Although it is true that surveys of attorneys in South Carolina evidenced only lukewarm support for that state’s business court, there is a fair amount of evidence to support the contention that these courts are at least capable of producing better decisions than generalist courts in complex business cases.2

Administrative Efficiency

There is, by contrast, little to no empirical support for the notion that the creation of a business court enhances the overall administrative efficiency of a particular court system. The only hard evidence in support of this claim lies in the oft-cited statistic that the creation of the New York Commercial Division led to a significant reduction in the average number of days it took to resolve a contract claim in New York.3 This lonely statistic aside, there is no published study suggesting that the court systems in any of the nineteen states that have established business courts to date were able to resolve business cases more efficiently after the creation of the business court. Nor is there any published study that provides statistical support for the claim that business courts lead to the more efficient resolution of nonbusiness cases. Although the lack of published data to date does not mean that business courts do not enhance administrative efficiency, it does mean that there is currently a mismatch between the confident assertions by business court advocates that these innovations enhance judicial efficiency and the lack of empirical data to support this contention. Until more and better data are made available, it is difficult—if not impossible—to determine the actual impact of a business court on the administrative efficiency of any particular court system.

Competition

The third rationale—which emphasizes the ability of business courts to enable the states that create them to compete more effectively for scarce economic resources—is typically advanced in one of three forms. First, the creation of a business court is said to attract out-of-state businesses to a state or, alternatively, to dissuade in-state businesses from moving elsewhere, thereby growing the state’s economy. Second, the creation of a business court is said to attract out-of-state corporations to incorporate, or to reincorporate, under the law of the state that creates it, thereby generating franchise fees for the state. Third, the creation of a business court is said to make it more likely that out-of-state companies will choose to litigate their disputes before that court, thereby generating fees for local lawyers. The common thread uniting each of these arguments is the notion that a business court is a product that serves to facilitate the diversion of economic resources away from other states to the state that creates the business court. As discussed below, each of these competition-based arguments is flawed in some way.

Attracting Businesses to the State

Although it is commonplace for state officials to argue that the creation of a business court will attract jobs and investment to a particular state, there is little reason to believe that this is so. Indeed, there are many more reasons to believe that a business court is unlikely to attract out-of-state businesses to a particular state. Decisions relating to business expansion are, for example, typically dominated by economic factors such as market size, product demand, distribution channels, and the availability of capital. The presence or absence of a specialized system of dispute resolution—even one tailored to the needs of business—is unlikely to make a great deal of difference in this decision-making process. Companies are, moreover, likely to discount the importance of business courts in deciding where to expand for any number of reasons. These include, but are not limited to, the contingent nature of litigation generally, the fact that most business disputes are resolved by means other than litigation, the restrictions on the type of cases that can be heard by the typical business court, the availability of federal court and arbitration as alternatives to state court adjudication, and the fact that out-of-state companies may make use of the business court as plaintiffs regardless of whether they are actually doing business in the state. Accordingly, the claim that the creation of a business court will encourage economic development by attracting out-of-state companies to expand into the jurisdiction is largely unpersuasive.

Attract Corporate Charters

The notion that the creation of business courts is likely to attract chartering business from out-of-state corporations is likewise unpersuasive. To the extent that a business court is seeking to enable a state to compete more effectively for corporate charters, it is competing with Delaware. Delaware’s success in attracting such charters is frequently attributed to certain unique attributes that attach to its Court of Chancery. This trial court hears corporate cases primarily or exclusively, hears all cases without a jury, publishes its opinion in online repositories like Lexis and Westlaw, and benefits from a state statute requiring that directors of corporations organized under that state’s law consent to being sued in that state. Modern business courts, significantly, lack each of these attributes.4 They hear cases across the entire panoply of corporate and commercial law. They have retained jury trials. It can be difficult in some states to search, or even to locate, business court decisions. And most states that have established business courts have declined to enact statutes requiring that directors of corporations organized under that state’s law consent to being sued in that state. If modern business courts are to compete successfully with Delaware for corporate chartering business, then state officials would be well advised to revamp their institutional structure so that they more closely resemble the Delaware Court of Chancery. Unless and until these basic design elements are changed, it is highly unlikely that any business court will succeed in attracting incorporation business away from Delaware.

