Lots of good ideas on both the Outlaws and Jails, but here are a few possible things to add to the list of considerations when implementing these new items:
Outlaws will be individuals attacking and the "posse" that goes after them will be more than one person so it will be stronger (maybe when fighting an outlaw, you get the strength of the entire town that is after him rather than the stats of just one good guy). How do you become an Outlaw? Robbing trains was mentioned as a great idea, so is robbing banks, robbing store, and a town can make someone an outlaw by putting up wanted posters of him if you have a character that is terrorizing a town (it would take something to trigger that ability like maybe repeatedly dueling the same guy, ie picking on the weak and of course the town would have to pay for the posters, posse, etc out of the town coffers so as not to make it too easy to buy a bounty on someone). There could be NPC outlaws like there are in the quests, only tougher.
Jails. The jailbreak idea was great, IMO, where someone could attempt to break you out and if they succeeded you were out, but if not they got to join you too (LMAO, that would really suck to have company in that situation).
Someone also made mention that dueling with outlaw would always result in the outlaw winning, NOT TRUE! Outlaws could use their abilities to hide (stay off the ranking list or not be locatable based on their hiding and other skills). The good guys have items such as leadership (organize the posse), trapping (set a trap for the outlaw), vigor, toughness, stamina, appearance all could work in the good guys favor in catching an outlaw.
Example of how it could be played:
Outlaw - commits a crime or series of crimes. Bank robbing, train robbing, stage coach robbing, holding up the general store, terrorizing a town (needs to be multiple attempts there)
System - Can automatically put a bounty/reward once the outlaw hits a certain point of "success" at being an outlaw. A town can declare someone an outlaw but has to pay a town "fee" to go after the outlaw (fee is for organizing and equiping the posse, hiring trackers and gunslingers, posting a suitable reward, etc.)
Outlaw can use his skills to evade (take himself off the ranking list to hide for example, but there would have to be penalties such as not being able to stay in a hotel, or buy from a store in any town without being "spotted" and this chance of being spotted/discovered could be based on the distance from the town/area where he became an "Outlaw" ... effectively he could run all the way across the map to avoid detection from a certain area but eventually the Outlaw wouldn't be able to run if he kept up his ways)
Good guys - capturing vs dueling. Most bad guys were not challenged to a duel, they were hunted down and ambushed so the same dueling skills in a shootout would not apply. The skills of tracking abilities and tasks could come into play (putting up posters, bounties, etc), tactics, trading (trading for information), setting traps, even hiding (if you know how to hide you're more likely to find someone hiding)
Sheriff - The sheriff could actually be a feature in a town just like a building and the more that was invested into a sheriff, the safer the town and surrounding community would be. A bounty hunter from the town (you) would add the abilities of the sheriff to your own during the outlaw hunt to make it more fair (if the sheriff were built up enough it would make it like he was an entire posse unto himself).
Once captured - The outlaw is jailed back in the area he was an outlaw (so that if he has buddies, it may take them a while to travel to him to do a jailbreak). Being in jail should be a penalty (maybe no energy/health regeneration or even drain all of the players energy on his release, and of course any money he had on him is GONE. Also, his possessions would be confiscated so he would also lose the abilities associated with those items ... do you really think the sheriff will allow a peacmaker or a colt 45 into the jail?). Put in a chance to escape, but make it slim with penalties (loss of health points per attempt which don't regenerate in jail and increased sentence too). Make a jailbreak possible, but make it harder too (I loved the idea of explosives being used in a jail break and if the jail has levels then it would require more explosives to break out too). Make a penalty for being caught breaking someone out was a fantastic idea to eliminate the unrelenting breakout attempts from friends. Upon release, release the outlaw (now a non-outlaw for serving his sentence) far away from the jail to minimize the retaliation factor.
Jail Breaks - The people breaking the outlaw out of jail would have to have a different set of skills than dueling. If it was all about dueling then the sheriff could just board up the jail until reinforcements came (and don't forget about the deputies too, maybe even the entire town plus hired guns too). If a jail break is successful (abilities of jail breaker, jail breakee, level of the jail, explosives used, etc. can all come into play) then there is a chance that the person helping on the jail break is discovered and also tagged as an outlaw (or earns outlaw points if you will, but the outlaw points can only be earned if you are able to be tagged as an outlaw and for that to happen you'd have to be recognized in any crime that you do, including jail breaks).
Completion of sentence - The outlaw is restored to "Normal Citizen" status will all the outlaw penalties removed and maybe his gear is given back to him too (chance that something got "lost" in the process? or just plain confiscated.)
In conclusion, a simple form of outlaw could be easy to add to the game (the jail as a building, sheriff as a character/NPC, hiding out and penalties for outlawing) but to really make the outlaw a true element of the gme would take a lot of work to implement completely (jail breaks and bouties for example). I think I've added some background to the entire discussion of this topic that may make it more playable and hopefully add this feature in without upsetting game balance one way or the other.