Editor’s Note: We know of no Kentucky authority providing guidance on lawyer fees paid by crowdfunding. This article is a synthesis of ethics opinions by the D.C. Bar Legal Ethics Committee Opinion 375, (11/18); New York State Bar Association Committee on Professional Ethics Opinion 1062 (6/29/15); and the Philadelphia Bar Association Professional Guidance Committee Opinion 2015-6 (12/ 2015). All three bar associations have rules of professional conduct virtually identical to the Kentucky Rules of Professional Conduct and all are well reasoned. Accordingly, we consider them valid secondary authority for Kentucky lawyers considering receipt of crowdfunding fee payments.
The D.C. Bar describes crowdfunding as:
[T]he process of raising money from third parties for the benefit of another. While the term is most often used to describe the practice of raising small amounts of money from numerous people through social media and other platforms, as used in [the D.C.] opinion, “crowdfunding” refers to the solicitation and acceptance of such funds to pay for someone else’s legal representation.
Crowdfunding is generally structured in one of two ways:
There is agreement in the opinions that there is nothing in the rules that per se prohibit a lawyer from accepting fees raised by crowdfunding. This does not mean, however, that there are not a number of risks of violating laws or professional conduct rules when accepting crowdfunding fees. The threshold question is whether the funds are raised by the client or by the lawyer.
The D.C. Bar opinion points out that clients often depend on family and friends for help in paying fees. This does not automatically trigger ethics issues for lawyers. Similarly, clients independently soliciting donations from friends and strangers on the Internet do not necessarily create ethics issues. Nonetheless, lawyers should take these precautions with clients who use the Internet to raise funds:
The client should be counseled about disclosures to third parties whether family or on social media. While some information must be revealed to interest potential donors in participating, clients must understand the risk of waiving the attorney-client privilege or revealing case strategy.
The client should be warned about giving misleading information about the matter to encourage donations. Angry donors may resort to legal remedies for fraud.
There is a heightened risk of fraud, money laundering, and scams with crowdfunding. Lawyers must be careful to avoid becoming involved in a client’s illegal acts. If a lawyer knows or suspects fraud, the lawyer is required to counsel the client of the limitations on his ability to represent the client in these circumstances. Lawyers must avoid the accusation of engaging in or assisting the client in unethical or illegal conduct.
Lawyers must be sure that crowdfunding by a client does not result in a violation of SCR 3.130(1.5)’s prohibition of excessive fees and complies with the writing requirement of the Rule. Paragraph (b) of the Rule provides:
The scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation….
When a lawyer controls crowdfunding several ethics rules are triggered dealing with accepting fees from third parties, client confidentiality, misleading statements, excessive fees, and use of client trust accounts for crowdfunding donations. What follows are the key considerations for each of these issues.
The Kentucky Rules of Professional Conduct permit lawyers to accept payment from third parties if certain conditions are met. SCR 3.130(1.8) Conflict of Interest: Current Clients; Specific Rules provides:
(f) A lawyer shall not accept compensation for representing a client from one other than the client unless:
(1) the client gives informed consent;
(2) there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and
(3) information relating to representation of a client is protected as required by Rule 1.6.
When crowdfunding, lawyers must not let donors influence the purpose of the representation or legal strategies in any way. The Philadelphia Bar opinion nicely lays out a lawyer’s duty not to mislead donors:
Finally, the [lawyer] also should consider the duties owed to non-clients. The Rules refer in several places to the obligation of lawyers to be truthful in all respects to third parties. Rules 4.1* states that “[i]n the course of representing a client a lawyer shall not knowingly ... make a false statement of material fact or law to a third person. Rule 7.1* requires that lawyers not make false or misleading communications about the lawyer or the lawyer’s services, noting that a communication is false or misleading if it contains a material misrepresentation of fact or law or omits a fact necessary to make the statement considered as a whole not materially misleading.
*Note: Kentucky Rules of Professional Conduct, SCR 3.130 (4.1 and 7.10)
The Philadelphia Bar opinion explains well the enhanced sensitivity to client confidentiality that crowdfunding requires:
In order to seek funds on a crowdsourcing site, the lawyer will of course have to reveal certain information about the matter sufficient to interest the public in making contributions. That will require obtaining the informed consent of the client. The [lawyer] indicates he is aware of this requirement and provided the [lawyer] obtains the informed consent of the client by satisfying the requirement of having “communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct” (see Rule 1.0e)*, the Committee believes that is possible. Care should be taken, of course, to keep information revealed about the client and the matter to the minimum necessary to achieve the purpose.
The overarching problem in avoiding excessive fees when agreeing to accept crowdfunding payment is that it cannot be known how much money will be raised. The Philadelphia Bar opinion offers this analysis:
It cannot be known how much may be raised; and the course of the representation is by no means certain. The litigation could end quickly, either favorably or not; before the litigation’s end the [lawyer] may seek to withdraw or the client may wish to discharge him; or the [lawyer] may or may not succeed in seeking the payment of fees and expenses under an applicable fee shifting statute. Thus, just to give one example, if the matter ends quickly with relatively few hours of work expended, the retention of the entire amount raised on the crowdfunding site may produce an effective hourly rate that is extremely high. Without knowing how much was raised, it would therefore be difficult to determine whether or not the fee would be clearly excessive.
The Philadelphia Bar opinion raises this issue:
The scope of the [lawyer’s] obligation in return for the payment of the fee also is not clear to the Committee. Does the [lawyer] anticipate that if the client agrees to allow the lawyer to retain the total raised on the crowdfunding site that the [lawyer] is promising that he will handle the matter from its inception to its conclusion in return for whatever the crowdfund raised fee turns out to be? That is, in return for the fee, does the lawyer promise to remain in the case through its termination, regardless of what the fee is, or may he withdraw in the event certain contingencies arise but still keep his fee?
The Philadelphia Bar opinion suggests the following:
The D.C. Bar opinion advises that fee agreements also cover who owns excess crowdfunds raised and who is responsible for payment if the crowdfunds are not enough to cover agreed fees and expenses. It is strongly recommended that letters of engagement signed by the client be used in all crowdfunding representations.
Fees paid by crowdfunding are advanced fees and must be deposited in the lawyer’s client trust account [SCR 3.130, (1.15) Safekeeping Property] and only moved to the operating account after they are earned. The D.C. Bar opinion includes the following guidance for lawyers managing crowdfunds:
While we could locate no Kentucky authority on crowdfunded fees, KBA Ethics Opinion E-432 [5/20/2011] is a comprehensive opinion on third-party litigation financing. In that opinion the Committee advised:
Opinion E-432 uses the same reasoning and cites the same Rules of Professional Conduct that are cited in the crowdfunding ethics opinions in this article. For this reason, we believe that our risk management advice on crowdfunding is acceptable in Kentucky. Just to be sure, however, we recommend calling the KBA Ethics Hotline for confirmation of any crowdfunding program you want to use.