For decades, civil litigation followed a relatively familiar economic model. Plaintiffs pursued claims because they believed they had suffered a legal wrong. Attorneys evaluated these claims, often accepting representation on a contingency basis when they concluded the case had sufficient merit to justify the risk. Defendants assessed liability, measured litigation costs against settlement opportunities, and resolved disputes based largely upon the facts, the law, and the parties' respective tolerance for risk. The rapid growth of third-party litigation funding has altered that dynamic.
What was once a dispute between two opposing litigants increasingly may involve additional participants whose financial interest extend well beyond the courtroom. Private investment firms, hedge funds, and specialized litigation finance companies now provide capital to support lawsuits in exchange for a contingent return tied to the outcome of the litigation. Although proponents characterize these arrangements as expanding access to justice, critics argue that they fundamentally alter the economics of litigation by introducing investors whose objectives may differ from those of the actual litigants.
North Carolina has now taken one of the most aggressive legislative steps in the country to address that concern. House Bill 315, titled the "Prohibit Litigation Investments Act," does not simply regulate litigation funding or require greater disclosure of funding arrangements. Instead, it seeks to prohibit the practice altogether. The legislation places North Carolina at the forefront of a growing national debate over whether civil litigation can function as an investment market at all.
While the law applies only to North Carolina, its significance extends well beyond state borders. For insurers, defense counsel, corporate defendants, and litigation professionals nationwide, House Bill 315 offers an important glimpse into what may become the next phase of legislative efforts to reshape third-party litigation funding.
North Carolina Spearheads a New Approach
Much of the recent legislative attention surrounding litigation funding has focused on transparency. Several jurisdictions have considered requiring parties to disclose litigation funding agreements or identify investors with a financial interest in pending litigation. The underlying premise of those proposals is straightforward and ethically sound. Courts and opposing parties should know when outside financial interests may influence litigation decisions.
House Bill 315 takes a markedly different approach. Rather than regulating litigation funding, the legislation outright prohibits it. The bill broadly defines a "litigation investment" as the provision of money- whether by direct payment, loan, investment, advancement, or otherwise- to finance the fees, costs, or expenses associated with a pending or potential civil proceeding in exchange for repayment or other consideration contingent upon the outcome of that proceeding. By using expansive language that captures virtually every form of contingent litigation financing, the General Assembly appears to have narrowly drafted the statute to prevent creative restructuring of investment arrangements designed to avoid its reach to ensure third-party litigation funding has no place in North Carolina's legal market.
Equally significant is what the legislation does not prohibit. The bill expressly preserves traditional methods of financing litigation that have long existed within the civil justice system. Contingency fee agreements remain fully permissible under the North Carolina Rules of Professional Conduct. Attorneys may continue advancing litigation costs for their clients. Insurance carriers retain their contractual obligations to defend and indemnify insureds. Nonprofit legal organizations and pro bono legal service providers are excluded from the statute under specified circumstances. Likewise, conventional loans that require repayment regardless of litigation outcome remain outside the bill's scope. The legislation does not seek to alter the traditional attorney-client relationship or interfere with longstanding ethical rules governing legal representation. It targets a much narrower category of financial arrangements. Namely, outside investors whose return depends upon the success of someone else's lawsuit.
Enforcement Protocols
The legislation's enforcement provisions are as noteworthy as its prohibition. Any litigation investment agreement entered into in violation of the statute is void. The North Carolina Attorney General has authority to seek injunctive relief and pursue civil penalties of up to $50,000 for each violation. The bill also creates a private right of action allowing injured parties to recover either traditional damages or statutory damages measured at three times the amount of the contemplated litigation investment, together with court costs and reasonable attorneys' fees.
Perhaps the most notable is the legislation's jurisdictional provision. House Bill 315 expressly provides that anyone engaging in litigation investment involving North Carolina proceedings has purposefully availed themselves of the privilege of conducting business within the state and therefore may be subject to suit in North Carolina courts, regardless of whether they conduct any other business there (i.e., automatically establishing personal jurisdictional requirement for suit). The provision reflects an apparent legislative recognition that many litigation funding companies operate across multiple jurisdictions. By expressly establishing personal jurisdiction over litigation investors, the General Assembly seeks to ensure that enforcement actions may proceed even when investors are located outside North Carolina.
