crowdfunding legal fees

Has your client ever suggested paying for your services via donations from a Kickstarter campaign, or a GoFundMe page?  The District of Columbia Bar recently considered such donation-based crowdfunding, and greenlighted the basic concept — but noted that the ethical implications vary depending on the lawyer’s level of involvement in the crowdfunding effort.

Other people’s money

Not many opinions have yet addressed the ethics of third-party funding of legal services using social media — but the phenomenon appears widespread.  A search for the term “legal” on the GoFundMe site, for instance, brings up thousands of results from all over the country, many referring to “legal defense fund,” or “legal fund.”

The D.C. opinion deals only with “donation-based funding,” and not “equity-based funding,” in which an investor contributes funds in exchange for a stake in the potential recovery.  (We’ve discussed equity-based third-party funding here, here and here.)

The opinion notes that the term “crowdfunding” and the use of social media to raise money for legal fees  may be relatively new, but “payment by third parties for another’s legal representation is not” new.  So it’s no stretch to conclude that the Rules of Professional Conduct “apply to a lawyer’s receipt and disposition of all funds received in connection with a client representation, regardless of their source.”

Client-directed crowdfunding

When the lawyer is not involved in the actual fundraising, but simply receives the funds raised by the client’s social media efforts, the opinion finds nothing unethical — but notes the following potential issues:

  • be aware of any increased risk of fraud, money laundering or other criminal activity in connection with the exchange of crowdfund-generated fees, and take reasonable precautions to avoid unwittingly engaging in or assisting illegal conduct;
  • consider counseling the client about avoiding the disclosure of confidential information to third parties as part of the fundraising effort — whether on-line or in person;
  • discuss with the client whether the use of crowdfunding is the best choice, as Model Rule 2.1 permits advice that refers not only to law but to “moral, economic social” and other factors that may be relevant.

Crowdfunding by lawyers

The D.C. bar also outlined the ethics obligations where a lawyer steps in and “assists” in,  “undertakes or exerts control” over the crowdfunding effort — and not surprisingly, these obligations are the ones that also apply generally, namely:

  • getting informed consent before accepting compensation from third parties for the client’s legal fees,  not letting the donors interfere with the lawyer’s legal judgment, and protecting the confidentiality of the information relating to the representation (Model Rule 1.8(f));
  • memorializing the crowdfunding arrangement through a fee agreement with the client, preferably in writing — including eliminating confusion about issues like “who gets any excess crowdfunds?” and “who is responsible for paying fees if crowdfunding falls short?”;
  • treating crowdfunds collected by the lawyer as advance fees, placing them in trust as required by D.C. Rule 1.15, and drawing on them only as earned;
  • returning unearned crowdfunds to the client at the conclusion of a representation, recognizing that unlike a contingent fee, the lawyer has not incurred any risk of non-payment, and therefore it would “be unethical … to claim unearned crowdfunds” after the matter is over.

Fee-splitting issues?

In contrast to the donation-based crowdfunding the D.C. opinion discusses, investment-based third-party funding can arguably raise the issue of splitting fees with non-lawyers.  That might be so even under D.C.’s version of Model Rule 5.4, which permits some forms of fee-splitting — but only with “nonlawyer professionals [who] work with lawyers in the delivery of legal services,” such as “psychologists or psychiatric social workers [who] work with family law practitioners.”  See id. cmt. [7].

Prof. Alberto Bernabe, at John Marshall Law School, has a 2016 article on the fee-splitting issue, linked here, and a post on the D.C. ethics opinion over at the Professional Responsibility Blog.