California Enacts AB 2305: Funder Control of a Case Is Now the Unauthorized Practice of Law

California has enacted the country's most detailed statutory limit on outside capital inside a plaintiffs' practice: AB 2305, by Assemblymember Ash Kalra and sponsored by Consumer Attorneys of California, was listed among the bills signed in Governor Newsom's 20 September 2026 legislative update, reported signed on 21 September 2026, and chaptered as Chapter 393, Statutes of 2026. The California AB 2305 litigation funding law does not outlaw funding; it makes a funder's control of a case the unauthorized practice of law, and it backs that with State Bar discipline, statutory damages of $10,000 per violation or treble actual damages, and a rule that voids any contract term permitting the interference.

For the firms this site covers, the operative detail is not the private equity headline. It is that Article 7.5 defines a "litigation practice" to include representation in arbitration and administrative proceedings, and that the carve-out preserving nonrecourse Third-Party Litigation Funding is conditioned on the money not being spent to acquire claimants. Those two features put funded Mass Arbitration campaigns and funded Mass Tort inventories squarely inside a statute most of the coverage has read as a corporate-governance measure.

What the California AB 2305 litigation funding law actually does

AB 2305 adds Article 7.5 to Chapter 4 of Division 3 of the Business and Professions Code. Its premise, stated in the bill's own findings, is that licensed attorneys and litigants must retain full autonomy over litigation decisions and strategies, free from improper control or interference by corporate investors, private equity firms, hedge funds or other nonlawyer entities whose primary interest is financial return rather than the interest of the injured individual.

The statute works through three defined terms and one consequence.

A corporate investor — the category from which "corporate legal funder" is drawn — is defined broadly: any private equity group, hedge fund, investment firm, or any nonattorney corporation whose primary purpose is raising or managing capital, that participates in a litigation practice through an ownership, financing or management arrangement. The definition is deliberately agnostic as to structure. It does not matter whether the capital arrives as equity, as a loan, as a management services agreement, or as a revenue share.

A litigation practice is an attorney, law firm or other professional association that represents parties in judicial, administrative, arbitration or other adversarial dispute resolution settings. Transactional, advisory and other non-litigation work sits outside Article 7.5. Arbitration does not.

A substantive litigation decision is the list of things a lawyer is supposed to decide with the client and nobody else. The enumeration runs to client selection, the scope of representation, the financial terms of the representation, legal strategy, whether to file or dismiss a claim, settlement, what evidence to present, how discovery is conducted, and appellate or procedural choices.

The consequence: a corporate legal funder that interferes with a substantive litigation decision, or exercises control over a litigation function, commits the unauthorized practice of law. That is the doctrinal move worth pausing on. California could have written a disclosure statute, as Georgia and half a dozen other states did in 2025. Instead it took conduct that was previously a matter of professional responsibility — enforceable, if at all, through a Rule 5.4 discipline case against the lawyer — and converted it into a statutory prohibition running directly against the funder, with a private damages remedy attached.

Conduct by the funder	Status under Article 7.5	Practical consequence in a funded inventory
Choosing or vetoing which claimants the firm signs	Interference with a substantive litigation decision	Portfolio-level claimant screening by the capital provider becomes the unauthorized practice of law
Setting or approving settlement authority, floors or acceptance thresholds	Interference with a substantive litigation decision	Funder sign-off on an Aggregate Settlement (Mass Arbitration) or a Settlement Matrix cannot be contractually required
Directing which claims are filed, held back or dismissed	Interference with a substantive litigation decision	Capital-driven Batching and staggered filing schedules must be the lawyer's call, documented as such
Controlling case staffing, expert spend or discovery conduct	Exercise of control over a litigation function	Budget covenants that function as discovery vetoes are exposed
A contract term permitting any of the above	Void, unenforceable and against public policy	The term fails even if both sides want it
A term barring the lawyer or client from reporting interference	Void; penalties for reporting also barred	Confidentiality and non-disparagement drafting has to be rebuilt
A term restricting withdrawal from the representation after interference	Void	The lawyer's exit ramp cannot be contracted away
Providing nonrecourse capital for identified, already-retained matters	Permitted; not impermissible fee sharing	The mainstream funding model survives intact

The anti-gag provisions deserve separate emphasis because they are the enforcement engine. A funding agreement may not stop an attorney or a client from speaking publicly about interference or reporting it to the State Bar, and may not impose a financial penalty for reporting or for resisting corporate influence. Without those clauses, the prohibition would be close to unenforceable, since the only people who see the interference are contractually silenced. With them, every funded California litigation practice now contains a lawful whistleblower.

Does AB 2305 ban private equity from owning law firms in California?

