A recent Law 360 article by Hilary Gerzhoy and Julienne Pasichow, “Avoiding The Ethical Pitfalls of Crowdfunded Legal Fees”, reports on the ethics of crowdfunding for legal fees.  This article was posted with permission.  The article reads:

Within two days of being charged with manslaughter in the death of Jordan Neely, Daniel Penny had crowdfunded over $1.5 million to cover his legal fees.  Penny was charged with killing Neely, a Michael Jackson impersonator, on a New York City subway after placing him a fatal chokehold.  The case was widely covered and highly politicized.

Democrats, including Rep. Alexandria Ocasio-Cortez, D-N.Y., and New York Gov. Kathy Hochul, called for charges against Penny and justice for Neely's family.  Republicans, including Florida Gov. Ron DeSantis, Rep. Marjorie Taylor Greene, R-Ga., and Rep. Matt Gaetz, R-Fla., voiced their support for Penny.

Crowdfunding legal services is a relatively new phenomenon.  It's most often used to fund litigation involving individuals — as opposed to corporate entities — that implicates human rights issues, the environment and judicial review.

In one widely publicized case, two Yemeni refugees with valid immigrant visas were intercepted at Dulles International Airport, handcuffed and sent out of the country — the result of former President Donald Trump's temporary seven-country travel ban, which had been signed just a few hours earlier while the brothers were en route.  The crowdfunding campaign raised $36,600 in its first week.

While crowdfunding legal services provides a way for many to access lawyers when representation would otherwise be unaffordable, it also comes with a bevy of ethics risks.  This article will examine the key ethical rules governing crowd-sourced legal funds and the steps lawyers can take to mitigate their risk.

The Daniel Penny Case

In May, the Manhattan District Attorney's office charged Penny, a 24-year-old U.S. Marines veteran, with second-degree manslaughter after he killed Neely on a New York City subway earlier that month.  For more than three minutes, Penny placed Neely in a fatal chokehold leading to his death.  Penny claimed self-defense, stating that Neely was threatening passengers on the train.  It was later learned that Neely had been suffering from a mental health crisis and was experiencing homelessness at the time he was killed.  Penny was released on $100,000 bond.  On June 28, he appeared in court in Manhattan to plead not guilty.

The law firm representing Penny — Raiser & Kenniff PC — arranged for a fundraiser on the Christian crowdfunding site GiveSendGo to cover Penny's legal fees.  As of Sept. 29, the fundraiser has collected nearly $3 million.  How can Penny's legal team use those crowd-sourced funds? What restrictions are imposed by the ethics rules?

This article will examine the critical steps to ensure compliance with the American Bar Association's Model Rules of Professional Conduct, which are largely adopted in most jurisdictions.

Confidentiality Runs to the Client, Not the Funders

Perhaps the most fundamental feature of the lawyer-client relationship is the protection of client confidences.  Model Rule of Professional Conduct 1.6 prohibits a lawyer from revealing "information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted [under certain enumerated circumstances]."

A lawyer must make reasonable efforts to prevent inadvertent or unauthorized access to the information, a standard that is highly fact-dependent and considers the sensitivity of the information and the extent to which additional safeguards would enhance security versus hinder the representation.  Lawyers who organize fundraisers, manage crowdfunded donations and apply them toward legal fees must ensure that they neither represent nor imply that they will provide information about the representation to donors in exchange for donations.

It is best to obtain informed consent for any information that will be disclosed to donors and to steer clear of "providing specific information about how the funds will be used to effectuate the legal strategy," as articulated by the D.C. Bar in a 2018 ethics opinion.  To avoid any ambiguity, lawyers should note in the narrative section of the fundraiser that they will not provide any information about the objectives of the representation, actions taken, specific uses of the funds or developments in the case.

When donors fund a lawyer's representation of a client through crowd-sourcing, they must do so with the understanding that they will receive no information about the representation.  We recommend including the proposed narrative language for the fundraiser in the engagement letter signed by the client, which should also describe the fundraising arrangement and the fact that the collected funds will be applied to legal fees and expenses as they are earned or incurred.

