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Highlights
- California Assembly Bill (AB) 2305 would establish one of the most comprehensive statutory frameworks in the nation restricting corporate investor involvement in litigation practices, with broad definitions covering ownership, financing and management arrangements.
- The bill would prohibit corporate investors from influencing litigation decisions, attorney professional judgment or client representation and void contractual provisions that permit investor control or limit reporting of interference.
- Violations could result in discipline by the State Bar of California, statutory damages, attorneys' fees and injunctive relief.
- If the bill is enacted, practitioners with management services organization or investment structures should evaluate existing arrangements for compliance.
California is poised to take a further step in the growing backlash against alternative business structures (ABS). On March 16, 2026, the California State Legislature amended Assembly Bill (AB) 2305, which would add Article 7.5 to the Business and Professions Code and is intended to further regulate and restrict corporate investment in litigation practices.
This legislative proposal follows California's passing of AB 931 in October 2025, which largely froze California lawyers' ability to do business with certain ABS arrangements for the next four years. If enacted, AB 2305 would represent what would currently be the most comprehensive statutory framework in the nation explicitly prohibiting corporate investor interference in litigation practices.
Although the bill's scope is expressly limited to "litigation" practices and does not appear to extend to transactional, advisory or other nonlitigation legal services, it is worth stressing that "litigation" is defined broadly and explicitly includes administrative and arbitration proceedings, not just traditional litigation before a court.
Proposed Bill Would Restrict Corporate Investor Influence in Litigation Practices
The bill is premised on preserving attorney autonomy, requiring that "licensed attorneys and litigants must retain full autonomy over litigation decisions and strategies, free from improper control or interference from 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." To achieve this goal, the bill defines "corporate investor" broadly to include any private equity group, hedge fund, investment firm or any nonattorney corporation with the primary purpose of raising or managing capital that participates in a litigation practice through an ownership, a financing or management arrangement. Notably, the bill specifies that the corporate form of a litigation practice – whether a law firm partnership, professional corporation or limited liability company – does not affect the applicability of these restrictions.
Under AB 2305, a corporate investor involved in any California litigation practice would be prohibited from interfering with, or attempting to influence, a licensed attorney's professional judgment regarding substantive litigation decisions. Prohibited conduct includes determining which clients to represent, the scope of representation, financial terms of client representation, legal strategy, whether to file or dismiss claims, settlement decisions, evidence presentation, discovery conduct, and appellate or procedural choices. Corporate investors are further barred from exercising control over litigation functions such as selecting counsel based on profit maximization rather than client interest, setting financial incentives tied to litigation outcomes that compromise attorney independence, making decisions about litigation funding allocations that may affect case strategy or requiring that litigation decisions be predicated on investor return metrics rather than client objectives and professional ethics.
The bill also targets the contractual relationships between litigation practices and corporate investors. AB 2305 prohibits any corporate investor from entering into a contract, an agreement or arrangement with a litigation practice if it would enable the prohibited interference or control described in the statute. Any contractual provision that permits or facilitates such prohibited interference is deemed void, unenforceable and against public policy.
The bill further specifies that contracts between a litigation practice and a corporate investor may not include clauses that restrict an attorney or client from withdrawing from representation in the event of corporate interference, prohibit an attorney or a client from speaking publicly or reporting corporate interference to the State Bar of California, or impose financial penalties for reporting or resisting corporate influence.
Penalties, Enforcement and Practical Considerations
Violations of AB 2305 would carry significant consequences for both the relevant attorney and investor. A violation constitutes cause for the imposition of discipline by the state bar on the attorney and subjects both the attorney and corporate investor to statutory damages of $10,000 per violation or three times the actual damages incurred by the consumer, whichever is greater, as well as attorneys' fees and costs and injunctive or declaratory relief.
AB 2305 remains a proposed bill and has not yet been enacted into law. Even so, California practitioners with corporate investment arrangements – and investors contemplating involvement in California litigation practices – should closely monitor this legislation. That said, because AB 2305 largely codifies existing lawyer independence obligations under Rule 5.4 and related ethical standards, a well-structured law firm and management services organization relationship that already respects attorney autonomy over professional decisions will likely be compliant with these proposed regulations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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