A new and growing risk is threatening the U.S. bar: third-party litigation funding (TPLF), a practice that originated in Australia. Under TPLF, a person, entity, or agency with no formal role in a lawsuit bankrolls a legal campaign on behalf of a plaintiff or plaintiff group, often in exchange for a share of the financial recovery. That outside funder may have interests of its own—including, in some cases, ties to an adversary seeking access to proprietary or sensitive information, or even seeking retribution. And because TPLF is typically nonrecourse, the funder generally cannot recover its investment from the litigant or law firm if the lawsuit fails.
This has presented an ethical dilemma for the legal profession. The American Bar Association has issued ethical guidelines, like Model Rule 5.4, to prohibit lawyers from sharing legal fees with non-lawyers. Critics have also argued it threatens the integrity of the profession and even national security. TPLF can touch nearly any practice area—from class actions and torts to defamation and commercial litigation. And it can lead to fraud and raise legal defense costs for commercial entities that could result in those expenses trickling down to consumers. Various lawyers, firms, organizations and even public agencies have updated their risk registers for a multibillion-dollar business that was not included in most law school curriculum. Counsel on both sides of the bar are educating themselves now and standing on their ethical principles.
“Maximizing investor value, or return on investment, should not be the goal of a litigation. It should be the pursuit of justice,” said Fabio Bertoni, general counsel for the New Yorker. “When lawsuits are financed by non-lawyer investors, the risk is that it can have a distorting effect on the underlying goal of litigation, which should be to correct some injustice or to right some wrong. The parties who have a stake in the outcome should be the ones before the court.”
- Third-party litigation funding is reshaping high-stakes lawsuits, giving outside investors influence over settlements, discovery and litigation strategy while raising ethical and national security concerns for businesses and legal teams.
- North Carolina became the first state to ban TPLF in 2026, while Ohio approved sweeping reforms and several states are advancing similar legislation targeting foreign-backed funding.
- General counsel and defense lawyers are adapting fast by adding TPLF discovery tactics, reviewing financing filings and reassessing settlement assumptions as funded cases grow more expensive and prolonged.
- With federal disclosure rules still unresolved, companies facing commercial litigation need to understand how hidden funding sources could increase costs, expose sensitive information and shift case dynamics.
Understanding Commercial TPLF
Commercial TPLF typically finances businesses and sophisticated litigants pursuing high-value disputes as a strategic risk management or capital allocation tool, whereas consumer legal funding provides non-recourse cash advances to individual plaintiffs to help cover living expenses while their cases are pending. While the latter practice is commonly accepted in consumer law, the former has sparked debates on transparency and market impacts.
“TPLF can affect almost every stage of a case,” said Richard Lenkov, a capital member of Downey Lenkov Milstein Kus (formerly Downey & Lenkov), a firm nationally ranked Tier I by Best Law Firms for Construction Law and Construction Litigation. “Settlement discussions may become more complicated because there may be another stakeholder whose interests don’t perfectly align with the plaintiff’s. Discovery may become more extensive because there are resources available to pursue every possible issue.”
Lenkov added defense counsel should reinforce the importance of evaluating the merits early and be realistic about exposure. “You don’t want to assume a case will settle simply because it’s becoming expensive,” he noted. “That assumption may no longer hold true.”
National Security Implications
Beyond or possibly supplementing the financial interests is the potential national security risks posed by TPLF. A hostile nation or agency could use its finances and influence to infiltrate the judicial system in high-profile, high-value and sensitive matters. Furthermore, they could can anonymously bankroll lawsuits against U.S. companies, potentially gaining access to sensitive information produced in discovery.
The Department of Justice (DOJ) FARA Unit is the office responsible for administering and enforcing the Foreign Agents Registration Act. Operating within the Counterintelligence and Export Control Section of the National Security Division at the DOJ, the FARA Unit had identified foreign-funded litigation as an enforcement priority. In 2024, during the Biden administration, a FARA advisory opinion finding a U.S. firm receiving foreign-organization funding for impact litigation had to register as a foreign agent. But in February 2025 under the Trump administration, then-U.S. Attorney General Pamela Bondi issued a wide-ranging formal Memorandum that appeared to pause most FARA enforcement actions by disbanding the Foreign Influence Task Force (FITF), which investigated TPLF.