There may be instances in which a client wants a lawyer to provide case updates to donors or specific individuals.  To do so, the lawyer must obtain informed consent from the client.  This requires that the lawyer explain the risks of disclosure to the client and have the client approve of the exact information to be disclosed.

Most importantly, the client must understand that disclosing privileged and confidential information about the representation to third parties will destroy the attorney-client privilege and prevent the lawyer from later claiming privilege over the disclosed information.  The same warning should also be given to a client who is managing the fundraiser themselves and wishes to disclose case information or updates to donors.

Crowd-sourced Funds Cannot Interfere with a Lawyer's Professional Independence

Before accepting crowd-sourced funds as payment for legal services, a lawyer must obtain informed consent from the client.  This is true regardless of whether the lawyer is self-administering the funds as they are earned or whether the client is paying the lawyer's invoices using crowd-sourced funds.  Lawyers should consider including relevant language providing for this arrangement in their engagement letter with the client.  Under the Model Rules, even if such an arrangement is in place, a lawyer may not, under any circumstances, allow the person or persons paying the lawyer's fees to "direct or regulate the lawyer's professional judgment in rendering such legal services."

While donors' generosity often enables a client to pursue legal claims or defenses where it would otherwise be financially impossible, donors cannot control how the fundraised money is used within the representation.  Only the client determines the objectives of the representation and whether to follow the lawyer's recommended strategy.

Ensuring that the narrative statement on the fundraising website contains language informing donors that they will not be permitted to exert control or influence over the objectives of the representation or the methods by which they are carried out — in addition to not being entitled to case information — may prove helpful in warding off donors who believe that their dollars earn them a say in the representation.  There may be situations in which the donors' interests differ from those of the client — for example, where donors may wish to minimize the amount spent on the representation to get more for less or avoid taking steps in the representation that may be costly.

In circumstances where the lawyer is aware of divergent interests between the donors and the client, the lawyer cannot accept the representation or continue the crowdfunded payment arrangement unless the lawyer is certain that they can exercise independent judgment and will not allow the donors to interfere with their professional decision making.

Be Circumspect About Trial Publicity

Crowdfunded cases are often those that are highly publicized, political and involve public figures. They tend to come with an increased public desire for publicity and insider information.  Many of these cases go to trial, which further extends the period in which the public remains interested and heightens public intrigue.

Model Rule 3.6 governs trial publicity and warns lawyers against making statements that are likely to prejudice the proceedings in any way.  This is all the more true in highly publicized cases, where a lawyer's statements about a case are likely to be widely disseminated.  While media attention on a case does not change lawyers' confidentiality obligations under Model Rule 1.6, Model Rule 3.6 provides that lawyers can provide concrete facts about the case if they are unlikely to cause prejudice.

Lawyers can reveal basic information about the claim at issue, people involved, public records, the existence of a pending investigation, the scheduling or results of litigation, and requests for help in obtaining evidence, and they can offer warnings of danger to an individual or to the public.  In criminal cases, lawyers can provide additional information to the public, including, among other things, information about the residence and occupation of the accused, and the location, time and place of the arrest.

Where a client has suffered prejudice due to recent bad publicity, the lawyer can make statements to mitigate that prejudice.  A lawyer should not speak publicly about a case, however, without the consent of their client after the client weighs the risks and benefits of such disclosures.

Treat Cowdfunded Legal Fees as Advanced Fees, Safeguarding Them in a Trust Account

The two most prominent ethics opinions to address crowdfunded legal fees, a 2015 Philadelphia Bar opinion and a 2018 D.C. Bar opinion, emphasize the importance of safeguarding crowdfunded fees in a trust account and not moving them over to an operating account until they are earned.

