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Specializing the Courts$

Lawrence Baum

Print publication date: 2011

Print ISBN-13: 9780226039541

Published to Chicago Scholarship Online: March 2013

DOI: 10.7208/chicago/9780226039565.001.0001

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Economic Issues: Private Litigation

Economic Issues: Private Litigation

Chapter:
(p.175) Six Economic Issues: Private Litigation
Source:
Specializing the Courts
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226039565.003.0006

Abstract and Keywords

This chapter describes a different category of courts that deals with economic issues that primarily occur between private parties. This disparate set of courts includes the Federal Circuit in its patent jurisdiction, the Delaware courts in the field of corporate governance, federal bankruptcy courts, and state business courts. Specialized courts play major roles in three fields of private economic litigation: Patents, corporate governance, and bankruptcy. The Federal Circuit has a high level of case concentration in patent law and a moderate level of judge concentration. Delaware's standing as the leading home for large corporations gives automatic importance to its courts as interpreters of corporation law. The role of Delaware's courts in corporation law should be put in the context of state policy as a whole. These courts underline the potential for specialization to shape the content of judicial policy.

Keywords:   private economic litigation, Federal Circuit, Delaware courts, federal bankruptcy courts, corporate governance, state business courts, specialized courts, patent law, judicial policy

Government is a litigant in nearly every field of law, but some fields are dominated by lawsuits between private parties. Most of those fields involve economic issues, issues on which interested groups often have a strong stake in the outcomes of cases and the content of legal rules.

Among these interests, the most prominent is the business community. Businesses participate in all fields of private economic litigation. In some fields they are regular participants on one side (as in debt collection and tort law) or on both sides (as in patent and copyright law). Business groups could be expected to advocate judicial specialization when they perceive that it would benefit them, just as the federal government has done in some fields. Because business groups have considerable influence in politics, they might well succeed in some instances, especially because they do not regularly face government as an adversary.

Specialized courts play major roles in three fields of private economic litigation: patents, corporate governance, and bankruptcy. There is also a movement toward specialization in a broad subset of business litigation. Because businesses are prominent litigants in all four fields, one key question is the extent to which their efforts are responsible for these instances of judicial specialization.

Patents

Taxes and patents have been the most common targets for people who advocate increased specialization within the federal courts. Tax law is quite complex, and judges who lack backgrounds in tax law (the overwhelming majority) can find it quite difficult to analyze the issues in cases (see Hand 1947, 169). Patent law is not especially complex, but patent cases often involve (p.176) complicated facts in technical or scientific fields such as chemistry. Because facts are relatively important at the trial level and the law is relatively important at the appellate level, the current situation is the opposite of what might be expected. Most federal tax cases are heard by a specialized court at the trial level, but appeals go to generalist courts. In contrast, trials in patent cases are in the district courts, but appeals go to the Court of Appeals for the Federal Circuit or, as it is usually called, the Federal Circuit (see Rao 2003, 1123). To a great extent, this outcome reflects historical circumstance.

There are two distinct types of patent cases in the courts. The first is appeals from decisions of the Patent and Trademark Office (until 1975, the Patent Office). Those decisions concern whether to grant a patent to an applicant and which of two competing applicants merits a patent. The second is lawsuits over actual patents, of which the great majority are for infringement of patents.

The most important and most contentious issue in patent law is the standard of patentability, that is, how rigorous the requirements for obtaining a patent should be. The standard is an issue not just in appeals from administrative denials of patents but also in infringement suits. Defendants in those cases frequently challenge the validity of the patents in question, claiming that the Patent and Trademark Office should not have issued them. If the defendant proves invalidity, then the question of whether the patent was infringed is moot.

By and large, patent lawyers favor a lenient standard of patentability (see Rao 2003, 1075). Although they represent both sides in patent infringement cases, those who represent applicants for patents benefit directly from lenient standards of patentability. More fundamentally, patent lawyers believe in the desirability of patents, so they prefer to see more patents issued rather than fewer.1 This point of view is generally shared by patent examiners in the Patent and Trademark Office. Patent examiners also have practical reasons to adopt lenient standards. Most important, it takes less time to award a patent and thereby dispose of a case than to reject an applicant's patent claims and face further efforts at persuasion by the applicant (Rao 2003, 1075–76; Burkand and Lemley 2009, 23–25).

In contrast, many nonspecialists favor more rigorous standards of patentability, in part because they associate patents with monopolies and in (p.177) part because they perceive that the Patent and Trademark Office has unduly lenient standards. That point of view has been widely held among generalist federal judges since the 1930s. As a result, there has been a long-standing tension between specialists and generalists. That tension is reflected in the contempt expressed by some patent lawyers toward generalist federal judges, including Supreme Court justices (Chisum 1999).

Today, the Court of Appeals for the Federal Circuit hears both types of patent cases at the intermediate appellate level, but the two types were given to specialists more than a half century apart. Appeals from the Patent Office came first.

With a statutory change in 1927, appeals from Patent Office decisions could go to a federal district court or to the District of Columbia court of appeals (see U.S. Senate 1926, 7–8, 31).2 But at about the same time, the idea of substituting the Court of Customs Appeals (CCA) for the D.C. court of appeals emerged. Congress enacted this idea into law in 1929. The transfer was supported by judges on the two affected courts, Chief Justice William Howard Taft, the Justice Department, the head of the Patent Office, the American Bar Association, and the primary association of patent lawyers (U.S. Senate 1926, 26–27; House of Representatives 1928a, 4, 6, 14).

The dominant rationale for the change was efficiency: the three judges of the D.C. court of appeals were overworked, with patent cases accounting for a large part of their backlogged docket, while the five judges on the CCA did not have enough cases to fully occupy them. Indeed, some of the CCA judges had been sitting in cases at the D.C. court of appeals to help out (House of Representatives 1928a, 13; House of Representatives 1928b, 2; Federico 1940, 946–47). There is no evidence that an interest in the substance of patent policy motivated the jurisdictional change. One congressional report referred to the preference of many patent lawyers for a specialized court (U.S. House of Representatives 1927, 1), but that preference does not seem to have rested on policy considerations. For its part, Congress did not treat the jurisdictional change as a matter of great consequence.

(p.178) With the passage of the 1929 legislation and a sorting out of venue in the district courts (Canon v. Robertson 1929), the renamed Court of Customs and Patent Appeals (CCPA) and the D.C. district court (with appeals to the D.C. court of appeals) became alternative forums for appeals from the Patent Office. In its first quarter century, the CCPA played a fairly passive role in patent law, affirming denials of patents in the great majority of cases.3 To a degree, this stance reflected the backgrounds of the CCPA's judges. As noted in chapter 5, appointments to the court were based primarily on political patronage. Only one judge, appointed in 1952, had any experience related to patent policy (see Rich 1980, 125–26). Under those circumstances, the easiest course for the court was to affirm the Patent Office at a high rate. Further, despite their specialized role, some CCPA judges probably shared the preference of most generalist judges for a relatively rigorous standard of patentability.

Even so, the court displayed considerable insularity. As suggested in chapter 2, one manifestation of insularity on the part of specialists is skepticism toward higher authorities who are generalists. Compared with the courts of appeals, the CCPA was far less likely to cite or quote from Supreme Court opinions; instead, CCPA opinions mostly cited other CCPA opinions (Baum 1994). Thus, the early CCPA shows that a court's specialization can create a degree of isolation from the judicial mainstream.4

During the Eisenhower administration, leaders of the patent bar sought the appointment of patent specialists to the court and succeeded with appointments in 1956 and 1959. The 1956 appointee, Giles Rich, had been active in the politics of patent law (Rich 1963). Both judges shared the dominant point of view in the patent bar. The effect was dramatic. The proportion of patent denials that the court reversed quickly doubled and remained at that higher level. With some resistance from their colleagues, the patent lawyers on the court also secured doctrinal changes that favored a more lenient standard of patentability. This new stance became permanent, in part because additional patent lawyers were appointed to the court. Meanwhile, the courts in the District of Columbia reviewed Patent Office decisions under a more rigorous standard (Dunner 1972).

The patent bar's capture of the CCPA might seem inevitable. But that interpretation is inconsistent with the lengthy period before the capture (p.179) actually occurred. It might not have occurred at all if the Eisenhower administration had not been sympathetic to the claims of patent lawyers. The sharp difference between the court's policies in the first and second halves of its tenure underlines the role that contingency plays in shaping the impact of judicial specialization.

