On June 22, 2026, Governor Josh Stein signed House Bill 315 into law as Session Law 2026-14. Titled the “Prohibit Litigation Investments Act” and codified at G.S. 66-511 through 66-515, the law makes North Carolina the first state in the nation to broadly ban third-party litigation funding rather than merely regulate it or require its disclosure.
Most state efforts to date have taken a regulatory approach — registration of funders, mandatory disclosure of funding agreements in discovery, caps on funder recoveries, and limits on funder control over litigation. North Carolina's law goes further: it declares litigation investment unlawful outright, voids offending contracts, and creates significant civil penalties and a private right of action. This alert summarizes the law and explains what it means for litigation funders, for law firms and lawyers, and for plaintiffs operating in or connected to North Carolina, along with structuring considerations and the question of retroactivity.
What the Statute Does
The Prohibition
The law makes it unlawful for any person to engage in litigation investment in North Carolina or to furnish litigation investment to a party or counsel of record in a civil proceeding in North Carolina (G.S. 66-513). The prohibition has two prongs: one keyed to investing activity occurring in the State, and one keyed to furnishing investment to a party or counsel of record in a North Carolina civil proceeding.
"Litigation Investment” Defined
The statute defines litigation investment broadly (G.S. 66-512(3)) as the 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, in exchange for a right to repayment or other consideration that is contingent in any respect on the outcome of the proceeding. Two elements define the prohibited transaction: (i) money provided for litigation costs, and (ii) a return that is contingent in any respect on the outcome. The breadth of “or otherwise” and “contingent in any respect” signals that economic substance, not labels, will govern.
“Civil Proceeding” Defined Broadly
“Civil proceeding” includes not only civil actions but also arbitrations, mediations, administrative proceedings, and other proceedings to resolve a civil legal claim (G.S. 66-512(1)). The ban therefore extends well beyond courtroom litigation.
Statutory Exclusions
The statute preserves nine categories of conventional litigation-related financial support (G.S. 66-512(3)(a)–(i)). The most significant are:
• Contingency fees. Legal services provided on a contingency basis under the N.C. Rules of Professional Conduct are not litigation investment. Traditional contingency-fee practice is untouched.
• Attorney/firm cost advancement. A law firm's own advancement of costs and expenses, made in accordance with the Rules of Professional Conduct, is excluded.
• Insurer defense and indemnity. An insurer's or other entity's contractual obligation to defend or indemnify a party is excluded.
• Nonprofit and pro bono funding. Funding to or by a nonprofit organization or nonprofit legal services organization is excluded, so long as any repayment is limited to principal plus reasonable interest.
• Non-contingent direct loans. A direct loan to a party, law firm, or attorney is excluded so long as repayment is not contingent on the outcome of any civil proceeding.
• Personal/household-expense support and non-contingent-interest support. Money for a party's personal or household expenses during litigation (not used for litigation costs), and money for litigation costs where the source receives no contingent interest in the outcome, are excluded.
• Immediate-family support. An immediate family member's financial support to a party is excluded, even if the family member receives a contingent right to recovery.
Enforcement, Penalties, and Jurisdiction
• A contract that violates the law is void (G.S. 66-514(a)).
• The Attorney General may sue to enjoin violations and seek a civil penalty of up to $50,000 per violation (G.S. 66-514(b)).
• A person injured by a violation may recover damages, electing at judgment between common-law damages and statutory damages equal to treble the full potential litigation investment contemplated by the investor, plus court costs and reasonable attorneys' fees (G.S. 66-514(c)).
• A special long-arm provision deems any person who furnishes litigation investment to a party or counsel of record in a North Carolina civil proceeding to have purposefully availed itself of doing business in North Carolina and subject to suit there, whether or not it otherwise transacts business in the State (G.S. 66-514(d)).
• The law is to be “liberally construed to effectuate its purpose” (G.S. 66-515), reinforcing that courts are likely to read it expansively and to look past form to substance.
Does the Statute Apply Retroactively?
No, the law is prospective, not retroactive. By its own terms (Section 3), Part I is effective when it became law (June 22, 2026) and applies to civil proceedings commenced on or after that date and to contracts entered into, renewed, or amended on or after that date.