As the D.C. Bar opinion notes, because crowdfunding can "trigger areas of confusion that may not be present in a traditional client-self pay situation," lawyers should establish, in a written fee agreement, the rate of their fees, the scope of the representation and specific plans for crowdfunded money, such as the ownership of excess crowdfunds and responsibility for payment if the crowdfunds do not fully cover legal fees and expenses.

Critically, funds collected by a lawyer on a client's behalf through crowdfunding should be treated as advanced fees and placed in a trust account for the client.  In the crowdfunded legal fees context, lawyers need to be especially cognizant of their duty not to charge excessive fees under Rule 1.5.  For example, if a matter resolves quickly, a lawyer would be hard-pressed to claim all of the proceeds of the fundraiser as fees.

Conclusion

The crowdfunding of legal fees represents an exciting opportunity to provide access to legal services to those for whom it might be otherwise unattainable.  With a principled approach — paying special attention to your obligations to maintain confidentiality and your professional independence, and safeguarding funds in a trust account — you can protect yourself from ethics mishaps while serving a wider array of clients.

Hilary Gerzhoy is a partner and vice chair of the legal ethics and malpractice group at HWG LLP.  Julienne Pasichow is an associate at the firm.

A recent Law 360 story by Caleb Symons, “Pillsbury Blasted for ‘Unreasonable’ Atty Fees in Cinema Row,” reports that Chinese cinema magnate Hui Qin has accused top attorneys at Pillsbury Winthrop Shaw Pittman LLP of spending too much time handling routine court filings, telling a federal judge that the firm "egregiously inflated" a fee estimate in litigation filed by several of his investors.  The lawsuit is proving contentious well after a Manhattan federal judge last year ordered Qin to satisfy a $457 million award that three investors in his movie theater company, Chengdu Run Yun Culture Communication Co. Ltd., obtained following Chengdu's failed IPO.

With the investors — all entities of Chinese asset manager Zhongzhi Group Enterprises — now seeking an additional $161,000 in attorney fees, Qin lashed out at their counsel, Pillsbury, for a pattern of overbilling that he called "breathtaking in scope."  Pillsbury identified nine people who collectively spent 557 hours preparing a sanctions motion for the investors, according to Qin, who noted that the firm didn't even include paralegals or other staff in that list. Even though the investors are seeking compensation for only a portion of that work — 229 hours, performed by two partners and one counsel — the movie theater magnate said there is still no "reasonable justification" for such a commitment.

Time entries that the petitioners have submitted, Qin argued that Pillsbury's top attorneys "hogged the work, failing to delegate tasks to junior lawyers."  The billing fight comes amid an enforcement case the Chengdu investors — Huzhou Chuangtai Rongyuan Investment Management Partnership, Huzhou Huihengying Equity Investment Partnership and Huzhou Huirongsheng Equity Investment Partnership — filed in late 2021.

After a Manhattan federal judge confirmed their $457 million arbitral award last September, the group accused Qin of ducking their attempts to identify his assets.  The cinema tycoon, who Forbes once estimated was worth $1.8 billion, has mainly turned over records that are already in the public domain, but withheld bank documents and details on real estate transactions, they claimed in February.

U.S. District Judge Katherine Polk Failla again sided with the investors this spring, telling Qin to submit to deposition and ordering him to reimburse the petitioners for legal fees in connection with their sanctions request.  Those costs include $161,374.50 in attorney fees, according to the investors, who said that figure represents less than 50% of their true expenses.  The group, in a lightly redacted May 9 court filing, said it had "voluntarily chosen not to seek fees from other attorneys who have worked on this matter."

Even accounting for those omissions, though, Qin responded by lambasting Pillsbury for billing practices that he called "grossly unreasonable on their face."  The sanctions motion shouldn't have taken hundreds of hours to prepare, he said, especially for top lawyers at the firm.  Such overbilling, Qin said, "is even more egregious given the garden-variety discovery issues in the motion."

"Petitioners cannot make their bloated billing seem reasonable by limiting their fee application to the work done by three of their most senior lawyers," he argued.  "Having two partners and a counsel bill nearly 230 hours on a discovery motion is excessive by any standard."  Pillsbury's invoices are also "replete" with instances of block billing, in which an attorney lumps together multiple tasks without specifying how much time was spent completing each item, according to Qin.

