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Think Twice Before Using Crowdfunding and Litigation Investments

We're in the middle of a crowdfunding golden age. Individuals have raised thousands of dollars to make potato salad ($55,000), create inflatable Lionel Richie sculptures ($12,500), and conduct a squirrel census ($9,000). When it comes to fundraising, it seems like people are just giving money away.

Should lawyers and litigants looking to finance a suit hop on the crowdfunding train? What about working with litigation investment companies? The answer, of course, is maybe. While crowdfunding has been used successfully, litigation investment poses significant ethical risks for lawyers.

Crowd Funding for the Public Interest

Nonprofits that engage in public interest law have long appealed to the public for donations and contributions. Now, some upstart public interest lawyers have turned to the Internet to do the same thing, appealing to a wide audience without needing to purchase the mailing lists and marketing materials that often drive nonprofit fundraising.

Another use of Internet fundraising is to achieve donations for individual court costs. Crowdfunding websites such as GoFundMe, Kickstarter, and IndieGoGo allow people to raise money to cover legal costs for criminal defense, custody fights, civil rights lawsuits, and the like. But all of these are donations -- those who give typically expect nothing in return. That sets them apart from litigation investment, where individuals and companies put their cash down in hopes of a large payout later on.

Litigation Investment: Not Unethical, But Not Not Unethical Either

Third-party interference with litigation is one of the biggest ethical concerns when it comes to investments, according to a recent article by Lawyerist. For the same reason lawyers can't let a mob boss direct the defense of a low-level street thug, lawyers can't allow litigation financiers to interfere with the representation.

That interference can happen even before investment in litigation is made. For example, LexShares, a new-ish litigation investment company, wants to "close the justice gap" but requires information about the litigation before handing over cash. That's reasonable from an investment standpoint -- especially for litigation loans where, should the backed party lose out, the investor can be left with nothing. But as the New York City Bar ethics committee has noted, it raises ethical concerns about client confidences and third party interference.

Those risks are amplified once investment has been made. A litigation finance company may want to play back seat driver to a lawsuit, chiming in on potential settlements, speed of litigation, trial strategies, and other decisions that are reserved to the attorney and the client. Even when financing agreements are structured to avoid interference, one can easily imagine lawyers kowtowing to the party controlling the purse strings, rather than their clients.

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