Having now gained what they wanted from the CCPA, patent lawyers and business groups that favored a lenient standard of patentability still faced a generalist and less sympathetic judiciary in patent infringement suits. Indeed, after the patent bar won a change in the key requisite for patentability in the Patent Act of 1952, the Supreme Court interpreted the new criterion of nonobviousness as effectively ratifying the rigorous preexisting judicial standard (Graham v. John Deere Co. 1966). Because of the generalist courts' rigorous standard, a high proportion of the patents whose validity was challenged in court were found invalid.

Those who favored a more lenient standard would have been pleased if patent infringement cases were moved into the CCPA or another specialized court. But a long series of efforts to create a specialized court of patent appeals had failed, and those efforts died down by the 1940s (U.S. Senate 1959; Janicke 2001). Then there was a sudden reversal. In the late 1970s, Congress and the executive branch began to consider a proposal to merge the CCPA and the Court of Claims and give the new court jurisdiction over patent appeals from the district courts. Congress adopted that proposal in 1982, creating the Court of Appeals for the Federal Circuit.

The Federal Circuit legislation is consistent with Kingdon's (1984, 2003) process stream perspective on policy making, discussed in chapter 2. Kingdon depicted policy problems and potential solutions as traveling in separate streams, which are joined under favorable conditions through the efforts of entrepreneurs. The Federal Circuit proposal was successfully attached to two sets of perceived problems in somewhat different ways (see Newman 1992, 513–15).

The first set of problems concerned the functioning of the federal appellate courts. In the 1970s, there was growing concern about caseload pressures and intercircuit conflicts in interpretation of the law. Two special federal commissions reflected and publicized this concern. Neither commission favored the use of specialized courts (Study Group on the Case Load of the Supreme Court 1972, 10–17; Commission on Revision of the Federal Court Appellate System 1975, 63–68), but both pointed to the problem of legal conflicts between circuits.

Meanwhile, University of Virginia law professor Daniel Meador was writing about possible solutions to problems in the federal appellate courts. In (p.180) collaboration with two colleagues, Meador argued for the idea of designating subsets of judges in a circuit to hear all the cases in certain categories for some period of time (Carrington, Meador, and Rosenberg 1976, 167–84). In 1977, new Attorney General Griffin Bell worked with Meador to create the Office for Improvements in the Administration of Justice (OIAJ), and he made Meador head of the office (Meador 1992). Meador and his staff worked to develop a plan for a national court that would hear appeals in fields in which doctrinal uniformity was especially desirable. Because several categories of cases would go to the court, it was thought, the advantages of case concentration would be obtained without the disadvantages of judge concentration.

This idea resulted in a proposal to merge the CCPA with the appellate level of the Court of Claims, with new jurisdiction added to the existing jurisdiction of the two courts. The specific set of fields proposed for inclusion in the new court's jurisdiction changed over time, as some were added and others were dropped because of opposition to their inclusion. A representative of the American Bar Association charged that the OIAJ proposal was “little more than a solution in search of a problem” and that “OIAJ seemed to scurry around rather desperately to find additional categories of appeals to include within the jurisdiction of the new court so that the new court would appear to have an adequate caseload” (House of Representatives 1980c, 767).

The second set of problems that led to creation of the Federal Circuit concerned the functioning of the economy. Worries about the nation's economic problems impelled President Carter to set up a Domestic Policy Review that gave some emphasis to fostering innovation. That emphasis led to close scrutiny of the patent system, and the Review group proposed creating a single court of patent appeals (Newman 1992, 515–16; Abramson 2007, 6–8).

In part, this proposal reflected the same interest in uniformity that motivated Professor Meador. Uncertainty in the law that resulted from differences in legal standards among federal circuits had long been cited in support of proposals for a court of patent appeals (U.S. House of Representatives 1908, 2; 1909, 2–3). Uncertainty about the validity of patents was now depicted as hampering industrial innovation and thereby damaging the country's economic health. But those who favored a lenient standard of patentability thought that the rigorous standard applied by many federal judges was at least as serious a problem as differential standards. A patent attorney who participated in the Domestic Policy Review as an industry representative linked the two problems directly: “It was clear that patents could never serve as reliable investment incentives when their fate in the (p.181) courts was so unpredictable, and the judicial attitude in general so hostile” (Newman 2002, 542).

The proposal from the Review group helped to crystallize support for a single court of patent appeals among large corporations. The Justice Department already had a strong inclination to include patent appeals in its Federal Circuit proposal. As other fields dropped in and out of the proposal, patents were the key constant. Corporate support for that part of the Justice proposal gave it additional impetus and played a key part in creation of the Federal Circuit in 1982 (Cihlar 1982).

For people who favored lenient standards of patentability, the idea of giving new patent jurisdiction to a merged CCPA and Court of Claims was especially attractive. The CCPA was the leading judicial proponent of a lenient standard, and its members (especially the patent lawyers on the court) could be expected to have a disproportionate impact on patent decisions in the Federal Circuit. Further, in deciding patent cases brought against the federal government, the Court of Claims generally supported a similar lenient standard (J. Davis and Frei 1982). Thus it was easy to predict that a merger of the two would bring about a more relaxed standard in the adjudication of patent appeals.

Congress began considering legislation to create the Federal Circuit in 1979.The Senate passed one version of the bill in 1979 and the House in 1980, but the two were not reconciled. Both houses passed bills in 1981, and they were reconciled in early 1982 as the Federal Courts Improvement Act of 1982. The basic thrust of the legislation attracted only limited opposition among members of Congress.

The congressional hearings on the Federal Circuit proposal centered on transfer of jurisdiction over patent appeals, generally viewed as the most important feature of the proposed court. The hearings underlined disagreement about the desirability of that provision, even within the patent bar (House of Representatives 1981a, 71–86). Lawyers who worked for corporations supported the provision, but many litigating attorneys opposed it (Meador 1992, 610; Abramson 2007, 16).

Even with that opposition, the combined support of the Carter and Reagan administrations and the business community was sufficient to secure approval of the Federal Circuit proposal. Supporters were successful in part because they could muster two arguments that minimized the potential negatives of creating the Federal Circuit (U.S. Senate 1979c, 32–34; House of Representatives 1981b, 18–19, 23). First, they said that the Federal Circuit would not be a specialized court, since it would have jurisdiction over several kinds of cases. Second, the proposal would not add to the size (p.182) and expense of the federal judiciary, since two existing courts would be merged. At the same time, proponents' emphasis on negative effects of the existing state of patent law created a sense of urgency.

The congressional hearings on the proposal had an air of unreality. The most important effect of creating the Federal Circuit was its near-certain effect on the substance of patent law. But the supporters of the Federal Circuit proposal who welcomed that prospect recognized that it would be controversial. So they left it unspoken and emphasized the uncontroversial problem of conflict in legal standards among the circuits:

The change was presented in the congressional hearings as a benign one, bringing consistency to the chaotic world of patent litigation, and predictability to the enforcement of valid patent rights. But it was clear from the beginning that advocates of stronger patent protection hoped that the new court would come down squarely on the side of patent holders. (Jaffe and Lerner 2004, 10)

For their part, people in Congress and the executive branch who supported the Federal Circuit proposal as a matter of judicial reform showed almost no awareness of its likely policy impact. That impact was mentioned only by a few opponents of the proposal, and they did not seem to attract much attention (U.S. Senate 1979c, 515–18; House of Representatives 1980c, 226–27; 1981a, 149, 253).5 As a result, it appears that few members of Congress who voted to create the Federal Circuit understood the full implications of what they were doing (see Hellman 1980, 355–59; but see House of Representatives 1980c, 253).

Congress gave the court all the jurisdiction of the CCPA and the appellate level of the Court of Claims. In addition to patent appeals from the district courts, the new court received several other pieces of new jurisdiction, including appeals from decisions in federal employee matters by the Merit Systems Protection Board and appeals from the district courts in cases involving claims against the federal government. It was anticipated that Congress might add to the court's jurisdiction later; a congressional opponent referred to the court as a potential “dumping ground” for new types of cases (U.S. Congress 1981, 27794). Indeed, the court has been given some additional types of cases, including appeals from the Court of Veterans Appeals (p.183)

Table 6.1 Cases filed in Court of Appeals for the Federal Circuit, fiscal 2009, by subject matter

Subject

Percentage

Patents

35.9

Federal employees

31.5

Veterans' benefits

11.7

Federal contracts

4.8

International trade

3.5

Trademarks

3.0

Taxes

1.9

Other

7.8

Source: Web site of Court of Appeals for the Federal Circuit, http://www.cafc.uscourts.gov/pdf/TableAppealsFiledTerminated09.pdf.

when that court was created in 1988 and cases formerly heard by the Temporary Emergency Court of Appeals when TECA was abolished in 1992. However, as table 6.1 shows, patent cases remain the single largest source of court business and constitute a substantial share of that business.6 Thus, the Federal Circuit features a high level of case concentration in patent law and a moderate level of judge concentration.

