The Prohibition Model: North Carolina Bans Litigation Funding

The Prohibition Model: North Carolina Bans Litigation Funding

North Carolina became the first US state to outlaw third-party litigation funding outright — not disclosure, not a cap, a flat prohibition with $50,000 penalties and treble damages. It passed the House unanimously and the Senate 45-1, which is a strange result for a contested policy fight until you read the rest of the bill. The prohibition travelled attached to an increase in workers’ compensation benefits.

My interest here is an investor’s. I hold commitments to private litigation finance funds, plus a legacy book of individual funded cases that’s winding down. A state making the activity itself unlawful raises a question I can’t answer from my quarterly reporting: whether the venues my managers underwrite into are still places the business is legal. That question didn’t exist as an underwriting input a year ago.

What the Statute Prohibits

Governor Josh Stein signed House Bill 315, the Prohibit Litigation Investments Act, on June 22, 2026 — Session Law 2026-14, codified at GS 66-511 through 66-515, effective on signing. The operative provision makes it unlawful to “engage in litigation investment in this State or to furnish litigation investment to a party or counsel of record in a civil proceeding in this State.” “Litigation investment” means providing money for the fees, costs or expenses of a pending or potential civil proceeding in return for compensation contingent on the outcome.

Three features of that trigger do the real work:

  1. The hook is the North Carolina proceeding, not the funder’s location. A New York or London funder backing an NC-venued case is inside the statute.
  2. It reaches the party and “counsel of record.” That sweeps in portfolio facilities extended to law firms, not just single-case deals with a plaintiff.
  3. “Civil proceeding” isn’t limited to lawsuits. It covers civil actions, arbitrations, mediations and administrative proceedings. This one killed a reflex I had on first reading — that large commercial money lives in arbitration and would route around a state-court ban. An NC-seated arbitration is inside the prohibition.

The applicability clause is narrower than the prohibition, and that gap matters: the Act reaches civil proceedings commenced on or after June 22, 2026, and funding contracts entered into, renewed, or amended on or after that date. A funder holding an untouched pre-June-22 agreement on a case already underway is largely outside it. The word carrying the risk is “amended” — extending a facility, adjusting a budget, adding a case, all the ordinary housekeeping of a live credit relationship, each arguably re-dating the whole agreement into the statute. That’s not a constitutional question, it’s a document-management question, which makes it far likelier to actually catch someone.

The Teeth

Mechanism Effect
Contract voided (GS 66-515) The offending funding agreement is void and unenforceable
AG enforcement Civil penalties up to $50,000 per violation, plus injunctive relief
Private right of action An injured party may elect common-law damages or statutory damages of treble the contemplated investment, with costs and fees
Long-arm jurisdiction A funder is deemed to have purposefully availed itself of the state and is subject to suit there “whether they have transacted business in the State or not”

That last row is the one funders should reread. The statute asserts personal jurisdiction over an out-of-state funder solely because it financed an NC case, and instructs courts to construe the Act liberally to effect its purpose.

The carve-outs don’t rescue the commercial model, because they describe everything litigation finance isn’t: attorney contingency fee agreements, a lawyer advancing costs in the ordinary course, an insurer’s defense and indemnification obligations, conventional bank lending, pro bono and nonprofit legal aid — and, generally, any financial support not contingent on the outcome. Outcome-contingent return is the entire product. A non-recourse advance repaid only on a win, whether single-case or portfolio, is precisely what’s prohibited.

How a First-in-the-Nation Ban Passed Almost Unanimously

The vote is the most interesting fact about this law, and the coverage skipped past it. A House vote with no opposition and a Senate vote of 45-1 is not what a contested economic policy looks like. Litigation funding has an organized industry, a trade association, and natural allies among plaintiffs’ lawyers, who are usually effective in a state legislature. They lost without a fight worth recording.

The explanation is sitting in the bill’s own title. HB 315’s short title is “Prohibit Litigation Invest/Amend WC Benefits,” and the enacted act is captioned “AN ACT TO PROHIBIT LITIGATION INVESTMENTS IN THE CIVIL JUSTICE SYSTEM AND TO AMEND THE WORKERS’ COMPENSATION ACT TO INCREASE CERTAIN BENEFITS UNDER THE SCHEDULE OF INJURIES.” Alongside the new Chapter 66 article, the same session law amended GS 97-29 and 97-31 — the workers’ compensation provisions governing compensation for total incapacity and the schedule of injuries.

So the prohibition didn’t run as a standalone. It was packaged with a raise for injured workers. That is a hard bill to vote against from the plaintiff side of the aisle, and a very cheap one to support from the business side: the state Chamber got a first-in-the-nation funding ban, and the price was a workers’ comp benefit increase that costs employers and insurers something real but bounded.

I can’t prove intent from a title and a vote count, and I’m not going to pretend the pairing was necessarily a negotiated trade rather than ordinary legislative housekeeping. But the structural point doesn’t depend on proving motive. Whatever the drafters intended, the effect was that the most aggressive litigation-funding law in the country cleared two chambers with essentially no recorded opposition, because opposing it meant opposing something else entirely.

