May 06, 2020 Scruples

Client Fees from Crowdfunding

If there is a significant risk the lawyer’s personal interest or obligations to the payers may materially limit the lawyer’s representation of the client, then the lawyer needs to get the client’s consent confirmed in writing.

Michael Downey

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“OK, this is not one I expected,” Paradox said.

“What is it?” Ethox asked.

“We have been approached to represent a client in a public interest lawsuit,” Paradox said. “The prospective client asked if they could crowd-fund to raise money for legal fees,” Paradox said. “Are there any ethics restrictions for crowdfunding payments for legal fees?”

“It depends on the involvement the lawyer has in raising the money,” Ethox answered. “If the client does all the work to crowd-fund without the lawyer’s involvement—at most the lawyer only knows the source of the funds is crowdfunding—then there are no special legal ethical obligations.

“However, if the lawyer directs or is significantly involved in obtaining money through crowdfunding,” Ethox continued, “then the arrangement must comply with all the ethics rules, including those that usually govern third-party payment of legal fees.”

“What are those rules?” Paradox asked.

“The most significant rule is ABA Model Rule 1.8(f),” Ethox responded. “Under Rule 1.8(f), the lawyer may accept compensation from non-client payers as long as the client consents, the payers do not interfere with the lawyer’s professional judgment or the lawyer-client relationship, and the client’s confidences remain protected as required by Rule 1.6.”

“Does the consent have to be in writing?” Paradox questioned.

“Generally no,” Ethox responded. “As explained in paragraph 12 of the comments to Rule 1.8, sometimes the lawyer discloses the identity of the payer and the fact of third-party payment.

“When the payer imposes greater restrictions on the representation,” Ethox continued, “the lawyer may have a Rule 1.7(a)(2) conflict. If there is a significant risk the lawyer’s personal interest or obligations to the payers may materially limit the lawyer’s representation of the client, then the lawyer will need to get the client’s consent confirmed in writing.

Ethox offered an example. “A Rule 1.7(a)(2) conflict that would likely need written confirmation of the client’s consent would be when the payers are interested in changing public or government policy action, and may want the client to keep litigating when the client receives a settlement offer with the terms the client would like to accept.”

“I get it. But you also mentioned confidentiality,” Paradox said. “Are there things the client may not share when seeking funds?”

“Rule 1.6(a) permits the client to control confidentiality and to disclose basically whatever the client wants,” Ethox answered. “But it is good to advise a client about disclosures because the client’s voluntary disclosures may waive the attorney-client privilege. Also, you need to make sure you get consent for anything you say when trying to solicit funds.”

“Right.” Paradox sounded reassured. “Any other concerns?”

“Yes,” Ethox said. “You also need to believe you can still represent the client ethically. Rule 5.4 prohibits a lawyer from allowing a third-party payer to interfere with the lawyer’s professional judgment. That someone else is paying the fees is not supposed to interfere with the lawyer-client relationship.

“There are two more issues to consider,” Ethox said. “First, you will need to make sure that all statements used to solicit funds are truthful, to avoid violating Rules 4.1, 7.1, and 8.4(c).”

“Easy enough,” Paradox reassured Ethox.

“Good. You also need to think through how you will handle the money. This raises several issues. You need to decide what will happen if the client cannot raise adequate funds—will we decline the representation or seek to withdraw? Also, you and the client need to determine when you will stop taking funding, when you have received enough—and whether excess funds will be refunded on some basis, or donated to a charity, when the representation ends.”

“Those are things I never would have considered,” Paradox answered. “This may be a bit more complicated than I had thought.”

“Don’t worry,” Ethox said reassuringly. “I would be happy to guide you through the process. Also, there are some good legal ethics opinions on these issues, including D.C. Ethics Opinion 375 and Philadelphia Bar Opinion 2015-6.”

Michael Downey

The author is a legal ethics lawyer at Downey Law Group LLC in St. Louis, Missouri.