Several practical consequences follow:
• Pre-existing contracts are grandfathered, but are at risk. A funding contract entered into before June 22, 2026 is not, by negative implication, swept into the prohibition merely because it remains in force. However, any renewal or amendment on or after that date brings the contract within the statute. Parties to legacy agreements should be cautious about amending, extending, or restructuring them, as doing so may forfeit grandfathered status and void the agreement.
• New proceedings are covered regardless of when funded. Because the prohibition also keys to civil proceedings commenced on or after June 22, 2026, funding tied to a case filed after that date falls within the statute even if discussions or commitments predated it. The safest reading is that both the contract date and the proceeding date matter.
• The workers' compensation changes are separate. Part II of the law (increases to certain workers' compensation schedule-of-injury benefits) has its own effective date of July 1, 2027 and applies to claims arising on or after that date. It is unrelated to the funding prohibition.
Because retroactivity questions can turn on fine distinctions, such as when a “proceeding” is “commenced,” what counts as an “amendment,” and how a renewal is treated, parties with existing arrangements should obtain matter-specific advice before relying on grandfathered status.
What This Means for Litigation Funders
The law is aimed squarely at commercial third-party funders, and the impact is direct:
• Core commercial funding, meaning advancing case costs or capital in exchange for a return tied to recovery, whether structured as single-case or portfolio funding, is prohibited where it reaches North Carolina civil proceedings or constitutes engaging in litigation investment in the State.
• Contracts that violate the law are void, meaning a funder could lose its entire bargained-for return even after performing, with no contractual recourse.
• Exposure is asymmetric and severe: treble statutory damages measured by the full potential investment contemplated, AG penalties up to $50,000 per violation, and fee-shifting. For portfolio deals, whether “per violation” is read per contract or per case could multiply exposure dramatically.
• The long-arm provision means an out-of-state funder cannot assume it is beyond reach: furnishing funding to counsel of record in a North Carolina proceeding establishes jurisdiction in North Carolina by statute.
• Form will not defeat substance. Given the broad definition and liberal-construction mandate, relabeling a contingent investment as a “loan,” “fee,” or “servicing charge” is unlikely to succeed if repayment remains tied to outcome.
What This Means for Law Firms and Lawyers in North Carolina
• Traditional contingency-fee practice is expressly preserved and unaffected. Firms may continue to take cases on contingency and to advance their own costs under the Rules of Professional Conduct.
• Firms may no longer accept outside capital to fund cases in exchange for a contingent return where the arrangement reaches a North Carolina proceeding. Existing funding relationships should be reviewed; many common firm-financing arrangements that share litigation upside with a capital provider are now at risk.
• Non-contingent borrowing remains available. Firms may still take genuine loans, such as lines of credit or term debt, so long as repayment is not contingent on case outcomes (the subsection (f) exclusion).
• Counsel-of-record exposure. A lawyer appearing as counsel of record in a North Carolina proceeding that is backed by prohibited funding may face not only the voiding of the funding contract but professional-conduct scrutiny. Rules on fee-sharing with nonlawyers, third-party interference with professional judgment, and the lawyer's independence remain in force and overlay the statute.
• Multi-state firms should not assume that routing a transaction through an out-of-state office cures the problem if the underlying matter is a North Carolina proceeding or if a North Carolina-licensed lawyer appears as counsel of record. Choice-of-law and entity routing do not control a prohibition keyed to the forum of the litigation.
• Diligence obligation. Firms should confirm the source and structure of any capital touching their North Carolina matters and avoid amending legacy funding agreements without analysis.
What This Means for Plaintiffs in North Carolina
• Plaintiffs lose access to a financing tool. Individuals, small and midsize businesses, and inventors that cannot self-fund meritorious, but expensive and complex, litigation against defendants with robust balance sheets can no longer turn to commercial third-party funders for North Carolina proceedings. Critics of the law argue this disadvantages access to justice for NC residents and businesses; supporters argue it protects the integrity of the civil justice system.
• Contingency representation remains available. Because contingency fees and firm cost advancement are preserved, the most common access-to-justice mechanism for individual plaintiffs is intact, albeit with increased financial pressure on contingency fee law firms.
• Permissible support continues. Plaintiffs may still receive non-contingent loans, immediate-family support, nonprofit or pro bono assistance, and money for personal or household expenses during litigation (so long as it is not used for litigation costs).
• Consumer-style funding affected. Pre-settlement “advances” to plaintiffs that are repaid from recovery are contingent on outcome and fall within the prohibition.
