The Funded Lawsuit
Introduction Law firms have always needed money. Modern litigation can cost millions before a trial begins. Specialized testimony must be secured. Documents must be reviewed. Depositions must be taken. Lawyers must be paid, and sometimes for years before a judgment or settlement produces revenue.
That reality has fueled a booming industry of litigation finance, where outside investors provide capital to fund legal disputes in exchange for taking a potential financial return on the success of their investment.
The arrangement can make difficult litigation possible, but it raises an unsettling question: Who controls a lawsuit when a non attorney is footing the bill?
California has now drawn a new line. On September 21, 2026, Governor Gavin Newsom signed new legislation that restricts corporate legal funders’ ability to interfere with or influence substantive litigation decisions. The law views unauthorized corporate interference as an unauthorized practice of law while explicitly preserving certain types of non recourse litigation finance.¹
The law reflects a broad professional accountability principle: Money can pay for legal representation, but it cannot become the lawyer.
The Traditional Boundary
California has long prohibited non lawyer involvement in the practice of law. California Rule of Professional Conduct 5.4 generally prohibits lawyers from sharing fees with non lawyers and allows a person who pays the lawyer from directing the lawyer’s independent professional judgment.² The traditional justification is simple: Lawyers owe a duty to clients, while investors owe a duty to their own financial interests.
A client may want the case settled today, even if a larger payout is years in the future. A client may value a public trial, a particular legal principle, or simply certainty. An investor may care less about settlement or the principle and far more about the return.
The legal profession has traditionally handled such conflicts by putting the client and lawyer on one side of a dispute and outside financial interests on the other side.
The Rise of Litigation Finance
But third-party litigation finance blurs that boundary. Under a typical non recourse agreement, an investor provides money for a particular case and receives repaid only if the litigation succeeds. If the case fails, the funder may have lost its money anyway.
That differs from a simple loan to a law firm the funder’s return on investment can depend directly on the outcome of litigation. This type of litigation has grown because the cost of legal disputes prevents parties from pursuing otherwise viable claims. Businesses, individuals, and litigation practices may lack the resources to finance a case to trial. Outside capital can be crucial in enabling access to courts but the same arrangement can favor financial interests that conflict with professional judgment.
An investor may want to continue the case because a larger eventual recovery will provide a greater return, even if the client wants a settlement. An investor may want the cases with the highest yield, even if they are less beneficial to the firm’s clients.
The financial arrangement itself does not necessarily entail misconduct. It becomes a problem when financial influence begins to function as legal control.
Drawing the Line
AB 2305 attempts to distinguish between the two. The new statute defines “corporate legal funder” broadly to cover any business entity with an explicit interest in raising or managing capital and that participates in the process of litigation by ownership, service, financing, or management arrangements.³
The statute then prohibits such funders from interfering with an attorney’s or litigant’s professional judgment regarding substantive litigation decisions
those prohibited decisions include deciding which clients to represent, setting the scope or financial terms of representation, deciding legal strategy, determining whether to file or dismiss claims, deciding whether to settle, deciding what evidence to introduce, conducting discovery, and decisions about appellate or procedural choices.³
That’s a significant breadth the law does not apply just to the decision on which the final settlement check will go. It applies to the decision making process surrounding a lawsuit.
Funding Without Control
The law does not prohibit outside litigation finance entirely rather, the statute explicitly states that qualifying non recourse litigation finance is not prohibited fee sharing.³ The financing must meet specified conditions, including limitations on the funder’s return and restrictions on use for the acquisition of future clients or cases.
Most importantly, the funding must target particular legal representation that has already been commenced or which the lawyer has already been retained.³ This distinction draws a key boundary of the law: capital can support an existing representation without acquiring control over the representation.
The distinction is important because an outright prohibition would create its own problem. A plaintiff with a legitimate claim may lack the finances to bring the case. A small firm may lack the capital to pursue a long, costly case. Outside funding can enable such cases without the lawyers or clients to bear all of the risk.
The legal system therefore has an interest in facilitating access to litigation. But it also has an interest in maintaining the integrity of that process
The MSO Question
And when investors do not formally “own the” firm? Modern legal businesses can use management services organizations, or MSOs, to provide technology, marketing, administrative, finance, human resources, and other nonlegal functions.
They can allow outside capital to flow into the business without formally owning the law firm or practicing law which can complicate the legal distinction.
California’s new statute is deliberately broad in this respect. It applies regardless of whether a relationship is labeled ownership, financing, management, or services.³ The relevant question is not necessarily what the contract calls the investor it is what authority does it possess.
A company can help finance the firm’s operations without violating the law but if it can determine which cases the firm is permitted to take, or control settlement decisions, or pressure lawyers to pursue strategies based on expected investor returns, the arrangement crosses the line the law is trying to draw.
