California Would Shield Nonrecourse Litigation Finance While Curbing Firm Control
The measure bites only on contracts signed from January 1, 2027, and leaves enforcement to clients suing rather than to any regulator.
September 1, 2026
California is one signature away from becoming the third state this year to write limits on outside capital in law firms into statute. But the version on Governor Gavin Newsom’s desk differs materially from the one Assembly Member Ash Kalra introduced in February, and the change that matters most to allocators is an express statutory safe harbor for nonrecourse litigation finance.
Assembly Bill 2305 cleared the Senate 40 to nothing on August 24 and won Assembly concurrence 78 to nothing the next day. Enrolled August 27 and presented to the governor on August 31, it leaves him until the end of September to sign or veto.
Who counts as a corporate legal funder
The bill adds an article to the Business and Professions Code aimed at what it terms corporate legal funders: entities created for, and with the primary purpose of, raising or managing capital that are involved in a litigation practice through an ownership, service, financing, or management arrangement. The definition is drafted to defeat structuring — it applies no matter how the entity is organized, labeled, or operated, and the corporate form of the firm on the other side is expressly irrelevant. The inclusion of service arrangements is the operative detail, because the management services organization model that has carried private capital into US law firms rests on that kind of agreement.
A funder may not interfere with or attempt to influence an attorney’s professional judgment on substantive litigation decisions, a list running from which client to take through the scope and financial terms of representation, strategy, whether to file or dismiss, settlement posture, and discovery. A second list bars control over litigation functions, including:
- counsel selection driven by profit maximization rather than client interest;
- financial incentives tied to outcomes that compromise attorney independence;
- funding allocation and budgeting decisions that may affect case strategy;
- any requirement that litigation decisions be predicated on investor return metrics.
The carve-out for nonrecourse capital
The provision most consequential for anyone underwriting legal assets arrived in the Senate. A new section states that nothing in the article prohibits nonrecourse litigation finance, and that the practice is not impermissible fee sharing under the state’s fee-sharing statute or its rules of professional conduct, provided four conditions are met:
- the contract specifies a dollar amount, or a maximum, payable to the lawyer or firm;
- the return is limited to a multiple of the funded amount or a rate of interest on it;
- the contract expressly precludes using the money to solicit or acquire future clients or matters, purchase leads, or seek referrals;
- the funding goes solely to the fees or expenses of specific, identified representations already commenced or for which the firm has been retained.
Read together, those conditions draw the safe harbor tightly around case-level capital, which the bill defines as funding repayable only on the successful resolution of specific, identified representations. Facilities built around origination, marketing spend, or a firm’s general working capital do not meet the four tests, and the section immunizes nothing that otherwise amounts to control.
Enforcement runs through clients
Conduct that crosses the line is designated the unauthorized practice of law, but the bill expressly provides that a violation is not a crime. Remedies sit in two places instead. A violation is grounds for State Bar discipline against the attorney, and it exposes both attorney and funder to a client-brought action for statutory damages of ten thousand dollars per violation or three times actual damages, whichever is greater, plus costs, fees, and injunctive or declaratory relief.
Contract terms permitting or facilitating the prohibited conduct are void and unenforceable, and firms may not agree to clauses restricting withdrawal from a representation, barring a report to the State Bar, or penalizing an attorney for resisting interference. The article reaches only contracts entered into on or after January 1, 2027, which leaves arrangements already papered outside its scope.
A third state, and a template borrowed from healthcare
Colorado and Illinois both enacted measures on nonlawyer investment in legal practices earlier this year, and California already bars fee sharing with out-of-state entities that permit nonlawyer ownership, a prohibition running through 2029. Arizona and Utah remain the only states that let nonlawyers own legal practices outright.
The structure will look familiar to anyone following private equity in healthcare. Professional-independence principles get lifted out of ethics rules into statute, management and service agreements rather than cap tables become the exposure surface, and a private right of action supplies the teeth. What distinguishes California’s version is that it also tells one category of capital provider how to stay onside.
