California's AB 2305 Restricts Corporate Funder Influence Over Litigation Decisions

Highlights

• California Assembly Bill (AB) 2305, now signed into law, establishes a statutory framework restricting corporate funder involvement in litigation practices, with broad definitions covering ownership, service, financing and management arrangements.
• The law prohibits corporate legal funders from influencing litigation decisions, attorney professional judgment or client representation, and expressly characterizes such interference as the "unauthorized practice of law." It also voids contractual provisions that permit funder control or limit reporting of interference.
• Violations constitute grounds for disciplinary action by the State Bar of California and may result in statutory damages, attorneys' fees and injunctive relief.
• The law applies to contracts entered into on or after January 1, 2027. Practitioners with management services organization or investment structures should evaluate existing arrangements for compliance.

California Gov. Gavin Newsom has signed Assembly Bill (AB) 2305 into law, adding Article 7.5 to the Business and Professions Code, which draws a clear line between permissible financial participation in litigation practices and impermissible interference with attorney independence. (See Holland & Knight's previous alert, "California's Proposed AB 2305 Targets Corporate Investment in Litigation Practices," March 19, 2026.)

AB 2305 builds on the foundation laid by AB 931, enacted in October 2025, which restricted California lawyers from sharing legal fees with certain out-of-state alternative business structure (ABS) arrangements. Although AB 931 addressed fee sharing, AB 2305 targets a different concern: the point at which a financial relationship with a litigation practice becomes an impermissible influence over how attorneys conduct their work. The enacted version of the law underwent substantial revision in the California State Senate, emerging with a new defined term – "corporate legal funder" – along with an express characterization of prohibited interference as the unauthorized practice of law, enhanced restrictions on facilitating contracts and a conditional safe harbor for nonrecourse litigation funding.

The law applies exclusively to "litigation practices," but that term is defined broadly. It encompasses not only traditional courtroom litigation, but also administrative proceedings, arbitrations and other adversarial forums. Transactional, advisory and other nonlitigation legal services fall outside the statute's reach.

New Law Restricts Corporate Funder Influence Over Litigation Decisions

Central to the new law is the concept of a "corporate legal funder," defined as any business entity – regardless of its organizational form or label – whose primary purpose is raising or managing capital and that maintains an ownership, service, financing or management relationship with a litigation practice. The statute is deliberately structure-neutral: Whether the practice operates as a partnership, professional corporation or limited liability company, the restrictions apply equally.

The statute treats a corporate legal funder's interference with, or attempt to influence, an attorney's or litigant's independent professional judgment on substantive litigation matters as the unauthorized practice of law. The categories of prohibited conduct are extensive: They include directing client selection, dictating the scope or financial terms of engagements, steering litigation strategy or settlement decisions, controlling evidence and discovery choices, and influencing appellate timing. The law further bars funders from choosing or directing counsel on the basis of profit maximization, tying financial incentives to case outcomes in ways that undermine attorney independence, making budgeting decisions that constrain case strategy or imposing investor-return requirements that override client interests and professional ethics. Notably, although such interference is deemed unauthorized practice, a violation is not subject to criminal prosecution.

AB 2305 also places significant restrictions on the contractual relationship between litigation practices and their funders. A corporate legal funder – or any entity under its control – is prohibited from entering into any agreement with a litigation practice that contemplates conduct amounting to the unauthorized practice of law. Any contractual provision enabling or facilitating such conduct is rendered void, unenforceable and contrary to public policy.

The statute imposes reciprocal obligations on litigation practices as well. They may not enter into agreements containing provisions that would 1) bar an attorney from withdrawing from representation, or a client from ending the attorney-client relationship, when prohibited funder interference occurs, 2) prevent public disclosure or reporting of such interference, or 3) penalize anyone financially for reporting or resisting it. These provisions carry particular significance for law firm management services organizations (MSOs). Because the "corporate legal funder" definition encompasses service, management, ownership and financing arrangements, an MSO whose primary purpose involves raising or managing capital may fall squarely within the statute's scope regardless of how the relationship is labeled.

Nonrecourse Litigation Finance Illustrates the Capital-Control Boundary

The law's treatment of nonrecourse litigation finance provides perhaps the most instructive illustration of where the line falls. AB 2305 does not prohibit nonrecourse funding arrangements, provided they do not otherwise amount to unauthorized practice of law.

When the statutory conditions are met, such arrangements also do not constitute impermissible fee sharing under Business and Professions Code Section 6156 or the California Rules of Professional Conduct. However, this protection is narrowly drawn. The financing agreement must, among other things, state the amount or ceiling of funding to be provided, cap the funder's return at a multiple of the funded amount or a specified interest rate, prohibit the use of funds for client solicitation or lead generation, and limit funding to fees or costs for specifically identified matters that are already underway or for which counsel has been retained.

In short, the law permits capital to flow into litigation practices but prohibits that capital from carrying with it any measure of control over the attorney's professional conduct of the representation.

Enforcement and Practical Considerations

On the enforcement side, an attorney who violates the statute faces State Bar disciplinary proceedings. Affected clients may pursue statutory damages of $10,000 per violation – or treble actual damages if greater – together with attorneys' fees, costs, and injunctive or declaratory relief.

AB 2305 takes effect for contracts entered into on or after January 1, 2027, giving practitioners and investors a window to bring existing arrangements into compliance. A thorough review of current agreements is advisable, with particular attention to provisions governing client selection, engagement scope and pricing, litigation strategy and settlement authority, counsel selection, budgetary controls that could constrain case management and any outcome-linked compensation structures.

Not every advisory or approval mechanism will run afoul of the statute; the critical inquiry is whether a given provision effectively allows a funder to direct professional judgment or to substitute investor-return considerations for the client's interests and governing ethical standards. California practitioners with corporate investment structures – and the entities financing or managing those practices – should begin evaluating their arrangements promptly.

For questions about these developments, please contact the authors or your Holland & Knight relationship attorney.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.