Approximately 220 hours of the firm's sanctions-related work were block billed, he said.  Those entries, Qin added, "make it impossible to assess the reasonableness of the work performed and whether it was performed by an attorney at an appropriate level of seniority."

The cinema magnate said his investors also redacted most of the Pillsbury lawyers' time entries, leaving "massive gaps in the record."  That information, Qin said, is important to determine if counsel spent a reasonable amount of time on the sanctions question.  "Thus, for example, it is impossible to determine whether work described in the unredacted entries is entirely duplicative of work performed in the redacted time entries," he said.

Pillsbury partner Geoffrey Sant, co-leader of the firm's China practice, rebuffed the allegations of overbilling in a statement to Law360.  The investors didn't present "garden-variety" issues as Qin alleged, he said, also accusing the cinema tycoon's lawyers of improperly quoting information that had been filed under seal.  Qin's new filing, Sant said, "is entirely without merit and merely [his] most recent attempt to evade responsibility for his actions."

A recent Law 360 story by Jack Karp, “Quinn Emanuel, Insurers Spar in $185M Fee Fight,” reports that Quinn Emanuel Urquhart & Sullivan LLP balked at what it called insurers' "incendiary" request for an accounting and discovery related to $185 million in attorney fees stemming from a $3.7 billion award secured in litigation over the Affordable Care Act.  The case law Kaiser Foundation Health Plan Inc. and UnitedHealthcare Insurance Co. cited to justify their requests for an accounting related to the $185 million and discovery regarding judgment preservation insurance taken out by the firm is irrelevant, Quinn Emanuel told the U.S. Court of Federal Claims in a join status report concerning the briefing schedule for its renewed fee application.

The insurers' request "once again relies on aspersions rather than any on-point precedent," the firm said.  "Throwing around the idea of ethical violations having nothing to do with class counsel's representation of the class against the government may be incendiary, but it is not a basis to delay resolution of the renewed fee application."  Quinn Emanuel asked the court to consider just its renewed fee application.  If the court allows the objectors to file any motions, the briefs on those motions should be filed simultaneously "in order to prevent undue delay in resolving this seven-year-old case," the firm said.

"Given the age of this case, class counsel respectfully submits there is no reason to drag this process out unnecessarily, and class counsel still does not understand the antagonism the United/Kaiser objectors are bringing to a process involving fees for claims that class counsel originated, pursued to a 100% result for United and Kaiser, and has continued to pursue doggedly for all remaining class members through the present," it said.  The two insurers were equally heated in their own portion of the joint status report.

Quinn Emanuel's proposal that the court order simultaneous briefing on the objectors' motion for discovery and accounting and Quinn Emanuel's motion for fees is inappropriate and would deprive the insurers of the information they need to file their opposition to the fees, they said in response.  "In effect, by insisting on simultaneous briefing, Quinn Emanuel seeks to moot the objectors' motion for discovery," they said.  The class has a right and the court has a duty to know if the accounting they request would demonstrate any ethical violations, the insurers added.

"Quinn Emanuel calls this argument 'incendiary' but does not deny that it is refusing to provide an accounting contrary to its obligations under Rules of Professional Conduct," they said.  In January, the Federal Circuit wiped out the $185 million in attorney fees awarded to Quinn Emanuel by the federal claims court following heated oral arguments in which an attorney for the firm was scolded for being "aggressive."

Quinn Emanuel and a group of health care plan insurers it represents had urged the Federal Circuit to affirm the fee award, insisting the firm had used a novel claim and achieved a 100% recovery for the class in litigation over so-called risk corridor payments under the ACA.  But Kaiser, UnitedHealthcare and others argued that class counsel was entitled to just $8.8 million after a lodestar cross-check.

