Business courts and interstate competition.

• Author: Coyle, John F.

ABSTRACT

Over the past two decades, specialized trial courts that hear business disputes primarily or exclusively have been established in nineteen states. To explain the recent surge of interest in these courts, policymakers and scholars alike have cited the process of interstate competition. Specifically, these commentators have argued that business courts serve, among other purposes, to attract out-of-state companies to expand their business, reincorporate, or litigate disputes in the jurisdiction that created the business court.

This Article critically evaluates each of these theories. It argues first that business courts do not serve to attract companies from other states because business expansion decisions in the United States are rarely driven by the high quality of the courts in a particular jurisdiction. It next argues that business courts are unlikely to attract incorporation business because their core attributes are such that they are unlikely to compete successfully with the Delaware Court of Chancery. The Article goes on to argue that while the creation of a business court may in some cases serve to divert litigation business to local lawyers, the opportunities for diversion are relatively limited.

The Article then draws upon these insights to offer a number of suggestions as to how future business courts should be designed. It suggests that states seeking to attract technology companies should think twice before creating a business and technology court. It notes that major institutional reforms will be required if states wish to use business courts to attract incorporation business away from Delaware. It also identifies additional steps that states might take to more effectively attract litigation business. The Article concludes by evaluating the viability of several non-competition-based rationales for establishing business courts.

TABLE OF CONTENTS INTRODUCTION I. THE CORE ATTRIBUTES OF A BUSINESS COURT II. THEORIES OF LEGAL INNOVATION AND COMPETITION A. Supply Side: State Incentives B. Supply Side: Lawyer Incentives C. Demand Side: Company Incentives III. COMPETING FOR BUSINESS ACTIVITY A. The Irrelevance of Dispute Resolution B. Misalignment of Litigation Incentives C. Business Courts as Branding Devices IV. COMPETING FOR CORPORATE CHARTERS V. COMPETING FOR LITIGATION BUSINESS A. The Diversion of Legal Business Occurs B. But There Are Limits on Its Scope C. A Response to a Possible Counterargument VI. LESSONS FOR INSTITUTIONAL DESIGN A. Rethinking Technology Courts B. Breaking Delaware's Dominance C. Innovating to Attract Litigation Business VII. ALTERNATIVE JUSTIFICATIONS A. Improved Quality of Decisions B. Enhanced Administrative Efficiency CONCLUSION 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 in the United States. In 1993, business courts were established in New York and Illinois. (1) In the years to follow, business courts were created in North Carolina (1995), New Jersey (1996), Pennsylvania (2000), Massachusetts (2000), Nevada (2000), Rhode Island (2001), Maryland (2003), Florida (2004), Georgia (2005), Oregon (2006), Colorado (2006), South Carolina (2007), Maine (2008), New Hampshire (2008), Alabama (2009), Ohio (2009), and Delaware (2010). (2) There are today in the United States more trial courts that hear business disputes primarily or exclusively than at any previous moment in the nation's history.

In seeking to explain the rise of the business court, policymakers and legal scholars alike have cited the process of interstate competition. (3) Some commentators have argued that a business court serves 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. (4) Others have suggested that a business court attracts 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. (5) Still others have contended that a business court makes it more likely that out-of-state companies will choose to litigate their disputes before that court, thereby generating fees for local lawyers. (6) 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.

This Article critically evaluates each of these theories. First, with respect to the theory that business courts serve to attract or retain business to a particular state, this Article argues that decisions to relocate a business in the United States are rarely, if ever, driven by the high quality of the courts in a particular jurisdiction. Rather, they are driven by a variety of economic factors--including labor costs and proximity to markets--that have a direct and immediate impact on a company's bottom line. It is highly unlikely that any business, whether in-state or out-of-state, would make a location decision based on the absence or presence of a specialized business court. Nevertheless, officials in a sizable number of states have sought to rationalize the creation of business courts on the ground that these courts can attract and retain business for the state.

Second, with respect to the theory that business courts will attract corporate charters to the states that create them, this Article notes that corporations tend to incorporate in their home state or in Delaware, and that Delaware's success in attracting corporate charters is partly attributable to the high quality of its Court of Chancery. (7) If the purpose of the current crop of business courts is to attract incorporation business away from Delaware, one would expect to see these courts replicate some of the unique attributes of Delaware's Court of Chancery, such as that court's focus on corporate law or its practice of resolving all cases without juries. They do not. (8) Nevertheless, some commentators continue to argue that the creation of a business court by a state may help it to attract corporate chartering business away from Delaware.

Finally, with respect to the theory that business courts serve to attract litigation business to a particular state, this Article notes that such courts can accomplish this end in individual cases. The Article goes on to identify, however, a number of limitations on the ability of these courts to attract litigation business. In sum, this Article concludes that theories emphasizing competition for economic resources provide only tenuous support for establishing business courts.

This insight matters because it offers useful lessons in institutional design. Specifically, this Article suggests that states should rethink whether business and technology courts are likely to attract technology companies to a particular jurisdiction, that states wishing to attract corporate chartering business should rethink the design of their business courts, and that states attempting to attract litigation business should consider adopting a host of additional reforms designed to make it more likely that attorneys representing commercial actors will choose to litigate their disputes before the state's business court. These insights can inform the choices made by states that are planning to adopt business courts in the future and should also spur those states that have already established business courts to adjust their respective approaches.

This insight also matters because it highlights the importance of other rationales for establishing business courts. Confronted with the reality that the economic benefits to be derived from creating business courts will flow principally to local attorneys--a group not historically popular with voters--state officials may cease to invoke the claim that business courts may be used to compete for economic resources. Should this occur, then the case for establishing business courts would rise or fall based primarily on two alternative justifications: (1) that these courts improve the quality of dispute resolution in individual cases; and (2) that these courts enhance administrative efficiency within a court system. This Article suggests that there is some empirical support for the notion that business court judges render better-reasoned decisions in business disputes than do generalist courts. The Article also notes, however, the near absence of any statistical evidence as to whether business courts enhance administrative efficiency.

This Article proceeds as follows. Part I provides a brief history of business courts in the United States, describes the core attributes of such courts, and outlines the basic rationales in support of creating them. Part II summarizes the theories that seek to justify and explain the creation of these courts as part of a process of interstate competition. Part III explains why the establishment of business courts is unlikely to attract foreign companies to expand into a particular jurisdiction or, alternatively, to prevent local companies from moving away. Part IV details why the establishment of a business court, at least as such courts are currently designed, is unlikely to persuade companies to incorporate or reincorporate in a particular state. Part V shows that, while business courts may attract some litigation business to a state, there are limits on their capacity to achieve this end. Part VI outlines a number of recommendations as to how to design the next generation of business courts if the ultimate goal is to divert economic resources from one jurisdiction to another. Finally, Part VII discusses the viability of two alternative justifications for creating business courts.

1. THE CORE ATTRIBUTES OF A BUSINESS COURT

   A business court is a specialized trial...