The Federal Circuit is equal to the courts of appeals in every formal respect, but its judges recognize that some people think of their court differently because of its limited jurisdiction. Some Federal Circuit judges have argued in public settings that their court hears too wide a range of cases to be considered a specialist (Markey 1989, 179–80; Plager 1990, 857–63; Rader 1991, 1004–9). That argument illustrates judges' interest in their status as well as their perception that some people accord specialist judges a lower status than generalists.

When it began operation, the Federal Circuit quickly ruled that it would adopt the body of law established by the CCPA and the Court of Claims, a choice that favored a lenient standard of patentability (South Corp. v. United States 1982). In its own decisions it established a series of doctrines that also supported a lenient standard (O'Hearn 1984; Sobel 1988, 1092–105; Federal Trade Commission 2003, chap. 4, 8–19). To take one example, the court has interpreted the statutory presumption that an issued patent is valid as a “strong presumption” that can be overcome only by “clear and convincing (p.184) evidence” (Al-Site Corporation v. VIS International, Inc. 1999, 1323; see Burk and Lemley 2009, 133–34).

Patterns in the court's decisions on patent validity present a similar picture. The proportions of challenged patents that the Federal Circuit holds to be valid have been considerably higher than they had been in the courts of appeals (Allison and Lemley 1998, 205–6; Landes and Posner 2003, 337–38). One study showed that in the 1982–94 period, the court affirmed 87 percent of the district court decisions that had held patents to be valid, as against 58 percent of the decisions holding patents invalid (Dunner, Jakes, and Karceski 1995; see also Coolley 1989; Harmon 2009, 1469–87).7

Thus, the court acted as expected. The appointments of additional patent lawyers to the court8 have helped to cement the court's relatively lenient standard of patentability, though the court's patent lawyers have not differed dramatically from their colleagues in their voting records on patent validity (Allison and Lemley 2000; see Jaffe and Lerner 2004, 101–2).9 Perhaps more important than the backgrounds of judges are their immersion in a field of law in which there is a dominant point of view among lawyers (see Rao 2003, 1114).

For two decades the Supreme Court heard few patent cases and did little to disturb the course of policy in the Federal Circuit, even though the Federal Circuit arguably had diverged from the Supreme Court's doctrinal positions (Desmond 1993). But the Court has intervened more actively since 2002. In this period it has overturned several Federal Circuit decisions, typically with little or no dissent. The most important of the Court's decisions was KSR International Co. v. Teleflex Inc. (2007), in which it made clear its collective view that the Federal Circuit had failed to follow the Court's position on nonobviousness as a requisite for patentability.

(p.185) The sources of what one commentator called the Supreme Court's “increasingly disdainful rhetoric directed against the Federal Circuit” (Sween 2008, S4) and the reversals that accompanied it are uncertain. But the consensus in the Court's decisions chastising the Federal Circuit seems to stem in part from a suspicion of specialized courts. Indeed, two justices have alluded in opinions to concerns about the Federal Circuit's specialization.10 The Court's interventions may also reflect a growing feeling outside the courts that the range of patentable subject matter in fields such as business methods and biotechnology has become too broad (Jaffe and Lerner 2004).

The Federal Circuit has not favored patent owners in all respects. Most important, on some major issues the court has made it more difficult to prove that a patent was infringed. In one instance, the Supreme Court interpreted a significant issue about infringement more favorably to patent owners than had the Federal Circuit (Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co. 2000, 2002; see Abramson 2007, 80). Moreover, the Federal Circuit affirmed findings that a patent had not been infringed nearly as often as it did findings of infringement in the 1982–94 period, and in the last five years of that period the percentages were essentially equal (Dunner, Jakes, and Karceski 1995, 155). Indeed, some scholars have concluded that patent owners do no better at the appellate level than they did before 1982, because a reduction in findings of invalidity has been balanced by an increase in findings of noninfringement (Lunney 2004; Henry and Turner 2006; see Federal Trade Commission 2003, chap. 5, 25–26).

Even on issues of patentability, the Federal Circuit's doctrinal positions do not always favor patent owners and applicants, and that seems to have become increasingly true over time. Especially striking was a 2008 en banc decision that toughened standards for patenting of business methods, a decision with a different tenor from one that the court had issued in 1995.11 (In Bilski v. Kappos [2010], the Supreme Court affirmed the Federal Circuit, but on grounds that seemed more favorable to patent applicants.)

On the whole, however, the Federal Circuit has followed the path in patent law that advocates in the patent bar had sought. The patent bar has no consensus on standards for patent infringement, and for the most part (p.186) (especially in its early years) the Federal Circuit supported the lenient standard of patentability that most patent lawyers favor.

The work of the Federal Circuit in patent law demonstrates a high level of assertiveness. This quality is reflected not only in the court's doctrinal innovations but also in its close scrutiny of decisions by district judges and juries (Rooklidge and Weil 2000; see Control Resources, Inc. v. Delta Electronics, Inc. 2001). It appears that the familiarity of Federal Circuit judges with patent law has produced an institutional self-confidence that leads to a highly active role in shaping case outcomes and legal rules.

The concentration of patent cases in a single appellate court undoubtedly has increased uniformity in patent law, the primary rationale for creation of the Federal Circuit. However, this uniformity has been far from complete, because of differences among Federal Circuit judges that translate into variation across court panels. In a survey of lawyers who practiced before the federal courts of appeals, the Federal Circuit ranked second highest for the proportions of respondents who thought “the difficulty of discerning circuit law due to conflicting precedents” was significant and that the “unpredictability of results until the panel's identity is known” was a “grave problem” (Tobias 2000, 58, 58n92).

This problem has been evident on the key issue of claim construction, which refers to interpretation of a patent to determine its scope. In a 1995 decision, the Federal Circuit held that claim construction was a matter of law rather than fact, thereby enhancing its power to rule on the scope of patents.12 Yet uniformity has not developed, because judges on the Federal Circuit differ in their approaches to construction of claims (Wagner and Petherbridge 2004; Bessen and Meurer 2008, 58–61; see K. Moore 2005). In Phillips v. AWH Corporation (2005), a dissenting opinion complained eloquently about the court's failure to achieve a coherent approach to claim construction. That matter aside, the thirty-five amicus briefs in that case illustrate the impact of concentrating a field of litigation in a single court.

Corporate Governance: the Delaware Courts

American business operates in a national and international economy, but most public policy on the governance of corporations is state law (Hamilton 2000, 72). Corporations are chartered by states rather than the federal government, and states do the basic regulation of corporations as organizations.13 (p.187) As a result, state courts play a larger role than federal courts in shaping the law of corporations.

According to the state government of Delaware, more than half of all publicly traded companies in the United States and 63 percent of the Fortune 500 are incorporated in that state.14 Delaware has been the leading center of incorporation for nearly a century, a status it attained as the result of two pieces of legislation. In 1898, when New Jersey was the primary home of corporations, the Delaware legislature followed New Jersey's lead by adopting similar lenient rules for corporations in order to gain more incorporations. In 1915, the New Jersey legislature enacted more restrictive rules. In response, corporations gravitated to Delaware (D. Sullivan and Conlon 1997, 724). Since that time, the state has maintained its primacy in incorporations. Delaware's attractiveness to corporations serves the state well. Among other things, about 20 percent of state government revenue comes from sources directly connected with incorporations.15

Delaware's standing as the leading home for large corporations gives automatic importance to its courts as interpreters of corporation law. At the trial level, the Court of Chancery (often referred to as the Chancery Court) hears all cases in this field. The state has no intermediate appellate court, so the state supreme court hears all appeals from Chancery.

The Chancery Court is an unusual body; only two other states have chancery courts. Delaware's trial courts originally functioned as both law and equity courts. In 1792, a constitutional convention created the position of chancellor, who would hear all equity cases. The Chancery Court over which the chancellor presided has continued, having survived the general movement to eliminate the distinction between law and equity. A second judge was added in 1939, and today there are five judges on the court (Hartnett 1992; Quillen and Hanrahan 1993). Officially, the chief judge has the title of Chancellor, and the other judges are Vice Chancellors.

The court's equity jurisdiction brings it a wide range of cases, including trusts and estates, real estate, an array of commercial and contractual issues, and corporation law. One of its most important decisions was Belton v. Gebhart (1952), in which Chancellor Collins Seitz ordered the desegregation of Delaware schools two years before Brown v. Board of Education. The court had jurisdiction over some aspects of corporate governance before the (p.188) state legislature acted in 1898 to garner incorporations, and its jurisdiction in the corporate field has been augmented since then (Quillen and Hanrahan 1993, 834).