Quinn Emanuel had originally promised in a supplemental class notice to limit its fee request based on the hours it worked on the litigation — the lodestar cross-check — and said its fee could be "substantially less than 5%" of the recovery, according to the Federal Circuit's January ruling.  But a Court of Federal Claims judge granted Quinn Emanuel's request for $185 million, or 5% of the total $3.7 billion settlement, finding that a lodestar cross-check was unnecessary.  That conclusion "was legal error," the Federal Circuit ruled.

"We are proud of our work in this case and of the unprecedented $3.7 billion award we obtained for qualified health plan providers, including Shepherd Mullin's clients," Quinn Emanuel partner Adam Wolfson told Law360 in a statement.  "When Quinn Emanuel won this case, we made certain the class administrator paid out 95% of the risk corridors claims to the plaintiffs as soon as possible.  We believe that the fee agreement the class members agreed to when we began our work on the case should stand," he said.  "Should the court come to a different conclusion, we will pay back any ordered amounts to the class administrator, who will then distribute those funds to the entire class."

A recent article by William F. Cobb, “Do We Really Need An Attorney Fee Expert?” discusses the need to hire an attorney fee expert.  This article was posted with permission.  The article reads:

In 2002, the Fourth District Court of Appeal issued a decision in Island Hoppers Ltd. v. Keith 820 So. 2d 967 (Fla. 4^th DCA 2002) discussing whether or not expert testimony should be required to support an award of attorney’s fees to a prevailing party.  The decision questioned the necessity and wisdom of the longstanding judicially-created requirement.

Justice Polen, who authored the opinion in Island Hoppers, recognized that an award of attorneys’ fees must be supported by competent substantial evidence and Florida courts have required testimony by the attorney performing the services, together with testimony by an expert fees witness as to the time and value of those services.  The expert in that case spent a scant three hours in preparation of his opinion in this wrongful death case and is accused of lacking a sufficient factual predicate to form an opinion.  Although Justice Polen and the court allowed the testimony, claiming the testimony went to the weight of the evidence and not its admissibility, the opinion questions whether the longstanding rule requiring the corroborative testimony of an expert fees witness is always the best or most judicious practice. 

The opinion recognizes that expert witnesses are presented to assist with guidance to the trier of fact and fails to see what “guidance” if any a fees expert provides to judges who see various levels of skill and experience in the courtroom on a regular basis.  The opinion does recognize the expert may provide some assistance to the court in terms of a multiplier determination in the market, but distinguished the more fundamental issues of determining appropriate hours expended and rates charged and states the trial judge has greater insight and understanding regarding what is reasonable.   The Island Hoppers decision prompted a Florida Bar Journal article, authored by Robert J. Hauser, Raymond E. Kramer III and Patricia A. Leonard, of Beasley & Hauser, P.A., in January 2003 regarding the same topic, (Vol. 77, No. 1, page 38) essentially agreeing the requirement should be revisited and perhaps eliminated.  In virtually every case decided by the Florida Supreme Court, both before and subsequent to the Island Hoppers decision, the Court has found, or at least commented upon, the requirement for an expert to testify regarding the reasonableness of the time and amount of attorney’s fees being sought, together with a multiplier determination in the relevant market area, especially where there was a fee-shifting provision involved. 

In Roshkind v. Machiela, decided in 2010, the Fourth District Court of appeal again addressed the long-standing requirement of independent expert witness testimony to support a claim for attorney’s fees.  The Court recognized generally “where a party seeks to have the opposing party in a lawsuit pay for attorney’s fees incurred . . . independent expert testimony is required” and “case law throughout this state has adhered to the requirement of an independent expert witness to establish the reasonableness of fees, regardless of whether a first or third party is responsible for payment.”  Although the opinion recognizes Island Hoppers and the previously questioned judicially-created requirement of independent expert testimony to establish the reasonableness of attorney’s fees, it ruled the judicially-created requirement “remains etched in our case law.”  The Fourth District certified a question to the Florida Supreme Court regarding whether or not an expert witness is required to testify to establish attorney’s fees, seeking a final determination of the issue.  The Florida Supreme Court initially accepted jurisdiction but later issued an opinion “upon further consideration, we have determined to deny review and discharge jurisdiction” thereby denying a review and ruling on the issue.

