Intermezzo: The American Legal System in Brief


Modern economic analysis of law originated in the United States a few decades ago; the first issue of the Journal of Law and Economics, the first law and economics journal, was published in Chicago in 1958. One result is that although the theory is relevant to all systems of legal rules in all times and places, most applications, including most of this book, are to modern Anglo-American law.

chapter 17 will change that, applying ideas developed in the preceding chapters to the legal institutions of medieval Iceland and eighteenth century England and the private norms of a rural county in twentieth century California. Until then, we will mostly be looking at the legal institutions that most of us live under. The purpose of this chapter is to provide a sketch of those institutions before we go on to examine the system of legal rules they implement.


Part I: Where Does Law Come From?


...There is some difference of opinion on the subject in American jurisprudence brought about by differing views as to the correctness or applicability of the decision of the English courts in Rylands v. Fletcher, L. R. 3 H. L. 330.

Annie Lee Turner et al. v. Big Lake Oil Company et al.

The year is 1936. The Supreme Court of Texas must determine what compensation, if any, Big Lake Oil Company owes Annie Lee Turner and her neighbors for damage done to their property by the escape of polluted water from Big Lake's storage pools. A key issue is whether Big Lake is liable only if it failed to take reasonable precautions (was negligent) or whether it is automatically liable for any damage done (is strictly liable).

To answer that question, the Texas judges looked first not to the statute law of Texas but to a case decided in another country in another century: Rylands v Fletcher, decided by a committee of the British House of Lords in 1868. That case too dealt with liability for spilled water; it held that the appropriate rule was strict liability. The Texas court, for reasons which we will return to in chapter 19, reached the opposite conclusion, holding that Big Lake was not liable unless it had been negligent. To justify that conclusion it spent a considerable part of the written opinion explaining its disagreement with the British House of Lords.

The obvious question is why it bothered. England had never ruled Texas, and its authority over the American colonies ended almost a century before Rylands v Fletcher was decided. The British legislature had no authority over the law of Texas.

Law is not entirely the work of legislatures. The House of Lords, in addition to functioning as part of the British legislature, also appoints a committee of "law lords," judges who function as Britain's high court. It was that committee that decided Rylands v Fletcher. In doing so it was both a court deciding the outcome of a particular case—requiring Fletcher to pay damages to Rylands, a matter of interest only to them and their attorneys—and an expert body interpreting the common law of England. In that second role the conclusion it reached was relevant to, although not determinative of, the deliberations of a Texas court deciding a similar case based on the same underlying system of law. An English judge has authority over an American case in precisely the same sense in which an English scholar has authority over a dispute in his field carried on by American scholars; he is an expert whose opinion is relevant to deciding a disputed question of fact.

In the Anglo-American legal system, judges as well as legislators make law. One way in which they do so is by interpreting legislation and constitutions, resolving ambiguities, filling in gaps. Under the doctrine of stare decisis, decisions by one court are usually, although not inevitably, binding on another, so a decision in one case creates precedents that affect decisions in later cases.

But judges do more than merely interpret statutes or constitutions. They also create law, gradually, through a long series of decisions, out of thin air. The Court's opinion in Turner v. Big Lake Oil did cite one Texas statute but only to argue that, "interpreted... in the light of the Constitution and of the common law and Mexican civil law" it was irrelevant to the case. The decision was based not on statute but on past cases, in Texas and elsewhere, demonstrating that American courts had generally refused to apply strict liability in the fashion implied by Rylands v Fletcher.

One of the startling discoveries that students make in the first year of law school is how much of law is created, modified, and in some cases later repealed, entirely by judges.


"Defendant strongly urges that if said immunity is to be abolished, it should be done by the legislature, not by this court. With this contention we must disagree. The doctrine of school district immunity was created by this court alone. Having found that doctrine to be unsound and unjust under present conditions, we consider that we have not only the power, but the duty, to abolish that immunity."

(Mr. Justice Klingbiel in Molitor v. Kaneland Community

Unit District No. 302, 18 ILL. 2d 11, 22-26)



Part II: The Structure of the Court System


You are arrested, tried, and convicted of playing your accordion without a license, in violation of a state statute as interpreted and expanded by a series of court decisions. Being a litigious sort, you decide to appeal.