The Delaware Supreme Court has existed as a separate body only since 1951 (Dolan n.d.; Horsey and Duffy n.d.). Until that time, an ad hoc supreme court was created for each appeal, drawn from judges who had not heard the case at trial. That system was possible because Delaware was compact and had a small judiciary and few appeals. Demands for a supreme court with its own justices began in the 1930s, in large part because of corporate litigation. “It was an often repeated argument that the old court could not handle adequately the increasing corporate litigation; that a high bench concerned exclusively with the appellate function was vitally necessary if corporations were to continue to use the state as their official home” (Dolan n.d.).

Cases that concern corporate governance make up only a distinct minority of the Chancery Court agenda. For its part, the Delaware Supreme Court received only 7 percent of its cases from the Chancery Court in 2009.16 But of the work that the two Delaware courts do, corporate governance is regarded as the most important portion by far. The message on the Chancery Court's main Web page focuses on its work in corporate law.17 In addition, Delaware court decisions have enormous impact on the law in this field. According to a legal scholar, Delaware is “the author of corporate jurisprudence for the country, and in many ways for the world” (Gruson 1986). Based on the perceived importance of cases rather than numbers, there is a high level of case concentration in the Delaware courts at both the trial and appellate levels and a high level of judge concentration in Chancery (see Stempel 1995, 78).

The role of Delaware's courts in corporation law should be put in the context of state policy as a whole. As suggested earlier, Delaware first gained its role as primary home of large corporations by winning what Supreme Court Justice Louis Brandeis called a “race … of laxity” (Louis K. Liggett Co. v. Lee 1933, 559). But there is considerable disagreement about the character of Delaware policy toward corporations since that time.

Law professor William Cary was the most visible proponent of one point of view. Cary argued that Delaware policy makers maintained the state's enviable position by adopting rules that favor corporate managers over (p.189) stockholders and other constituencies, since officers and directors rather than stockholders effectively control decisions over matters such as incorporation.18 In Cary's view, Delaware continued to win what he called “the race for the bottom” (Cary 1974, 666).

Some other scholars take the position that, for the most part, Delaware policy makers actually engage in and win a “race to the top” (R. Winter 1977; Easterbrook and Fischel 1991, chap. 8; Romano 1993). Employing economic theory and empirical research, they argue that, if Delaware overly favored management over stockholders, the ultimate effect would be to discourage incorporations in the state. Therefore, the state benefits by making high-quality corporation law that benefits stockholders. Since the 1980s, this conception has been dominant among students of corporation law (Hamilton 2000, 63–68), though some scholars dissent from it to varying degrees (Macey and Miller 1987; M. Eisenberg 1989, 1506–14;Bebchuk and Cohen 2003).

The work of the Delaware courts figures into this debate. Among scholars and observers, there is broad agreement that the decisional law of the Delaware Chancery Court and Supreme Court has reinforced the state's standing as the preeminent home for large corporations. But explanations of that effect vary considerably (Sciulli 2001, 215–21).

Cary (1974) saw judicial policy as part of Delaware's successful race to the bottom. In Cary's view, Delaware's judges establish legal rules that generally appeal to corporate officers and directors. For instance, the Delaware courts favor management on issues involving corporate takeovers. Why do judges take this tack, when they do not benefit directly from it? According to Cary (1974, 688–92), judges want to avoid damaging the state's standing with corporate management, and they know that the legislature would overturn any rulings with potential for damage. Further, judges' sensitivity to the state's interest in incorporations is fostered by their personal ties with the other branches.

Some critics of the Delaware courts took a similar view during the growth in corporate takeover campaigns that began in the 1980s (Monks and Minow 1996, 31–32, 201–4). As they saw it, the state's judges generally sided with the efforts of current management to maintain corporate control, regardless of the interests of stockholders. One business writer pointed out that when the Chancery Court strayed from that position in several decisions, a leading antitakeover lawyer named Martin Lipton “lashed out at the court” (p.190) in several memos, including one in which he wrote, “Perhaps it is time to migrate out of Delaware.” According to this writer,

Did Lipton's memos have any effect on the fine, upstanding men (and one woman) who sit on the Delaware courts? Of course not! It was pure coincidence that within two months the Court of Chancery began producing decisions that were more to Marty Lipton's liking. They've been doing so ever since. (Nocera 1990, 48; emphasis in original)

In a widely noted episode, Delaware Supreme Court Justice Andrew Moore failed to win reappointment in 1994 (Schmitt 1994; Donovan 1994; Henriques 1995). A nominating commission sent only one name to the governor, that of Chancery Judge Carolyn Berger, and the governor chose Berger rather than challenging the one-person list. In one interpretation, Moore was removed because of his strong support for stockholders' rights in some court decisions. That interpretation fits the race for the bottom story. But his removal may have resulted instead from perceived deficiencies in his judicial temperament and the interests of a well-connected law firm.

Scholars who espouse the race to the top conception also incorporate the courts into their story, and some other analysts of the courts have offered support for their position (Winter 1977; Romano 1987; Dreyfuss 1995, 5–23; Sciulli 2001). In this view, Delaware courts support the state's interest in attracting corporations by providing high-quality adjudication, largely a product of the expertise in corporate law that judges develop by hearing many cases in the field. One benefit is to create a degree of certainty and stability in the law that corporations and their representatives find appealing.

Scholars in this camp apply their conception of policy makers' incentives to Delaware's judges, arguing that judges would not serve the state's interests if they took positions that consistently favor managers over stockholders (Winter 1977, 256–57; Dreyfuss 1995, 22–23). They also point to lines of decisions by the Delaware courts that benefit stockholders rather than management (Sciulli 2001, 216; see Meyers 1989).

The evidence that adherents to the competing stories cite shows that the patterns of decisions by the Chancery Court and state supreme court are not fully consistent with either story. For one thing, the overall tenor of those decisions has varied considerably over time (Meyers 1989;D. Sullivan and Conlon 1997). The conception that the courts have been captured by corporate management seems inconsistent with much of the doctrinal output of the Delaware courts. By the same token, the conception that the two courts (p.191) consistently act on the interests of shareholders rather than corporate management seems unjustified on the basis of the courts' records.

No matter where the truth lies between these competing stories, however, it is clear that case and judge concentration in corporation law affects the development of the law. Delaware judges inevitably develop familiarity with issues in corporation law. Judges also are aware of stakes that the state has in their decisions. One result, it appears, is to foster consistency between legislative and judicial policy in the state.

If the structure of Delaware's courts serves the state's interest in incorporations, to what extent is their structure a product of that interest? As noted earlier, an interest in serving corporations played a part in the creation of a true supreme court in 1951. But it seems inevitable that the state would replace its ad hoc supreme court at some point. The Court of Chancery long predated the incorporation issue. Once the Chancery Court gained jurisdiction over a broad range of issues in corporation law, the general satisfaction of corporate decision makers with its work guaranteed its continued existence.19 Yet tradition and inertia alone might have produced the same result, so it is uncertain to what extent the current Court of Chancery is a product of explicit efforts to serve the state's interest.

Business Courts

In the past two decades, there has been a movement in the states to create trial courts and court divisions that are devoted to certain kinds of cases in which businesses are parties. These courts, referred to generically as business courts, have now been authorized in more than a dozen states.20 In Michigan and Oklahoma, these courts were created through legislation. More often, the judicial branch has created business courts itself through administrative orders and rules. But in some of those states, the courts responded to encouragement from the other branches of state government.

A few of these courts, such as the North Carolina Business Court, have jurisdiction throughout a state. Most exist in certain localities, typically one (p.192) or more large cities. In Illinois, the Circuit Court of Cook County has a Commercial Calendar. In Nevada, there are business courts in Reno and Las Vegas that can hear cases from other places in the state. The commercial division of the Supreme Court in New York (a trial court) has a wider scope, operating in twenty-four counties.

The jurisdiction of business courts varies from state to state, and in some states it is ambiguous. Most often, these courts can hear cases involving issues of corporate governance, defined broadly, and several types of litigation between businesses. Some courts hear only business cases that are defined as complex. Arizona, California, and Connecticut have courts for complex litigation that are not limited to interbusiness cases, and some other courts have jurisdiction over certain types of cases between businesses and nonbusiness parties.

Business courts reflect the interest of state policy makers in attracting businesses to their states. In the absence of fundamental changes in Delaware policies, it is doubtful that any state could make serious inroads on Delaware's position as the primary location for large incorporations. But many state policy makers believe that their states can increase business activity and its attendant economic benefits by creating a favorable “business climate.” Indeed, state and local governments use a variety of policies on issues such as taxes and regulation to appeal to businesses.