Why the Defense Bar is Paying Attention
The practical implications of litigation funding extend well beyond the questions of who finances a lawsuit. From the perspective of insurers and defense counsel, the more significant issue is how outside investment may influence the course of litigation itself. The most immediate effect is often not an increase in the number of lawsuits filed, but the increase in how long those lawsuits remain pending.
Historically, economic realities created natural incentives for parties to evaluate settlement opportunities throughout litigation. Plaintiffs often faced mounting medical expenses, lost income, or business uncertainty. Defendants likewise sought to limit defense costs and avoid the uncertainty associated with prolonged litigation. Those compelling pressures frequently encouraged negotiated resolutions before cases progressed through every stage of discovery and trial preparation.
Third-party litigation funding can alter those incentives. When litigation expenses are financed by outside capital, immediate financial pressures may diminish. A lawsuit no longer represents only a legal dispute awaiting resolution. It may also represent an investment expected to generate a financial return. Cases that would have resolved during early negotiations may instead continue through extensive written discovery, multiple depositions, expert disclosures, dispositive motions, mediation, and even proceed to trial, which have become a scarce reality. Even if the ultimate outcome remains unchanged, the cost of reaching that outcome may increase substantially.
This phenomenon is described as litigation-duration inflation. Prolonged litigation carries significant financial consequences. Additional months of discovery generate higher defense costs, increased expert witness fees, expanded document production, greater administrative expenses, and prolonged reserve uncertainty for insurers. Even when successful, defense verdicts may require substantially greater expenditures than comparable cases resolved earlier in the litigation process.
Litigation Funding Changes Settlement Mathematics
Traditional settlement negotiations generally involve the plaintiff and the defendant. Each evaluates the risks, costs, and potential benefits of resolving the dispute versus continuing the litigation. Third-party litigation funding introduces another economic stakeholder whose interests may not align with either party. Unlike the plaintiff, whose primary goal may be compensation and closure, or the defendant, who seeks to manage liability and litigation costs, the litigation funder's objective is a return on investment. That financial interest can influence the economics of settlement in ways that are not always apparent to opposing counsel or the court.
For example, a settlement offer that would have been acceptable to an unfunded plaintiff may become significantly less attractive where the plaintiff must satisfy repayment obligations to a litigation funder. Depending on the terms of the funding agreement, a substantial portion of the recovery may be earmarked for repayment, reducing the plaintiff's net recovery. As a result, a plaintiff may reject an offer that otherwise would have represented a reasonable resolution of the dispute.
From the defense perspective, these dynamics can be difficult to identify. Settlement demands may appear disconnected from the underlying facts or legal exposure. Negotiations may stall despite offers that seem objectively reasonable, and cases may continue through expensive discovery, expert testimony, and trial preparation with no obvious explanation for the impasse. Where third-party funding is part of the equation, another's financial interest is influencing the negotiations behind the scenes. Because those arrangements often remain confidential, stakeholders may have little insight into whether an outside investor has become an influential participant in settlement discussions.
The Transparency Problem
One of the most persistent criticisms of third-party litigation funding is the lack of transparency surrounding it. In many jurisdictions, parties have no obligation to disclose that a lawsuit is being financed by an outside investor. As a result, defendants and their insurers may have little or no information about whether litigation funding exists, who provided it, the amount invested, the repayment terms, or the extent to which the investor may influence litigation strategy or settlement decisions. That lack of transparency complicates every stage of the litigation process. If an outside investor has a financial stake in the outcome, but that interest remains undisclosed, defendants may be negotiating without a complete understanding of the economic forces shaping the plaintiff' settlement position.
The same concern extends to mediation, which is mandatory in North Carolina Superior Court. Mediators routinely work to identify the individuals with authority to resolve a dispute. Yet if a litigation funder has contractual rights that effectively influence whether a settlement is acceptable, that decision-maker may never be identified or participate in the mediation process. While the plaintiff remains the named party, an investor's financial interests may affect whether a proposed resolution us ultimately accepted. The lack of disclosure also limits the court's visibility into the litigation. Judges routinely oversee discovery disputes, settlement conferences, and case management without knowing whether outside financial interests may be influencing the litigation decisions.
Why the Insurance Industry is Paying Attention
Few stakeholders feel the financial effects of prolonged litigation more directly than insurers. While much of the public debate surrounding third-party litigation funding focuses on plaintiffs and investors, insurers bear many of the costs associated with cases that remain active for months or even years longer than anticipated.
