LOS ANGELES, September 23, 2026 – Imagine the scenario of a high-profile courtroom drama where an enormous corporate funder lurks in the shadows and decides whether the injured party takes the money or pushes through to a multimillion-dollar verdict.
For decades, lawsuit financing—an industry that makes up more than $5 billion annually where outsiders, namely hedge funds and wealthy investors, fund lawsuits in return for a portion of the financial gain—has been operating in a gray area in California.
That dynamic just hit a brick wall.
Governor Gavin Newsom quietly signed Assembly Bill 2305 into law, which imposes tough guardrails that serve to constrain the influence of corporate funders on the strategy and decision-making of the attorneys. According to the newly adopted law, third-party financiers are not allowed to influence any of the three aspects of the litigation process.
The bottom line is that although litigation funders claim to be simply providing necessary funding to under-resourced plaintiffs suing well-funded corporations, the contracts are seen as compromising the ethical standards of the litigation system.
“When an outside investor has a financial stake in a case, the incentive structure shifts instantly from seeking justice to maximizing yield,” explained one veteran Sacramento legal ethics attorney. “AB 2305 draws a clear line in the sand—lawyers must answer solely to their clients, not to Wall Street portfolio managers.”
And this matters because the law directly addresses long-standing concerns regarding conflicts of interest within the legal profession.
Traditionally, aggressive funding agreements have provided third-party funders with the right to block any settlement proposal not meeting certain profitability criteria. With AB 2305, such terms become invalid. Legal experts gain the freedom of choosing strategies, preserving the attorney-client confidentiality agreement from business interests.
Unsurprisingly, opinions about the new regulation have been mixed in California’s legal community. Consumer rights protection groups have welcomed this law as an essential defense against extortionist funding practices. Meanwhile, some anonymous representatives of litigation finance firms have shared concerns regarding potential adverse consequences of overly cautious regulations in attracting investments into expensive class actions beyond the reach of ordinary people.
AB 2305 has additional disclosure obligations other than limiting the influence of funders. These provisions oblige legal representatives to disclose to the court and to the adverse party any third-party funding in certain business cases.
It’s hard to say whether AB 2305 will slow down the explosive increase in litigation funding in California. However, one thing is sure – the days of quiet control by third-party funders in the courtrooms of the Golden State are over.
