North Carolina moves to ban third-party investments in lawsuits
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North Carolina lawmakers have sent Gov. Josh Stein a bill that would ban third-party investments in lawsuits.
Why it matters: House Bill 315 has been pushed by the North Carolina Chamber, the state's largest business advocacy group, which says it would make North Carolina the first state in the country to ban outside investors from funding lawsuits in exchange for an equity stake in the outcome.
- It's unclear if Stein will sign or veto the bill. His office has not yet responded to a request for comment.
Driving the news: The bill passed both chambers of the N.C. General Assembly overwhelmingly, with the House voting 112-0 and the Senate voting 45-1 in favor of the bill.
Zoom in: Third-party litigation financing has grown significantly in the U.S. over the past decade, with $15.2 billion invested into commercial litigation in 2023, according to the U.S. Chamber of Commerce.
- Proponents say that litigation investment can increase access to justice for plaintiffs with limited resources.
- Detractors, though, say it turns the courts into an investment opportunity for hedge funds and investment firms and could lead to the proliferation of lawsuits.
How it works: House Bill 315 would bar a person or a company from paying a plaintiff or defendant's legal expenses in exchange for a percentage of a future settlement or judgment.
- The law would not apply to nonprofit organizations, legal-aid organizations, insurance companies defending policyholders and immediate family members.
- It also wouldn't preclude attorneys or law firms from forming contingency-fee arrangements between attorneys and clients, if they follow the N.C. Rules of Professional Conduct.
What they're saying: The NC Chamber got behind the push to ban third-party litigation funding after hearing concerns from its members, Alyssa Morrissey, director of legislative and regulatory affairs, told Axios.
- She said the practice is most common in lawsuits between businesses; however, because no disclosure is required in third-party litigation, it can be hard to determine how frequently it happens.
- Companies, she said, are worried that third-party litigation funding is leading to an increase in lawsuits and costly settlements to avoid discovery and the potential exchange of sensitive information about intellectual property or trade secrets.
- Innovative companies are concerned, Morrissey told Axios, "Because you might not necessarily know who's involved [in a lawsuit], and they could obtain intellectual property and things that are unique to a specific company."
State of play: Mark Weidemaier, a professor of law at UNC-Chapel Hill, said the bill will likely limit financing options for some plaintiffs and defendants.
- "My reaction is that if there is abusive litigation — and there clearly is in some cases — it would be better to regulate that directly than to limit access to credit," he told Axios in an email. "The bill further entrenches lawyers as providers of litigation finance."
Between the lines: Sen. Thom Tillis introduced a bill at the federal level last year that would have imposed a new tax on the profits earned from third-party litigation funding.
- He and the NC Chamber cited the presence of some foreign entities participating in the practice as problematic.
- The N.C. House bill does not explicitly mention foreign entities.