California has passed AB 931, new regulations designed to prevent plaintiffs from being controlled by financial backers who play an increasingly influential role in civil lawsuits. The law addresses a growing concern: outside investors funding lawsuits in exchange for a cut of the winnings, then pulling the strings on settlement decisions and litigation strategy. The legislation comes as litigation funding has exploded into an $18.9 billion industry in the U.S., with projections showing it could hit $67 billion annually by 2037. California's move makes it one of more than a dozen states trying to rein in an industry that's reshaping how civil cases get fought—and who really benefits from them.

The economic stakes are enormous, and research from the American Enterprise Institute helps explain why. In a study on the "litigation tax," AEI found that the U.S. tort system's direct costs total about $180 billion a year, though that 2002 estimate is now likely far higher. What's worse, an additional "deadweight loss" arises because these costs distort decisions by producers, who generate less innovation because of high litigation outlays and by consumers who pay higher prices for goods and services because of embedded litigation costs. Third-party litigation funding amplifies these problems. When investors back lawsuits, they're looking for returns, not justice—which can mean pushing for bigger verdicts, rejecting reasonable settlements, and prolonging disputes that drive up costs for everyone involved.

Here's how litigation funding works. An investor—often a hedge fund or specialized firm—agrees to cover a plaintiff's legal costs in exchange for a percentage of any settlement or verdict, sometimes as much as 40% or more. If the plaintiff wins, the funder makes money. If not, they eat the loss. That sounds like it helps people who can't afford lawyers. And sometimes it does. But it also creates twisted incentives. The funder's goal isn't to get the plaintiff made whole—it's to maximize return on investment. That means they can pressure plaintiffs to reject fair settlement offers and hold out for massive verdicts. They can dictate which lawyers to hire, which experts to call, and what legal strategy to pursue. The burden is ultimately borne by workers who lose jobs or see their wages go down, by consumers who pay higher prices, by landowners who experience a decline in property values, and by investors via lower profits and share prices.

California's AB 931 represents a broader shift happening nationwide. Seven states passed new litigation funding laws in 2025 alone, and federal proposals like the Litigation Transparency Act are gaining momentum in Congress. The core demand: disclosure. If someone's bankrolling a lawsuit and calling the shots, defendants and courts should know about it. Critics say the industry operates "largely in secret," letting funders shape billion-dollar cases without appearing on the docket. California's regulations aim to prevent that puppeting by requiring transparency about who's funding cases and ensuring plaintiffs retain control over their own litigation. The real test will be enforcement—whether these rules can actually stop financial backers from turning the courthouse into an investment casino where the house always takes its cut.