Lawsuit as an investment: crowdfunding litigation
In the past few years, a new phenomenon has been observed in Russia - crowdfunding.
Crowdfunding is a mechanism for attracting funding from the masses in order to implement a product, help the needy, hold events, support business, etc. In our country, this tool mainly serves to raise money for various creative projects, while the share of entrepreneurial projects on crowdfunding platforms is still quite small. Russian crowdfunding is only about three years old, so obviously, entrepreneurs need time to evaluate this tool.
Meanwhile, in the legal circles of our Western colleagues, a new line of litigation is being developed - the crowdfunding of lawsuits. The essence is simple: investors choose promising claims, finance them (pay lawyers, etc.), and then divide the compensation awarded to the plaintiff.
A little about the history of funding lawsuits in the United States.
Perry Walton is one of the names associated with the start of funding lawsuits in the United States. In the late 1990s, Walton lost his company, which was engaged in issuing fast cash loans, in connection with the criminal charges against him. According to Walton, he was forced to admit his guilt, since he could not pay for the services of a lawyer. Then he got excited about the idea of providing money to people who were to be tried.
When Walton's housekeeper was facing a lawsuit in a car accident case, Walton lent her $ 1100 in exchange for receiving some of the compensation from her success in the case. So, after almost two years, he tripled that amount.
Then he began to regularly invest in litigation, while conducting seminars, selling his idea for huge money. But when a sexual harassment lawsuit was filed against the owner of the NBA basketball team, Walton was confident of success and invested a large amount. But the case was lost. The conditions under which Walton provided the client with funds did not provide for a refund in case of loss. Moreover, the plaintiff woman filed a lawsuit for improper interference in the agreement between the lawyer and the client, in which she won $ 1.6 million.
P.S. Previously, the American justice system prohibited third-party investment in legal proceedings to avoid conflicts of interest, unlike Australia and the United Kingdom, where there were no such restrictions and where the practice of financing claims has existed for about 20 years.
In general, Walton currently runs a small restaurant in Las Vegas.
Later, the US Bar Association decided to take an example from Anglo-Saxon colleagues. However, contradictions in this area have not been finally resolved.
So, the American Bar Association has released a report on possible problems related to external financing. First of all, problems are ethical.
So, if it is not enough to inform the investor about the case, financing may be refused. If, on the contrary, to disclose all the nuances, there is a risk of losing the trust of the client or disclosing strategies that would be better kept secret.
Lawyer's confidentiality is inviolable, but the company-investor wants to be able to assess the likelihood of success in the case, get access to the case materials, and monitor the progress of the process so that the decision to invest is beneficial. A client who does not have enough money may find himself in a situation in which he has no choice but to apply for financial support from a third party, so it can hardly be considered a waiver of the right to confidentiality as voluntary.
The professional independence of lawyers can be questioned, as they make a deal with a third party. So, the "settlement agreement" can sometimes be beneficial to the plaintiff, but this will be a lost profit for the investor. The investor pays the lawyer, which means there is a danger that the interests of the lawyer and the claimant will no longer coincide.
The bottom line is this: it is not considered unethical to assist clients in obtaining third-party funding for a lawsuit. Bar associations leave the question of legality to the discretion of the courts. But they note that the problem exists, at least potentially.
The investing company will always strive to get the maximum profit. After all, profitability can be huge - tens, in some cases, hundreds of percent. Raising money from outside can lead to an increase in abuse.
Investors themselves may be the initiators of the trial and fully control it, may increase the number of unfounded claims. Then we are talking about “champtly” (illegal financing of another's process), which we have already mentioned in our other material (http://vitvet.com/blog/svechnikova/gonorar_uspeha/).
All of these shortcomings lead critics of the loan system to litigation, which require that such practices be banned.
Online Crowdfunding Platform
So, the lawsuit financing service in the USA has been around for several years. However, if earlier this market was available only to corporate partners-investors, then not so long ago a new platform LexShares appeared, which changed this state of affairs.
There is a crowdfunding legal protection platform as follows.
Plaintiffs who require financial support for commercial claims may contact the company, which then assesses the materials of the case and the chances of success. If the case passes the necessary verification and confirms the validity of the claim, LexShares lays out information about the case on the website so that accredited investors can decide on possible financing. If the plaintiff loses the case, the investor loses his capital, since the financing of lawsuits is most often built on the principle of no return.
Thus, LexShares receives a percentage of financing in exchange for providing financing, and investors receive a share in compensation: that is, shares are sold in litigation (of the five cases currently posted on the LexShares website, 4 received full funding).
Online crowdfunding, as well as other innovations in the field of alternative financing of lawsuits, may be the key to success in a lawsuit, at least in the USA, where civil procedure is an extremely expensive procedure. Although only over time it will become clear what will this intervention lead to.
Nevertheless, Russia, perhaps, is not yet ready for the crowdfunding of litigation: we have enough of our problems =).
Although I think that our law firm Vetrov and Partners is ready to try various options for such crowdfunding.
To prepare the material, we used the following sources. As always, we recommend reading them:
http://abovethelaw.com/2014/12/crowdfunding-the-future-of-public-interest-funding/
https://lawyerist.com/84724/crowdfunding-litigation-filling-access-justice-gap-ethical-pitfall/
Natalia Svechnikova