No. AB 2305 does not ban private equity ownership of law firms, does not ban management services organizations, and does not ban outside investment in a firm's infrastructure. Several early write-ups have described it as a ban on corporate takeovers of law firms; that is a misreading of what Article 7.5 does.

California already prohibits nonlawyer ownership of a law practice through Business and Professions Code § 6125 and Rule 5.4 of the Rules of Professional Conduct. AB 2305 does not touch that prohibition and does not need to. What it does is close the gap between the ownership rule and the reality that capital exercises control without owning anything — through management services organizations that supply back office, marketing and case-acquisition functions; through alternative business structures domiciled in states such as Arizona that permit nonlawyer ownership; and through financing documents that are labelled loans but carry covenants giving the lender decision rights over the underlying claims.

Article 7.5 attacks the control, not the cap table. An MSO may still exist. A fund may still lend against a firm's Contingency Fee receivables. What neither may do is take, or be given, a decision right over a substantive litigation decision — and a contract purporting to give one is void. Read that way, the statute largely codifies the independence obligations Rule 5.4 already imposes on the lawyer, then extends them outward to bind the counterparty who was previously beyond the reach of bar discipline entirely.

The distinction matters for compliance. A firm that responds to AB 2305 by unwinding its investor relationships has over-read the statute. A firm that responds by leaving its documents untouched because "we're not owned by anyone" has under-read it. The exposure lives in the operative covenants, not in the ownership structure.

Does AB 2305 apply to mass arbitration and mass tort funding?

Yes. "Litigation practice" under Article 7.5 expressly covers representation in arbitration and administrative proceedings alongside court litigation, so a firm running a Mass Arbitration campaign is a litigation practice and its funder is a corporate legal funder. Nothing in the statute treats a Demand for Arbitration differently from a complaint.

That is the least-reported feature of the new law and the one with the most operational bite. The economics of mass arbitration are capital economics. A campaign of ten thousand Negative-Value Claim demands is financed before it earns anything, and the financing decisions and the litigation decisions have a habit of collapsing into each other: when to file the next tranche, whether to pay a provider's Filing Fee across the whole inventory or a slice of it, whether to accept a respondent's per-claimant offer, whether to let an Administrative Closure stand or fight it. Each of those is a substantive litigation decision or a litigation function under Article 7.5. From 1 January 2027, a California campaign whose funder holds the pen on any of them is exposed, and the contract clause that gave the funder the pen is void.

The same logic reaches mass tort inventories. Funder consent rights over whether a client is signed, over the Claim Value assigned in a settlement grid, over participation in a Global Settlement, or over the allocation of a Common Benefit Fund contribution are all decision rights the statute puts back with the lawyer and the client. Funding a Qualified Settlement Fund (QSF) or advancing case costs against an identified inventory remains lawful. Holding a veto over what happens inside it does not.

Practitioners should also note what the statute does not do. It creates no disclosure obligation, no registration regime, and no discovery rule. A California defendant does not learn the identity of a plaintiff's funder from AB 2305, and the proposed federal disclosure amendment to Rule 26 remains the live vehicle for that question. Article 7.5 is about the allocation of decision rights, not transparency.

The nonrecourse carve-out and the claimant-acquisition condition

AB 2305 expressly provides that it shall not be construed to prohibit the practice of nonrecourse litigation finance, and that nonrecourse litigation finance does not constitute impermissible fee sharing. That sentence is why the International Legal Finance Association moved to neutral after the bill was amended, and why the Civil Justice Association of California — normally on the opposite side of anything Consumer Attorneys of California sponsors — supported it.

But the carve-out is conditional, and the conditions are where mass-filing practice gets caught. To fall inside it, the funding must be provided solely for the fees or expenses of specific, identified legal representations that have already commenced or for which the lawyer or firm has been retained. And the contract must expressly preclude using the money for the solicitation or acquisition of future clients or matters, for the purchase of a lead for one or more potential clients or cases, or to seek the referral of those clients or cases.

Read that against how mass tort and mass arbitration inventories are actually built. Claimant Solicitation at scale — television, digital lead buys, intake vendors, aggregator referrals — is the single largest use of outside capital in the plaintiffs' bar, and it is precisely the use the carve-out now forecloses for any contract signed from 1 January 2027 onward. This is a structural change to the funding market, not a drafting inconvenience. Capital that wants safe-harbour treatment has to attach to matters that already exist; capital that wants to build an inventory from scratch has to find another route, and the obvious routes — routing acquisition spend through an MSO, or characterising it as working capital rather than case funding — run straight back into the control prohibition and the void-contract rule.