In the original case, you faced both a judge and jury, the former with the job of determining the relevant law, the latter of determining the facts relevant to whether you violated it. The appeals court, if it accepts your appeal, will consist of a judge or group of judges. Its job is to review the work of the judge in the first trial. Since it is concerned with law, not facts, neither side will be able to introduce additional evidence about what happened, although both may, if they wish, introduce additional legal arguments.

If the appeals court finds that the judge's decisions on matters of law were correct, your conviction will stand. You may, if you can afford it, attempt a further appeal all the way up to the state Supreme Court, if it is willing to hear the case.

Suppose the appeals court rules that the judge below made an error of law. The result is not that you go free; the fact that the judge made a mistake does not imply that you are innocent. Typically, the higher court sends the case back down to the lower to be retried, with the necessary amendment in the judge's ruling. This time you get to introduce evidence on the quality of your performance, ruled out as irrelevant the first time around. Only if the matter of law on which the lower court erred was so important that once it is corrected there is no case left does your victory above translate into an automatic victory below.

The higher the court that makes a ruling, the more authority that precedent will have in future cases; if it was the supreme court of your state that decided to admit your evidence, generations of accordion players yet unborn may benefit by being able to introduce similar evidence in their trials.

One result of this system of appeals is that most of the decisions that law students and lawyers study are by appeals courts, especially ones near the top level of the system, since those decisions set precedents that can be used in arguing later cases. A further result is that law school education consists in large part of reading the middle of stories without ever learning either what really happened at the beginning—the appeals court takes the original findings of fact, however implausible, as gospel—or what finally happened when the case was sent back down and resolved. Some day an enterprising writer will fix that problem with a book written for curious law students telling them just what was going on between the plaintiff in Bird v Holbrook, "a youth of the age of nineteen years", and the "female servant" on behalf of whom he pursued a fugitive peacock into Holbrook's walled tulip garden, where he fell victim to a spring gun and what became of them thereafter. We may finally learn how much of the implausible chain of causation alleged by the plaintiff in Palsgraf v Long Island R. Co. actually happened, and whether Mrs. Palsgraf retained her stammer after she lost her case. He can call it The Rest of the Story.

[book link: Posner answer]

So far I have limited my example to the courts of a single state. Expanding the picture raises the problem of deciding what court has jurisdiction and what law applies in a particular case. Consider a suit for breach of contract brought by a corporation headquartered in one state against a corporation headquartered in another for events that occurred in a third, or a product liability suit by the owner of a car that was built in Michigan, sold in Illinois, and crashed in New York.

The rule for deciding jurisdiction is simple in principle, if not always in practice. Suppose I am a citizen of California and you of New York. Since I am suing you, I make the initial decision of what court to sue in. If I sue you in a state court in New York, your home state, the case will be decided by the New York court system. If I try to sue you in California, my home state, and if the California court decides that the case has sufficient connection to California to make my doing so appropriate (and the amount in controversy is more than $75,000), you then have the option of removing the case to federal court. The court, deciding a state law case under its diversity jurisdiction, then resolves the case according to California law. Alternatively, I could start by suing you in a federal court in New York.

Diversity cases are one way in which disputes get into the federal system. Another is by being appealed all the way up to the state's supreme court and from there to the United States Supreme Court on the grounds that they involve federal issues, such as claims that state law is inconsistent with federal law or the federal Constitution. A third is when the initial dispute involves federal rather than state law—for example, a criminal prosecution for violation of a federal narcotics law or a civil case involving charges that an employer violated federal antidiscrimination law. A fourth possibility is for the defendant in a state court to go to a federal court and initiate a suit asking to have the relevant state law declared invalid on federal grounds.

The pattern of the court system at the federal level is similar to that at the state level. A case comes into the system either as a case of first impression, to be tried by a federal court, or on appeal to the Supreme Court from a verdict already given by a state supreme court. A federal case may be appealed up the hierarchy of courts, first to a federal circuit court and from there to the Supreme Court. A circuit court must decide all cases appealed to it; the Supreme Court does not, and in fact refuses far more cases than it accepts. Decisions at any level provide precedents for that level and those below.