Interest in the business climate extends to the courts. Most visibly, business groups have argued that pro-plaintiff rules in personal injury law discourage business activity, reinforcing this argument with mechanisms such as rankings of states for “legal climate” relating to tort liability (U.S. Chamber Institute for Legal Reform 2010).21 That argument affects the thinking of state policy makers as they make decisions about personal injury law. Business courts are another, less visible manifestation of states' interest in the business climate. In contrast with personal injury law, the initiative for this movement has come primarily from state policy makers rather than from the business community.

The creation of business courts and proposals for similar courts in other states are motivated by the belief that these courts will appeal to businesses and thus attract them to a state. Perceptions of Delaware's success support (p.193) that belief (Gibson 1990; Wayne 1990; Dreyfuss 1995, 2). Arguing for a Michigan “cyber court” to serve businesses, Governor John Engler referred to Delaware and said, “We think this is a little bit of a case of if we build it, they may come” (Belluck 2001).22 An Ohio judge who helped to set up a business court program expressed the same idea at greater length: “We believe that once word gets out, other businesses might come to Ohio because they will realize the court system understands their needs. Ohio would be considered a favored state in which to do business” (Cadwallader 2008, C7). A New Jersey business litigator quoted Bruce Springsteen lyrics in support of his hope that a business court would help revive the state's economy (Muccifori 2004).

Business courts, then, reflect competition as a mechanism for the diffusion of innovations (Simmons, Dobbin, and Garrett 2006, 792–95; Shipan and Volden 2008, 842–43). These courts are created to attract business activity that would instead go to other states and to match the efforts of states that already have business courts. But what about these courts is supposed to appeal to businesses? Proponents of business courts have pointed to the neutral virtues of specialization. Providing a separate venue for certain business cases will allow them to be processed more quickly. Uniformity is achieved through specialization; as one proponent argued, “when you have the same judges making decisions repeatedly, it's easier to predict the outcome of a case” (W. Davis 2003, 35). Efficiency and quality of decisions are expected to improve through the selection of able and expert judges for business courts and through the expertise that judges gain by concentrating on one type of case.

People who favor business courts often do not refer to the possibility that these courts will change the substance of judicial policy in ways that please the business community. However, an interest in substantive policy underlies some support for business courts. For instance, a proponent of a New Jersey business court voiced the hope that such a court would alter what he saw as decisional patterns that were unfavorable to business interests (Metropolitan Corporate Counsel 2002).

Business court proposals have attracted opponents, who make two kinds of arguments (DeVries 1994; E. Friedman 1996; Junge 1998, 318; Post 2004b). First, some opponents and other commentators believe that business courts might adopt a pro-business bias. Even if a court hears no (p.194) cases with nonbusiness parties, they suggest, a pro-business mission might shape its choices and negatively affect other interests (Rivkin 2001, 41). Legal scholar Rochelle Dreyfuss (1995, 39) has noted that “there is an unsettling quality to a tribunal like Pennsylvania's, which will hear commercial and corporate cases but never see the consumers and employees who are affected by its decisions.”

Opponents also cite the neutral virtues, arguing that if special resources are given to business courts, then people engaged in other types of litigation will lose out. Quicker processing of business cases will lead to slower processing of other cases. When proponents talk of getting the best judges into business court, litigators in other fields see that step as working to their detriment.

As yet, there is only limited evidence about the actual operation and impact of business courts (Nees 2007, 524–32; Drahozal 2009, 501–7), so the validity of the arguments for and against them remains quite uncertain. However, these courts probably provide greater efficiency for the cases filed in them. In light of the purposes behind the creation of business courts, development of a pro-business bias is a real possibility. As for hopes that a business court could improve a state's economic situation, it appears that judicial specialization in business cases can have a substantial effect only under unusual circumstances. Even in Delaware, where the circumstances certainly are unusual, the work of the Chancery Court and supreme court is just one part of a broader pattern of state policy that attracts incorporations (Dreyfuss 1995).

Bankruptcy

In both 2008 and 2009, more than one million bankruptcy cases were filed in the federal courts (Administrative Office of the United States Courts 2010, 288). The outcomes of bankruptcy cases filed by individuals have fundamental effects on their lives. Bankruptcies of large businesses affect not only those companies but also their employees, stockholders, and others. That reality is underlined by the wave of corporate bankruptcies that resulted from the national economic problems that began in 2008. Decisions by bankruptcy judges helped determine the fates of companies such as General Motors and thereby shaped national policy and the economy itself (Glater 2009; de la Merced 2009; Boston Globe 2009). In turn, it might be consequential that bankruptcy cases go before specialized bankruptcy judges in each judicial district rather than district judges.

(p.195) The long and circuitous process that produced today's bankruptcy courts is summarized in table 6.2. In that process, issues of substantive policy were important to a key preliminary step, creating federal bankruptcy law. The neutral virtue of efficiency has been important, though mostly implicit, in the evolution of bankruptcy courts. But the primary driving force in that evolution has been the interests of judges.

For the most part, federal district judges want nothing to do with bankruptcy cases. These cases generally seem uninteresting and unimportant to district judges, and in the aggregate they could consume a good deal of judges' time and energy (see House of Representatives 1983b, 7, 9). For that reason, district judges find it attractive to delegate bankruptcy cases to someone else. At the same time, they do not want their status diluted by sharing that status with the numerous bankruptcy judges, now more than three hundred. For their part, bankruptcy judges have sought enhanced status. Other specialists in the bankruptcy field have supported this goal, because enhancing the status of bankruptcy law improves their own standing (Skeel 2001, 136). The history of bankruptcy adjudication since the 1970s has largely been about conflicts between the two sets of judges over issues that affect their status. Bankruptcy judges have achieved some victories, but their gains have been limited by adamant opposition from generalist federal judges.

During the first century under the Constitution, federal bankruptcy laws were in force for only three periods that totaled eleven years. The last of these laws was repealed in 1878. In the absence of federal laws, the states dealt with bankruptcy-like issues through insolvency laws (C. Warren 1935; U.S. House of Representatives 1890, 1–2; 1896, 2–3).

In the 1890s, Congress considered bankruptcy for several years before enacting the Bankruptcy Act in 1898. Business groups gave strong support to a federal bankruptcy law, so long as it allowed for involuntary bankruptcies alongside voluntary ones.23 As they saw it, their interests would be (p.196)

Table 6.2 Evolution of the system for adjudicating bankruptcy cases

Year

Event

1898

Bankruptcy Act reestablished federal bankruptcy law and created a system in which district courts appointed referees as adjuncts of the court for twoyearterms. Referees were paid fees based on the cases they handled rather than salaries. Referees had mostly administrative functions. In matters they handled as judges, their decisions could be reviewed by district judges.

1938

Chandler Act gave many of the referees' administrative duties to trustees or clerks.

1946

Referees' Salary Act of 1946 gave salaries to referees, eliminating the fee system. Their terms were lengthened to six years.

1973

Rules of Bankruptcy Procedure, issued by the Supreme Court, changed the title from referee to bankruptcy judge. Jurisdiction of bankruptcy judges was effectively expanded, and more of their administrative duties were given to other officers. District judges would hear appeals from decisions of bankruptcy judges.

1978

Bankruptcy Act of 1978 created distinct bankruptcy courts as adjuncts of the district courts. Jurisdiction of bankruptcy judges was broadened to include other cases involving the party that files for bankruptcy, and their powers as judges were expanded. Appointment by the district courts was replaced by presidential nomination and Senate confirmation. Terms were increased to fourteen years. A circuit council could establish a panel of bankruptcy judges to hear appeals from bankruptcy courts; otherwise, appeals would generally go to district judges.

1982

Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipeline Co. struck down the 1978 statute. The Court ruled that the statute gave bankruptcy judges powers that were appropriate only for Article III judges, so the statute violated Article III. There was no majority opinion, and the two opinions for members of the majority differed in what theydepicted as the extent of the constitutional problem.

1984

After some interim measures, the Bankruptcy Amendments and Federal Judgeship Act of 1984 responded to the Supreme Court's decision. Courts of appeals would appoint bankruptcy judges with fourteen-year terms, and they were asked to consider reappointing the sitting bankruptcy judges. Bankruptcy judges were given full power to decide cases under thebankruptcy laws and 'core proceedings' that were directly related to thebankruptcy. In cases that were not core proceedings, bankruptcy judgeswould submit proposed findings of fact and conclusions of law to a district judge, who would make the final decision; with the consent of the parties, the bankruptcy judge could reach a final decision. The procedures for appeals were similar to those in the 1978 law.

1994

Bankruptcy Reform Act of 1994 authorized bankruptcy judges to conduct jury trials with the parties' consent. Each circuit was required to establish an appellate panel of bankruptcy judges unless it met one of two conditions. Appeals from decisions of bankruptcy judges would go to the bankruptcyappellate panel (if it existed) unless a party asked that an appeal go to a district judge instead.