Who Is Actually Affected

The direct, near-term hit to large commercial funders is probably modest. The disputes that anchor a serious commercial book — antitrust, patent, big-ticket contract claims, international arbitration — venue overwhelmingly in Delaware, the Southern District of New York, the major federal dockets and arbitral seats. North Carolina state court isn’t where that capital concentrates, so the number of agreements voided on day one is likely small.

The exposure that bites is less direct: active or pipeline NC-venued matters whose agreements are now unenforceable; portfolio facilities that touch NC cases, since the “counsel of record” language can reach a multi-case facility even if the funder never set foot in the state; and consumer and pre-settlement funders, who carry far more North Carolina retail exposure than commercial funders and have no disclosure-regime middle ground to fall back into. Expect explicit North Carolina carve-outs in new facility documents.

What Actually Replicates

The reason to care beyond one state is precedent, but the precedent isn’t what I first assumed it was. The text is trivially copyable — this is four operative sections, not a nineteen-section regulatory scheme, and a legislature that wants a ban doesn’t need drafting infrastructure to produce one. What’s harder to copy is the politics, and that’s where the bundling matters. What North Carolina demonstrated is not that a prohibition can be drafted. It’s that a prohibition can be made politically free by attaching it to something the other side wants.

Two things argue against a cascade. Model legislation gets introduced far more often than enacted, and the dominant direction of this cycle is emphatically disclosure and registration rather than prohibition — most legislatures that touched the issue chose the survivable lane. And the comparison with the other mechanism moving through the states is stark: in roughly the same window that produced exactly one outright ban, six states restricted funding by the origin of the capital behind it — Colorado, Oklahoma, Montana, Arizona, Georgia and Ohio. If you’re ranking threats to a commercial fund’s book by how fast they’re actually spreading, prohibition is not the leader.

What argues for taking the tail seriously is that regulation short of prohibition already demonstrably moves behavior. After the Chief Judge of the District of Delaware imposed a standing order requiring disclosure of third-party funding in April 2022, patent filings in that district fell 41% over two years — from 1,899 to 1,121 — against a 15% national decline, with the difference showing up as migration to districts without a disclosure requirement. That’s what a disclosure rule did to filing behavior. A prohibition doesn’t redirect cases to a friendlier forum; within its borders it removes the financing entirely.

So the honest base case is that North Carolina stays an outlier or close to it, and prohibition spreading across several states is a tail scenario rather than the modal one. It’s a tail worth pricing anyway, because the payoff is asymmetric: a disclosure regime is something a fund underwrites around, while a spreading prohibition movement raises the floor on risk for the whole asset class. Low probability, high impact, and nothing about my position lets me hedge it.

Two Questions That Set the Magnitude

Question Why it’s unresolved
Federal reach Can a state statute govern the funding of cases in North Carolina’s federal courts? There’s a credible Erie and preemption argument that it can’t fully, which would leave a federal-diversity lane partly open.
Constitutionality No challenge has been filed. Practitioners expect one on access-to-courts and freedom-of-contract grounds, with the long-arm provision inviting dormant-Commerce-Clause and extraterritoriality arguments. How that resolves on appeal is what decides whether other states copy this or revert to disclosure.

Where I Land

  1. The direct impact is small; the packaging is the precedent. North Carolina isn’t a core commercial venue, so the day-one damage is limited. The transferable lesson for other legislatures isn’t the statutory text, it’s that a prohibition attached to a benefits increase costs almost nothing to pass.
  2. Prohibition is worse for the industry than disclosure, and rarer. A disclosure regime implicitly accepts the asset class; a ban declares the activity illegitimate. It’s also the mechanism that has spread least — the capital-origin restriction is moving through the states several times faster.
  3. Venue legality is now an underwriting input. It sits alongside collectability and enforcement as a structural risk that has nothing to do with whether a claim is any good, and it’s the newest line on that list.

I’m not unwinding a litigation finance allocation over one state I have no active exposure in. What I’ve added is a question before any new commitment: which venues does this manager underwrite into, and does the fund have a process for screening the ones where the business is now unlawful or restricted. The NCOIL model act circulating behind most of these bills doesn’t contain a prohibition like this one, so a state that wants a ban is writing something deliberate rather than adopting a draft — which makes the sponsor and the coalition behind a given bill more informative than the bill’s own text.

The uncomfortable part is that I can’t verify my own answer. I hold fund commitments, not cases. I don’t see which venues my GPs are underwriting into, and nothing in my quarterly reporting would tell me if a fund had North Carolina exposure at the moment this law took effect. So “venue legality is an underwriting input” is a question I’ve added to a diligence list, not a risk I’ve measured — which is the recurring limit of investing one layer removed from the asset.

Sources

Commentary and personal experience — not investment, legal, or tax advice. Investing carries risk, including total loss of capital. Always do your own due diligence.