New California Laws 2026
AB 931: Regulating litigation funding and fee-sharing
By Brian S. Kabateck A B 931, signed as Chapter 565, Statutes of 2025, establishes California’s first compre- hensive regulatory framework for consumer legal funding while prohibiting fee-sharing with out- of-state alternative business structures. Effective Jan. 1, 2026, the law reshapes two fast-evolving areas of practice that have long operated in regulatory gray zones. Consumer legal funding—where companies pur- chase plaintiffs’ contingent rights to settlement pro- ceeds—has provided financial support to injured parties awaiting case resolution. For plaintiffs unable to work due to injuries or facing mounting medical bills, these advances offer essential relief during lengthy litigation. However, the industry has operat- ed without meaningful oversight, creating opportu- nities for exploitation. AB 931 now requires funding contracts in writing with plain-language disclosures including total amounts, itemized charges, repay- ment schedules and explicit statements that funders cannot influence settlement decisions. Consum- ers gain five-business-day cancellation rights, and charges are capped at 36 months from the funding date, preventing the compounding spirals that have plagued some arrangements. Critically, funding companies cannot pay attorney referral fees, eliminating conflicts where attorneys profit from steering clients toward expensive fund- ing regardless of whether it serves clients’ best inter- ests. Attorneys must certify they received no refer- ral fees and will ensure contract terms are fulfilled, creating professional accountability and preventing funders from operating without legal oversight. The bill’s second component addresses alternative business structures. Until Jan. 1, 2030, California at- torneys cannot share fees with out-of-state entities allowing non-lawyer ownership or decision-making authority—so-called “alternative business struc- tures”—except in court-approved multidistrict lit- igation. Violations carry penalties of $10,000 per violation or three times actual damages, whichever is greater, plus attorneys’ fees. This sunset provision provides time to evaluate whether California should follow Arizona and Utah’s regulatory experiments permitting such structures. Supporters emphasize protection from predato- ry practices. Unregulated funding companies have trapped consumers in agreements with excessive interest rates and terms permitting undue influence
over litigation strategy. Without statutory protec- tions, desperate plaintiffs facing mounting bills have had little choice but to accept unfavorable terms. The alternative business structure prohibition rein- forces ABA Model Rule 5.4, shielding attorney-client relationships from commercial pressures that could compromise professional judgment. Critics argue the alternative business structure ban ignores successful experiments in other juris- dictions. Arizona and Utah data suggests non-lawyer ownership has expanded access to justice without compromising ethics or attorney independence. The blanket prohibition may prevent beneficial part- nerships offering specialized expertise, advanced technology platforms or innovative service delivery models that improve client outcomes. The 36-month charge cap, while consumer-protective, might re- strict capital access for complex cases requiring lon- ger resolution timelines, potentially driving funders from California’s market and reducing options for plaintiffs who need financial support during litiga- tion. In November 2025, California lawyers and af- filiated parties filed a federal lawsuit challenging the alternative business structure ban as unconstitution- al, arguing it unlawfully discriminates against out-of- state firms. Practitioners must ensure litigation funding con- tracts comply with disclosure requirements and review all out-of-state co-counsel arrangements to confirm they don’t involve prohibited fee-sharing. The sunset provision suggests California may revisit alternative business structures, but for now, immedi- ate compliance is mandatory.
Brian S. Kabateck is founding partner at Kabateck LLP.
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