All Commentary
Monday, August 1, 1988

Privatizing the Judiciary

Mr. Popeo is founder and general counsel of the Washington Legal Foundation, a pro-free enterprise public interest law and policy center in Washington, D.C.

      This article first appeared in WLF’s Legal Backgrounder series.

      Copyright © 1988, Washington Legal Foundation.

As tight budgets have inclined some state governments and Federal executive agencies to search for alternatives to expensive government services, “privatization’ ‘—the shifting of government functions to the private sector—has finally become an acceptable option to pursue. Curiously, however, the idea of erecting a private judiciary as an alternative to the nation’s judicial system—a system in danger of becoming immobilized by an onslaught of litigation—has received little attention. Yet there is no reason why the idea couldn’t work in the judicial setting as well.

In fact, the litigation explosion that occurred in the 1970s (coupled with a simultaneous increase in judicial activism) has already caused a small number of entrepreneurs to set up alternative dispute resolution systems. The purpose of these systems is to ease the current judicial bottleneck, to allow for expeditious dispute resolution, and to open up the judicial process to a class of litigants who are finding it increasingly costly to use the public court system.

The Problem: A Judicial Bottleneck

There are two reasons for the recent bureaucratization of the judicial system: an increase in legal activism (which encourages parties and lawyers to seek judicial redress of an ever-increasing list of judge-made legal “wrongs”) and the government’s inability to respond to the courts’ added work load.

In 1960, the U.S. District Court system registered a mere 80,000 case filings. Today, by contrast, the most recent Annual Report of the Administrative Office of the U.S. Courts records that plaintiffs filed 238,982 civil cases from June 1986 to June 1987. That growth represents a 200 per cent increase in civil litigation. Actual court days have increased only 40 per cent during the same period.

The major cost to parties that this judicial bottleneck creates derives from the long discovery periods preceding trial. From the date of filing, the average civil case takes 20 months to get to trial. This in turn has led to a huge backlog in civil cases. For example, 243,159 civil cases were pending as of June 1987.

Although excessive delays and broadened discovery methods produce a financial boon to lawyers, the litigants (both individual and corporate) have suffered. According to The Practical Lawyer (March 1985), an insurance company will pay an average of $32,000 in legal fees out of every $!00,000 judgment that is awarded. Moreover, if a plaintiff wins $100,000, he can expect to take home up to 15 per cent less than what he would have recovered if he had received the compensation at the time the award became due (the time of the injury). This is because he has lost interest over the three-year waiting period preceding judgment.

The public also pays through higher taxes and lost national productivity. Currently, tax payers spend $10,000 a day to keep each Federal district court operating. In some states the cost may be even higher. For example, Arizona taxpayers dole out $24,000 per day to keep their Superior Court system functioning. According to the National Insurance Institute, in 1985 insurance companies paid nearly $85 billion in casualty claims, but spent an additional $16 billion in legal fees. This lost revenue is recouped from the general public in the form of higher premiums for individuals and businesses. Higher premiums, in turn, raise the costs of goods and services to all consumers.

A Private Judiciary

Although most of the for-profit companies that provide Alternative Dispute Resolution (“ADR”) and private courts did not appear until the early 1980s, they have already been quite successful in accommodating the in creasing demand for efficient and fair adjudication. The precursor to these for-profit companies is the American Arbitration Association (“AAA”). Although the AAA has principally been used by businesses to solve contractual disputes, parties are now using AAA guidelines and services to resolve other types of claims.

Businesses with contract disputes have increasingly turned to arbitration to settle them. In 1971, the American Arbitration Association conducted 22,549 dispute resolutions. By 1986, that figure more than doubled to 47,202. This trend is supported by former Chief Justice Warren Burger who has said, “If the courts are to retain public confidence, they cannot let disputes wait two, three and five years or more to be disposed of.”

Companies like Endispute, based in Washington, and the Center for Public Resources (“CPR”) in New York, have followed the AAA’s example by providing services in addition to deciding contractual disputes like those handled by the AAA. Endispute, like CPR, deals with mediation, arbitration, and mini-trials in what CPR refers to as “win-win solutions,” in contrast to the purely adversarial outcome of litigation. For example, Endispute has participated in patent and antitrust issues relating to the chemical and aerospace industries, as well as in an important mini-trial that resulted in a $61 million dispute settlement between American Can Company and Wisconsin Electric Power Company. Although groups like the AAA, Endispute, and the Center for Public Resources serve only quasi- judicial functions, their growth is directly related to the judiciary’s failure to resolve disputes in a timely manner.

Alternatives to traditional dispute resolution are being developed in the area of libel law as well. The Iowa Libel Research Project, an offshoot of the University of Iowa Law School, has developed a program to allow libel plaintiffs and defendants to settle their differences outside the courtroom. A “neutral” is appointed in each case to decide if the media statement at issue was false and whether the reputation of the complainant was harmed. Often the remedy is to get the media to publish or broadcast the neutral’s finding or to pay to have it published elsewhere. Given that the average libel suit now lasts four years and that 73 per cent of plaintiffs say they would be happy with a retraction, correction, or an apology, it would seem that non-traditional dispute resolution in this sensitive area has a promising future.