Within the federal system there are multiple circuits, geographical areas, each with its own system of appeals courts. A case decided by a district court in the seventh circuit will be decided by the law of the seventh circuit, meaning that decisions by courts in that circuit, especially the circuit's highest level courts, will be given more weight as precedent than decisions by federal judges in other circuits. One reason the Supreme Court accepts cases is to resolve a conflict between the law of different circuits; opinions by the Supreme Court are, at least in theory, binding on everyone. A similar situation exists within the state court system, with disagreements ultimately decided by the state's Supreme Court

It may have occurred to you by now to wonder how we can have a consistent legal system, rule by laws rather than by men, if law is judge made, so that for a wide range of issues the law is whatever the judge says it is. One answer is provided by the system of appeals. If a judge is frequently reversed on appeal, that fact will be known both to his colleagues, who will conclude that he is incompetent, and to the attorneys who appear before him. Other judges will decline to follow his precedents; attorneys will routinely appeal his decisions. Thus a judge who rules according to his own preferences rather than his interpretation of the legal rules set by precedent may suffer serious reputational penalties and find that his decisions have limited effect on the final outcome of cases.

The obvious exception is the federal Supreme Court, which cannot be reversed, save by its future self. In my experience, at least, reading the explanations provided by the Justices for their decisions can be a depressing experience, in part because they are written by men who know that, however bad their arguments, what they say goes.


"A federal judge can be lazy, lack judicial temperament, mistreat his staff, berate without reason the lawyers who appear before him, be reprimanded for ethical lapses, verge on or even slide into senility, be continually reversed for elementary legal mistakes, hold under advisement for years cases that could be decided perfectly well in days or weeks, leak confidential information to the press, pursue a nakedly political agenda, and misbehave in other ways that might get even a tenured civil servant or university professor fired; he will retain his office."


(Richard Posner, Chief Judge of the Seventh Circuit, in Overcoming Law . Cambridge, MA: Harvard University Press. 1995: p. 111)


Part III: The Structure of Law


Seen from a suitable vantage point, say the first semester of law school, Anglo-American law is a confused and tangled mess of laws and precedents, torts and crimes, procedure and substance. One purpose of this book is to untangle it at a deep level, to develop a pattern of ideas in terms of which it is possible to make sense out of most of law. In this section, I attempt a more modest task—to sort the mess into suitable piles, so that, in the next few chapters, we can try to make sense of one pile at a time.

The first big division is between criminal law and civil law. Under criminal law, the plaintiff is the government; a typical case might be labeled "State v Friedman." In civil law, the plaintiff is normally a private party, although governments can and do dress up as private parties from time to time in order to prosecute cases under civil rather than criminal law.

One consequence of this difference is that fines under criminal law go to the government while damage payments under civil law go to the victim, the private party who is suing. Another is that only the government can drop a criminal prosecution. Legally speaking, the victim is not a party to the case, merely a witness. A civil case, on the other hand, can be settled out of court by an agreement between private plaintiff and private defendant.

Other differences between civil and criminal law will be discussed at greater length in later chapters, especially chapter 18, which deals with the question of whether we need both systems and if so why. Among the more notable are that criminal law makes use of punishments such as imprisonment and execution, while civil law relies mostly on money damages, and that criminal law requires a higher standard of proof for conviction, proof "beyond a reasonable doubt," rather than the civil requirement of "by the preponderance of the evidence."

Within civil law there are further divisions, not always sharply drawn, into categories such as property, tort, and contract. Property law deals with the ownership of things, especially but not exclusively land and buildings (referred to in the law as "real property," from which it follows that the computer on which I am writing this book is unreal, hence the book does not exist, hence I am free to go home and play computer games instead of finishing this chapter). Included in the law of property is the law of intellectual property: patent, copyright, trademark, trade secret, and related areas.

Tort law deals with torts, literally wrongs, actions by one person that wrongfully injure another person or his property. If you carelessly run me down with your automobile, I will sue you for damages, a tort action. If you publish a hostile review of this book, I may sue you for defamation (and lose, even though everything you said is wrong, since it is well established that the rules limiting attacks on authors do not apply to attacks on their books), another tort action. Very loosely, one may think of tort law as the civil counterpart of criminal law, a set of legal rules designed to impose costs on people who do things that injure other people. But tort law, unlike criminal law, has built into it the principle of compensation; the tortfeasor is supposed to pay sufficient damages to his victim to "make him whole"—as well off as if the wrongful act had not occurred.

