The North Carolina General Assembly has passed a measure that would prohibit third-party litigation funding (TPLF) in the state. The vote wasn’t close, with HB 315 passing 112–0 in the House and 45–1 in the Senate. North Carolina Governor Josh Stein signed the bill on June 22.
Should the bill survive any potential legal challenges, it will be the first law in the nation to broadly ban most third‑party litigation investment, rather than merely regulating or requiring disclosure of TPLF arrangements.
The Battle Over Litigation Financing Shows No Signs of Slowing
Litigation funders have increasingly come under scrutiny as law firms use finance backers to fund expensive and complex litigation. Plaintiffs’ firms argue that TPLF is an essential tool to ensure access to justice. By involving another party, the firm reduces its own risk and secures sufficient funding to level the playing field with well-funded defense firms. On the other hand, critics argue that litigation funders create conflicts of interest, as the entity paying for the litigation may have a vested interest in the outcome, even beyond any return on investment it may realize if it wins. They also argue TPLF may make litigation more expensive and drawn out, and may revive champerty, which was long prohibited under common law doctrine.
There is also a debate over whether TPLF increases the number of frivolous lawsuits. Plaintiffs’ firms argue that backers have no incentive to pay for frivolous lawsuits, since they only get paid if the case succeeds, while defense firms argue that some funders may back litigation (in bad faith) regardless.
It’s a Hot Topic in State Legislatures
A growing number of legislatures have already tried to get a handle on TPLF arrangements, mostly by regulating them, rather than banning them outright.
In recent years, for example, Arizona, Colorado, Georgia, Kansas, Montana, Oklahoma, and Tennessee passed laws that do some mix of three things:
- Force parties to disclose funding arrangements
- Limit how much influence funders can have over litigation strategy and settlement decisions
- Restrict which foreign entities can bankroll cases.
In 2023, Montana enacted one of the first comprehensive TPLF laws with its Litigation Financing Transparency and Consumer Protection Act. Montana set up a detailed framework: funders must register, deals must be disclosed, funder recoveries are capped at 25%, and the law seeks to insulate funders from steering litigation. It also limits the rates funders can charge by tying them to Montana’s existing usury rules.
West Virginia, Indiana, and Louisiana followed a similar path in 2023–24. West Virginia extended consumer‑lending rules to cover TPLF and built in disclosure requirements. Indiana made funding agreements discoverable, limited the role of foreign “entities of concern,” and curbed funder influence. Louisiana went after foreign‑backed funding in particular, requiring reporting and disclosure, and barring funders from directing how cases are run.
‘Hold My Beer,’ Say North Carolina Lawmakers
HB 315 started life as the Gift Card Theft & Unlawful Business Entry Act. Over time, it evolved into the TPLF ban, which, according to funder-side critics, amounted to a bait-and-switch tactic.
With HB 315, North Carolina didn't just join the crowd of states tweaking litigation funding rules. This is an attempt to shut down most forms of TPLF altogether. Third parties wouldn’t be allowed to front a litigant’s costs in exchange for a piece of whatever the case brings in.
Fortunately for plaintiffs’ firms, there’s no attempt at limiting contingency‑fee arrangements. Also, there are carve-outs for legal‑aid groups and certain nonprofit organizations, liability insurers defending their insureds, and close family members.
Still, the change could be seismic for North Carolina attorneys, particularly considering the increase in TPLF in recent years.
How Will Plaintiffs’ Groups React?
The bill could face challenges from plaintiffs’ groups, who may argue that a complete ban unconstitutionally restricts access to the courts, especially for complex multidistrict litigation and other cases that are not feasibly funded on a contingency-fee basis.
Regardless, it’s clear that the battle over TPLF is not going anywhere anytime soon. Stay tuned.