Bondi notably stipulated that criminal charges could not be brought under FARA or a related statute at 18 U.S.C. § 951 unless alleged conduct was “similar to more traditional espionage by foreign government actors.”
This about face between administrations has stalled the creation of a federal framework, leaving many U.S. companies involved in litigation to defend against shadowy financiers.
The Push for Disclosure
Three federal proposals have been introduced to address TPLF since the FITF was disbanded:
- Litigation Funding Transparency Act (S. 3826): The bill was introduced in the Senate on Feb. 11, 2026, by Sen. Charles Grassley (R-Iowa) and referred to the Senate Judiciary Committee. Although the Act has not advanced independently, its core disclosure provisions were incorporated into the bipartisan Taxpayer Assistance and Service Act (TASA), which was approved by the Senate Finance Committee in July 2026 and, at the time of publication, awaits consideration by the full Senate.
- Protecting TPLF From Abuse Act (H.R. 7015): Introduced in the House on Jan. 12, 2026, by Rep. Darrell Issa, (R-Calif.), the bill was referred to the House Judiciary Committee and remained at the committee stage as of July 2026.
- A Proposed Amendment to Federal Rule of Civil Procedure 26(a)(1)(A): This is not a bill, but a proposed amendment to the Federal Rules submitted through the Judicial Conference’s rulemaking process by the joint proposal by the U.S. Chamber Institute for Legal Reform (ILR) and Lawyers for Civil Justice (LCJ). The proposal has been discussed by the Advisory Committee and Standing Committee as part of the ongoing rules process, but no amendment has been approved or transmitted to the U.S. Supreme Court for adoption, so there is currently no nationwide disclosure requirement under Rule 26.
These federal transparency initiatives have not yet become law or resulted in a nationwide disclosure rule, although each remains part of the broader policy debate over TPLF.
Kiesel Law LLP founder Paul R. Kiesel played a lead role in the landmark ovarian cancer trial—Echeverria v. Johnson & Johnson—in 2017, which resulted in a verdict for $417 million and spotlighted the detrimental effects of the defendant’s talcum powder on women’s health.
Kiesel has not used any outside funding when preparing for litigation. However, through a measured approach, he said it allows firms who do not have the financial wherewithal to support important litigation to receive the financial aid they need to proceed.
“As I understand, the firms who have provided funding do not receive a percentage of the case itself, but they do have interest rates which are significant multiples of the funded amount,” said Kiesel, who is recognized by Best Lawyers in the areas of Plaintiffs’ Mass Tort Litigation / Class Actions, Personal Injury Litigation and Product Liability Litigation in Southern California. “I understand why businesses would want to prevent firms—whether they be plaintiff firms or litigators—bringing patent or other business type cases from having the financial wherewithal to do so. But this is an important tool to hold individuals and businesses accountable for their conduct.”
What Can Be Accomplished Without Congress
In the absence of federal enforcement, or a framework to govern TPLF’s impact on the judicial system and local economies, some state agencies took matters into their own hands.
The North Carolina Chamber of Commerce wanted to protect its businesses after some members reported experiencing investors complicating practical dispute resolutions; others received email solicitations from entities that caught wind of pending litigation and would support a legal cause in exchange for a portion of a final settlement.
This caught the chamber’s attention more than two years ago. It aligned with local stakeholders as well as retired judges to collaborate with state legislators in championing House Bill 315. After a two-year campaign, the bill passed nearly unanimously in the North Carolina General Assembly, and was signed into law on June 22, 2026, by Gov. Josh Stein, making The Tar Heel State the first in the U.S. to outright ban TPLF.
“We pride ourselves on calling balls and strikes in the North Carolina court system,” said North Carolina Chamber of Commerce President and CEO Gary Salamido. “All [TPLF] does is make it uncertain for both sides. And that affects investment in the state—we have a strong agritech, life sciences, defense and finance sectors and there’s a lot of intellectual property that comes out of it. If these third parties get access during discovery, it’s just wrong. We don’t want that to be part of North Carolina’s fabric.”