Sources: The history through 1973 is based primarily on Representatives (1977b, 8–9; 1977c, 2–3); the history after 1973 is based on statutes, court decisions, and secondary sources.

(p.197) better served by federal rather than state adjudication of insolvency (U.S. Senate 1896, iii–xiii, 263–73). Their support was important to the enactment of federal legislation.

Jurisdiction over bankruptcy cases was placed in the district courts. Congress established the position of referee to do most of the work in bankruptcies. There was little attention to this choice, but one committee report noted that this position was “created in order to secure prompt proceedings” (U.S. House of Representatives 1893, 14). The alternatives would have been to give existing district judges considerable new work or to create a set of new judgeships, and both alternatives probably seemed unattractive. District judges may not have been consulted, but almost surely they would have approved the congressional choice.

Under one proposal, referees were to be “assistant judges” selected by the circuit courts to serve as full-time salaried employees. Congress ultimately rejected that proposal. District courts would select the referees, who would be paid from filing fees and commissions drawn from estates rather than through salaries. The House Judiciary Committee explained this change as a means to save the government money (U.S. House of Representatives 1892, 13).

Initially, the referees did primarily administrative work in bankruptcy cases, with judges retaining much of the adjudication that cases required. But once the referee position was created, district judges and the federal judiciary as a whole delegated increasing shares of adjudication to referees. Congress made the referees more like judges in 1938 by giving much of their administrative work to other officials. Thus Congress in 1898 laid the groundwork for a system of adjudication by specialists with little if any consideration of its long-term consequences. But even if Congress had given district judges full responsibility for bankruptcy in 1898, judges' distaste for those cases might well have led to something like the referee system.

According to a 1940 report (Attorney General's Committee 1941), the system established in 1898 did not operate very well in some respects. In choosing referees, district judges emphasized personal acquaintanceship more than relevant experience. Most referees served part-time, and the fee system gave them incentives to attract cases and to increase the size of estates. There was evidence that judges often engaged in little supervision of referees, and the lack of supervision allowed improper practices to develop. Congress acted on these problems in 1946, replacing the fee system with salaries for referees. As a result, the position became full-time for most referees.

A report of the Brookings Institution a quarter century later (Stanley and Girth 1971) identified continuing problems in the bankruptcy system. (p.198) Referees were still chosen primarily on the basis of personal ties and political patronage. Administration of cases was inadequate. Interviews with judges indicated that most “left the operation of the bankruptcy courts to the referees, taking action only on complex legal problems or on critical problems of ethics or administration” (Stanley and Girth 1971, 148).24

The Brookings report and the report of a federal bankruptcy commission two years later (U.S. House of Representatives 1973) helped to spur congressional consideration of changes in the system in 1977 and 1978. Several proposals were considered, ranging from minor changes in the bankruptcy courts to full Article III status for their judges.

The congressional hearings made clear the gulf between bankruptcy judges and generalist federal judges, each with their allies (House of Representatives 1977a; U.S. Senate 1978; Seron 1978, 1982; Barnes 1997). The generalist judiciary had enhanced the status of referees in 1973 with rules that gave them the title of judge, expanded their jurisdiction, and reduced their administrative responsibilities. Bankruptcy judges wanted more: Article III status and independence from the district courts (see Cyr 1978). Higher formal status and life tenure had considerable value in themselves, and bankruptcy judges' dependent positions within the district courts rankled them (House of Representatives 1977c, 10–12). Generalist judges and the Judicial Conference (which included no bankruptcy judges, even on its Bankruptcy Committee) opposed those changes. A representative of a trial lawyers' group expressed the central concern of generalist judges when he argued that creating so many new Article III judgeships “would dilute the significance, and prestige, of district judgeships” (Rifkind 1978, 189).

The Judicial Conference argued against creation of another specialized court. The response from advocates of a separate bankruptcy court was that specialization in bankruptcy already existed (House of Representatives 1977c, 13–16). One potential change that nobody advocated, least of all generalist judges, was to eliminate the bankruptcy judges and give district judges responsibility for handling bankruptcy cases.

In 1978, the House approved a bill that gave bankruptcy judges Article III status and independence from the district courts (House of Representatives 1977b), but the Senate-passed bill made more limited changes (Congressional Quarterly Almanac 1978a). When the House later passed a (p.199) compromise version, Chief Justice Warren Burger felt that it enhanced the bankruptcy judges' status too much, and he undertook last-minute lobbying to prevent its approval in the Senate. His lobbying was aggressive; one senator reported a telephone call to him in which Burger “yelled and screamed” and was “very irate and rude” (Greenhouse 1978). Burger's efforts led to some changes in the final version of the legislation, but he was still unhappy with the outcome. One scholar suggested that the most noteworthy attribute of that outcome was the degree of success that bankruptcy judges had achieved despite their relatively low status. She ascribed that success to their high stakes in the outcome, which made them more persistent than competing groups (Seron 1982, 96).

The 1978 legislation created distinct bankruptcy courts, though they remained adjuncts of the district courts. Bankruptcy judges gained broader jurisdiction and more judicial power. Their terms were lengthened to fourteen years, and they would be selected by the president (with Senate confirmation) rather than by the district courts.

Under the 1978 statute, each circuit council would determine whether to set up a Bankruptcy Appellate Panel (BAP) of bankruptcy judges to hear appeals from rulings of individual bankruptcy judges. If the circuit council did establish a BAP, that body would hear appeals. In other circuits, district judges ordinarily would hear appeals. The option of creating a BAP has remained, with some modification in 1994.25 Because BAPs exist in some circuits but not in others, their handling of bankruptcy appeals can be compared with that of district judges. Nash and Pardo (2008) concluded that the panels of bankruptcy judges provide higher-quality review of bankruptcy decisions than do district judges, based on rates of citation and affirmance by the courts of appeals (which provide second-level review in bankruptcy cases).

In Northern Pipeline Construction Co. v. Marathon Pipe Line Co. (1982), the Supreme Court struck down the 1978 statute as unconstitutional on the ground that it expanded bankruptcy judges' powers to a point that was impermissible without the protection of Article III status. But there was no majority opinion, and the pivotal opinion by Justice William Rehnquist framed the issue narrowly. In Rehnquist's view, it was the bankruptcy courts' power to decide an issue of state common law that created a constitutional problem in this case. Writing in dissent, Chief Justice Burger counseled (p.200) Congress that no “radical restructuring of the present system of bankruptcy adjudication” would be necessary to meet the Court's mandate (Northern Pipeline, 92). Clearly, Burger was worried that Congress would respond to the Court's decision by granting Article III status to bankruptcy judges.

The congressional debate over response to the Supreme Court decision involved the same issues and contending sides as the debate of the late 1970s (see House of Representatives 1983a; L. King 1983; Taylor 1984a). Congress did not act for two years, and the delay required the Judicial Conference to adopt an interim system for bankruptcy cases.26 The delay resulted in part from contention over substantive bankruptcy issues.

The debate over alternative proposals was premised on the assumption that the Northern Pipeline decision required bankruptcy cases to be decided by Article III judges. In an effort to prevent bankruptcy judges from achieving Article III status, the Judicial Conference proposed instead that Congress create a large number of new district court judgeships and magistrates' positions, as well as bankruptcy administrators, to handle bankruptcy cases (House of Representatives 1983b, 9–10). This proposal failed to win support. The House Judiciary Committee strongly favored converting bankruptcy judges into Article III judges, but opposition from the generalist judiciary once again blocked that option.

Congress ultimately adopted a more complicated response to the Supreme Court decision. Its 1984 legislation gave district courts jurisdiction over bankruptcy cases, but a district court could refer cases to its bankruptcy court. (Not surprisingly, every district court then issued an order that referred all bankruptcy cases to its bankruptcy court.) The legislation allowed bankruptcy judges to make final judgments on nonbankruptcy issues (those not directly related to the bankruptcy) only if the parties consented. In the absence of that consent, district judges would review bankruptcy judges' rulings about nonbankruptcy issues and reach final judgments themselves. Bankruptcy judges were left in their intermediate position between subordination to district judges and Article III status.

Under the legislation, courts of appeals rather than the president would appoint bankruptcy judges. Sitting bankruptcy judges were allowed to serve until October 1986 or, if it came later, until four years after their last (p.201) appointment. Because the authority of the sitting judges under interim rules had expired shortly before Congress enacted the legislation, that provision was retroactive.

