RALEIGH, North Carolina — North Carolina has become the first U.S. state to enact a broad ban on third-party litigation funding after Governor Josh Stein signed House Bill 315, the Prohibit Litigation Investments Act, into law on Monday, according to the governor's office and legislative records. The measure prohibits outside investors from financing civil lawsuits in exchange for a financial interest tied to the outcome of the case, marking a significant change in the state's civil justice system.
The law makes it unlawful for a person or entity to engage in litigation investment or provide litigation funding to a party or that party's attorney in a civil proceeding. It authorizes the North Carolina attorney general to pursue enforcement actions against alleged violators and allows injured parties to seek damages under specified circumstances outlined in the legislation. The measure passed the Republican-controlled General Assembly with near-unanimous bipartisan support before reaching Stein's desk.
Third-party litigation funding has grown into a multibillion-dollar industry in the United States, with investment firms providing financing for plaintiffs or law firms in exchange for a share of any settlement or judgment. Supporters of the North Carolina law argue that such arrangements can give outside investors undue influence over litigation and reduce transparency in the judicial process.
The U.S. Chamber of Commerce welcomed the legislation. Stephen Waguespack, president of the organization's Institute for Legal Reform, said in a statement that the law protects the state's legal system "against shadowy investors who bankroll litigation for profit." Gary Salamido, president and chief executive of the NC Chamber, said North Carolina had become "the first state in the nation to ban third-party litigation investment."
Critics of broad restrictions on litigation finance have argued that the practice can help plaintiffs pursue complex or costly cases that might otherwise be beyond their financial means. Legal scholars and some advocacy groups have said disclosure requirements or other regulations, rather than an outright prohibition, would better balance transparency with access to the courts.
The legislation includes exemptions for traditional contingency-fee arrangements between attorneys and clients, insurers' contractual obligations to defend or indemnify parties, nonprofit litigation funding in certain circumstances, and financial assistance provided by immediate family members, according to the text of the law.
As of Friday, the law had taken effect following Stein's signature. The enactment comes as lawmakers in several other states, including California, Colorado and Illinois, continue to consider legislation regulating third-party litigation funding rather than prohibiting it outright, according to legal and legislative reports.
