Business Courts and Interstate Competition

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. …