North Carolina Is the First and Only State (So Far) to Ban Third-Party Litigation Investments

The Prohibit Litigation Investments Act, N.C. Sess. Law 2026-14 (H315), codified at N.C.G.S. §§ 66-511 et seq., applies to arrangements where a third-party funder provides money for litigation fees, costs, or expenses in exchange for repayment or other consideration that is contingent "in any respect" on the outcome of a pending or potential civil proceeding. In other words, the funder steps into the role traditionally played by a lawyer, accepting a case on a contingent fee. Of note, this was bipartisan legislation that passed the North Carolina General Assembly almost unanimously, with only one dissenting vote.

Because the statute became effective immediately upon enactment, the litigation-investment prohibition applies to civil proceedings commenced on or after June 22, 2026, and to contracts entered into, renewed, or amended on or after June 22, 2026, even if for litigation pending prior to June 22, 2026. If left unamended and unrenewed, preexisting funding agreements tied to pending litigation remain outside the statute's reach, but any post-effective-date renewals or amendments will bring the arrangements within the statute's scope.

Application and What the Act Bans

The ban applies to any "litigation investment" which the statute defines as: "[t]he provision of money, whether as a direct payment, advancement, loan, investment, or otherwise, for the fees, costs, and expenses of or related to a pending or potential civil proceeding" where repayment is "contingent in any respect on the outcome of the pending or potential civil litigation."

The statute is broad and reaches more than traditional courtroom litigation. It applies to civil actions, arbitrations, mediations, administrative proceedings, and other proceedings used to resolve civil legal claims.

The statute also provides North Carolina courts with a direct jurisdictional basis: it automatically confers personal jurisdiction over any person or entity who engages in the business of litigation investment or has furnished litigation investment to a party or counsel in North Carolina, regardless of whether the person or entity is located outside the state or has never transacted business in North Carolina. It also, as discussed below, provides for a private right of action with a treble damages remedy.

Is All Litigation-Related Financial Support Banned?

The statute does not eliminate every form of litigation-related financial support. Nine traditional funding methods are excluded from the definition of "litigation investment," thereby preserving some longstanding funding mechanisms. Specifically, the ban does not apply to:

1. Contingency fee arrangements. Attorneys may continue to represent parties on a contingency basis, in accordance with the North Carolina Rules of Professional Conduct, without violating the statute.
2. Law firm advancement of costs. Firms may advance litigation costs and expenses in accordance with the North Carolina Rules of Professional Conduct.
3. Insurance indemnification. An insurer's or other entity's contractual obligation to indemnify or defend a party remains unaffected.
4. Non-profit litigation. Non-profit organizations may fund litigation involving the organization itself or one of its employees, and non-profit legal services organizations may provide pro-bono representation.
5. Non-contingent loans. Direct loans to a party, law firm, or attorney are permitted so long as repayment is not contingent upon the outcome of the litigation.
6. Living expenses and unconditional support. Money provided for personal or household expenses during litigation, or financial support for litigation costs where repayment or forgiveness is not tied to the outcome, remains lawful.
7. Family member support. Immediate family members may provide financial assistance for litigation without restriction.

Enforcement Has Teeth

The statute imposes serious penalties for violations. A contract that violates the ban is automatically void. Additionally, the Attorney General may seek injunctive relief, and courts may impose civil penalties of up to $50,000 per violation. A person injured by a violation may bring a civil action and recover common-law damages or statutory damages measured by three times the full potential litigation investment, plus court costs and reasonable attorneys' fees, against the funder.

Practical Impacts

North Carolina's ban on civil litigation financing will alter the future of civil litigation in several ways:

1. Shift in litigation power dynamics. Without access to external funding, the economics of litigation increasingly favor well-capitalized defendants who can outspend opposing parties in protracted proceedings, which may lead to below-value settlements out of financial necessity. However, the ban will also prevent outsiders to the dispute from attempting to influence its outcome solely for financial reasons.
2. Reduced litigation escalation. Without financial backing from investors, parties may lack the financial capacity to sustain protracted or complex litigation.
3. Diminished access to justice. Litigation finance allows parties who lack resources – including individuals, small businesses, and startups – to pursue claims against well-resourced opponents. Eliminating this option may effectively preclude certain valid claims from being brought or from continuing to be pursued in protracted litigation. The permitted exceptions do not offer the scale or flexibility of commercial litigation funding. Litigants must now rely on internal budgets, insurance coverage, contingency fee arrangements, or traditional (non-contingent) lending to fund their cases.
4. Outcome predictability. Without outside capital fueling prolonged discovery and trial strategies, certain litigation outcomes may become more predictable and closely aligned with the merits of each case. Cases may also increasingly settle at amounts that reflect the merits of the underlying dispute rather than the leverage conferred by virtually unlimited third-party funding.
5. Effect on innovation. The broad statutory language could create uncertainty for emerging financial products, conventional lending to law firms related to specific lawsuits, or other arrangements not traditionally viewed as third-party litigation funding.
6. Preservation of attorney-client integrity. The prohibition may lower the risk that funding arrangements can compromise both the attorney-client relationship and the attorney-client privilege.
7. Loss of objective claim evaluation. Third-party funders conduct extensive due diligence before investing, providing an objective, dispassionate assessment of case viability, which may improve settlement quality and discourage frivolous claims rather than encourage them. Removing third-party funders from the playing field may increase frivolous claims for some entities and individuals. Therefore, early-stage case evaluation and budgeting will become even more critical to ensure viable claims are pursued effectively.

Practical Considerations

Clients with existing matters involving third-party funding arrangements should immediately assess compliance and whether the arrangements fit within the statutory exclusions. Though agreements executed before June 22, 2026, may not be directly affected, ongoing funding disbursements could raise issues and should be assessed regularly. Clients should also review their litigation budgets, risk tolerance, and litigation strategies to account for the changed economic landscape.

If you have any questions about the Prohibit Litigation Investments Act or its impact on your business, please contact John Branch, Evan Sauda, Rachel Boyd, or any member of Baker Donelson's Commercial Litigation team.

*Thanks to summer associates Sydney Parrella and Austin Leeviraphan, who assisted in the preparation of this alert.