30 Pages Posted: 25 Sep 2017 Last revised: 28 Sep 2017
Date Written: September 1, 2017
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. Sarna raised over $45,000 through a crowdfunding website to cover his liability.
The Article provides a law and economics analysis of this emerging global trend, which may revolutionize the civil process in the near future. It argues, first, 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). The Article contends that 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. Thus, it should be minimally regulated by securing disclosure of relevant information to potential investors.
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. Outcome costs are the amounts payable under the settlement or the judgment. The Article contends that non-investment-based crowdfunding of process costs should be subject to professional vetting. This will inhibit frivolous claims and defenses that waste scarce administrative resources and do not further the underlying goals of civil law. Non-investment-based crowdfunding of outcome costs should be prohibited, because it undermines at least one of the primary objectives of substantive law.
Keywords: crowdfunding, civil law, civil procedure, torts, law and economics, finance, litigation
JEL Classification: G20, K13, K22, K41
Suggested Citation: Suggested Citation
Perry, Ronen, Crowdfunding Civil Justice (September 1, 2017). Boston College Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3041129