Is There a Market For Legal Decisions?

From an economic point of view, courts act in some ways like they are part of a market for legal decisions and in other ways like they are not.  There is a surprisingly large variability in both the supply and demand for legal decisions across states, but courts currently understand neither the reasons for such variability nor the forces driving any supposed market for such decisions. 

Thomas M. Clarke
Vice President, Research Division, National Center for State Courts

Courts are used to perceiving themselves as having a monopoly on legal decisions. That monopoly is preserved by state constitutions and statutes. If literally true, that would suggest that courts should only strive for maximum quality and never worry about efficiency or competitors. Of course, it is not literally true. Even before the current financial crisis, courts were pressured by increasing competition from private agencies claiming to be able to resolve cases more efficiently. Competitors have taken some case types, such as complex civil cases and some divorce cases, from traditional courts because of lower cost and superior convenience.

The evidence for such competition is scarce. Case filings continue to increase overall for many courts. On the other hand, trial rates have famously decreased over the last several decades. Numerous mediation and arbitration services now operate outside the formal courts and even online. These organizations sometimes offer potential litigants nonadversarial forms of legal resolution. That approach is attractive in certain case types to litigants who would prefer to avoid the institutionally adversarial processes of the courts.

On the other hand, the metaphor of a free market is not entirely accurate, either. Courts still do retain a monopoly on legal decisions for many case types. In that situation, the only recourse a potential litigant has is a decision not to seek a legal decision. There may be other less formal ways of still resolving their issues to their satisfaction, or they may just forgo the benefits of a real legal resolution due to cost or other barriers.

It may seem strange to even think about a market for legal decisions. First, economists make a distinction between underlying demand and effective demand. You may want to take your case to court, but if you cannot afford the legal fees or the long time to disposition, then you will not file a case. Second, we are conditioned by our culture to think about the courts as the only place where legal decisions can be obtained, but the commercial world commonly includes contract clauses that drive legal disputes to arbitration forums outside the courts. Third, private citizens may decide it is better overall to resolve their legal disputes using more informal mechanisms, even though we would not consider those decisions legal in the same sense that a court would.

These choices between legal forums are certainly complex and involve more than simple cost. Litigants often cite convenience, predictability of outcome, simplicity, and privacy as reasons for seeking (or not seeking) alternate forms of dispute resolution. Of course, courts have tried to cater to these customers by offering processes with lower costs like small claims or voluntary mediation. Business courts are a different kind of attempt to satisfy customers by guaranteeing a level of expertise not found in an average court.

Market Legal DecisionsWhether or not there is an erosion of demand for certain court services is debatable. Filings in some case types have flattened, and trials have almost disappeared. If such a trend is valid, it may be occurring in response to market pressures instead of as a thoughtful, policy-driven transition. While courts are primarily focused on outcomes like fairness and due process, they have to be efficient enough to continue attracting adequate funding and public support, while not creating significant barriers to access. The admittedly anecdotal evidence suggests that courts may be facing actual direct competition in some areas or at least being required to take considerations of efficiency more seriously.

The concept of “legal decision” used here is broad and informal. If certain types of enforcement are desired for such decisions, then courts are often the only place where that can be done. If we consider a looser definition where litigants merely want a decision that the parties will likely abide by, then competition definitely exists for certain types of civil and domestic-relations cases, and it is likely to increase in the future. From this perspective, many forms of private and online mediation and arbitration would qualify as competition. Organizations that facilitate negotiations on estates or divorce settlements would qualify, even if a court decree is still required. Even decisions by prosecutors to criminally charge or not, or by litigants to file or not, would affect the supply and demand for legal decisions in courts.

Judges and courts are not used to looking at the justice system as a market for decisions, but various incentives and disincentives constantly raise and lower the attractiveness of state and local courts. In criminal cases, prosecutors may decide whether to charge an offender partly based on the past behavior of the court. Corporations may seek private arbitration to obtain more specialized expertise, a less costly disposition, or a more predictable outcome. If indeed such a market at least partially exists, a significant question for court researchers is why states differ so much in the demand for court services. State per-capita-litigation rates in virtually every major case type vary across a surprisingly wide range. Why is this?

