State becomes the first in the US to prohibit litigation investment
North Carolina has become the first state in the US to ban third-party litigation financing after Democratic governor Josh Stein signed legislation prohibiting the practice, marking a significant development in the debate over litigation funding and the regulation of legal services.
Governor Stein signed House Bill 315, formally titled the Prohibit Litigation Investments Act, into law on Monday. The legislation prohibits any person from engaging in litigation investment or furnishing litigation investment to a party or counsel of record in a civil proceeding in North Carolina.
Reuters reported that the law also authorizes the state's attorney general to pursue legal action against anyone who violates the ban. People who suffer harm because of prohibited litigation investments can recover damages equal to three times the amount of the full potential litigation investment contemplated by the investor.
North Carolina lawmakers approved the bill with overwhelming support. The state House passed the bill unanimously, while the Senate approved it with only a single no vote.
The legislation comes as third-party litigation finance has grown into a multibillion-dollar industry in the United States. Under these arrangements, outside investors fund lawsuits in exchange for a share of any financial recovery.
Business groups welcomed the new law. Stephen Waguespack, president of the United States Chamber of Commerce Institute for Legal Reform, said the legislation would protect “against shadowy investors who bankroll litigation for profit.”
Gary Salamido, president and chief executive officer of the North Carolina Chamber, said North Carolina had become the first state in the country to ban third-party litigation financing.
The North Carolina law follows unsuccessful efforts to regulate litigation finance at the federal level. Reuters reported that the United States Chamber of Commerce has backed legislation in Congress that would require parties to disclose third-party litigation financing arrangements in federal courts, including a bill introduced in February by Senate Judiciary Committee Chair Chuck Grassley.
Lawmakers from both major political parties, along with conservative legal advocacy groups, have opposed those federal disclosure proposals.
North Carolina enacted the ban as several other states continued to consider narrower restrictions on litigation finance. Reuters reported that California, Colorado, and Illinois are considering legislation to limit the influence of outside investors on lawyers' practices as policymakers, lawyers, and investors examine arrangements that could circumvent existing restrictions on fee-sharing with non-lawyers.