Perhaps the most dramatic result of the disillusion with the current judicial system has been the creation of actual “shadow” courts run by for-profit companies. Two examples of these private initiatives are the publicly owned Judi-cate (now located in all 50 states and the U.S. Virgin Islands) and the Arizona-based Civi-Court. While associations and companies like AAA, Endispute and CPR provide expert mediation and consulting geared toward dispute resolution, these shadow courts actually hear cases and hand down legally binding decisions.

While some in the legal establishment suspiciously view these for-profit companies as a potential vehicle for “abuse and injustice,” the result has been just the opposite. CiviCourt director Alice Wright has noted the companies’ very existence rests on pleasing both the plaintiff and the defendant. If abuses take place on a significant scale, demand for their services will drop. At CiviCourt and Judicate, the parties are allowed to select the judge they wish to try their case. Selections are made from a list of senior and retired judges. The parties also decide what rules of discovery and evidence will be used and whether the decision will be legally binding. The companies stress fairness to both parties. As one superior court judge familiar with Judicate has said, “If they don’t, they’ll be out of business.”

One advantage of companies like Judicate is that they generally issue clearer and more concise opinions with no intent to set legal precedent for other parties. Since decisions are confidential, they are not published. Thus a savings in time and money results from avoiding overly verbose and prospective opinion-writing.

The Future

Whether it is an arbitration clause in a contract or patent infringement claims against a company, more and more potential litigants are solving their problems outside the courtroom. They are doing so for one main reason—the need to settle their disputes without the ruinous consequences of prolonged, expensive litigation. Cases now being handled by ADR companies include antitrust, personal injury, medical malpractice, insurance, and practically all other non-criminal disputes.

As long as a significant backlog of cases exists in the nation’s courts, the private ADRs will continue to have an incentive to provide inexpensive, speedy, and just judicial services. Although the private sector is not currently large enough to markedly relieve the state and federal governments’ caseload, a strong profit motive exists to expand. If dispute resolution continues to offer cost-efficient and fair adjudication in areas previously left to the government, industry growth potential is enormous given the estimated 8 million filings annually that are expected to come before our Federal and state courts this year.

Businesses should be encouraged to foster the creation of private courts, because their use could provide significant benefits to them. For example, although private courts would apply established law (which is, at times, unfortunately marred by an anti-business bias), there is almost no chance that the private judge would create a new judicial doctrine out of whole cloth. In addition there would be no judicial fiats that would shock business defendants and favor “small plaintiffs.”

Perhaps a more significant plus for businesses would be the absence of juries in the new private system. Juries typically tend to disfavor businesses over non-business parties. This is especially true when the business is not based in the region where the court is sitting. Judges, as finders of fact, are presumably more sophisticated than juries and less likely to be burdened by a jury’s typical prejudices.

However, the strong incentives to erect a comprehensive private judiciary may be offset by disincentives arising from the would-be legal entrepreneurs’ fears that any investment made in this field may be lost. Business people seem vaguely apprehensive that some future legislative backlash may occur, incited by “public interest” groups’ exaggerated emphasis on the negative policy implications of a private judiciary.

It is true that privatization of the judiciary will not happen without costs. The real costs, however, are not those to which such interest groups would likely object. Highly qualified judges, already being tempted away from their low-salaried positions on the bench back to the private sector, would likely leave in greater numbers for work as private judges. This migration might further impoverish the pool of legal thinkers in the publicly financed judiciary, thereby leaving behind both less skilled jurists and the type of activist judges for whom there would be no demand in the private sector. Another perceived cost of privatization, assuming the demand for dispute resolution does not rise in response to decreased costs, is the reduction in the number of billable hours that firms can expect to generate. The costs to the legal profession may here be directly inverse to the benefits clients receive. Accordingly, the legal establishment may be reluctant to endorse privatization. (The American Bar Association has taken no position on the trend as yet.)

However, in this respect it is certain that businesses involved in private dispute resolution would gain. Alan Epstein, president of Judicate, insists that any loss to a firm in billable hours will be offset by an increased capacity to take on cases, as well as by a happier group of clients.

Cases with profound social policy implications will inevitably continue to be brought in the public courts. Nevertheless, it seems likely that legislatures will eventually be persuaded that the greater dispensation of justice (in terms of speedier proceedings and the higher real awards that would result) outweighs any potential impoverishment of the public judiciary.

In sum, the policy question at the core of any future debate concerning whether a private judiciary should be allowed to exist is whether the public judiciary could profit by a little competition to its status as the primary organ of dispute resolution. Given the current crisis, the answer should be in the affirmative.