North Carolina Enacts First-in-the-Nation Ban On Third-Party Litigation Financing

North Carolina has become the first state in the nation to enact a comprehensive prohibition on third-party litigation financing in civil cases. Governor Josh Stein signed House Bill 315, now Session Law 2026-14, titled the “Prohibit Litigation Investments Act” on June 22, 2026, at which point it took effect. It applies to civil proceedings commenced on or after June 22, 2026 or litigation funding contracts entered into, renewed or amended on or after June 22, 2026.

The enactment is noteworthy because it represents one of the most sweeping state responses to the growing market for litigation finance and could influence legislative efforts in other jurisdictions. According to press reports, North Carolina is the first state to impose an outright ban on third-party litigation funding rather than merely regulating disclosure or imposing operational restrictions.

What Is Litigation Finance?

Third-party litigation finance generally refers to arrangements in which an investor provides funds to a litigant or counsel in exchange for a right to receive repayment that is contingent on the outcome of a lawsuit. The industry has grown substantially in recent years, with proponents arguing that it expands access to justice by enabling plaintiffs to pursue meritorious claims that otherwise might not be economically feasible. Critics contend that outside investors can distort litigation incentives, increase settlement amounts, prolong litigation, and introduce nonparty interests into the attorney-client relationship.

Key Provisions of the New Law

The new law adds a new Article 52 to Chapter 66 of the North Carolina General Statutes and broadly defines “litigation investment” as “the provision of money—whether as a direct payment, advancement, loan, investment or otherwise” for fees, costs, or expenses related to a pending or potential civil proceeding in exchange for a right to repayment or other consideration contingent on the outcome of that proceeding.

The statute makes it unlawful for any person to engage in litigation investment in North Carolina or to furnish litigation investment to a party or counsel in a civil proceeding in the state. The prohibition applies to civil actions, arbitrations, mediations, administrative proceedings, and other proceedings to resolve civil legal claims.

Importantly, the statute contains several exclusions. The prohibition does not apply to:

• Attorneys providing legal services on a contingency-fee basis
• Law firms advancing litigation costs and expenses consistent with professional conduct rules
• Insurance defense and indemnification obligations
• Certain nonprofit organizations funding litigation on behalf of themselves or their members
• Nonprofit legal services organizations providing pro bono representation
• Traditional loans whose repayment is not contingent on litigation outcomes
• Financial support for a litigant’s personal or household expenses that is not used to finance litigation
• Financial support used to finance litigation if the provider does not receive any right to repayment contingent on the outcome
• Financial support from immediate family members

Does the Law Reach Out-of-State Class Actions?

Probably not solely because a putative class includes one or more North Carolina residents. As written, the statute appears to focus on litigation investment “in North Carolina” or furnished to a party or counsel in a civil proceeding “in the state,” which suggests that the mere presence of absent class members who live in North Carolina would not, by itself, trigger the ban.

That said, the statute’s reach could become more complicated if the funding arrangement itself has a North Carolina nexus—for example, if the agreement is negotiated, executed, or performed in North Carolina, if the investor is operating in North Carolina, or if the named plaintiff or counsel is located in the state. The law’s broad jurisdictional language also appears designed to support enforcement against out-of-state actors, although its application to a class action filed elsewhere could still raise choice-of-law and constitutional questions.

Enforcement Mechanisms

The law establishes significant consequences for violations.

First, any contract entered into in violation of the statute is void. Second, the North Carolina Attorney General may seek injunctive relief and civil penalties of up to $50,000 per violation. Third, individuals injured by prohibited litigation investment arrangements may bring private actions and recover either common law damages or statutory damages equal to three times the amount of the potential litigation investment contemplated by the investor, together with attorneys’ fees and costs.

The statute also includes an expansive jurisdictional provision, providing that persons engaged in litigation investment have purposefully availed themselves of conducting business in North Carolina and therefore are subject to suit in the state.

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