What is Litigation Crowdfunding?

September 2nd, 2020
5 minutes read

Not a long time ago, crowdfunding was a niche associated mostly with local charities or struggling rock bands. Its unprecedented rise in recent years, however, has led to the spread of “crowdfunding mania” across many, sometimes surprising, areas, from crypto lending through start-up financing and invoice trading to real estate crowdfunding and student lending.

Now, lawyers and claimants are also beginning to tap into the crowdfunding model to secure funds that would allow them to seek justice. After all, a legal case is just as much a project as rolling out a new product, playing a concert or organising a “world clean-up” campaign in your neighbourhood, isn’t it? If so, can crowdfunding help people reach justice?

How does litigation (crowd-) funding work?

In principle, litigation funding, also known as legal financing, happens when a third party provides financial resources to the claimant to enable them to litigate or arbitrate a claim. How does it work exactly? In a traditional model, an investor – usually a specialised legal financing company, provides a cash advance to the litigant to cover their legal expenses. If the case proceeds to trial and the litigant wins, the investor is paid back along with a share of the judgment or settlement agreed upon beforehand. If the case is lost, the investor gets nothing. A litigation funding advance is not a loan – the receiver of the money is only obliged to repay if they win, and the transactions are not reported to the credit authorities, thus not affecting the litigant’s credit rating.

As you can already guess, litigation crowdfunding works pretty much the same with the crucial difference that multiple individual investors (the crowd) take the place of a legal financing company. There is also much more variety in the crowdfunding version on the business. The traditional model is typically limited to a return-seeking investor and a litigant with strong financial resources and a case with sufficient merit to be worth the risk. Crowdfunding offers more options regarding the expected reward (see this article for a more in-depth analysis of crowdfunding models):

  • In investment-based models, the funder expects financial return – either a share in the claimant’s future gain (equity-based crowdfunding) or repayment of the contribution with interest (debt-based crowdfunding). In other words, the investor supports a legal case they expect to be successful and bring them profit.
  • In non-investment-based models, the funder expects only a non-monetary benefit (reward-based crowdfunding) or none at all (donation-based crowdfunding). This opens up a whole new area for litigation funding, where donors can support causes for reasons other than profit-seeking.

It also covers a broader array of case types:

  • Corporate funding refers to business disputes, which tend to be large-scale and complex and involve sophisticated parties (a typical subject of traditional litigation funding and investment-based litigation crowdfunding).
  • Consumer funding focuses on small personal claims, such as personal injury and divorce cases.
  • Community funding usually involves initiatives important for a particular group (e.g. neighbours, school community) and tends to be limited to non-investment crowdfunding.

Some claimants have used popular crowdfunding platforms to finance their legal proceedings – for example, Mr Barry Beavis took his fight against “unlawful parking charges” to the Supreme Court thanks to funds raised on Indiegogo. Dedicated platforms have recently emerged as well though, most notably LexShares in the US and AxiaFunder in the UK. They are both for-profit (investment-based) litigation crowdfunding platforms, which actively pick cases, from individual claimants as well as lawyers and law firms, which they believe have strong merits and a high likelihood of succeeding. CrowdJustice is a donation-based platform, where people can support claims that affect broader communities or have some deeper moral rationale. Some recent cases include a 12-year-old deaf boy seeking British sign language GCSE (a secondary education exam) and a group of neighbours protecting a green space from road link development. 

The ethics of crowdfunded justice

Defending green spaces by a local community may sound virtuous, but litigation funding is very much a frontier territory with a chequered past. For centuries, it was strictly forbidden under the English “champerty and maintenance” laws, designed to prevent powerful men from misusing the courts by financing civil disputes in which they had no legitimate interest but served them simply to harass or ruin their rivals.

By the 20th century though, an informal market for insurance and bankruptcy claims had developed and around the late 1990s and early 2000s, the rules regarding external financing were relaxed in many jurisdictions, starting in Britain and Australia. Champerty and maintenance laws are not dead – lawyers being paid by funders remains an ethical dilemma and courts can still invalidate a third-party funding contract if they deem it an abuse of the legal process. It’s just that many commentators have acknowledged that there is much more to gain than to fear from litigation funding. After all, legal case proceedings usually require abundant capital, which many people simply do not have. Litigation (crowd-) funding has, therefore, the potential power to equalize access to justice and allow disputes to be settled based on merits rather than the depth of (one side’s) pockets. 

Litigation as an investment 

From the funders’ perspective, investing in litigation can yield very handsome returns. Although individual litigation results are inherently unpredictable and bear a great risk (remember, if the case is unsuccessful, you lose everything), a well-diversified portfolio can prove very profitable. AxiaFunder, for example, estimates expected returns on its platform of 20 to 30 percent per annum. What can be even more attractive, investments in legal claims are not bound to economic fluctuations – that is, true to the maxim that lawyers make money in good and bad times alike, litigation funding can earn profit amid recessions and other economic shocks. 

Litigation crowdfunding is unlikely to go mainstream and create a multi-billion-dollar marketplace, just because of its inherent niche nature. But it can enhance access to justice and level the playing field and, in many cases, support causes we care about (be it saving a park or helping a disadvantaged kid pass his exams). For investors, putting some money in the litigation business might be a splendid idea to diversify and shockproof their portfolios.