Attract Litigation Business

With respect to the claim that business courts serve to attract legal business to a particular jurisdiction, there are examples of cases in which these courts have done precisely that. Most famously, the various corporate parties to the FirstUnion-Wachovia-SunTrust merger litigation agreed in 2001 that their dispute would be resolved by North Carolina Business Court rather than the courts of Georgia.5 The fact that litigation business was successfully diverted from Georgia to North Carolina in this particular case, however, does not necessarily mean that such diversion is likely to occur on a regular basis. In order for a business court in one state to divert litigation business away from another state, there must be (1) an out-of state party to the litigation, (2) multiple fora with personal jurisdiction over the defendant, (3) mutual agreement as to the forum or a successful race to the courthouse, (4) a lack of a business court in the other state, (5) a claim eligible to be heard by a business court, and (6) proper venue. Although this combination of factors is not unheard of, it is likely not the norm. Given the atypical character of such cases, it is open to question whether the size and scale of litigation business capable of being diverted from one state court to another as a result of a business court is significant.

Summarizing the Case for Business Courts

To sum up, the best case for establishing business court lies in their ability to render high quality decisions in business cases and in their (limited) ability to attract litigation business to a particular jurisdiction. Such courts are, however, extremely unlikely to attract regular business to a particular state and are likewise unlikely to prompt out-of-state firms to reincorporate in that state. As to the claim that business courts serve to enhance the overall efficiency of a particular court system, there exists to date scant statistical evidence to support this claim.

Lessons for Institutional Design

The foregoing analysis has a number of implications for state officials considering how best to design a business court. Several states, for example, have considered creating business courts that have a special focus on technology issues. Maryland has actually created such a court—the Business and Technology Case Management Program—and Michigan has seriously considered the idea. Advocates for these courts contend that they will attract not just any business, but a particular type of business—technology companies—to the state that creates them. The analysis set forth above, however, suggests that it is unlikely that the establishment of a business court with a focus on technology issues will have a meaningful impact on the location decisions of technology companies. There are, to be sure, other reasons why a state may choose to create a business and technology court. It may want to generate better decisions, for example, or to attract litigation business from technology companies. State officials tasked with setting up these courts will be better equipped to make sound decisions about how precisely they should be designed if they have a realistic sense for what ends these courts are likely to achieve.

The foregoing analysis also suggests that if states truly wish to attract litigation business, they should consider adopting additional institutional reforms beyond merely establishing a business court. States could, for example, adopt laws guaranteeing that forum selection clauses selecting the business court will be enforced. They could seek to hire “superstar” commercial arbitrators—that is, those individuals with a reputation for fairness and expertise in the field of commercial law—as their business court judges. They could even take steps to make jury trials optional in certain business disputes. All of these reforms would supplement the capacity of the business court to divert litigation to the jurisdiction that created it.

Acknowledgments:

John F. Coyle is and Assistant Professor of Law at University of North Carolina at Chapel Hill.

A version of this article will appear in the May 2012 issue of the William and Mary Law Review.

Copyright © 2012 William and Mary Law Review.

  1. Since 1993, business courts have been established in Alabama, Colorado, Delaware, Florida, Georgia, Illinois, Maine, Maryland, Massachusetts, New York, Nevada, New Hampshire, New Jersey, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, and South Carolina. A business court may be a program or a track within existing civil divisions or, in some cases, a separate division within a court.
  2. Although enhanced judicial expertise in business law is often cited as the source of a business court’s comparative advantage, it may be that the true source of its advantage is judicial expertise in the facts of a particular case.
  3. Mitchell L. Bach & Lee Applebaum, A History of the Creation and Jurisdiction of Business Courts in the Last Decade, 60 Bus. Law. 147, 154 (2004).
  4. Marcel Kahan & Ehud Kamar, The Myth of State Competition in Corporate Law, 55 Stan. L. Rev. 679, 708-15 (2002).
  5. This decision prompted a past president of the Georgia bar to observe that “[w]e flat out lost a significant amount of legal business to a neighboring state” and that “[t]here would have been a lot of lawyers involved here [in Georgia] if the litigation had stayed here.” Rachel Tobin Ramos, Business Court May Start Here as Pilot Project, Atlanta Bus. Chron., Oct. 8, 2004, at A3 (quoting Bill Barwick, Partner, Sutherland, Asbill & Brennan LLP).

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