Third-party financing in American litigation practice has grown quietly for years through third party financing, revenue-sharing agreements, and alternative business structures organized inside and outside California. Assembly Bill 2305 may end much of it. The bill passed the California Assembly on a bipartisan 68-0 vote on April 6, 2026, and, as of this writing, remains pending in the California Senate. Law firms and investors with existing arrangements should be evaluating them now rather than after enactment, which appears likely.
What AB 2305 Would Do
AB 2305, authored by Assemblymember Ash Kalra, would add Article 7.5, commencing with section 6134, to Chapter 4 of Division 3 of the Business and Professions Code. In its core operative provisions, the bill would prohibit a “corporate lender” involved in a litigation practice from interfering with a substantive litigation decision or exercising control over a litigation function.
The legislative findings frame the purpose directly: litigation decisions and strategy must remain with licensed attorneys and their clients, free from control by investors whose primary interest is financial return. Notably, the bill provides that the corporate form of the litigation practice, whether a partnership, professional corporation, or limited liability company, is immaterial to the proposed legislative restrictions.
AB 2305 Has Changed Substantially So Far
Practitioners tracking this legislation should read the current text rather than earlier summaries. AB 2305 began as a measure about lawyer referral services. A March 16, 2026 amendment stripped that content entirely from the bill and substituted the corporate investor framework. A further amendment in the Senate on June 1, 2026, retitled the bill and reframed the central prohibition around corporate lenders, treating interference with a litigation function as the prohibited unauthorized practice of law. Because the bill has been amended repeatedly, litigators and litigation funders should confirm its current status and operative language at the Legislature’s official bill site, before making any compliance or funding decisions.
Who Is a “Corporate Lender”?
In its iteration today, AB 2305 does not define “corporate lender.” Ostensibly, the legislation as interpreted could reach private equity groups, hedge funds, investment firms, and non-attorney business entities of any type whose primary purpose is lending, raising or managing capital, where the entity participates in a litigation practice through an ownership, financing, or management arrangement. That breadth is the point: the bill is aimed at loopholes created by recharacterizing equity participation as a loan or a services agreement.
Proposed Restrictions on Corporate Lenders
AB 2305 proposes to add Section 6134.4 to the Business & Professions Code, with the following language as of this writing:
A corporate lender doing any of the following shall constitute the unauthorized practice of law:
(a) Interference or an attempt to influence the professional judgment of a licensed attorney or litigant regarding any substantive litigation decision, including any of the following:
(1) Determination of which client to represent.
(2) Determination of the scope of representation of any client.
(3) Determining the financial terms of any client representation.
(4) Determining legal strategy or theory of the case.
(5) Deciding whether to file, continue, or dismiss a claim or defense.
(6) Making decisions about a settlement offer, negotiation position, or acceptance of proposed resolution.
(7) Determining what evidence to present or how to conduct discovery.
(8) Advising on appeals, procedural choices, or any litigation timing.
(b) Exercise control over, or be delegated authority for, any of the following litigation functions:
(1) Selecting or directing counsel based on profit maximization rather than client interest.
(2) Setting financial incentives tied to litigation outcomes that compromise attorney independence.
(3) Making decisions about litigation funding allocations or budgeting that may affect case strategy.
(4) Requiring litigation decisions be predicated on investor return metrics rather than client objectives and professional ethics.
The bill also carves out a safe harbor for properly structured nonrecourse litigation finance. Under proposed Section 6134.10, nonrecourse litigation finance would not constitute impermissible fee sharing or a violation of this article if the financing contract states a specific or maximum dollar amount payable to the lawyer or law firm, caps the return as a multiple of the funded amount or a stated rate of interest, expressly precludes use of the funds to solicit or acquire future clients or matters, and funds only fees or expenses of a specific, already-commenced or already-retained representation. Properly documented nonrecourse funding arrangements meeting those conditions should therefore remain viable even if AB 2305 is enacted in its current form.
Violations of AB 2305: Penalties and Contract Voiding
The consequences run to both sides of a litigation finance arrangement. A violation would constitute cause for State Bar discipline against the attorney involved, and would subject both the attorney and the corporate lender to statutory damages of $10,000 per violation or three times actual damages, whichever is greater, plus attorney fees and costs, and injunctive or declaratory relief. AB 2305 would grant the attorney’s client a private right of action against the attorney and corporate lender.
Equally significant, contract provisions that permit or facilitate investor interference with professional judgment would be void, unenforceable, and against public policy. Provisions limiting reporting of interference would meet the same fate. Notably, however, the bill as currently drafted would apply only to contracts entered into on or after January 1, 2027, so an agreement executed before that date appears to fall outside the bill’s reach unless it is later renewed, amended, or redrawn. Firms and investors should not assume this prospective limitation will survive further amendment, and should treat the voiding and reporting provisions as a live drafting consideration for any new or renewed litigation finance arrangement.
How AB 2305 Fits With AB 931 and Rule 5.4
AB 2305 does not arrive in isolation. AB 931 (also Kalra), enacted on October 10, 2025 and codified at Business and Professions Code Sections 6155.1, 6156, and 6250, et seq. (the California Consumer Legal Funding Act), bars California attorneys from sharing legal fees with certain out-of-state alternative business structures until January 1, 2030. Together the two pieces of legislation represent a deliberate California government position against non-lawyer ownership and control.
For most firms, the underlying principle is familiar. Rule 5.4 of the California Rules of Professional Conduct already restricts financial and similar arrangements with non-lawyers, and Business and Professions Code sections 6125 and 6126 govern the unauthorized practice of law. A third-party commercial relationship that genuinely respects attorney autonomy over professional judgment is likely to remain compliant. What changes is the enforcement architecture: private statutory damages, fee shifting, and contract voiding, in addition to State Bar discipline.
Action Steps for Law Firms and Investors
- Map every current litigation funding arrangement, including loans, MSO agreements, and revenue participation, and identify any provision touching case selection, settlement authority, staffing, or strategy.
- Review governance documents for consent rights, budget approvals, or reporting covenants that could be read as control over a litigation function.
- Confirm that reporting and whistleblower provisions do not restrict disclosure of interference.
- Monitor AB 2305’s progress through the Senate and any further amendments, since the operative language has already changed twice in 2026.
- Note that AB 2305, as currently drafted, would apply only to contracts entered into on or after January 1, 2027; confirm whether a planned renewal, amendment, or new funding tranche under an existing arrangement would count as a new contract for that purpose.
Key Takeaway
Corporate financing in litigation practice currently remains lawful in California, but the margin for arrangements that shade toward lender control is narrowing quickly. Firms and capital providers that restructure proactively will be in a materially better position than those waiting until AB 2305 becomes law.
Speak With a California Business and Corporate Attorney
The Law Office of Shanen R. Prout advises professional practices, investors, and closely held businesses on entity structure, governance, and commercial disputes in California. If your organization participates in or is considering an investment in a California litigation practice, we can help you evaluate the structure against the emerging statutory framework.
Shanen R. Prout, Law Office of Shanen R. Prout: 21 Miller Alley, Ste. 210, Pasadena, CA 91103
Telephone: (626) 529-3022
Email: shanen@srplawyer.com
Website: www.srplawyer.com
This article is provided for general informational purposes only and does not constitute legal advice or create an attorney-client relationship. AB 2305 is pending legislation; its status and text should be confirmed at the Legislature’s official bill site before this article is relied upon.