Crowdfunding—the aggregation of numerous but modest individual contributions through specialized online platforms—is a relatively new finance method. In the last few years, it has started its incursion into the realm of civil litigation funding. Three unrelated events, which took place in different jurisdictions in 2017, demonstrate this evolving trend and its potential impact. In the United States, the Southern Poverty Law Center included the political activist Maajid Nawaz on a list of ‘anti-Muslim extremists’. Nawaz launched an independent campaign for crowdfunding a defamation action against the organization. In the United Kingdom, a wildlife protection organization brought a defamation action against Andy Wightman, a Member of the Scottish Parliament, over his blog posts about the plaintiff’s practices. Wightman raised more than £60,000 through a British crowdfunding platform to fight this lawsuit. In Israel, the acclaimed journalist Igal Sarna was found liable in defamation for a Facebook post scorning Israeli Prime Minister Benjamin Netanyahu and his wife. Sarna raised over $45,000 through a crowdfunding website to cover his liability.
My new article, forthcoming in the Boston College Law Review, is the first to provide a law and economics perspective on this emerging global trend, which may revolutionize the civil process in the near future. The article begins with a brief historical overview. It explains the need that litigation funding models were developed to meet. Specifically, the risk of failure and the need to bear significant costs during a dispute resolution process might discourage meritorious claims or defenses. The article then shows how two contemporary models in the world of finance—third-party litigation funding on the one hand and crowdfunding on the other—emerged, gathered pace, and very recently combined to form an innovative and promising paradigm: civil litigation crowdfunding. It also considers potential legal obstacles to these developments, primarily the common law doctrines of champerty, maintenance, and usury.
On the normative level the article argues that the distinction between investment-based and non-investment-based crowdfunding models is crucial. In non-investment-based models, contributors expect only a non-monetary benefit (reward-based crowdfunding) or none at all (donation-based crowdfunding). In investment-based models, contributors expect financial return—a share in the fundraiser’s future gain (equity-crowdfunding) or repayment of the contribution with interest (debt-crowdfunding). Investment-based litigation crowdfunding is generally a welcome phenomenon, because it enables parties to pursue meritorious claims and defenses without generating a significant risk of frivolous litigation. Indeed, the cohort of contributors is large, diverse, and case-specific, and each has a minor stake in the outcome. Consequently, their ability and willingness to inspect claims and defenses prior to investment are limited. However, they are still profit-seeking players who prefer investment opportunities with the highest possible expected value. In addition, crowdfunding platforms have the incentives to assume the screening functions that are carried out by the funder in ordinary third-party litigation funding models. They have an incentive to list only sufficiently strong claims, because failing to do so will result in unsuccessful investments, deter investors, and reduce revenue. They also have the capacity, as aggregators of considerable capital, to conduct due diligence. Thus, investment-based litigation crowdfunding should be minimally regulated by securing disclosure of relevant information to potential investors.
In contrast, non-investment-based litigation crowdfunding should be more constrained. The analysis entails a second fundamental distinction between process costs and outcome costs. Process costs are any outlays incurred by either party in relation to the dispute resolution process and prior to its conclusion. These may include court charges, attorneys’ fees, witnesses’ and experts’ expenditures and remuneration, etc. In cases of incapacitating injury, process costs may also include the claimant’s living expenses throughout the process. The article contends that non-investment-based crowdfunding of process costs should be subject to professional vetting. In non-investment-based models, as opposed to third-party litigation funding and investment-based crowdfunding, no party has a sufficiently strong incentive to establish and implement reasonable screening processes. Contributors who pledge relatively modest amounts and do not pursue financial gain are not particularly concerned about the expected value of the claim (or the defense). Furthermore, the crowdfunding platform has only a meager incentive to vet applications, because it makes a profit whenever a funding goal is reached, irrespective of the case outcome. It does not need to credibly demonstrate its willingness and capacity to filter out weak claims or defenses in order to attract future investments. Frivolous claims and defenses waste scarce administrative resources and do not further the underlying goals of civil law. To overcome this problem the law must require professional vetting of claims and defenses. Outcome costs are the amounts payable under the settlement or the judgment. The article contends that non-investment-based crowdfunding of outcome costs should be prohibited, because unconditionally relieving the defendant of the burden of liability undermines at least one of the primary goals of civil liability: efficient deterrence.
The article focuses on direct litigation crowdfunding, whereby the crowdfunding platform serves as the sole intermediary between a party to a legal dispute and those offering financial support. Yet civil litigation crowdfunding is a nascent phenomenon, likely to develop in additional directions. In particular, market forces may push for indirect litigation crowdfunding. Litigation funding companies and law firms may seek equity- or debt-crowdfunding, and non-profit legal advocacy organizations may seek donation-based crowdfunding. These and other developments will surely require modification and extension of the basic theoretical framework. The article thus paves the way for further research on emerging topics at the intersection of technology, law, and economics.
Ronen Perry is Professor of Tort Law and Director of the Aptowitzer Center for Risk, Liability, and Insurance at the University of Haifa Faculty of Law.