North Carolina Enacts Nation’s First Third-Party Litigation Funding Ban

The Wright brothers made North Carolina “First in Flight” in 1903. On June 22, Governor Josh Stein added another first for North Carolina — this time related to litigation funding. After being passed unanimously in the North Carolina House and with only a single “No” vote in the North Carolina Senate, the governor signed into law the Prohibit Litigation Investments Act (House Bill 315), which made North Carolina the first state in the country to outright prohibit third-party litigation funding rather than merely regulate it through disclosure rules or licensing requirements.

Codified at N.C.G.S. §§ 66-511 et seq., the act takes direct aim at the private financing of civil lawsuits. Until now, no other state legislature and no act of Congress has meaningfully restrained this fast-growing practice.

What Is Third-Party Litigation Funding?

Third-party litigation funding (TPLF) is the practice of an outside investor bankrolling a plaintiff’s or law firm’s pursuit of a claim in exchange for a share of any settlement or judgment. Once a niche product, TPLF has grown into a vast and rapidly expanding global market. It is especially active in high-exposure disputes, including wage-and-hour class and collective actions, medical malpractice suits, mass torts, products liability cases, intellectual property litigation, and other large commercial proceedings, where the projected recovery justifies the investor’s risk capital.

Supporters argue that TPLF puts capital in the hands of litigants who could not otherwise afford to pursue meritorious claims, allowing them to seek a day in court that would be out of reach without an outside investor. Critics raise concerns about the lack of transparency. Funding agreements are rarely disclosed to opposing parties or the court. The identities of the financiers and the terms of their deals are kept confidential. And the extent of any financier’s influence over case strategy, settlement decisions, or counsel selection is almost never visible on the record. Critics also point to inflated demands, prolonged litigation, and the risk that nonparty financiers will steer strategy in ways at odds with the client’s interests or counsel’s professional obligations.

What the Act Prohibits

In a single sentence, the act makes it unlawful for anyone to engage in litigation investment in North Carolina or to provide litigation investment to a party or attorney in a civil proceeding in the state.

Two broad statutory definitions do the heavy lifting:

• • “Litigation investment” means money supplied — as a direct payment, advance, loan, investment or “otherwise” — to cover the fees, costs or expenses of a pending or potential civil proceeding, where the provider’s right to repayment is “contingent in any respect” on the outcome of the case. Any outcome-linked upside, however the deal is dressed up, falls within the prohibition.
  • “Civil proceeding” sweeps in not only lawsuits filed in state and federal courts, but also arbitrations, mediations, administrative proceedings, and any other proceeding used to resolve a civil legal claim. The statute is not confined to the courthouse.

The ban applies to every civil proceeding commenced on or after June 22, and to every funding contract entered into, renewed or amended on or after that date. This includes renewals or amendments tied to litigation that were already pending when the Act took effect. Pre-existing agreements that are left alone do not violate the statute. Touch them after June 22, however, and they fall squarely within the statute’s scope.

The consequences for engaging in unlawful TPLF are serious. Any contract formed in violation of the act is void. The attorney general may sue to enjoin violations and recover civil penalties of up to $50,000 per violation. And any person injured by a prohibited investment has a private right of action, with the option to recover either common-law damages or treble the full potential litigation investment, plus court costs and reasonable attorneys’ fees. Just as important for out-of-state funders: the act confers personal jurisdiction over any financier whose activities touch North Carolina litigation, regardless of whether the funder otherwise transacts business in the state.

What the Act Leaves Alone

The act is not a wholesale rewrite of how civil litigation is financed in North Carolina. It carves out nine categories of financial support from the definition of “litigation investment.” The most familiar carve-outs are:

• • Contingency-fee representation and attorney advancement of costs and expenses
  • Financial support from an immediate family member
  • Funding by a nonprofit organization (or a nonprofit legal services organization providing pro bono representation), so long as any repayment is capped at the original amount plus reasonable interest

The remaining exceptions cover:

• • An insurer’s contractual duty to defend or indemnify
  • Ordinary loans to a party, law firm or attorney whose repayment is not tied to the outcome of any civil proceeding
  • Personal and household financial support during the pendency of a case, provided the funds are not used to pay litigation fees, costs or expenses
  • Outcome-independent support for litigation expenses where the provider receives no contingent right to repayment.

What remains prohibited, in short, is the modern industry of outcome-tethered investments by outside financiers earning returns on lawsuits.

The Practical Impact on North Carolina Litigation

Outside capital has become a recurring, and often invisible, presence in high-stakes matters such as wage-and-hour class and collective actions, medical malpractice cases, mass torts, and large commercial disputes, where the size of the potential recovery makes the economics attractive to nonparty investors. With the act now codified, North Carolina has gone further than any other state to push that capital out of its courtrooms. The practical consequences will be felt in how cases are valued, staffed, budgeted and resolved across the state.

Three near-term implications stand out.

1. Case valuation may shift. Without a financier behind the plaintiff, the incentive to push marginal claims to verdict diminishes, and defense-side leverage in mediations and settlement discussions may grow accordingly.
2. Discovery into unlawful TPLF relationships becomes a legitimate and lawful subject of targeted interrogatories, document requests and deposition questioning going forward.
3. Compliance is a present concern for any person or business that has historically participated in litigation finance, which should be reviewed before any renewal or amendment given the act’s void-contract, treble-damages, and long-arm jurisdiction provisions.

Contact Matthew Perez, Patrick Meacham or any member of the Phelps litigation team with questions.