When President Reagan signed the legislation, he said that it was unconstitutional for Congress to extend the terms of bankruptcy judges. The director of the Administrative Office of the U.S. Courts then announced that this provision was indeed unconstitutional, that he would withhold the salaries of what he called the former bankruptcy judges, and that district judges could appoint them as magistrates or consultants to handle bankruptcy cases until Congress amended the law. The chair of the House Judiciary Committee reacted angrily, and a week later the no-salary order was rescinded (Taylor 1984b, 1984c; Riley 1984). The episode did nothing to heal the conflict between the generalist courts and the bankruptcy judges. Strangely, the Supreme Court never ruled on the reappointments of the bankruptcy judges or on whether the 1984 law complied with its Northern Pipeline decision. With relatively minor changes in 1994, the system established in 1984 has continued since that time.

There has been considerable research on the functioning of the current bankruptcy system. One study analyzed the work of the bankruptcy courts in organizational terms, emphasizing the linkages between the courts and their political and social environments (Seron 1978). Some work deals with consumer bankruptcy, which accounts for the great majority of cases (T. Sullivan, Warren, and Westbrook 1989, 1994; Braucher 1993; see E. Warren 2004). One contribution of these studies is to make it clear that judges' practices—such as their steering of debtors' choices between different forms of bankruptcy—vary a good deal. But the most attention has been given to business bankruptcies and specifically to those of large corporations. This body of scholarship relates directly to the impact of specialization, and it raises some interesting issues about concentration of judges.27

The debate in this scholarship begins with the fact that rules of venue give large corporations considerable choice about where to file for bankruptcy. In one widely noted case, decision makers in Eastern Airlines wanted to file in the Southern District of New York. Lacking any basis for doing so directly, they had a small subsidiary that was itself solvent file in that district on the basis of connections that established venue in the Southern District. Six minutes later, Eastern Airlines itself filed in the Southern District, based on the filing by its subsidiary (LoPucki 2005, 36–37).

(p.202) With choices over venue, large corporations that file for bankruptcy tend to gravitate toward some federal districts rather than others. At present, the most popular site for these cases is the district of Delaware. The reasons for that preference are a matter of debate. This debate has some similarities with the debate about the role of state courts in maintaining Delaware's advantage as a home for corporations.

In the 1990s, law professor Lynn LoPucki and his collaborators called attention to forum shopping in bankruptcy law (LoPucki and Whitford 1991; T. Eisenberg and LoPucki 1999), and LoPucki (2005) later analyzed this phenomenon at greater length (see LoPucki 2008). In LoPucki's account, many bankruptcy judges want to preside over large corporate bankruptcies, even though they get no tangible benefit from handling these cases and have to do more work. In part, he argues, they do so to gain greater power, status, and celebrity. They also want to please lawyers and other professionals who work in bankruptcy in their districts, people who benefit a good deal from having big corporate cases in their districts (LoPucki 2005, 20–21). To a degree, judges seek the approval of bankruptcy professionals for personal reasons: they work together, and the great majority of bankruptcy judges had been bankruptcy lawyers (Mabey 2005, 123). That approval may also enhance judges' chances of reappointment.

According to LoPucki, bankruptcy judges attract cases to their districts by appealing to corporate managers and lawyers who determine where cases are filed. To appeal to these decision makers, judges are responsive to the practical needs of lawyers and litigants and willing to approve lawyers' fee requests. In addition,

the courts relaxed conflict of interest standards and granted lawyers and financial advisers unprecedented releases and indemnification from liability for their own wrongdoing. The jobs of executives—including those who led their companies into financial disaster—became more secure, and the courts allowed their companies to pay their executives huge bonuses. … Deals made among the case placers were sacrosanct, even if they violated the rights of other parties. Procedures designed to protect small investors and the public were abandoned. (LoPucki 2005, 18)

In other words, judges engaged in a race to the bottom.

Two scholars with a similar perspective have offered an account of how Delaware became the favored location for bankruptcies of large companies (Rasmussen and Thomas 2000, 1371–76). The Southern District of New York (which includes Manhattan) had held that status in the 1980s, based (p.203) on its convenient location and policies that favored debtor corporations and their attorneys. Then, for idiosyncratic reasons, Continental Airlines took its 1990 bankruptcy case to Delaware.28 Its executives were happy with the results: the one bankruptcy judge in the district handled the case effectively and treated the corporation and its attorneys well.

Observing these outcomes and knowing that their cases would go to the same judge, other large corporations flocked to Delaware. After a second bankruptcy judge was added, one way that the Delaware court maintained its advantage was by letting potential case filers know which of the two judges would handle their case (Bermant, Hillestad, and Kerry 1997, 40–41). The addition of four more bankruptcy judges in 2006 helped to solidify Delaware's position (LoPucki 2008). Delaware continues to get the biggest share of large corporate bankruptcies by far, with the Southern District of New York second (Marek 2009).

Along with the support it receives from some scholars, LoPucki's argument has been criticized by others. Some of the criticism is based on the strong tone of his 2005 book, one chapter of which is entitled “Corruption” (Dickerson 2006; Jacoby 2006; see LoPucki 2006). And one scholar has explained Delaware's success in attracting large corporate bankruptcies in terms that generally track the race to the top thesis: Delaware bankruptcy judges attract cases because they do their jobs well, and they would draw strong criticism within the state if they unduly favored the interests of corporate managers (Skeel 2001, 230–31).

But there is little doubt about some basic facts. Bankruptcy judges feel pressure from other bankruptcy professionals to take actions that favor the interests of those professionals. In an extreme case, a Philadelphia judge failed to win reappointment in 2000, apparently because of negative comments from local bankruptcy lawyers whom he had displeased with his actions (Groner 2001; LoPucki 2005, 44; In re United States 2006). In part because of that pressure and in part because of their own preferences, some (though by no means all) bankruptcy judges want to attract bankruptcies of large corporations. Finally, an interest in attracting those cases affects the choices of some bankruptcy courts. Judges in some districts have adopted procedural changes and approved higher lawyers' fees as means to attract (p.204) lawyers to file there (Rovella 2001). Although there is disagreement on this point, it also appears that some judges have adopted more significant policies that favor corporate management in order to attract cases.

If bankruptcy cases went to district judges rather than to specialized bankruptcy judges, would the same incentives operate? To a degree, they did in a past era: the efforts of bankruptcy judges today to attract big cases have some parallels in the efforts of generalist federal judges to attract railroad reorganization cases in the late nineteenth century (Buckley 1994, 775–78; Skeel 2001, 60–68). On the other hand, the agendas of the federal courts have broadened enormously since then, a change that reduces the interest of district judges in any bankruptcy cases and limits the leverage of bankruptcy lawyers over district judges. With the exception of Delaware, where big bankruptcy cases are important to the state, district judges today would seem unlikely to respond to the considerations that shape the behavior of some bankruptcy judges.29

Discussion

At the beginning of the chapter, I raised the question of whether judicial specialization in fields of private economic litigation reflects the interests of the business community. The movement toward special business courts in the states certainly does, and to a considerable degree the creation of the Court of Appeals for the Federal Circuit did so as well. State policy makers have established business courts as means to attract business activity to their states. Several considerations led Congress to establish the Federal Circuit, but one major reason was corporate interest in the outcomes of patent litigation.

In other instances, however, business did not play a major role. The record of the Court of Customs and Patent Appeals during the second half of its tenure was favorable to the same business interests that supported creation of the Federal Circuit, but that outcome was hardly envisioned when Congress gave jurisdiction over patent cases to the Court of Customs Appeals in 1929. The managers of large corporations that go into bankruptcy (p.205) may benefit from the existence of separate bankruptcy courts, but that benefit was not responsible for the series of steps that ultimately produced the bankruptcy courts.

The Delaware courts are an intermediate case. The Court of Chancery existed long before Delaware's efforts to attract incorporations, but its continued existence was guaranteed and its jurisdiction over corporate governance was expanded once those efforts began. Delaware probably would have created an independent supreme court in any case, but an interest in serving business played a part in that step.

What stands out most about private economic litigation is how little specialization there is in this area. The preponderance of cases still go to generalist state and federal courts, and there is little judicial specialization in the traditional private-law fields of contracts, property, and torts. There might be two reasons for this result.

The first is that other mechanisms to influence the outcomes of litigation seem more likely to pay off. Tort reform is an example. Business and professional groups that seek more favorable outcomes in personal injury cases have achieved considerable success by shaping the attitudes of the public (and thus of jurors), campaigning in judicial elections, and lobbying in courts and legislatures for favorable legal rules (Daniels and Martin 1995, 2004). Thus, they have accomplished a good deal within the existing structure of courts. In contrast, specialized courts offer less certain benefits.

