Crowdfunding Legal Expenses: Ethical Considerations

In late November 2018, porn star Stormy Daniels claimed that her lawyer, Michael Avenatti, initiated a “crowdfunding campaign without her knowledge” in order to fund her defamation litigation against President Trump. See Matt Stevens, Stormy Daniels Says Michael Avenatti Filed Trump Defamation Suit Against Her Wishes, N.Y. Times (Nov. 28, 2018). Whatever its origin, a donation site remains live for “Cliffford (aka Daniels) v. Trump” on crowdfunding site crowdjustice.1 On the site, Daniels (purportedly) pleads for:

funds to pay for: attorneys’ fees; out-of-pocket costs associated with the lawsuit, arbitration, and my right to speak openly; security expenses; and damages that may be awarded against me if I speak out and ultimately lose to Mr. Trump and Mr. Cohen.

Crowdfunding” involves raising money through the Internet in the form of small donations from many contributors. While disciplinary standards permit some models of crowdfunding, they prohibit others. A New York State Bar Association ethics advisory opinion addressed the ethical implications of each approach. See N.Y. State Bar Assoc. Cmte. on Prof’l Ethics, Op. 1062 (Jun. 29, 2015).

  • Royalty and Equity Models. These models give the contributor some ownership interest in the firm or some right to a portion of the firm’s legal fees. According to the committee: “The royalty model contemplates the investor receiving a percentage of revenues, and would therefore violate Rule 5.4(a) (“A lawyer shall not share legal fees with a nonlawyer”). Similarly, the equity model violates Rule 5.4(d) (lawyer shall not practice law in a for-profit entity if a non-lawyer owns any interest therein.).” This advice holds true under Louisiana Rule 5.4.
  • Reward Model. This model gives the contributor some reward, such as an informational pamphlet or pro bono services provided by the firm to a charitable organization. The committee found no per se prohibition with this model: “[A] law firm may send a funder non-confidential memoranda discussing legal issues (provided the law firm complies with any applicable advertising rules), or may agree that the law firm will provide pro bono legal services to certain charitable organizations, provided that the lawyer complies with Rule 1.1 regarding competence and the representation does not involve conflicts in violation of Rule 1.7 or Rule 1.9.” This advice is likewise good under the Louisiana Rules.
  • Lending Model. This model gives the contributor the right to repayment of the contribution. The committee offered no opinion on this model because it “would only increase debt and therefore would not meet the law firm’s goal.” However, neither New York nor Louisiana disciplinary standards would prohibit a lawyer from borrowing money from a lender who has no control over firm operations.
  • Donation Model. This model gives the contributor nothing—just the ability to contribute gratuitously to the firm. Said the committee, “we see no ethical issues with the donation model, as long as the lawyers make clear that donors will receive nothing in return and that the law firm is designed to be a profit-making enterprise.” This is also true under the Louisiana Rules. The “donation model” is the most common of all law-related crowdfunding efforts.

The District of Columbia Bar Association recently issued an ethics opinion with additional guidelines for lawyers seeking to crowdfund legal expenses for clients using the “Donation Model.” See D.C. Bar Ethics Op. No. 375 (Nov. 2018). The key takeaways from the opinion are these bits of advice:

  1. A lawyer cannot accept payments for representing a client from third persons unless: the lawyer obtains the client’s informed consent to the third-party payment; the lawyer assures that there is no interference with the lawyer’s independence or professional judgment; and, the lawyer protects the confidentiality of client information. See, e.g., Louisiana Rule 1.8(f).
  2. The lawyer and client must clearly understand the terms of the crowdfunding arrangement. Said the committee: “crowdfunding can trigger areas of confusion that may not be present in a traditional client-self pay situation, such as ownership of excess crowdfunds raised and responsibility for payment if crowdfunds fall short of legal fees and expenses incurred.” Although a written agreement is not required, it is preferred.
  3. The lawyer must be truthful with the public about the case and the crowdfunding campaign. See, e.g.Louisiana Rule 4.1(a).
  4. The lawyer must handle crowdfunded contributions as “advances” for future fees and costs. As a result, the lawyer must deposit crowdsourced funds into a client trust account.
  5. Because crowdsourced funds belong to the client, the lawyer generally must return unearned contributions to the client. In addition to possibly constituting conversion, failing to deliver to the client any “unearned fees at the conclusion of such a representation risks violating Rule 1.5(a)” by collecting an unreasonable fee.
  1. Crowdjustice proclaims itself to be “the leading crowdfunding platform for legal action.” See crowdjustice.com.

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