To appreciate the extent of the variability, consider data collected by NCSC on case rates per 100,000 population at the state level. The table reports the ranges for 2007, the last year before the Great Recession. For example, the incoming case rates per 100,000 juveniles in the state population varied from a low of 1,287 cases per 100,000 juveniles in Montana to a high of 6,334 cases in Ohio. Based on the population of juveniles, Ohio sees almost five times as many juvenile cases as Montana does. The case rates vary from factors of 3 to factors as high as 80. This would be like one state consuming toothpaste or dental visits at 80 times the rate of another state. Economists almost never see that kind of market variation.

NCSC staff spend significant time ensuring that cases are counted in equivalent ways across the sample states. Unfortunately, NCSC is unable to obtain a complete sample for any case type, and some samples are significantly smaller than others (see Examining the Work of State Courts, 2007, and Examining the Work of State Courts: An Analysis of 2007 State Court Caseloads for the sample sizes and other details).

Market Legal DecisionsFor a few of the case types reported in the table, the end points constitute outliers and the range would be significantly smaller if they were removed (New Jersey for traffic, Puerto Rico for traffic and paternity). For most case types, the range is smooth, with no gaps from end to end. The actual range of variability for each case type is certainly understated here. The sample of states for each case type is a subset of all the states. The actual samples range from around 10 states to a maximum of about 30 states. Since the rates are also state averages, the rates for individual courts within a state will be more variable than the state averages.

The large variability in case-type demand across states is striking and could be due to a variety of reasons. Courts in some states, at least for some case types, may be significantly less expensive, thereby increasing the apparent demand for their services. Conversely, states with unusually low demand may be doing something that prevents access to justice (although there are many other possible explanations for the variability). Another obvious possible driver of differences in case rates might be case-type definitions or counting rules. These possibilities cannot be completely discounted as a partial explanation, even though the data have been scrubbed extensively by NCSC to ensure comparability.

Another possibility is substantive differences in state law. For example, some states exclude many lower-value estates from any requirement to obtain court orders, while other states force all estates through their probate system. Another potential cause might be cultural differences. Puerto Rico has the lowest rate for paternity, adoption, and misdemeanors, and for several of those case types, there was a significant gap between Puerto Rico and the state with the next lowest rate. Something unique is definitely going on there. In the case of criminal case types, states do vary in their underlying rates of crime. Finally, the range of filing fees charged by state courts differs considerably. Complexity of process, cost, timeliness, unpredictability of result, and perceived low quality could contribute to low demand.

Some case types may not be validly comparable using population rates. Rates of crime may be higher in poorer states. Rates of foreclosures may vary by the structure of the local economy. Divorce rates will be higher in “no fault” divorce states and lower in states that erect significant barriers or delays as a matter of policy. These are all valid possible factors in differences between state markets for court decisions. The extent to which each one affects the results shown in the table is currently unknown.

Note also that no state seems to be consistently at the top or bottom of the rates across all case types. That suggests that no simple explanation will work across all case types. Whatever the explanations, courts and judges have traditionally viewed the demand for their services as a given they cannot influence. This may be true for some causes and some case types, but it is unlikely to be universally valid. Courts can certainly influence demand by the level of their fees, the timeliness of their decisions, the complexity of their processes, the quality and predictability of their decisions, and other factors under their control.

The supply of decisions is also highly variable. State averages for incoming non-traffic cases per judge in general-jurisdiction courts ranged from a low of 360 in Massachusetts to a high of 4,374 in South Carolina—a 12.2 variability factor. The number of judges per 100,000 population ranges from a low of 1.1 in South Carolina to a high of 6.7 in Oklahoma—a smaller 6.1 variability factor.

The variability in cases per judge is higher than the variability in judges per population because judicial districts and courts tend to be established by constitution using a geographical basis instead of a demand basis. Small courts in rural areas may require a full-time judge by constitution, even though that judge only has a caseload requiring part-time coverage. If venue constraints exist to prevent underused judges from hearing cases out of their district routinely, then the supply of decision-making resources is suboptimally distributed. Statistics about judges per population ignore these practical constraints, so the apparent variability is lower.

These figures suggest that the current supply of judges could potentially do more work if those decision makers were distributed in a way that was more proportional to the actual incidence of cases. The idea here is to distribute judges like Walmart or McDonald’s site their stores. Venue and districting alone create significant inefficiencies. Of course, rural judges also increase access and convenience for those living in less populated areas. They do so for a relatively small proportion of total litigants in most states and at the cost of access for those living in more populated areas. The data also suggest that a greater use of magistrates or quasi-judicial officers, especially in limited-jurisdiction courts, might be cost-effective.

