California has adopted a new law addressing a question that can become uncomfortable in financed litigation: if outside capital is helping fund a litigation practice, who gets to make the decisions about the case?
Assembly Bill 2305 was signed on September 20, 2026. The law adds Business and Professions Code sections 6134 through 6134.14 and applies to contracts entered into on or after January 1, 2027.
The statute does not prohibit litigation funding. Instead, it focuses on control. A corporate legal funder may provide capital in arrangements permitted by law, but it cannot cross the line into making or influencing substantive litigation decisions that belong to the lawyer and client.
That distinction matters because litigation financing can take different forms. Some arrangements provide funding for a particular case. Others may involve broader financing, management, service, or ownership relationships with a litigation practice. AB 2305 addresses the point at which a financial relationship begins to interfere with the conduct of the litigation itself.
What Is a “Corporate Legal Funder”?
The statute defines a corporate legal funder broadly.
It includes a business entity, regardless of how it is structured or labeled, that is created primarily to raise or manage capital and is involved with a litigation practice through an ownership, service, financing, or management arrangement.
The definition therefore looks beyond the name placed on the relationship.
A financing company is an obvious example. Depending on the structure, an investment firm or management entity may also fall within the statute if its primary purpose involves raising or managing capital and it maintains the type of relationship with a litigation practice described by the law.
The statute defines a litigation practice to include representation in court proceedings, administrative matters, arbitration, and other adversarial dispute resolution proceedings.
What Decisions Must Remain With the Lawyer and Client?
AB 2305 identifies a number of litigation decisions that a corporate legal funder cannot control or improperly influence.
Those include which clients to represent, the scope and financial terms of a representation, litigation strategy, whether to file or dismiss a claim or defense, settlement decisions, discovery and evidentiary decisions, appeals, procedural choices, and litigation timing.
The statute also addresses financial control that can indirectly affect those decisions.
For example, a funder cannot control litigation budgets in a way that affects case strategy, select or direct counsel based on maximizing investor returns rather than the client’s interests, or require litigation decisions to be driven by return metrics instead of the client’s objectives and the attorney’s professional obligations.
Under the new law, this type of interference constitutes the unauthorized practice of law.
The Settlement Question May Be the Easiest Way to Understand the Rule
Consider a straightforward example.
A lawsuit is being financed by an outside funder. The defendant makes a settlement offer. The client wants to accept it. The funder believes continuing the case could produce a larger return.
Who decides?
AB 2305 reinforces that the decision cannot be handed to the outside funder merely because the funder has money at risk.
The same principle applies in the opposite direction. A funder should not be able to require acceptance of a settlement because it wants to recover its investment quickly if the lawyer and client believe continued litigation serves the client’s interests.
A financing agreement may affect the economics of a case. It cannot transfer control over the substance of the litigation.
Contracts That Give the Funder Too Much Control Can Be Unenforceable
The statute also reaches the contract itself.
A corporate legal funder cannot enter into an arrangement with a litigation practice if the agreement would permit the unauthorized practice of law described by the statute. Contract provisions that permit or facilitate prohibited interference are void, unenforceable, and against public policy.
The law also restricts provisions designed to prevent lawyers or clients from resisting improper interference.
For example, an agreement cannot restrict an attorney or client from withdrawing because of prohibited funder interference. It also cannot prohibit reporting that interference to the State Bar or another authority, or impose financial penalties for reporting or resisting it.
This means the analysis should begin when the financing or management agreement is drafted, not after a dispute over control has already developed.
California Did Not Ban Nonrecourse Litigation Finance
One of the most significant parts of AB 2305 is what it does not prohibit.
The statute expressly preserves nonrecourse litigation finance when the arrangement does not otherwise constitute the unauthorized practice of law.
Nonrecourse litigation finance generally involves capital provided to a litigation practice where repayment depends on the successful resolution of identified legal matters.
The statute also provides a path for qualifying nonrecourse financing to avoid being treated as impermissible fee sharing. The agreement must satisfy specific requirements.
Among them, the contract must identify a specific amount or maximum amount of funding. The funder’s return must be limited to a multiple of the funded amount or an interest rate. The funds cannot be used to solicit future clients, purchase leads, or acquire future matters. Funding must be tied to fees or expenses for specifically identified representations that have already begun or for which the lawyer or firm has already been retained.
The distinction is therefore between providing capital and controlling legal representation.
What Happens If the Line Is Crossed?
A violation by an attorney can be grounds for State Bar discipline.
The law also permits a client to bring an action against the attorney and corporate legal funder. Available remedies include statutory damages of $10,000 per violation or three times the client’s actual damages, whichever is greater, along with attorney’s costs and fees and injunctive or declaratory relief.
The statute provides that a violation of these provisions is not itself a crime.
The Law Is Broader Than Traditional Case Funding
Businesses and litigants may associate litigation finance with a third party investing money in a single lawsuit in exchange for a contingent return.
AB 2305 reaches a broader structural concern.
Its definition of corporate legal funder includes ownership, service, financing, and management arrangements. The practical question is whether an outside capital provider or related entity has obtained influence over decisions that should remain with licensed counsel and the client.
That can become especially important as law firms and litigation practices explore new financing arrangements, management structures, and relationships with outside capital.
What Clients Should Understand About a Funded Case
For a client, outside financing may be useful. Complex litigation can be expensive, and access to capital can allow a claim to be pursued when the cost of litigation would otherwise be difficult to carry.
But financing should not quietly create a second decision maker.
A client should understand whether a funder is involved, what economic rights the funder has, and whether the financing agreement affects decisions about settlement, litigation budgets, counsel, or strategy.
The attorney’s professional judgment and the client’s substantive litigation decisions cannot simply be transferred to an investor.
AB 2305 makes that boundary considerably more explicit in California.
The new law applies to contracts entered into on or after January 1, 2027. Litigation practices, funders, and entities involved in management or financing arrangements therefore have a relatively short period to review how their agreements allocate authority before the statute begins applying to new contracts.
For litigants, the central principle is simpler: someone may finance the lawsuit, but financing the lawsuit does not mean that person gets to run it.
Legal Authorities
- Assembly Bill 2305 (Kalra), 2025–2026 Reg. Sess., signed Sept. 20, 2026 — official bill text
- California Business and Professions Code §§ 6134–6134.14 (Article 7.5), operative for contracts entered into on or after Jan. 1, 2027
Related practice areas: Civil Litigation · Business and Commercial Litigation