States Building Momentum for Change
Should a lawyer or firm try to circumvent the new law in North Carolina, Salamido said it would be a “professional death sentence,” since the state attorney general is empowered to enforce the law and there is a private cause of action that can be filed against any funder.
Salamido and Christopher G. Smith, a partner at Smith Anderson and board member of the North Carolina Chamber’s Legal Institute, met many of their commerce chamber counterparts from other states during a visit to Washington, D.C., shortly after House Bill 315 passed. Smith said they showed “polite disbelief” that North Carolina could ban TPLF without exception.
“These other states are realizing if we can ban it here in North Carolina, they can ban it in their state,” said Smith, who has been recognized since 2013 in The Best Lawyers in America® in North Carolina for Commercial Litigation and Environmental Litigation. “States are the experiments and if they can build enough momentum…it could be the law of the land one day in the U.S.”
Catching Fire
The concept gained the necessary traction in Ohio shortly after North Carolina’s landmark legislation.
On July 7, 2026, Ohio Gov. Mike DeWine signed House Bill 105, a comprehensive third-party TPLF reform into law. The law will take effect Oct. 6, 2026, and the ILR touted its signing as “a victory for civil justice reform,” while the Institute noted that costs related to the litigation system in the Buckeye State reached $2,583 per household in 2022.
Several other states are drafting and introducing similar legislation—with Michigan, Missouri and Tennessee specifically targeting foreign TPLF. Should the trend catch on nationwide, Smith is optimistic the impact will renew the appetite for a federal framework.
“One of the essential components of a strong business and legal climate is predictability,” Smith said. “In litigation disputes, the rules of the road are supposed to be the law and the facts and not what some stranger to the dispute says.”
What This Means for General Counsel in 2026 and Beyond
TPLF can lead to nuclear verdicts or drive-up settlement costs and prolong litigation – potentially even when the plaintiff may prefer to settle. General counsel will benefit by building TPLF discovery into standard litigation strategy in jurisdictions with disclosure statutes.
Marisa A. Trasatti is a partner in the civil defense group at Bowman and Brooke LLP, in Maryland and general counsel to Sciton, Inc., a leading medical laser device manufacturer in California. She said prior joining Bowman and Brooke, TPLF influenced plaintiffs in her experience as outside and general counsel, including defending against civil action filed under the federal Trafficking Victims Protection Reauthorization Act (TVPRA).
The signs of TPLF influence, she noted, are often found in unique requests during discovery.
“[Look for] objections to written discovery requests if otherwise discoverable by state and/or federal law. There are public filings for publicly traded litigation finance firms like Burford Capital,” said Trasatti, who is recognized by Best Lawyers for Product Liability Litigation – Defendants in Maryland since 2013 and the immediate past president of the Maryland State Bar Association. She added that defense counsel should check for “UCC-1 financing statements filed by the [suspected third party] and review deposition testimony from the plaintiff about payments received during the course of litigation.”
Strategizing for an Evolving Risk
Salamido noted that outreach to local businesses was the foundation for North Carolina’s effectiveness. He stressed that acting on survey feedback from owners and operators gave impetus for his state’s achievement and that even with bipartisan support, “results did not happen overnight.”
Until a uniform standard sweeps across the country to address TPLF, the concept of a legal showdown with an unseen adversary is a reality in the modern landscape. Funders could take other forms to stay one step ahead of the law, especially since billions of dollars in resolutions and legal tie-ups are at stake.
As for general counsel, Bertoni continues to have faith in the legal system, and hopes more lawyers will strategize and stand up to all lawsuits, especially those suspected of TPLF.
“I think it’s important for in-house counsel to have the courage of their convictions and to fight frivolous and baseless lawsuits,” he said. “Lawyers have a duty to their clients, but they also have a duty to the administration of justice. And part of that is not settling claims brought by finance companies who would be encouraged to bring baseless cases in the hopes of making a profit.”