The observed degree of variability in demand and supply is unusual, compared to other markets for services. It would be astonishing if the rate for hip surgery were ten times greater in one state than another, even though some states attract concentrations of retired people. Further, courts exhibit the same wide range of variability in almost any operational indicator chosen. For some perspective, courts often benchmark to health care and particularly hospitals for administrative best practices, since both types of organizations tend to be loosely coupled and doctors play a role similar to judges. Yet hospitals certainly show less variability in their fundamental operating characteristics. Why is this?

One reason may be the pressure from insurance funders and the federal government to standardize their practices and control costs. Another reason may be the establishment of medical best practices for treatment. A third reason is that most doctors now are employees and not independent entities. Contrast this situation to courts where many judges are independently elected and few explicit best practices exist or are recognized. The only real pressure for standardized or improved business practices comes from funders in tight times.

The traditional argument by judges against best practices is that cases are unique and too variable. Each case demands special treatment. At one time doctors made the same arguments for the same reasons, but objective and comparative data eventually showed that best practices were not only possible but necessary. No one would argue that doctors do not still exercise their best medical judgment in each unique case, but there are bounds to what is considered permissible or desirable. Some may say that judicial conduct commissions exist to ensure the same kinds of preferred behavior, but it is very difficult to do so when there are few objective standards for competent court administration.

The health-care analogy is not a perfect one for several reasons, but it is clearly inadequate when talking about adult criminal cases. For example, when courts operate in problem-solving modes, they are not trying to lower case-processing times or costs. Instead, they are trying to use evidence-based practices to apply the program or treatment most likely to prevent future recidivism. Moreover, criminal-court judges are also required to take into account a number of other considerations, not least of which is appropriate and fair punishment.

Market Legal DecisionsThe issue of variable court demand and supply is not just an interesting academic puzzle. Courts are struggling now to maintain or recover adequate operational funding. Some courts believe they are now unable to fulfill their basic constitutional missions. The question of what constitutes the essential functions of a court is at the forefront of every conversation between court leaders. Both the breadth and size of functions offered by a court certainly influence the overall demand for court services. After all, no service, no demand.

The effect of services offered is complex and not easy to tease out. For example, what is the impact of a court offering probation services in contrast to probation being an executive-branch function? What is the impact of shifting some criminal cases from traditional adversarial dockets to problem-solving dockets? We do not really know what the impacts on demand or supply are. In the former case, the necessity of maintaining probation services might reduce the supply of decision-making judges in tight budget times. In the latter case, increasing the supply of problem-solving judges might reduce timeliness as the average case takes longer to dispose and requires more of the decision-making resource.

Barriers to demand are also probably important and variable. Such barriers may include cost, complexity, physical access, and timeliness. The reader can easily add to the list. In the United States, cost has traditionally been considered a valid screening barrier for court cases. In contrast, most other developed countries have unbundled their legal services in a way that has dramatically lowered the cost of litigation on the low end and removed a significant barrier to effective demand. To the extent that some states and courts do the same in our country, it will be interesting to see the effect on demand, if any.

Of course, a lower cost for court services may increase demand in a way that is self-defeating for a court in a funding crisis. Just as new highways make traffic congestion worse, more efficient courts might lead to a higher case demand that puts case quality under pressure. Without having a meaningful debate about the extent of legitimate unmet legal needs, there is no way to know what an adequate level of court funding should be.

The current budget crisis has caused several state court systems to ponder, for the first time, a reduction in the supply of judges. Since such decreases in decision makers are unprecedented, there is usually no recognized process for doing so. At best, it requires formal redistricting and a reduction by attrition as current judges retire. At worst, it requires a constitutional amendment. Removing venue constraints or expanding areas of concurrent jurisdiction offer more feasible ways to improve judicial productivity without actually reducing the supply of judges themselves. Replacing judges with quasi-judicial officers is another strategy being used by several states now.

There is much anecdotal evidence from judges that the supply of decision makers has not kept pace with the demand, causing an increase in average times to disposition, a decrease in the quality of justice, or both. Data from NCSC show that the overall demand for litigation in state and local courts did increase by 10 percent from 1997 to 2006. Note that the general population also increased by 10 percent over the same period, so the rate of litigation remained the same. Criminal and civil caseloads increased slightly faster. Traffic and domestic-relations caseloads followed the average increase. Juvenile caseloads were flat.