A third area of civil law is the law of contracts, the legal rules that determine when a contract has been formed, what obligations it imposes on the parties, and what recourse one party has against another for violating the agreement.

In trying to make some rough sense out of these categories, a useful starting point is the question of who has a right against whom, what determines what it is, and why. Contract law is the clearest case. I have a right against you (and you against me) because we have signed a contract. The particular rules of this contract were drawn up by us, within the constraints permitted by more general rules of contract law created by courts and legislatures.

The most striking difference between contract law and property law is that while a contract right is good only against the other party to the contract, a property right is good against the world; I can legally prevent you from trespassing on my land, or violating my copyright, without first getting your agreement. The same is true of tort law; my right not to be assaulted or defamed by you does not require your consent either. But while property law defines a bundle of rights associated with objects—somewhat metaphorical objects in the case of intellectual property—that belong to one person and can be transferred to another, tort law's central concern is with a bundle of rights associated with a person.

Contract law and property law resemble each other, however, in a different way: in both cases, what rights you have in part depend on past agreements. But while contract rights are created out of thin air by the contracting parties, the owner of property starts with a preexisting bundle of rights defined by property law: the right to prevent people from trespassing on his land by the use of fences but not by the use of land mines, to prevent trespassers from passing a foot above his land but not airplanes from passing a mile above. Those rights can be transferred to someone else, and to some limited extent they may be unbundled first, as when a landowner sells an easement permitting a neighbor to cross his land, and then sells the land, subject to the easement, to someone else. But property transactions do not create new rights; to do that requires contract.

The traditional categories of property, tort and contract are convenient ways of thinking about the law, but it does not follow that an actual legal dispute can always be neatly classified as one of them. An important issue in property law is just what rights ownership of property implies—and it shows up, among other things, in tort suits by one landowner against another under the common law of nuisance. Breach of contract is, under some, but not all, circumstances, a tort, and it is tortious for A to persuade B to breach his contract with C. A lease is both a contract between landlord and tenant and the transfer of a property interest, the right to control the land for a certain number of years.

Putting things in the right piles is a useful first step in housekeeping—too often, in my case, also the last step. In the case of legal rules, these particular piles are of considerable practical significance for those involved in litigation. Tort, contract and property has each its own set of legal rules, differing in a variety of details. Whether a particular breach of contract is or is not tortious determines, among other things, what is or is not included in the damages that the successful plaintiff is entitled to collect.

Beyond these large categories, there are additional areas of law that either do not fit neatly into any of them, such as antitrust law and regulatory law, or provide a background for all of them, such as rules of procedure and jurisdiction.

One final distinction among sorts of laws is implicit in the first section of this chapter, the distinction among laws according to where they come from. On this basis, there are three major classes of law in the United States: statutory law, judge made or common law, and constitutional law.

Here again, the distinction is far from tidy. Statutes such as the copyright act exist to implement parts of the Constitution, so disputes involve both the question of what the act says and of what the constitution implies that the act must, or may not, do. And neither statutes nor constitutions interpret themselves, so statute law and constitutional law, at the point at which they actually decide cases, are heavily overlaid with the decisions of the judges that have interpreted them in the past.

One result is to make "common law" a somewhat ambiguous term. Broadly speaking, it describes judge made law in contrast to legislative or constitutional law. But where that line should be drawn is far from clear. This question is of particular interest to us because the economic analysis of law, as it has actually developed, has been heavily influenced by Judge Posner's conjecture that common law, but not statutory law, tends to be economically efficient. In order to test that conjecture one must first figure out what law is or is not common.

Our perspective on law in this book is functional; we view a system of legal rules as a tool with a purpose. But legal rules are also historical facts, produced by a long history of legal development. Even if it turns out that a large part of the structure can be explained on functional grounds, we must also expect to find embedded in it rules that can be explained, if at all, only by historical accident.

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