New state laws block third-party litigation funding

The Prohibit Litigation Investments Act made North Carolina the first state to impose a complete ban on third-party litigation funding. (ferrantraite/Getty Images)

Two states recently adopted laws governing third-party litigation funding, adding momentum to a growing debate over the role of outside investors in civil lawsuits.

Because third-party litigation financing is not specifically regulated under federal law, states increasingly are adopting measures aimed at curbing fraud and lawsuit abuse while increasing transparency for instances in which outside investors back claimants seeking multimillion-dollar verdicts.

In June, North Carolina became the first state to impose a complete ban on third-party litigation funding when Gov. Josh Stein signed into law the Prohibit Litigation Investments Act. Spearheaded by Rep. A. Reece Pyrtle Jr., a retired police chief in Eden, the law makes it illegal to provide litigation investments to a party or attorney in a civil court action in North Carolina.

Ben Greenberg, president and CEO of the North Carolina Trucking Association, said the association worked alongside a broader business coalition to secure passage of the measure.

“This legislation solidifies that North Carolina is not open for business for this type of interference in our judicial system,” Greenberg said.

He encouraged other states to pursue similar legislation or, if a ban is not politically feasible, adopt stronger disclosure requirements.

North Carolina defines litigation investments as providing money through direct payments, advances, loans, investments or other means to cover fees, costs and expenses tied to a pending or potential civil case in exchange for repayment contingent on the outcome.

The ban took effect June 22 and applies to civil proceedings filed on or after that date, as well as contracts entered into, renewed or amended after June 22.

Violators face fines of up to $50,000 per offense, enforced by the state attorney general.

Ohio enacts reforms

Ohio also is tightening restrictions on litigation funding. Beginning Oct. 6, a new law will ban foreign investment in third-party litigation and establish a more transparent framework for civil lawsuits.

Gov. Mike DeWine signed House Bill 105 into law July 7 after it passed the 136th General Assembly with bipartisan support from 19 representatives and seven senators.

“An important component of a strong business environment is a stable and predictable civil justice system,” said Rep. Jim Thomas. “This bill will protect Ohioans, consumers and businesses and help our state improve its standings.”

Thomas’ office said the law targets “hidden actors or anonymous funders” that can influence legal outcomes behind the scenes. Specifically,it requires that funding agreements disclose the amount advanced, fees charged, how those fees accrue and the maximum amount a consumer could owe.

Thomas, an attorney, and Rep. Meredith Craig, vice chair of the House Insurance Committee, sponsored the 12-page measure, which revises 11 sections of state law and repeals another. The law bars foreign governments, foreign corporations and foreign investors from participating in third-party litigation financing.

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Effective Oct. 6, foreign investment in third-party litigation funding will be banned in Ohio. (traveler1116/Getty Images)

“For too long, foreign actors have profited off Ohio citizens and businesses by investing in our courts,” Craig said.

The measure also prohibits litigation financiers from directing legal strategy or selecting attorneys. Plaintiffs and attorneys are also barred from sharing with commercial litigation funders information sealed by a court or protected by court order. In addition, attorneys involved in financed lawsuits must provide financing agreements to the Ohio attorney general within 14 days after a case is resolved.

Kiera M. Sullivan, an attorney and co-president of Continental Express Inc., testified in support of the legislation. Continental Express is an Ohio-based truckload carrier and logistics provider operating 550 trucks, 1,300 trailers and employing 750 people.

Sullivan described third-party litigation financing as a predatory practice that can incentivize and prolong lawsuits.

“As a trucking company owner and having spent 15 years involved in both the law and the trucking industry, I have seen firsthand the rising costs associated with lawsuits, settlements, verdicts, insurance premiums and, frankly, frivolous litigation,” she said. “This is a problem in both the state of Ohio and more broadly across the country.”

Tom Balzer, president and CEO of the Ohio Trucking Association, said the trucking industry depends on a fair and transparent legal system to resolve disputes efficiently.

“Funders are incentivized to pressure plaintiffs to continue litigation, even when injuries are minor or settlements are reasonable, leading to delayed resolutions and an overburdened court system,” Balzer said.

He noted that the issue was one of seven priorities identified by an OTA lawsuit-abuse task force. While he called the legislation “a good step forward,” he said additional reforms are planned.

Other state reforms

In Illinois, state Sen. Michael Hastings sponsored House Bill 5487, which Gov. JB Pritzker signed Aug. 7. The law took effect immediately.

The measure prohibits investors, including private equity firms and hedge funds, from interfering with attorney-client relationships or controlling client records. It also restricts fees tied to law firm revenue or profits.

“This bill is about one simple truth: Illinois clients deserve attorneys who are loyal to them, not to some distant investor chasing a quarterly return,” Hastings said.

Mississippi also enacted litigation-financing reforms when the Transparency in Consumer Legal Funding Act, Senate Bill 2747, took effect July 7. The measure was sponsored by Sen. Brice Wiggins, an attorney.

Under the law, litigation funders must disclose to the state attorney general the name, address, citizenship or country of incorporation or registration of any foreign entity that may receive proprietary information or information affecting national security interests through its involvement in financing a civil lawsuit.