North Carolina’s New Civil Litigation Funding Law Brings Immediate Compliance Implications

North Carolina is the first U.S. state to ban third-party litigation funding, prohibiting outside investors from providing capital to plaintiffs in exchange for a portion of the final settlement or judgment. The law applies to both pending and future civil litigation matters, according to reporting on the state’s new legislative framework.

Third-party litigation funding, often called TPLF, involves agreements where a non-party to a lawsuit provides a plaintiff with money to cover legal fees and living expenses. In return, the investor receives a predetermined percentage of the recovery if the case is won or settled. This practice has grown across the U.S. as a way for plaintiffs who lack financial resources to pursue claims against larger corporations or insured entities.

How does the North Carolina litigation funding ban work?

The new law removes the legality of these investment agreements within the state’s civil courts. Under the legislation, any contract that allows a third party to fund a lawsuit in exchange for a share of the proceeds is prohibited. This effectively cuts off the flow of outside capital into North Carolina civil cases.

The ban targets the financial structure of the agreement rather than the legal merits of the lawsuits themselves. While plaintiffs can still hire attorneys under traditional contingency fee arrangements—where the lawyer takes a percentage of the win—they can no longer sell a portion of their future recovery to a professional investment firm.

Legal practitioners must now ensure that no outside funding agreements are attached to their filings. The law imposes immediate compliance requirements, meaning that any funding arrangements currently in place for active cases may be rendered unenforceable or illegal depending on the specific terms of the statute.

What happens to pending lawsuits?

The legislation creates immediate compliance implications for matters already moving through the court system. For pending cases, the law suggests that existing funding agreements may no longer be valid. This puts plaintiffs who rely on that capital to sustain their litigation in a precarious position.

Attorneys managing these cases must evaluate whether their clients’ funding sources violate the new law. If a funding agreement is voided, the investor may lose their right to a share of the settlement, but the plaintiff may also lose the financial support necessary to continue the case against well-funded defendants.

The law’s application to pending matters is a significant departure from typical legislative rollouts, which often include “grandfather clauses” to protect existing contracts. By applying the ban immediately, North Carolina has forced a rapid restructuring of how civil litigation is financed in the state.

How does this differ from other state laws?

North Carolina’s approach is an outlier compared to the rest of the United States. Most states currently allow third-party litigation funding, though some have implemented transparency and disclosure rules. For example, several states require plaintiffs to disclose the existence of a funding agreement to the opposing party during the discovery phase of a trial.

The difference between a disclosure regime and a total ban is stark. Disclosure laws aim to prevent “secret” funders from influencing the strategy of a case or controlling the settlement process. North Carolina’s law goes further by removing the financial mechanism entirely.

This ban revives old legal doctrines known as champerty and maintenance. Maintenance is the act of assisting a party in a lawsuit without having a legitimate interest in the case. Champerty is a specific type of maintenance where the assistant provides help in exchange for a share of the proceeds. While these doctrines were largely abandoned or modernized in most U.S. jurisdictions to allow for modern legal funding, North Carolina has effectively codified them back into law.

Why does this change the litigation landscape?

The ban shifts the balance of power in civil litigation toward defendants. Large corporations and insurance companies often have the resources to litigate a case for years, potentially exhausting the financial reserves of an individual plaintiff. TPLF previously leveled this field by providing plaintiffs with the “war chest” needed to survive a long legal battle.

Without access to these funds, plaintiffs may be more likely to accept lower settlement offers early in the process to avoid the risk of bankruptcy. This change could lead to a decrease in the number of complex, high-cost lawsuits filed in North Carolina, as only those with independent wealth or high-capacity contingency lawyers will be able to pursue them.

The law also affects the professional investment industry. Firms that specialize in litigation funding can no longer acquire assets or enter into new contracts within the state, marking a total exit for the TPLF industry from the North Carolina market.