Every additional stage of litigation carries a price. Extended discovery, expert witness retention, motion practice, mediation, and trial preparation and/or attendance all increase defense costs, regardless of the ultimate outcome. Insurers must also maintain reserves for pending claims, tying up capital and creating uncertainty that can persist long after a case might otherwise have resolved. These concerns are particularly pronounced in high exposure matters such as mass tort litigation, catastrophic injury claims, class actions, complex commercial disputes, and construction defect litigation. In those cases, the economics of prolonged litigation may become almost as significant as the merits of the underlying dispute.
National Security Concerns
Beyond concerns over litigation costs and settlement dynamics, third-party litigation funding has increasingly become part of a broader national security discussion. The issue is whether undisclosed litigation investments, particularly those involving foreign sources of capital, could create risks that extend beyond the parties to the lawsuit.
The worry stems from the nature of modern litigation, which frequently involves the exchange of proprietary business information, trade secrets, confidential financial records, technology, critical infrastructure information, and other commercially sensitive materials during discovery. If the identity of litigation investors remains undisclosed, questions naturally arise regarding who ultimately has a financial interest in the outcome of the litigation and whether those investors could directly benefit from access to sensitive information.
The concern is reflected in North Carolina's legislation, which includes legislative findings addressing foreign influence in litigation funding. Similar issues have also attracted attention in Congress and in other state legislatures as policymakers examine the rapid growth of the litigation finance industry.
The Plaintiff's View
Supporters of third-party litigation funding argue that it serves an important purpose by expanding access to the civil justice system. Not every plaintiff has the financial resources to pursue a lengthy lawsuit, particularly in complex commercial disputes or catastrophic injury cases where expert witnesses, document discovery, and other litigation expenses can quickly become overwhelming. For smaller businesses, individual plaintiffs, and undercapitalized litigants, outside funding may provide the resources necessary to pursue claims against well-funded corporate defendants that might otherwise be abandoned for economic reasons rather than legal merit. From that perspective, litigation funding can help level the playing field by allowing parties with legitimate claims to see them through to resolution.
What Happens if Other States Follow North Carolina?
The broader significance of North Carolina's legislation may not lie within its own borders, but in the precedent it establishes. Whether other legislatures adopt a similar approach remains to be seen. The result may be an increasingly diverse legal landscape in which litigation funding is prohibited in some jurisdictions, tightly regulated in others and subject to relatively few restrictions elsewhere. As additional states consider their own approaches, the national conversation is evolving. The debate is no longer limited to whether litigation funding should be disclosed. Increasingly, policymakers are asking a more fundamental question: What role, if any, should outside investors play in the civil justice system?
Conclusion
The debate over third-party litigation finding is often framed as a question of access to justice. That is certainly part of the discussion, but it is no longer the entire discussion. As the litigation finance industry has grown, so too have questions about transparency, settlement dynamics, litigation costs, investor influence, and the role outside capital should play in the civil justice system.
North Carolina's enactment of the "Prohibit Litigation Investments Act" marks a significant shift in that debate. Rather than requiring disclosure or imposing additional regulation, the General Assembly concluded that litigation investments themselves should have no place in the state's civil justice system. Whether that approach ultimately proves successful, or withstands further legal and political challenges, remains to be seen.
For defense counsel, insurers, and corporate defendants, the legislation is significant because it recognizes that third-party litigation funding may influence more than who pays for a lawsuit. It has the potential to affect settlement negotiations, extend the life of litigation, increase defense costs, and introduce financial interests that are neither parties to the litigation nor readily visible to the court. Those practical realities explain why the insurance and defense communities are watching North Carolina's experiment so closely.
Whether other states follow North Carolina's lead remains an open question. Some may choose greater transparency, others may impose additional regulation, and still others may conclude that litigation funding should remain largely unchanged. What seems increasingly clear, however, is that the conversation is fluid. The debate is no longer limited to how third-party litigation funding should be regulated. It has become a broader discussion about whether civil litigation should function solely as a mechanism for resolving disputes or whether it should also serve as an investment market for outside capital.
The "Prohibit Litigation Investments Act" officially became law on June 22, 2026, when it was signed by Governor Josh Stein.