It is worth being precise about scale, because the numbers usually quoted understate the exposure. Westfleet Advisors recorded 42 active funders with roughly $16.1 billion in assets under management and an average deal size around $8.1 million in 2025, with new commitments rebounding about 23% after two contracting years. Those figures cover commercial litigation finance only; Westfleet expressly excludes consumer legal funding and law firm finance, including the mass tort and personal injury lending that AB 2305's acquisition condition hits hardest. The affected market is larger than the headline number, and nobody publishes its size.

When does AB 2305 take effect and what happens to existing contracts?

Article 7.5 applies only to contracts, agreements and arrangements entered into on or after 1 January 2027. Funding agreements and management arrangements already in place before that date are not retroactively voided, which gives every California litigation practice a little over three months of runway.

That runway is shorter than it looks, for three reasons. First, the trigger is contract formation, not conduct — so an amendment, extension, renewal or new tranche documented in 2027 under a pre-2027 master agreement is very likely a new contract for these purposes, and should be papered as if Article 7.5 applies. Second, the anti-gag and void-term provisions operate on the document, so a legacy agreement that silences the lawyer about interference will start to look indefensible well before anyone litigates its date. Third, the statute reaches the conduct of interference as unauthorized practice of law regardless of how comfortable the paper is; a funder relying on a 2026 covenant to direct a 2027 settlement decision is inviting a test case it does not want to be the defendant in.

Date	Event
16 March 2026	AB 2305 amended into the comprehensive Article 7.5 framework
6 April 2026	Passes the Assembly floor 68-0
24 August 2026	Passes the Senate 40-0
25 August 2026	Assembly concurs in Senate amendments, 78-0 with one abstention
20 September 2026	Listed among the bills signed in the Governor's legislative update
21 September 2026	Signing reported; chaptered as Chapter 393, Statutes of 2026
1 January 2027	Applies to contracts, agreements and arrangements entered into on or after this date

What are the penalties for violating AB 2305?

A violation is cause for the imposition of discipline by the State Bar of California against the attorney, and it subjects both the attorney and the corporate legal funder to statutory damages of $10,000 per violation or three times the actual damages incurred, whichever is greater, together with attorney's fees and costs and injunctive or declaratory relief.

Three features of that remedy set deserve attention. The statutory floor is per violation, which in an inventory practice is a multiplier with no obvious ceiling — a single funder covenant applied across a book of claims can generate a very large number of discrete interferences. The treble-damages alternative attaches to actual damages incurred, which points the claim at the injured client rather than at a regulator. And the attorney is exposed alongside the funder, which is the provision most likely to change behaviour: in-house compliance at a funder can price a damages risk, but a plaintiffs' lawyer facing a State Bar referral over a financing covenant will simply refuse to sign it.

The enforcement question nobody can answer yet is institutional. Article 7.5 gives the State Bar a new category of misconduct but no new investigative resources, and the practical reach of the statute will depend on how aggressively the Bar pursues referrals it receives — a point the defence bar has already made about both AB 2305 and its companion, AB 2039, which targets capping and running by runners and marketers who steer accident victims to firms for a fee, with a civil penalty of $25,000 per violation and summary disbarment procedures for certain convictions.

Who supported and opposed AB 2305?

The bill was sponsored by Consumer Attorneys of California, whose president Doug Saeltzer framed it as the plaintiffs' bar holding itself to the standards it demands of corporations, and it drew support from the Civil Justice Association of California, a defence-side and business-oriented group. The International Legal Finance Association, the trade body for commercial funders, moved to a neutral position after amendments addressed its concerns. AB 2305 passed both houses without a single recorded no vote.

That coalition is the most instructive fact about the statute. Litigation funding is normally a proxy war between the plaintiffs' bar and the business lobby, which is why the 2025 state wave produced disclosure and registration statutes pushed by tort reformers over trial lawyer opposition. AB 2305 inverted the alignment by targeting something both sides dislike for different reasons: the plaintiffs' bar objects to outside capital displacing the lawyer-client relationship and driving indiscriminate claim acquisition, and the defence bar objects to litigation being generated as an asset class. The price of that consensus was the nonrecourse safe harbour, which is why the funding industry stood down.

How AB 2305 compares to other state and federal litigation funding rules

California has taken a different route from every other state that has legislated in this area. The 2025 wave — Georgia, Kansas, Oklahoma, Colorado, Arizona and Montana, following Indiana, Louisiana and West Virginia in 2024 — produced disclosure, registration, foreign-funder restrictions and discoverability. Georgia's SB 69, signed 21 April 2025 and effective 1 January 2026, is the template: register with the Department of Banking and Finance, restrict foreign ownership, make the funder's involvement discoverable in civil cases. New York's 2026 statute took a consumer-protection route, capping a funder's total take and giving plaintiffs a cancellation window.

