North Carolina has become the first US state to ban third-party litigation funding outright, drawing strong backing from the insurance industry and marking a sharp escalation in efforts to curb outside investment in civil lawsuits - a move being watched in markets such as Australia, where funders currently operate with comparatively little restriction.
Governor Josh Stein signed House Bill 315 into law this week, making it unlawful for outside parties to finance civil litigation in the state in exchange for a financial stake tied to a case's outcome. The measure authorizes the state attorney general to seek injunctions and civil penalties of up to $50,000 per violation, and allows injured parties to recover treble damages based on the value of an unlawful litigation investment.
The contrast with Australia is stark. Australia is recognised as having one of the world's largest litigation funding markets, particularly in class actions, a position anchored in the 2006 High Court decision in Campbell's Cash & Carry Pty Ltd v Fostif Pty Ltd, which confirmed litigation funding is not contrary to public policy nor an abuse of process. Attempts to bring funders under the managed investment scheme (MIS) regime were reversed after the Full Court of the Federal Court held in 2022, in LCM Funding Pty Ltd v Stanwell Corporation Limited, that the earlier Multiplex decision was "plainly wrong" and that a litigation funding scheme did not constitute a managed investment scheme. The federal government then amended the Corporations Regulations, effective December 2022, to exempt litigation funding schemes from the managed investment scheme provisions. The Australian Securities and Investments Commission (ASIC) has since gone the other way to North Carolina, extending its related relief instruments until January 31 2029 to provide certainty for funders, lawyers and members while the government considers its policy position.
The new law in North Carolina leaves common arrangements untouched. It carves out insurers' contractual obligations to defend or indemnify policyholders, traditional contingency-fee agreements, nonprofit and legal-aid funding, financial support from immediate family, and direct loans whose repayment is not contingent on the outcome of a case. Contracts that violate the statute are rendered unenforceable.
The legislation passed with overwhelming bipartisan support, clearing the state House 112-0 and the Senate 45-1.
The law goes further than the disclosure measures being debated elsewhere by imposing a near-total prohibition on litigation investment rather than merely requiring transparency. It arrives as lawmakers in states including California, Colorado and Illinois weigh restrictions on the role outside investors can play in legal disputes, according to Reuters.
The Insurance Information Institute (Triple-I) has welcomed the legislation, arguing that third-party litigation funding has become a major contributor to rising litigation costs and broader legal system abuse.
"Third-party litigation investment has become an increasingly significant driver of legal system abuse, injecting profit motives into disputes that should be resolved on their merits," said Mark Friedlander of the Triple-I. "North Carolina's historic action sends a clear message that the civil justice system is not an investment vehicle."
Friedlander added that the law "helps protect consumers, businesses and communities from the rising costs associated with excessive legal activity."
The ban is the most aggressive state action taken against third-party litigation funding to date, but it forms part of a wider wave of legislative activity as policymakers confront the rapid expansion of the multibillion-dollar industry.
Several have now enacted some form of restriction, ranging from light-touch disclosure to funder registration, recovery caps and bars on foreign-backed financing.
|
State |
Approach |
Key provisions |
Status |
|
Georgia |
Registration + disclosure |
Funder registration via NMLS; agreements of $25k or more discoverable; foreign-adversary certification; failure to register a felony; joint liability for funders |
Enacted 2025 |
|
Montana |
Registration + control limits |
Funder registration and disclosure; recovery capped at 25%; bars funder control; rates tied to state usury limits |
Enacted 2023 |
|
Indiana |
Disclosure + foreign limits |
Funding agreements discoverable; restricts foreign "entities of concern"; curbs funder influence |
Enacted 2024 |
|
Louisiana |
Disclosure + foreign focus |
Reporting and disclosure; targets foreign-backed funding; bars funders from directing cases |
Enacted 2024 |
|
Arizona, Colorado, Oklahoma, Tennessee |
Disclosure + control (varies) |
2025 laws mixing disclosure, funder-control limits, foreign-funding restrictions and joint liability; provisions differ by state |
Enacted 2025 |
|
Kansas |
Light-touch disclosure |
Disclose to the court and protect the information — the least restrictive of the 2025 cohort |
Enacted 2025 |
|
West Virginia |
Automatic disclosure |
Consumer-lending rules extended to funding; automatic disclosure |
Enacted 2023–24 |
|
Wisconsin |
Automatic disclosure |
Early adopter; automatic disclosure of funding agreements |
Enacted 2018 |
|
Florida |
Failed |
Would have barred funders from selecting lawyers and experts and capped recovery; died in the legislature in March 2026 |
Failed 2026 |
|
Missouri |
Pending |
Bill filed in late 2025 would bar foreign principals and impose fiduciary duties on funders |
Pending |
|
California, Illinois |
Considering |
Weighing restrictions on funder control over attorneys and clients |
Considering |
|
Pennsylvania |
Court-rule proposal |
Proposed civil-procedure amendment on funding disclosure under review |
Pending |
The pressure is also building beyond the legislatures. The Insurance Services Office has introduced an optional "Litigation Funding Mutual Disclosure" endorsement for 2026 commercial liability programs, a mutual-disclosure condition that, in practice, gives insurers a route to obtain funding details in coverage disputes.
Separately, the US Judicial Conference's Advisory Committee on Civil Rules met in October 2025 to weigh a federal disclosure rule and agreed to continue studying the question.
At the federal level, lawmakers have repeatedly pursued disclosure rather than prohibition. In February, Senator Chuck Grassley, joined by North Carolina's Thom Tillis and Senators John Kennedy and John Cornyn, reintroduced the Litigation Funding Transparency Act, which would require disclosure of third-party funding in federal class actions and multidistrict litigation and bar funders from steering strategy or settlement. The bill is backed by the US Chamber of Commerce but has yet to advance.
Supporters of the law, including the US Chamber of Commerce, argue that litigation finance lets investors profit from lawsuits while driving up legal costs and prolonging disputes.
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Litigation finance firms and many plaintiff attorneys counter that the practice expands access to justice, enabling individuals and businesses with legitimate claims to take on well-funded defendants. They have opposed broad restrictions, arguing that existing ethical rules and judicial oversight already provide adequate safeguards. Some access-to-justice advocates warn that a full ban could shut ordinary claimants out of complex, costly cases that are not viable on a contingency-fee basis alone.
North Carolina's move is likely to intensify the debate well beyond US borders. For Australian brokers, underwriters and risk managers, it sharpens a question regulators here have so far declined to answer with prohibition - whether the country's permissive, court-supervised model holds, or whether concern over funded class actions and their cost to insurers eventually pushes policymakers toward the disclosure rules, control limits or outright bans now spreading across the United States.