The Client's Interest
The strongest reason for the rule is the nature of the attorney-client relationship. A lawyer does not sell a product. He takes on duties of loyalty, confidentiality, competence, and independent professional judgment to the client. This can entail the recommendation of a course of action that results in less revenue to the lawyer or outside funder
Consider a hypothetical settlement, an injured client has received an offer of $5 million, the attorney believes that accepting this is reasonable given the risk of pursuing further litigation, but that the investor thinks that proceeding to trial could produce a $15 million judgment.
If the funder can pressure the lawyer to accept the offer, the person with the largest financial stake can no longer be the person whose interests the lawyer is legally obligated to protect.
This precisely the type of conflict that professional independence rules are designed to prevent.
The Cost of the Wall
There is also the other side of the argument, however. Limits on capital can make litigation more costly and potentially result in a reduction in access to justice.
A client with a strong claim may not be able to finance years of discovery. A smaller, plaintiff-side firm may be unable to compete with a large corporation’s litigation budget. Outside funding can sometimes allow the smaller firm to survive long enough to get a meaningful resolution
The question is not simply which side is better. It is whether we can find a way to preserve both AB 2305 tries to do exactly this by allowing certain nonrecourse financing while prohibiting funders from controlling legal decisions.¹
Whether the distinction will be easy to implement is another question.
What Counts as Influence?
It is not necessarily obvious what constitutes control. An investor may not tell the lawyer “reject this settlement.” Influence can be indirect, through budget restrictions, performance incentives, funding conditions, or contractual terms that render certain strategies financially impractical.
The new statute addresses this issue by explicitly prohibiting funding or budgeting decisions by corporate legal funders that can impact case strategy or requiring that litigation decisions be made based on investor-return metrics as opposed to client objectives and professional ethics.³
That acknowledges the reality that control can be indirect. A person can influence a decision without directly having the authority to make it. Enforcement
AB 2305 also attaches consequences for crossing this line. A violation by an attorney can constitute grounds for State Bar discipline. A client may also pursue statutory damages of $10,000 per violation, or 3 times the actual damages, whichever is greater, plus attorney’s fees, costs, and injunctive or declaratory relief.³
The law applies to contracts entered into on or after January 1, 2027.¹ This leaves current financing agreements time to comply The law combines disciplinary, private, and contractual remedies. A prohibited provision is not simply unethical, it can also be unenforceable.
Why It Matters
The debate over litigation finance reflects a much larger transformation in the legal profession. Law firms increasingly operate in a technological and sophisticated financial environment, and face pressure to control costs. The traditional law firm centered around lawyers and clients, modern law firms can include a much wider array of financiers and service providers
That does not necessarily undermine professional independence but it does make the boundary more important. The legal system presumes that a lawyer’s judgment ultimately belongs to the lawyer and the client.
A funder can have an economic interest in the outcome of a dispute. The client has a legal interest in the representation. Those interests can overlap, intersect, and diverge sharply. The law must determine which controls which when they do.
Conclusion
Litigation costs money. Justice does too. Outside financing can allow people to pursue claims they might not otherwise afford, but it can create the very real possibility that financial interests will drive legal decisions that ought to belong to lawyers and clients.
California’s new law draws a line between them, and it is one that may become increasingly important as law firms test new business structures and investors look for new ways to finance legal services.
The legal profession can tolerate outside money but it also needs to accept that outside judgment can come at a price. A lawsuit may have a financier, but it can only have one client.
Assem. Bill 2305, 2025–2026 Reg. Sess., ch. 393, Stats. 2026. Governor Gavin Newsom signed AB 2305 on September 21, 2026. The statute applies to contracts entered into on or after January 1, 2027, and expressly preserves qualifying nonrecourse litigation finance.
Cal. Rules Prof. Conduct, rule 5.4. California's rule generally prohibits the sharing of fees with nonlawyers and provides that when a person recommends, employs, or pays a lawyer, the person may not direct or regulate the lawyer's independent professional judgment or interfere with the lawyer-client relationship.
Cal. Bus. & Prof. Code §§ 6134–6134.14, enacted by AB 2305. The statute defines “corporate legal funder,” identifies prohibited influence over substantive litigation decisions, sets requirements for qualifying nonrecourse litigation finance, and authorizes discipline and civil remedies for violations.
See Cal. Rules Prof. Conduct, rule 1.8.1 (business transactions and pecuniary interests adverse to clients); rule 1.8.2 (use of client information). California's professional conduct rules impose additional restrictions designed to protect client interests when lawyers have financial relationships involving clients.
Cal. Bus. & Prof. Code § 6125. California law generally prohibits unauthorized persons from practicing law in the state; AB 2305 expressly views specified corporate-funder interference with litigation decisions as unauthorized practice of law.
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