Groundbreaking New York Law Regulates Third-Party Litigation Funding For The First Time

New York, N.Y. (January 12, 2025) - On December 19, 2025, New York Governor Kathy Hochul signed the Consumer Litigation Funding Act (A804-C/S1104A) into law. The new statute takes aim at abusive third-party litigation funding practices statewide.

For years, the unregulated "lawsuit loan" industry has acted as a silent inflator of claim values, forcing plaintiffs to reject reasonable settlement offers in order to pay back exorbitant interest. The new regulatory framework, effective June 17, 2026, introduces caps and transparency measures that may help stabilize settlement negotiations and curb artificially inflated demands. The law does not apply to contracts made before its effective date. Below are some of its most important provisions.

• The Cap – Most importantly, the new law caps a funding company's total recovery at 25% of the gross recovery of the litigation. This should help reduce the problem of litigation funding as a roadblock to settlement negotiations. While many plaintiffs cannot accept a fair offer if their litigation funding debt exceeds the settlement value, the funder's take will be limited under the new law. This should facilitate settlements by making it more likely that plaintiffs will accept reasonable, market-value settlement offers, rather than holding out for "nuclear verdicts" out of financial desperation.
  
• Limiting Influence – Under the current system, third-party financiers exert shadow influence over litigation strategy, often pressuring plaintiffs to drag out cases in hopes of a higher payout. The new law explicitly prohibits funding companies from influencing settlement decisions, legal strategy, or the timing of resolution. After it takes effect, settlement authority should rest solely with the plaintiff and their counsel. If defense counsel has evidence that a settlement is being stalled by a third-party financier, we can cite the new statute as a way to challenge that interference.
  
• Limiting referrals – Under the current regime, funders are often intertwined with specific law firms and doctors, thus creating opportunities for abuse and conflicts of interest. Under the new law, funding companies will be prohibited from referring clients to specific lawyers or medical providers.
  
• Transparency – The opacity of the litigation funding market has often made it difficult to know who is truly on the other side of the "v." Under the new law, all consumer litigation funding companies must register with the state, post a bond, and submit to character and fitness evaluations. This registration requirement creates a public registry of authorized funders, and could help drive the most predatory, unregulated lenders out of the New York market. The new law also requires that contracts be in plain language, and gives plaintiffs a 10-day right of rescission period. Finally, the law aims to prohibit misleading advertising to prospective plaintiffs.
  
• Discovery – While the Act focuses on contract terms, it does not close the door on discovery. It will standardize the contracts and disclosures that plaintiffs sign in connection with funding. In cases where credibility or the extent of damages are at issue, the existence of these regulated contracts may be easier to subpoena, or request in discovery (subject to relevance standards) to determine if a plaintiff is under financial duress, or if the funding application contradicts their testimony regarding financial hardship or disability.

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