Click here for justice?
Why legal crowdfunders might need restraining.
The online Crowdfunder has become a staple of the modern internet. They pop up after tragic incidents to support the victims, are plugged under viral tweets for all manner of causes, and have spread to the commercial world used for raising seed money and equity rounds. In Britain, the legal Crowdfunder has taken on a particular popularity. A lack of regulation, however, raises the risk against both those who invest in this crowdfunding and those who find themselves on the other side of their cases.
The attraction of crowdfunded litigation is obvious and often commendable. Bringing a case to court in Britain is expensive, often prohibitively so. Legal aid for civil matters has been massively cut by the government and is not available for most cases. If you find yourself libelled, or accused of it, or want to challenge a government decision through judicial review, you might expect to spend hundreds of thousands of pounds on litigation, or else suck it up.
Crowdfunding offers a way around this. If you, or your case, is sufficiently popular you can rely on the generosity of the crowd. With the right publicity, a few thousand people might chip in small amounts, and suddenly you have a sufficient fighting fund. It’s a model that works and there is by no means anything inherently wrong with it. Yet a lack of regulation fails to guard against outright scams, ill-founded claims, and those getting rich from the naivety of others, not to mention those forced to fork out their own vast sums should a rogue Crowdfunder take aim at them.
At the simplest, such fundraisers can be a pure grift. People can launch the pages with the loosest intentions of pursuing a claim, and pocket the money. Or else, they can spend a little sourcing an opinion and pocket what remains. Such cases are rare – but the fact that such donations are small means those scammed are unlikely to take it up. The Advertising Standards Agency and the police should be far hotter on this and root out a few high-profile ones to make an example. But even when they are not a bare scam, there is plenty of opportunity for consumers to lose out.
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In ordinary litigation, the cost of bringing a claim acts as a break on the ferocity of pursuit. From the outset, claimants are warned of the costs of their claim and the balance against any success. More detailed advice is given about any particular action within a suit too. Seeking disclosure of a particular document, commissioning an expert report, or even launching an action at all, is viewed through this balance. In crowdfunding, this is often absent.
With this sort of case, there is a new distinction between the person running the suit, the case manager, and the people funding it. The customers pay into the crowdfund, but the case manager directs where those funds go. They chose the line of argument, the applications that are made, and whether the case is brought at all. This also means that they are privy to information that the funders aren’t.
In a normal case, as the client you are given advice that remains under strict legal privilege. The most basic of these is around chances of success. Lawyers are reluctant to ever put these in blunt terms but are often instructive. As a paying client, you’d be told whether a particular action was likely to be worth the fees. As a donor to a crowd funder, this is impossible. Spreading the advice that wildly would undermine privilege, and risk leaking the strengths and weaknesses of the case to the other side. But that also means that the people funding the case have limited information about what it is done in their name, and how worth it the litigation might be.
Plenty of crowd-funded lawsuits have foundered in this way. They have appeared with ambitious, but speculative plans of litigation, often about holding errant governments or politicians to account, and initially picked up a lot of money. They have then been kicked out at an early hearing by a court, roundly beaten on preliminary points and sunk back into obscurity, often with surplus funds. The issue here is that funders are being induced to part with money on a dubious premise, litigation that bears no, or minimal hope of success, but in the absence of the sort of legal advice that would accompany that decision. They are, in essence, paying for nothing but a waste of time.
This becomes more conflict-laden when the person behind the crowd funder seeks to enrich themselves as a by-product. Some of these cases are run by lawyers, partly trading off their own expertise, who then employ themselves or their own firm to run the litigation. Other times, a non-legally qualified person will employ themselves through the fund as a sort of case manager. This is not necessarily done through ill will, their interests usually align with the broader crowd, and they genuinely want to prosecute it, but a conflict still arises.
As a legal client, you get to choose your lawyer, what they are paid and what you instruct them to do. This is broken when you donate to a crowdfund. You are instead trusting whoever manages it to do the same. When that money is flowing into their pocket, however, they do not have the same perspective. Spending tens of thousands on a certain preliminary application, for example, might be a razor edge decision, but it would look a bit different if instead of paying your own cash for it, you were applying someone else’s towards your own fees. The same runs through all aspects of litigation, from the initial lawyer’s rates to the challenging of bills. Working via a Crowdfunder allows an element of self-dealing that would ring alarm bells elsewhere. Some examples have been particularly egregious.
There is an argument to say that none of this matters. People who put money into crowdfunders are content to spend it that way. They are not huge sums and they get something from it – just as the value of a lottery ticket might be the daydreams you have of winning, the same may be true for this. It doesn’t matter what the odds are or where the money goes. Yet this ignores the other side of the litigation equation, the other party who is forced to spend time, effort and energy responding to the case.
English law has always been wary of allowing third parties to fund litigation. The medieval concepts of champerty and maintenance have long been part of our common law, preventing those with money from seeking out those with a grievance and pouring their money in to harass someone. Historically, you were barred from putting money into a case that didn’t directly concern you, or from taking a financial stake in one. This is effectively a public policy issue, preventing the rich from using their litigious power to bully others.
