NC bans third-party litigation funding; NY limits fees and mandates disclosures
North Carolina bans third-party litigation funding; New York caps funder fees at 25% with new disclosure rules.
Why it matters: Legal professionals must adapt as states introduce differing regulations affecting litigation financing and client cost transparency. These changes impact law firm funding strategies and client advisories amid rising scrutiny.
- North Carolina’s Prohibit Litigation Investments Act bans third-party litigation financing effective June 22, 2026.
- New York’s Consumer Litigation Funding Act caps funder recoveries at 25%, mandates contract clarity, disclosures, and a 10-day rescission period.
- Third-party litigation funding investment reached $15.2 billion in 2023, spurring regulatory actions across multiple states.
- Federal authorities have not enacted specific oversight, placing responsibility on individual states to regulate this growing industry.
States are intensifying regulation of third-party litigation financing, a sector that attracted $15.2 billion in investments in 2023. North Carolina became the first state to fully ban this practice when its Prohibit Litigation Investments Act takes effect on June 22, 2026. The Act defines litigation investment as funds given to cover costs of civil cases in exchange for a contingent share of the recovery and prohibits such agreements.
In contrast, New York’s approach through the Consumer Litigation Funding Act, enacted in December 2025, does not ban funding but imposes a 25% cap on funder recoveries. It also requires contracts to include clear, standardized terms and disclosures, and grants consumers a 10-day right of rescission to protect from excessive costs.
Legal professionals should note that 'third-party litigation financing' means funds provided by a non-party to cover litigation expenses in exchange for repayment from the lawsuit's proceeds, distinct from consumer legal funding which often involves cash advances for individuals without repayment contingencies. This distinction is important as regulatory frameworks typically focus on third-party funders.
The idea of a 'tort tax'—claims that third-party financing inevitably drives up legal costs—remains debated. Analysis by the LegalClarity Team highlights regulatory challenges facing the multibillion-dollar industry but notes varying impacts on litigation economics.
At the federal level, the Government Accountability Office reported no specific regulations govern third-party litigation financing nationally, leaving states as primary regulators. As of 2025, eight states passed new laws on litigation finance; 21 additional states considered legislation. This patchwork regulatory environment requires legal teams to stay vigilant to state-specific compliance and advising on litigation funding options amid evolving client expectations.
By the numbers:
- $15.2 billion — total third-party litigation funding invested in 2023
- 25% — New York's cap on litigation funders' recoveries under new law
- June 22, 2026 — effective date for North Carolina's ban on third-party litigation financing
Yes, but: While North Carolina bans third-party litigation financing entirely, New York’s regulatory model permits it with safeguards, reflecting differing state perspectives on balancing access to justice and consumer protections.
What's next: More states are expected to introduce or refine third-party litigation finance legislation in 2026 as regulators monitor market impacts and legal community responses.