North Carolina has become the first state in the nation to ban third-party litigation funding, a practice where private equity firms and hedge funds invest in lawsuits in exchange for a percentage of any settlement or judgment. Governor Josh Stein signed the Prohibit Litigation Investments Act into law on June 22, 2026, marking a significant shift in how litigation is financed across the state.
The law broadly prohibits any arrangement where a third party provides money for litigation fees, costs, or expenses in exchange for repayment or other consideration tied to the outcome of a pending or potential civil proceeding. The ban applies to civil proceedings, arbitrations, mediations, and administrative proceedings commenced on or after June 22, 2026, as well as to any funding contracts entered into, renewed, or amended after that date.
North Carolina’s approach stands apart from other states that have attempted to regulate the practice. Although eleven other states have enacted limited restrictions on third-party litigation funding, North Carolina is the first to make it unlawful for any person or entity to engage in litigation investment within its jurisdiction. The legislation passed the North Carolina General Assembly with near-unanimous support, with only one dissenting vote in both chambers combined.
What the Law Preserves and Prohibits
The statute preserves nine traditional funding methods that remain lawful. Attorneys may continue to represent parties on a contingency basis, and law firms may advance litigation costs in accordance with professional conduct rules. Insurance indemnification and defense obligations remain unaffected, and nonprofit organizations may fund litigation involving themselves or their employees. Non-contingent loans to parties or attorneys are permitted, as are direct financial support for personal and household expenses during litigation, and assistance from immediate family members.
The law defines “litigation investment” as the provision of money—whether as a direct payment, advancement, loan, investment, or otherwise—for fees, costs, and expenses of or related to a pending or potential civil proceeding where repayment is contingent in any respect on the outcome. This broad language reaches arrangements that traditional third-party litigation funding companies have used to finance cases.
Violations carry serious penalties. Any contract made in violation of the law is automatically void. The state Attorney General may bring enforcement actions seeking civil penalties of up to $50,000 per violation. A person injured by a violation may recover common-law damages or statutory damages equal to three times the full potential litigation investment, plus court costs and reasonable attorneys’ fees.
Industry and Risk Management Reactions
RIMS, the Risk and Insurance Management Society, applauded North Carolina’s decision, calling it an important step toward increasing transparency and protecting the integrity of the legal system. Lawmakers had raised concerns that outside funding can prolong litigation and increase costs, potentially allowing funders to influence litigation decisions and compromise attorney independence.
The ban fundamentally alters the economics of civil litigation in North Carolina. Without access to external third-party funding, litigants must now rely on internal budgets, insurance coverage, contingency fee arrangements, or traditional non-contingent lending to finance their cases. This shift may lead to more resource-driven litigation strategies and earlier settlement discussions as parties bear greater responsibility for their own legal expenses.
Legal experts note the law could have implications beyond North Carolina’s borders. Some in the legal industry question whether other states may follow suit given the strong lobbying effort against litigation funding from organizations representing business and commerce. However, others argue that disclosure mandates—the approach taken by states such as Arizona, Colorado, Georgia, Kansas, Montana, Oklahoma, and Tennessee in 2025—will remain the preferred regulatory method.