For every crowd-funded claim, there is a defendant. Sometimes this is an individual, a business, or, in public law cases, an arm of the government. No matter how poor the claim, they are forced to defend it, often at great expense and stress. Those who chip into the crowdfund have no such issues. They might put a fiver here or there, but they don’t have to concern themselves with court deadlines and witness statements and the rest. Rather than levelling the playing field, crowdfunding can prove just as unfair as when rich individuals have lots to spend on legal fees.
Part of the normal deterrence against this is adverse costs. Usually in English law, the losing side pays the costs of the other side. This attaches a penalty to launching ill-founded litigation. It is, rarely, however, that easy. The recoverability of costs is neither perfect nor absolute, and this causes particular issues when crowdfunding comes into play.
The first is a question of cash flow. Questions of legal costs are usually dealt with after a final conclusion when it is clear who won and lost. In the interim, lawyers are unlikely to extend huge amounts of credit. It doesn’t suit their business model and is often rendered difficult through regulation. Defendants also struggle to find alternative funding, as there is no compensatory payment for a funder to profit from. Where loans are available, they are likely to be expensive. As a result, even when defending a claim with a low chance of success, you will be met with significant upfront and ongoing costs. Where a crowdfund is fully funded from the outset, they would be at a real advantage.
There then comes the issue of quantum. Costs law is a particularly technical and tedious part of the legal system. Its intricacies, however, mean that someone who wins at trial is rarely entitled to all of their legal fees. The losing side might ordinarily have to pay 70-90%, with the winner on the hook for the rest. On top of that, it only applies to legal fees, not second-order costs. A business or government department cannot claim for the time their employees spend dealing with the case or any opportunity cost. This can easily be just as valuable as the legal fees, especially after a complex trial.
Finally, there is the matter of enforcement. Costs orders are only good so long as there is someone to pay them. This is a problem with crowdfunded claims. When it comes to paying for the other side, the kitty may be empty. If the crowdfunding was brought by some sort of corporate entity, it would likely go insolvent and let the debts die. If in the name of an individual, they may be liable but unable to pay. A defendant might push for enforcement, or even bankrupt them, but usually, this is throwing good money after bad. All the while, those who first funded the litigation face no further liability.
All of this highlights the current deficiencies of legal crowdfunding as a model. Even aside from the issues of outright scams, there is little protection for naïve funders who put money into prospectless litigation. More innocently, where there is a change of heart or a surplus, there is little control over where the money goes. Even among the more honest, there is a risk of self-dealing and conflicts of interest – and the possibility that crowdfunding could impose unrecoverable costs on those on the other side of litigation, whether governments, businesses or individuals.
At present, the funds fall into a regulatory lacuna. Court rules were not drawn up with them in mind, and the evolution of common law around them will be slow. FCA regulation only applies to those who seek to raise debt or equity through crowdfunding. Equally, the ASA has been slow to move into this space – though some adjudications have been made around Kickstarter-style product advertising. For the sake of customer and defendant protection, some relatively straightforward changes could be made.
First, the ASA should issue clear guidance on how legal crowdfunders promote themselves. There should be as much honesty as possible without undermining legal privilege. At the very least, there should be an indication of where the risks in a case lie, for example, whether the crowdfunding has clear standing, and how funding will be used to get there. ought to be transparency on how funds are handled and clarity on who controls them. It is all too easy for people to make vague claims at the moment and disappear once the attention has died down.
Beyond that, there should be a bar on self-dealing. The person controlling the funds and managing the claim should not be able to pay themselves, fund their expenses, or hire a firm where they are an employee. The scope for conflict is too great if someone receives a large budget to pay themselves to litigate without further oversight. The person acting as the client should be entirely independent from the legal team.
For costs, action will largely have to come within the court rules. Courts have already used asking for security for costs – i.e. an upfront payment for the other side’s potential fees – in crowdfunded cases. This should be the norm in such matters, to deflate the advantage of being able to raise money upfront. Where insufficient funds haven’t been raised for this, there should be some requirement for insurance, to payout in favour of the other side to cover a shortfall in recoverable fees. There should also be some clarity, perhaps backed by legislation, around what happens when a crowdfunded litigant is entitled to recover the costs they have incurred. It is wrong for them to profit from free litigation and impractical to refund everyone who contributed. Perhaps some could be diverted to a fund for those left out of pocket by failed crowdfunded cases against them. Additionally, adding some liability for platforms would help transfer the burden of first-instance regulation onto those sites.
There is nothing inherently wrong with legal crowdfunding. It is a useful way of prosecuting cases that otherwise would not be. It has probably delivered more beneficial results than scams and complications. Yet that is no reason not to use the nudge of regulation to take away some of the risks and the negative consequences. Legitimate actors should welcome this – it will bolster their trustworthiness and take some of the reputational risk away from the model. For consumers and defendants, there is a clear case for the value of regulation.
 For a counterexample, see the Hulk Hogan litigation against the Gawker website, funded by Peter Thiel as revenge for them outing him.