In 2007, In re Amendments to Florida Rules of Civil Procedure, The Florida Bar Civil Procedure Rules Committee recommended adding Rule 1.526 to The Florida Rules of Civil Procedure.  The proposed rule was entitled “Expert Opinion Testimony on Costs and Attorneys’ Fees” and included “[e]xpert opinion is not required to support or oppose a claim or an award of costs, attorneys’ fees, or both, unless by prior order of the court.”  Essentially, the proposed rule would leave it to the trial judge to determine whether or not he or she would require “guidance” in the form of an expert’s opinion regarding the determination of attorneys’ fees.  In rejecting the proposed rule, the Florida Supreme Court opined “that the issue of whether expert opinion testimony is required in this context is not one that is appropriately addressed in a rule of procedure” and declined to adopt the proposed rule.

From a review of the foregoing, although at least one District Court of Appeal has questioned the judicially-created requirement for and independent attorneys’ fee expert to testify in a fee determination hearing, it is clear the Florida Supreme Court consistently has supported and recognized the longstanding requirement and has further refused to adopt a rule of procedure that would allow the trial court to determine the need for expert testimony.  In order to support an award of attorney’s fees, the attorney for the party seeking the fees, whether first or third party obligation for payment is present, is required to retain the services of an expert to offer testimony regarding the reasonableness of the hours expended and amount being sought in recovery in order to prevail.

William F. Cobb is a Partner at Cobb Gonzalez in Jacksonville, FL.

A recent Law 360 story by Emily Sides, “Ga. Judge Finds Atty Fees Must Be Public After $200M Verdict” reports that a Georgia state judge has rejected arguments that a Florida couple could keep their attorney fee agreement secret as he ruled that the deal was a matter of public interest as part of their efforts to add millions of dollars in legal fees to the $200 million verdict over their son's boating death.  Stone Mountain Judicial Circuit Judge B. Chan Caudell of Rabun County's Superior Court ruled that Stephen and Margaret Batchelder must file the agreement in connection with their motion requesting to amend the judgment to add almost $8 million in pre-judgment interest and attorney fees ranging from $31 million to $62 million.

The jury found in August that Malibu was responsible for $140 million of the total verdict, including $20 million in compensatory damages and $120 million in punitive damages.  Judge Caudell rejected the couple's argument that their fee agreement should be filed with the court under seal because it includes "details of the attorney-client relationship."

Earlier in February, Tennessee company Malibu Boats LLC, which made the boat at issue in the case, opposed the Batchelders' attempt to keep the attorney fee arrangement secret.  In a Feb. 9 email obtained by Law360 Pulse, Laurie Webb Daniel — an attorney for Malibu Boats — said sealing the fee agreement would be "particularly inappropriate where a party is relying on the document to claim more than $50 million in fees."  "Indeed, [the Batchelders] have asserted that their fee agreement with counsel is customary, which makes this motion quite odd," Daniel said. "There simply is no justifiable reason to seal this document."

Malibu Boats said the plaintiffs were not entitled to pre-judgment interest or attorney fees, calling the request exorbitant "on top of an already enormous verdict," while noting that their calculations include time spent working on dismissed claims and are based on a "discredited 'value added' methodology."

Representing the Batchelders, Donald R. Fountain — a partner at Clark Fountain La Vista Prather & Littky-Rubin — told Law360 Pulse that they accepted the judge's decision, and although they would have preferred a different ruling, they don't plan to appeal it.  Fountain said the fee agreement is privileged information that could be submitted under seal if the case was in Florida.  The Batchelders argued Feb. 10 that Malibu Boats should be responsible for prejudgment interest and attorney fees because the company unreasonably objected to a pretrial settlement offer of $16.9 million despite having an insurance policy that covered up to $26 million, Fountain said.

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