Crowdfunding – Is the Solicitation of Donations for Payment of Fees Ever a Good Idea?

//Crowdfunding – Is the Solicitation of Donations for Payment of Fees Ever a Good Idea?

Crowdfunding – Is the Solicitation of Donations for Payment of Fees Ever a Good Idea?

Back in 2015, I was one of over 23,000 people who made a donation to a Kickstarter campaign for the Planetary Society’s LightSail project. The original goal was to raise $200,000 to be used for the continued development of a solar sail that would eventually be launched into space. That campaign ended up bringing in well over $1.2 million and LightSail II is now awaiting launch on a SpaceX Falcon Heavy rocket. This was the first time I was personally involved in a crowdfunding effort and, suffice it to say, I was blown away by its success. Of course, the Planetary Society isn’t alone in recognizing the possibilities here. Lawyers have also been looking at and using crowdfunding as a way to get paid.

While crowdfunding models vary, there are primarily two general approaches to using the tool to fund a legal matter. One is an investment model where the contributor(s) invests funds in exchange for some kind of benefit. I am going to discuss the other model, which is the donation approach. Here, the donors have no expectation of a return or benefit.

You have a potential client who has no ability to cover your fees. Would it be ethically permissible to solicit donations through a crowdfunding source as a way to have your fees paid? Perhaps the matter is something that a segment of our society might be interested in supporting, seeing it as a worthy cause. The Philadelphia Bar Association was the first to address this very issue back in 2015. While the Philadelphia Bar’s ethics committee concluded that the ethical rules do not outright forbid the use of crowdfunding to collect donations, the committee did provide some guidance as to what a lawyer must keep in mind. Here’s the gist of the opinion.

First, the client must be made aware of and consent to having a third party pay the fees. The lawyer must ensure that there will be no interference in the attorney-client relationship or with the lawyer’s independent professional judgement, and client confidentiality must be maintained. (See RPC 1.8 (f))

Second, even though certain information must be shared publicly in order to generate interest in funding the matter, the lawyer must still comply with RPC 1.6, the confidentiality rule. No information can be disclosed absent client consent and the information that is to be disclosed should be limited to the minimum necessary to achieve the purpose.

Third, the lawyer would need to set forth the basis of her fee and explain what would happen if the donated funds failed to cover her fees or were such that they constituted an excessive fee. In other words, regardless of the success of the campaign, the fee must still be reasonable. (See RPC 1.5) Questions such as what happens if insufficient funds or excessive funds are raised should be addressed. For example, will the lawyer see the matter through to completion regardless of the amount funded?

Fourth, the lawyer must place all funds collected by the crowdfunding effort in an appropriate trust account until the fees are earned in accordance with the fee/representation agreement with the client. (See RPC 1.15)

Finally, the lawyer should be aware of the duties owed to non-clients, particularly regarding the purpose and use of any funds collected. This means that during the course of representation, the lawyer cannot knowingly make a false statement of material fact to a third person nor can any false or misleading statements about the lawyer or lawyer’s services be made. (See RPC 4.1 & 7.1)

Of particular interest to me was what the Philadelphia opinion didn’t discuss. For example, what should a lawyer do if funds are raised and then the lawyer is subsequently discharged from the matter? Crowdfunding platforms typically take a cut of the funds collected. Would this be an unauthorized fee split? And last, but not least, if the amount collected turns out to be an amount that would make the earned fee unreasonable if kept, must those funds be returned to the donors? I would assume so given that unearned fees belong to the third-party payor. The problem here is that with successful campaigns that involved a large number of donors, it may be difficult if not practically impossible to calculate and distribute the excess of each donor’s pro rata share of their individual donation.

These problems are very real and need to be responsibly addressed prior to setting up a crowdfunding campaign. That said, I still believe that in a number of jurisdictions, moving forward is possible with a little creative thinking. For example, consider the excess funds problem. Instead of trying to return the unearned pro rata share to every donor, if disclosed upfront as part of the terms of the funding campaign, donors could agree in advance to have any excess funds used to fund some other indigent client, turned over to the client for personal use, or donated to a nonprofit entity that is working to further the cause of the client.

After chewing on all of the above, I’ve had lawyers tell me that the headache associated with trying to navigate these waters just isn’t worth it. Their solution is to have the client setup the crowdfunding campaign. That way all of the above problems go away. I get that, and I don’t necessarily disagree; but I always follow up with this one caution. As a lawyer, you need to be remember your role. If you are aware that a client is going to try to crowdfund your fees or you are the one responsible for putting that idea into your client’s head, you should advise your client about the legal ramifications of taking such a step. At a minimum, discuss attorney-client privilege and let your client know that the other side will see all information shared on the crowdfunding page. The following story is one reason why I say this.

A lawyer was representing a client in a domestic matter and this client was in a situation where, in the client’s mind, crowdfunding was going to be the only way he could continue to have the financial wherewithal to pay his lawyer’s fees. The lawyer agreed to continue working with the client knowing that this was how his fees were to be paid. The campaign turned out to be quite successful and the client was thrilled. Thrilled, that is, until the other side sought to have his support obligation changed as a result of the financial windfall. Oh, and this client also learned there was going to be an unanticipated tax consequence. Of course, you can guess what happened next. The client pointed the finger of blame at the lawyer and said, “Why didn’t you tell me this could happen? I’m going to hold you accountable for these new troubles.” So, I’ll say it again. Remember your role.

Is soliciting crowdfunded donations for payment of fees ever a good idea? It might surprise you that I believe there are times when it absolutely may be. However, if you’re ever tempted, make sure you go down this path with eyes wide open; because, as you now know, crowdfunding is not always the panacea some hope and believe it is.

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By |2018-04-26T15:34:43+00:00April 26th, 2018|Managing Your Practice|0 Comments

Since 1998, Mark Bassingthwaighte, Esq. has been a Risk Manager with ALPS, an attorney’s professional liability insurance carrier. In his tenure with the company, Mr. Bassingthwaighte has conducted over 1200 law firm risk management assessment visits, presented over 400 continuing legal education seminars throughout the United States, and written extensively on risk management, ethics, and technology. Mr. Bassingthwaighte is a member of the State Bar of Montana as well as the American Bar Association where he currently sits on the ABA Center for Professional Responsibility’s Conference Planning Committee. He received his J.D. from Drake University Law School.