Informal and anecdotal comments from judges suggest that they have been working ever harder over the last several decades. It is hard to comment on changes in the supply of judges over the same period, since several changes in the categorization of California judges skew the data. Taken at face value, limited-jurisdiction courts saw an increase of 13 percent in cases per judge, while general-jurisdiction courts saw a decrease of 8 percent in cases per judge from 1997 to 2007. If accurate, lower-court judges may be working slightly harder, and higher court judges may be working a bit less hard. Of course, these statistics date from the period before the current recession and budget crisis, which has caused some courts to delay filling judicial vacancies and significantly increased caseloads in some case types. Either way, it is to legally difficult to either increase or reduce the supply of judges in the short run.

Market Legal DecisionsThe causes of variation in the demand for litigation also factor into a related discussion on the economic impacts of state court systems. In theory, case fees should be set at some level that clears the market at the point where the supply and demand for judicial decisions in general and trials in particular intersect. It would be more correct to say that case costs, including fees for legal representation and the cost of time to appear in court, are the appropriate measures. Still, court fees are a significant proportion of total litigation costs, especially for case types where self-representation is common. Some states may have set fees too low and induced a higher level of cases and trials than the market would expect. Other states may have set fees too high and seen the opposite problem.

Understanding what the economically appropriate level of case fees should be is an issue that the courts currently know nothing about. Research in this area would not only benefit public policy, but also help courts better understand their impact on the larger economy. Rationalizing such fees across states would smooth out inequities in the demand for court services between states and also stabilize more consistently the markets for other solutions for legal decisions outside the courts. Since most businesses now operate in at least a national market, if not an international market, a more consistent environment for legal decisions would probably be welcomed by businesses. NCSC is looking into the possibility of doing such a study of court fees.

A final significant problem with the court market for legal decisions is the lack of consumer information. In a series of papers on case triage, Flango and Clarke argued in part that consumers need information on case costs, timeliness, complexity, and predictability to make better decisions about whether to file cases, in which types of courts to file, and which types of case management processes to use. In particular, litigants often cannot now make rational decisions between civil cases using the traditional adversarial process and extensive due process versus a less onerous version of civil case processing when both queues are available. As economists know, no market operates efficiently when insufficient information is available about it. The market for legal decisions clearly operates in a very inefficient way now, partly due to the almost total absence of useful market information.

Toward that end, some courts have begun to regularly publish results for the ten CourTools performance measures. Data on case timeliness and cost per case are certainly helpful to potential litigants, even though the costs reported are only for the court. Adding some measures for litigant costs, average hearings per case, and transaction times would be even more beneficial for improving market efficiency. The last two performance measures have already been proposed by some court practitioners and could be practically measured. Litigant costs would be harder to measure, but a sampling approach might provide a set of initial estimates. Again, true litigant costs are important to understand for studies of court economic impacts, barriers to access, and the demand for legal decisions.

We have not even talked seriously about a fuller set of incentives and disincentives affecting the supply and demand for legal decisions. We have also ignored most court competitors in that market. These are subjects beyond the scope of the current article, but still of utmost interest if courts are to maintain themselves as viable social institutions in the future. Until then, courts would do well to begin the work of understanding their market and better positioning themselves to be successful within it.

A Research Agenda

If one accepts that the courts do operate within a broader market for legal decisions and that market can significantly affect at least the demand for court services, then it may be both useful and important to answer the following questions:

  • How many different markets for legal decisions do the courts participate in?
  • What are the incentives and disincentives affecting supply and demand for court services in each of these markets?
  • Who are the competitors with the courts for legal decisions in each of these markets?

We are used to thinking about a court as a court and due process as due process. However, a traditional criminal court is very different from a drug court, and even more different from a court hearing juvenile-dependency cases or uncontested divorces. Some litigants participate involuntarily. Others vary greatly in available resources to litigate. If the courts ever operated using relatively uniform processes across all case types, those days are probably gone forever. Acting as if the typical litigants in different case types are all the same is probably equally mistaken.

Understanding those kinds of differences would help the courts determine how potential litigants trade off quality (due process), cost, timeliness, and predictable outcomes when deciding whether to use the courts to reach legal decisions. That kind of knowledge would help courts take steps to improve their services to litigants and maintain public trust and confidence.