June 2, 2015
By Brian S. Kabateck and Tsolik Kazandjian
In the past decade, crowdfunding entities like Kickstarter have emerged as the go-to resource for anyone who needs to raise money for a pet project, a charity cause or to grow a start-up company. If an aspiring filmmaker wants to fund a short film, there are multiple crowdfunding websites that can take an idea and within hours, get it green-lit after investors around the world offer to chip in to make the film. From honeymoons to the world’s best potato salad, it seems any goal can be achieved via the crowdfunding platform.
Unsurprisingly, the genius of crowdfunding has finally reached the legal market. In just the past couple of years, websites have launched providing a crowdfunding platform for litigation funding. These various companies exist to help cash-strapped plaintiffs who have potentially lucrative cases against large entities or, on the flip side, smaller companies being sued by Goliath-type competitors, connect with able investors to support the inevitable costs of bringing a lawsuit.
Meeting the Minimums
For example, one litigation crowdfunding website, LexShares, looks for solely commercial cases already filed that need between $100,000 and $1 million in capital. The company helps attorneys determine how much funding is needed based on the case’s details. The case types LexShares helps fund range from antitrust, to intellectual property, to shareholder suits, among others. LexShares then posts the offering on the website with certain case details, funding goal, and deadline.
Notably, LexShares requires investors to meet certain income requirements and FTC guidelines before being allowed to invest in cases. Plaintiffs also have the option to reveal the details of their case by “request only,” thus allowing plaintiffs to pick and choose which investors can see and invest in their case. Investors can then track the case and expect a healthy return on their investment when the lawsuit ends on a positive note. In the end, LexShares takes a carried interest in each case funded, with no upfront or management fees for investors.
Another litigation crowdfunding website, Invest4Justice, exists more like an online marketplace and networking resource. Unlike LexShares, Invest4Justice allows any type of case of any size to be posted online by either a plaintiff or defendant. Furthermore, any person can pitch in to help out with a case. Donors are screened if they wish to provide funding over $6,000, and the site uses PayPal Advanced Payments, which allows Invest4Justice to facilitate direct transfers between peers and litigants.
Plaintiffs can elect to receive donations from individuals, or offer “rewards” of their choosing, such as two dollars for each dollar contributed, with a total reward of 40 percent of the amount recovered offered to contributors. Defendants, on the other hand, can only ask for donations, as a defense victory reaps no monetary payout. If a case’s funding goal is met, Invest4Justice—a non-profit—takes four percent to cover their operation costs, and allows up to 10,000 individuals to fund a single case. It truly brings the world to a litigant’s fingertips.
David vs. Goliath
This new, high-tech trend in litigation funding can be a godsend for solo practitioners or start-up companies. A solo practitioner with only a few years of practice and a modest income may have a once-in-a-lifetime case against a well-funded defendant come across his desk that might be just too expensive to finance himself. Using a litigation crowdfunding site would enable him to get the financing to adequately try the case and advocate for his client while gaining valuable experience litigating the case. A positive result would then generate new business, and eventually the attorney would have enough cases coming through the door for the business to sustain itself without additional financing.
Similarly, a high-tech startup could find itself at the receiving end of a lawsuit brought against it by a huge competitor for something like patent infringement. Indeed, The Wall Street Journal has reported that at least 66 percent of defendants in intellectual property lawsuits are high-tech companies with less than $100 million in annual revenue. Under normal circumstances, that one lawsuit—with astronomical costs associated with litigating a case—could cause the start-up to fold, settle or pay licensing fees. But by bringing its case to a crowdfunding site, these small companies could now have access to enough money to obtain justice instead of drowning.
Of course, crowdfunding litigation websites are so new that litigants may want to stick with more traditional sources of third-party litigation financing that are well-established, reliable, and battle-tested, such as specialized litigation funding firms or bank loans. However, crowdfunding litigation companies may be the less risky option because they are non-recourse options—the litigant does not have to pay anything back if he or she loses their case. Indeed, it is also the less risky option for investors; for example, with LexShares, the amount pledged by investors is not debited from the investors’ accounts until the full investment target is met.
On the Rise
In any event, crowdfunding litigation websites are certainly picking up steam. At the end of April, Invest4Justice had 18 campaigns, with almost $3,000,000 funded. The cases asking for funding come from around the globe, and contain myriad subject matters, including cases involving family court, injustice in France, a civil rights lawsuit, an infringement action in the United Kingdom, and enforcing legal actions in Singapore. One case asks for only $10 in donations, while another case asking for $30,000 in total has already been successfully funded. Along the same vein, LexShares currently boasts three commercial cases on its website, all successfully funded with offering sizes between $100,000 and $250,000. Many more are sure to come.
While litigation funding could be beneficial as a jumping-off point for a new practitioner or small company, it should not be relied on entirely to fund one’s practice, and should be approached with caution. There is no guarantee that your investment goal will be met, especially with a smaller case that may not attract heavy-hitting investors. There is also the fact that a win means that your client will walk away with less money, after attorney fees and the investors’ cut from the client’s winnings.
It is also worth noting that if you decide it is not worth it to the fund the case, the client could potentially decide to self-fund through one of the many forms of litigation financing. If that is the case, it may become your responsibility to inform the client of the risks and benefits of that arrangement and sometimes even counsel against it.
Attorneys who turn to crowdfunding as a means to finance their case should stay cognizant of ethical concerns that may come into play when third parties are involved. These concerns include potential fee splitting issues, outside influences on a case, and protecting attorney-client privilege. In any event, if you are directing your client to a crowdfunding source, do your due diligence and be doubly sure that you comply with your ethical duties to your client.
For the right case and the right situation, litigation funding can be a lifeline, and the new trend of litigation crowdfunding will only expand the public’s access to justice. It could also be a smart way to kick-start a fledgling attorney’s solo practice into a small, well-oiled machine. Regardless of the scenario, it is up to the attorney to be vigilant in weighing the cost versus benefit for both the attorney and the client, and remember to “never put your eggs in one basket.”
Brian S. Kabateck is the founding and managing partner of Kabateck LLP. His practices focus is the areas of personal injury, insurance bad faith, pharmaceutical litigation, wrongful death, class action, mass torts and disaster litigation. Tsolik Kazandjian is an associate at Kabateck LLP experienced in litigating consumer class actions, insurance bad faith, wage and hour actions, unfair competition and breach of contract cases.