The second reason for the dearth of specialized courts is the difficulty of securing major changes in judicial structure that require legislation. This difficulty is aggravated by the general presumption against judicial specialization. That presumption is not as heavy a barrier when specialization is perceived to serve government interests that legislators support. But when it is private interests that might be served by judicial specialization, the task of enacting legislation is more demanding. This may be especially true in common law fields that have long histories in generalist courts.

State business courts are too new to provide much evidence about the impact of judicial specialization, but the other sets of courts discussed in this chapter indicate some ways in which specialization can affect court policies. The CCPA and the Federal Circuit illustrate how judge and case concentration increase the potential for interested groups to exert influence through the selection of judges. According to one interpretation, the treatment of large corporate bankruptcies in some federal districts shows how judge concentration enhances the direct influence of litigants over judges. The work of the Delaware courts in corporate governance cases occurs in an (p.206) unusual situation, one in which judges' decisions are perceived as important to the economic interests of their state. In that situation, both dimensions of specialization facilitate the impact of the political environment on judges' perspectives and choices. Taken together, these courts underline the potential for specialization to shape the content of judicial policy.

Notes:

(1.) Lawyers' views of patents, like those of the business community, differ by industry (Coyle 2009). In the information technology field, lawyers and executives have relatively negative views of patents (Burk and Lemley 2009, 4). Overall, however, both lawyers and executives of large corporations tend to favor lenient standards.

(2.) Some terminology should be clarified. Until 1936, the district court in D.C. was called the Supreme Court of the District of Columbia, but I will refer to it as the district court even prior to that time. The court of appeals was originally called the Court of Appeals for the District of Columbia and underwent two name changes before becoming the Court of Appeals for the D.C. Circuit in 1948; I will refer to it in this early period as the D.C. court of appeals. The current D.C. court of appeals, the equivalent of a state supreme court, was created in 1970. Changes in terminology and structure in the D.C. courts are discussed in Banks (1999, 7–10, 26–32) and summarized in Federal Judicial Center, “Federal Courts of the District of Columbia” (http://www.fjc.gov/public/home.nsf/hisc).

(3.) This discussion of the CCPA is based largely on Baum (1977, 833–46).

(4.) Not surprisingly, the pattern of citations that existed in the early years of the CCPA continued when new CCPA appointments led to a wide divergence between the court's policy positions and those of the Supreme Court (Baum 1994).

(5.) In a few instances, proponents of giving patent appeals to the Federal Circuit addressed this issue obliquely by arguing that the CCPA's standard of patentability did not differ from that of other federal courts (U.S. Senate 1979c, 114; U.S. House 1981a, 181).

(6.) In this section I discuss the work of the Federal Circuit only in patent law. Unah (2001; 1998, chap. 8) analyzes its work in international trade, and Abramson (2007) discusses the full range of its work. The court decides “whistleblower” cases under its jurisdiction over federal personnel matters, and critics have charged it with hostility toward whistleblower claims (Coyle 2008a, Eisler 2010).

(7.) The figures in the text were compiled from tables in the Dunner et al. study (1995) for decisions on three sections of the patent statute, which probably constitute the great majority of all decisions on patent validity.

(8.) Of the sixteen appointees to the Federal Circuit since its creation, five had extensive experience in patent law prior to appointment. Several other judges had at least some experience in areas of the court's work; several had worked with senators or with presidential administrations. Biographical information on the court's judges is at the court's Web site (http://www.cafc.uscourts.gov/judgbios.html) and the Web site of the Federal Judicial Center (http://www.fjc.gov/public/home.nsf/hisj).

(9.) One study did find that the relationship between the ideological positions of judges' appointing presidents and their votes on obviousness was stronger for judges who had expertise in patent law prior to their appointments (B. Miller and Curry 2009).

(10.) Holmes Group v. Vornado Air Circulation Systems (2002, 839) (Justice John Paul Stevens); Laboratory Corporation of America v. Metabolite Laboratories (2006, 138) (Justice Stephen Breyer).

(11.) In re Bilski (2008). The earlier decision was State Street Bank & Trust Co. v. Signature Financial Group 1998. On the significance of Bilski, see Kusmer and Shelton (2008).

(12.) Markman v. Westview Instruments, Inc. (1995). The Supreme Court affirmed the Federal Circuit decision in Markman v. Westview Instruments, Inc. (1996).

(13.) The primary exception is the major role of the federal government in securities regulation (see Romano 1993, chap. 1).

(14.) Web site of the Delaware Division of Corporations (http://corp.delaware.gov/).

(15.) This information is from the Web site for the Delaware governor's budget (http://budget.delaware.gov/fy2010/operating/10opfinsumcharts.pdf).

(16.) Data on cases in the two courts are from the 2009 annual report of the Delaware Judiciary (http://courts.delaware.gov/AOC/Annual%20Reports/FY09/?index.htm).

(18.) Favoring managers over stockholders does not necessarily mean lax regulation; enactment of anti-takeover statutes may benefit managers.

(19.) It is also possible that legislation augmenting the court's jurisdiction over issues relating to corporations reflected that satisfaction to some degree.

(20.) Leaving the Delaware Chancery Court aside, a 2007 article identified business courts in thirteen states and three states with courts for complex litigation that are largely business oriented (Nees 2007, 503; see Drahozal 2009, 494–95). This discussion of business courts is based in part on the exhaustive survey in Bach and Applebaum (2004) and the survey of courts in Nees (2007).

(21.) The 2010 rankings, based on a survey of “in-house general counsel, senior litigators or attorneys, and other senior executives” at large companies who “indicated they are knowledgeable about litigation matters” (U.S. Chamber Institute for Legal Reform 2010, 2) put Delaware in first place for the best legal climate, a rank that it has consistently held. It appears that corporate governance is not the only legal field in which Delaware policy makers seek to appeal to the business community.

(22.) Governor Engler's proposal was enacted in 2001 with the necessary two-thirds majorities in both legislative chambers. But the court never went into operation because it did not receive state funding (Ankeny 2005).

(23.) The House Judiciary Committee in 1894 approved a bill that allowed for only voluntary bankruptcy. A minority report denounced that action in strong terms. In one passage it ascribed “opulent selfishness” and “stupid ignorance” to certain supporters of the bill. It also offered a noteworthy analysis of human motivation: “The great mass of the people are honest and they want honest laws. Even the rogues want everybody else to be honest” (U.S. House of Representatives 1894, 32, 30).

At least in the current era, involuntary bankruptcies are quite uncommon—about six hundred out of one million filings in 2008 (U.S. Census Bureau 2009, table 752). This is because bankruptcy is generally disadvantageous to creditors (Sullivan, Warren, and Westbrook 1994, 812–13).

(24.) Judges most often cited appeals from referees' decisions as a means to evaluate referees' work. But the rate of appeal was low and the standard of review lenient. One reason for the paucity of appeals was that attorneys were reluctant to alienate referees who would approve fees and appoint trustees in the future (Stanley and Girth 1971, 155).

(25.) Circuit councils of judges (originally with only court of appeals judges, now also including district judges) are the governing bodies for each judicial circuit. The 1994 modification is described in table 6.2. Berch (1990) discusses the functioning of the panel in the Ninth Circuit.

(26.) The interim system may have been inconsistent with Northern Pipeline, and lower courts reached conflicting decisions on that matter. The president of the National Conference of Bankruptcy Judges, sitting in the Northern District of Illinois, wrote a long opinion holding that the interim system was unconstitutional (In the Matter of: Wildman, Debtor 1983; see Krasno 1984). The opinion expresses strong resentment of generalist judges and their governing bodies, so it provides a good sense of the tensions between bankruptcy judges and the generalist judiciary.

(27.) There also has been scholarship on corporations' use of bankruptcy as a strategic device (Delaney 1992).

(28.) This action was set up by two one-sentence proclamations by Delaware's bankruptcy judge that the Delaware court was proper venue for a bankruptcy case in which the debtor is a Delaware corporation (In the Matter of Ocean Properties of Delaware 1988; In the Matter of Delaware & Hudson Railway Company 1988). Not surprisingly, efforts to change that venue rule through legislation were blocked by Delaware's senators (Rasmussen and Thomas 2000, 1381; LoPucki 2005, 16–17).

(29.) The chief district judge in Delaware ended automatic referral of bankruptcy cases to bankruptcy judges in 1997, and district judges themselves decided some large corporate cases for about a year. The chief judge's order may have been a response to criticisms of the practices of Delaware's bankruptcy judges (LoPucki 2005, 83–96). Almost surely, one reason for the brevity of the period in which district judges heard some cases and for the rescinding of the 1997 order in 2001 was that Delaware district judges, like their colleagues elsewhere, prefer to have someone else hear bankruptcy cases (see Murray 2001).