• Possible constitutional challenge. Plaintiff-side groups may argue the ban unconstitutionally restricts court access, particularly for cases not feasibly funded on contingency. Until any such challenge is resolved, plaintiffs should treat the ban as fully effective.
Future Transaction Structuring: Requirements and Alternatives
For funders, firms, and lawyers situated in or connected to North Carolina, the following structures and requirements should guide future financing of claims and firm operations. The options are arranged from lowest to highest residual risk. Because the law is new and untested, with no judicial or Attorney General interpretation, even lower-risk options carry uncertainty and should be confirmed with counsel.
Option 1: Non-Contingent Financing (Lowest Risk; Fits an Express Exclusion)
Structure capital as a genuine loan to the party, firm, or lawyer at a fixed rate with a fixed or scheduled maturity, repayable regardless of any case outcome. This fits the subsection (f) exclusion for direct loans whose repayment is not contingent on the outcome of any civil proceeding.
• Make the obligation general recourse; avoid securing it solely by case proceeds or a specific fee.
• Avoid acceleration triggers, return adjustments, or bonus features keyed to recoveries, which reintroduce contingency and forfeit the exclusion.
• Trade-off: the capital provider gives up contingent upside. This converts the relationship from investing to lending.
Option 2: Confine Funded Matters to Non-North Carolina Forums (Relies on the Territorial Reading)
Where a contingent return is required, limit funded matters to civil proceedings outside North Carolina, supported by binding contractual guardrails. On the most defensible reading of “in this State,” a case filed and litigated outside North Carolina is not a North Carolina civil proceeding, so the furnishing prong is not triggered.
• Eligibility covenant limiting funding to matters whose forum is outside North Carolina, with a representation at the time each matter is funded.
• Automatic exclusion or conversion to a non-contingent advance as to any matter later commenced in a North Carolina court, arbitration, mediation, or administrative forum.
• Keep North Carolina-licensed lawyers off the complaints in funded matters, or clear their participation with North Carolina ethics counsel; an NC lawyer's appearance is the fact most likely to connect a matter to the State.
• Locate investing activity outside North Carolina — out-of-state contracting entity, governing law, and situs of negotiation, execution, and funding — to address the “engage in litigation investment in this State” prong.
• Residual risk: the first prong could be read to focus on where the investor acts, and the liberal-construction clause invites an expansive view; this option is sound but not airtight.
Option 3: Out-of-State Funder Entity (Supporting Measure)
Use an investing entity organized and operating outside North Carolina, with no North Carolina offices, employees, or solicitation. This strengthens the argument that no one is engaging in litigation investment in the State and complements Options 1 and 2. It does not, standing alone, defeat the law where a funded case is a North Carolina proceeding, because the long-arm provision reaches a funder regardless of its location.
Option 4: Phased Entry and Enhanced Diligence
Pending interpretive guidance, parties may begin with single-matter, out-of-state transactions rather than broad portfolios to cap per-violation and treble-damages exposure, and should build forum verification, source-of-funds diligence, and outcome-de-linking into their processes and documentation.
Structures and Pitfalls to Avoid
• A “loan” that is contingent in substance, whether repaid only from recoveries or adjusting with outcome, will be treated as litigation investment despite its label.
• Reliance on out-of-state office routing or choice-of-law alone while funding a North Carolina proceeding.
• Recharacterizing a contingent return as a “fee” or “servicing charge” tied to recoveries.
• Amending or renewing a pre-effective-date agreement without re-analysis, which brings the contract within the statute and may void it.
Key Takeaways
1. North Carolina now bans commercial third-party litigation funding outright, not merely regulates it, effective June 22, 2026.
2. Contingency fees, firm cost-advancement, insurer defense/indemnity, nonprofit and pro bono funding, non-contingent loans, personal-expense support, and immediate-family support remain permitted.
3. The law is prospective: pre-existing contracts are grandfathered unless renewed or amended on or after June 22, 2026, but proceedings commenced on or after that date are covered.
4. Penalties are severe: void contracts, treble statutory damages, AG penalties up to $50,000 per violation, fee-shifting — and a statutory long-arm provision reaches out-of-state funders.
5. Future financing should favor non-contingent structures or, where contingent returns are required, out-of-state forums and entities with robust contractual guardrails; substance, not form, will control.
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