North Carolina's Historic Ban on Third-Party Litigation Funding: A Major Shift
North Carolina has enacted legislation prohibiting third-party litigation funding, becoming the first state in the U.S. to implement such a ban. This law, signed by Governor Josh Stein through House Bill 315, prevents external entities from financing civil legal actions in return for a financial interest in the outcomes. Significant support came from the insurance sector, which seeks to curtail the involvement of third-party investors in lawsuits.
The new law empowers the state attorney general to impose injunctions and civil penalties up to $50,000 per infringement. It allows affected parties to claim treble damages based on the value of the unlawful investment. Standard legal funding practices remain unharmed, including insurers’ contractual duties to defend or indemnify policyholders, traditional contingency fee structures, funding from nonprofits and legal aid, and supportive loans from family.
The sweeping ban received near-unanimous approval in both chambers of the state legislature, signaling strong bipartisan endorsement. The legislation is notable for going beyond the disclosure requirements being considered in other states, aiming for a comprehensive prohibition rather than mere transparency mandates. As reported by Reuters, this development comes amid deliberations in states like California, Colorado, and Illinois about restricting external financial influence in legal proceedings.
Industry Response
Industry advocate, the Insurance Information Institute, praised North Carolina's decisive action. Mark Friedlander from the Institute remarked that third-party litigation funding is a driving force behind escalating legal costs, adding, “North Carolina’s measure delivers a strong message that the civil justice system shouldn't serve as an investment market.” He further commented that this law is intended to shield consumers and businesses from the financial strain induced by heightened legal activity.
The ban represents the most aggressive stance against third-party litigation financing yet, amidst a broader legislative response to the rapid growth of the multi-billion-dollar industry. Several states have introduced varying degrees of regulation, ranging from mandatory disclosure to funder registration and restrictions on foreign investments. For instance, legislation across Georgia, Montana, Indiana, and Louisiana has established specific rules involving registration, disclosure, and foreign-funding controls.
Federal Implications
Insurance carriers and other stakeholders are not only pushing for state-level measures but federal ones as well. The Insurance Services Office is developing a commercial liability endorsement for 2026 that necessitates mutual disclosure of funding agreements. Concurrently, federal discussions around a potential disclosure rule are ongoing, as noted during a recent meeting of the US Judicial Conference's Advisory Committee on Civil Rules.
While the federal legislative environment continues to focus on transparency rather than outright bans, the reintroduced Litigation Funding Transparency Act spearheaded by Senator Chuck Grassley, along with a cohort of bipartisan senators, seeks to mandate disclosure requirements in federal class actions and multidistrict litigation. This proposal is endorsed by the U.S. Chamber of Commerce but has yet to make significant progress through Congress.
Proponents of litigation funding argue that it serves the broader goal of enhancing access to justice, supporting claimants in pursuing valid legal actions against financially robust defendants. They contend that ethical and judicial oversight frameworks are sufficient to manage these investments effectively. Nonetheless, North Carolina’s pioneering move is poised to influence ongoing discussions at both the state and national levels, challenging other jurisdictions to address the debate over financial influence in the legal process.