Jurisdiction	Mechanism	What it regulates	Who enforces
California (AB 2305, Ch. 393, Stats. 2026)	Prohibition plus private damages	Funder control of, and interference with, litigation decisions	State Bar discipline; private action for $10,000 per violation or treble damages
Georgia (SB 69, eff. 1 Jan 2026)	Registration and disclosure	Funder registration, foreign ownership, discoverability of the funding	Department of Banking and Finance; discovery in the underlying case
New York (2026)	Consumer protection	Cap on the funder's total take; cancellation right; bar on steering strategy or settlement	Consumer statute enforcement
Federal — Litigation Funding Transparency Act of 2026 (S. 3826)	Disclosure	Identity of funders, including foreign funders, in federal class actions and MDLs	Federal courts, if enacted
Federal — proposed Rule 26 amendment	Disclosure	Funding agreements as part of initial disclosures	Federal courts, through the Rules Enabling Act process

The comparison exposes what California chose not to do. There is no registry, no disclosure obligation and no discovery rule in Article 7.5. A California defendant facing a funded mass tort or Mass Arbitration inventory learns nothing new about who is behind it. What changes is that the person behind it can no longer be given the right to run it — and if a defendant does obtain a funding agreement through the federal disclosure route, an interference covenant in a post-2027 California contract is now evidence of a statutory violation rather than merely an awkward fact.

What it means for plaintiffs' firms, funders and defendants

For California plaintiffs' firms. Every funding, MSO and portfolio document that will be signed, amended or renewed from 1 January 2027 needs a control audit before it is executed: consent rights, approval thresholds, budget covenants, staffing and vendor requirements, reporting obligations that function as approvals, and any clause limiting what the firm may say about interference. A Retainer Agreement should record that litigation decisions rest with the client and the lawyer. Firms that fund Claimant Solicitation from case-finance facilities need a new capital structure for acquisition spend, because the safe harbour will not cover it.

For funders. The safe harbour is available and workable, but it is drafted as a condition rather than a status. Capital must attach to identified, already-retained matters, and the contract must say in terms that the money will not be used to solicit clients, buy leads or seek referrals. Portfolio facilities written against future inventory are the exposed product. Information rights survive; decision rights do not, and a term that dresses a decision right as a reporting covenant is void either way.

For defendants and their counsel. Article 7.5 supplies no discovery hook of its own, so the practical route to a funding agreement is unchanged — the federal disclosure proposals and state discoverability statutes. What changes is the value of the document once obtained. In a post-2027 California matter, a control covenant is not merely impeachment material about who is really driving the case; it is a void term and the predicate for an unauthorized-practice claim, with a statutory damages figure attached.

For mass arbitration respondents. The statute does nothing to slow a campaign and does not create a defence to a Demand for Arbitration. Its relevance is structural: it constrains how a California campaign can be capitalised, which over time constrains how fast an inventory can be assembled, and it gives claimants' counsel a statutory reason to resist funder pressure toward an aggregate resolution the claimants have not authorised.

Frequently asked questions

What is California AB 2305?

AB 2305 is a California statute, authored by Assemblymember Ash Kalra and sponsored by Consumer Attorneys of California, chaptered as Chapter 393, Statutes of 2026. It adds Article 7.5 to the Business and Professions Code and makes it the unauthorized practice of law for a corporate legal funder to interfere with a substantive litigation decision or exercise control over a litigation function.

Is third-party litigation funding still legal in California?

Yes. Nonrecourse Third-Party Litigation Funding remains lawful and is expressly not impermissible fee sharing, provided the funding is for specific identified representations already commenced or retained, and the contract expressly precludes using the money to solicit or acquire future clients, buy leads or seek referrals.

When does AB 2305 take effect?

Its provisions apply to contracts, agreements and arrangements entered into on or after 1 January 2027. Agreements executed before that date are not retroactively voided, though the conduct prohibition on interference is not obviously limited by the age of the paperwork.

What are the penalties under AB 2305?

State Bar discipline for the attorney, and for both the attorney and the corporate legal funder, statutory damages of $10,000 per violation or three times actual damages, whichever is greater, plus attorney's fees, costs and injunctive or declaratory relief.

Does AB 2305 apply to arbitration?

Yes. A "litigation practice" under Article 7.5 includes representation in judicial, administrative, arbitration and other adversarial dispute resolution settings, so funded Mass Arbitration campaigns are within the statute's scope.

Does AB 2305 require funders to be disclosed?

No. AB 2305 contains no registration, disclosure or discoverability provision. Disclosure of funding in federal cases remains the subject of the proposed Rule 26 amendment and the Litigation Funding Transparency Act of 2026, and in state cases of statutes such as Georgia's SB 69.