California has enacted a new legal-ethics law that bars corporate funders from directing attorneys’ litigation decisions, placing explicit limits on how private-equity firms and other outside investors may participate in law-firm business arrangements. Governor Gavin Newsom approved Assembly Bill 2305 on Sept. 20, and the measure was filed as Chapter 393 the same day, according to the Legislature’s bill history.
The law treats specified interference by a “corporate legal funder” as the unauthorized practice of law. Its text defines that term broadly to cover a business primarily created to raise or manage capital and involved with a litigation practice through an ownership, service, financing or management arrangement, regardless of how the relationship is labeled or organized.
Beginning with contracts entered on or after Jan. 1, 2027, outside funders may not influence which clients a firm accepts, the scope or financial terms of representation, legal strategy, settlement decisions, evidence, discovery or appeals. They also may not control litigation budgets in ways that affect case strategy or require attorneys to prioritize investor-return metrics over a client’s objectives and professional duties.
Law firms cannot use contracts that prevent an attorney or client from leaving a representation after unlawful outside interference, block public disclosure or reporting of that conduct, or impose financial penalties on someone who resists it. Contract provisions that facilitate the unauthorized practice of law are void and unenforceable.
The legislation preserves a defined form of nonrecourse litigation finance. Funding tied to a specific case may continue when the repayment is limited to a set dollar amount, multiple or interest rate; the money is used only for identified representations; and it is not used to buy leads or acquire future clients. That distinction separates financing a case from gaining authority over how the case is litigated.
Violations can carry meaningful consequences. An attorney may face State Bar discipline, while a client may sue the attorney and corporate funder for $10,000 per violation or three times the client’s actual damages, whichever is greater, plus fees and other relief. The statute expressly says a violation is not a crime.
The bill moved through both chambers without a recorded dissent in its final votes: the Senate approved it 39-0, and the Assembly concurred 78-0. The Legislature’s analysis file traces committee and floor reviews that refined the boundaries between permitted financing and impermissible control.
The measure responds to growing investor interest in management-services organizations, which can supply capital and run a firm’s administrative operations without directly owning the legal practice. Reuters reported that similar statutes in Colorado and Illinois have not halted those arrangements. The California rule instead draws its line at influence over professional judgment, giving clients a private remedy when outside financial interests cross it.
