What is litigation funding, and why are there two kinds?
People use the phrase “litigation funding” for two different products. The difference matters.
Commercial litigation finance is investment money. A fund pays some of the costs of a lawsuit, or lends against a law firm’s portfolio of cases, in exchange for a share of any recovery. It shows up most in business disputes, patent cases and large, expensive tort cases, such as claims over a dangerous drug or environmental harm.
Consumer legal funding is money for a person, not for the case. Someone who is hurt and out of work gets an advance to cover rent, groceries or a car payment while the claim is pending. It is usually “nonrecourse.” That means if the case is lost, the person owes nothing back. The funder does not pay for experts or run the case.
Most of the fight in Washington is about the commercial side. But broad bills can sweep in both.
Why does funding matter for injured people?
Most injured people cannot pay a lawyer by the hour. So plaintiff lawyers work on contingency. The lawyer is paid only if there is a recovery, and the firm usually fronts the costs of the case: records, experts, depositions, filing fees and trial preparation.
In a serious case, those costs are large and the wait is long. A product liability or catastrophic injury case can take years of discovery and several expert witnesses before trial. The other side is usually an insurer or a large company with a defense budget that does not depend on winning.
Funding narrows that gap. It lets firms take cases that are strong but expensive. It lets an injured person refuse a low offer made because the rent is due. Take funding away, and those cases do not become cheaper to bring. Many simply never get filed.
What happened to the federal litigation funding tax?
In May 2025, Senator Thom Tillis introduced the Tackling Predatory Litigation Funding Act (S. 1821), a new tax on profits earned by third-party litigation funders. The House companion, H.R. 3512 from Rep. Kevin Hern, described the rate as 37% plus 3.8% on funder profits. A version of the tax was added to the Senate draft of the “One Big Beautiful Bill.” The Senate parliamentarian then ruled that it did not meet the budget rules for reconciliation, and it was removed. The final law was signed July 4, 2025 without it.
That was a procedural win, not a verdict on the merits. I said so at the time, and the last year proved it. The effort did not stop. It changed venues.
What’s new since July 2025
Congress
- The House Judiciary Committee took up Rep. Darrell Issa’s Litigation Transparency Act of 2025 (H.R. 1109) in November 2025, and his newer Protecting Third Party Litigation Funding From Abuse Act (H.R. 7015) at a markup on January 14, 2026. Neither reached a committee vote, according to published reports of those sessions.
- The committee did report H.R. 2675, the Protecting Our Courts from Foreign Manipulation Act, which targets litigation funding by foreign governments and sovereign wealth funds.
- On February 11, 2026, Senators Chuck Grassley, Thom Tillis, John Kennedy and John Cornyn introduced the Litigation Funding Transparency Act of 2026 (S. 3826). It would require disclosure of third-party funding in class actions and mass tort cases. It was referred to the Senate Judiciary Committee.
- As of late September 2026, none of these bills has become law.
Federal courts
- The federal Advisory Committee on Civil Rules created a subcommittee in 2024 to study funding disclosure. Its April 2026 agenda materials show it was still studying the issue and had not proposed a rule.
- On September 14, 2026, a group of more than 200 companies asked the committee to amend Rule 26 so that parties must identify any nonparty funding the case.
States
- California. AB 931 (Chapter 565, Statutes of 2025) created the California Consumer Legal Funding Act. Contracts must be in writing and spell out the amount funded, the charges and the maximum owed. Consumers can cancel within five business days by returning the money. Charges cannot be set as a percentage of the recovery. Funders cannot pay lawyers referral fees and have no say in whether or when a case settles. The same law bars California lawyers, until January 1, 2030, from sharing fees with out-of-state legal services companies that have nonlawyer owners or managers.
- Georgia. SB 69, signed in April 2025 and effective January 1, 2026, requires funders to register with the state Department of Banking and Finance, bars funders affiliated with foreign governments, foreign adversaries or sovereign wealth funds, and makes agreements above $25,000 subject to discovery.
- North Carolina. House Bill 315, the Prohibit Litigation Investments Act, took effect June 22, 2026. It bans money for the costs of a lawsuit repaid based on the outcome, with exceptions that include attorney contingency fees and financial support for personal or household expenses.
- Ohio. House Bill 105, signed July 7, 2026, requires consumer and commercial funders to register with the Attorney General, requires disclosure of funding agreements after a case ends, bars funder control of litigation and referral fees, and adds consumer contract protections.
- Medical lien financing. California’s SB 623, signed June 25, 2026, reaches a related practice. In rideshare crash cases arising on or after January 1, 2027, the sale or financing of a medical lien must be disclosed, and recovery on a sold lien is limited to what was paid for it.
Where does regulation go wrong?
Some of these rules are sensible. Written contracts, a right to cancel and a ban on funders steering settlements protect consumers. I support that.
The problem is direction. Most proposals look only at money on the plaintiff’s side. Insurers and corporate defendants spend enormous sums defending cases, with outside counsel, experts and reserves no one asks them to disclose. If transparency is the goal, it should run both ways. If profit from litigation is going to be taxed, the tax code should not ignore what the defense side spends and deducts. Rules that bind one side only do not level the field. They tilt it further.
Watch the framing, too. Caps on contingency fees and limits on lawyer advertising are sold as consumer protection. In practice, they make it harder to find a lawyer willing to take on a powerful defendant.
What would a fair framework look like?
- Disclosure to the judge, not to the world. Let courts review funding arrangements for conflicts, without handing the other side a map of the plaintiff’s resources.
- Equal tax treatment. Treat plaintiff-side and defense-side litigation spending by the same rules.
- Licensing with real standards. Register funders and hold them to duties like other financial services.
- Protect the lawyer’s independence. Strategy and settlement decisions belong to the client and the lawyer. Never the funder.
Bring funding into the open. Do not tax or regulate it out of existence.
What this means for you
- Talk to your lawyer before taking an advance. A consumer funding advance can grow quickly. Your lawyer can tell you how it may affect what you take home.
- Read the contract. In California, it must show the amount you receive, every charge and the most you could owe.
- Use the five-day window. Under AB 931, you can cancel without penalty within five business days of funding by returning the money.
- No one but you decides to settle. A funder may not control whether, when or for how much your case settles.
You can read the original column at the Daily Journal and more of Reza Torkzadeh’s writing on the publications page.
Frequently asked questions
What is the difference between litigation finance and consumer legal funding?
Commercial litigation finance funds the lawsuit itself or a law firm, usually for a share of the recovery. Consumer legal funding is a nonrecourse cash advance to an individual for personal expenses while a claim is pending.
Is consumer legal funding legal in California?
Yes. AB 931, effective January 1, 2026, regulates it. Contracts must be written and include specific disclosures, consumers have a five-business-day right to cancel, and funders cannot control settlement or pay lawyers for referrals.
Did Congress pass a tax on litigation funding?
No. A tax on funder profits was removed from the 2025 federal tax bill before it was signed on July 4, 2025. Related bills remain pending.
Do I have to tell the other side I received a funding advance?
It depends on the court, the type of case and the state. Ask your lawyer before you sign.