Existing law, the State Bar Act, provides for the licensure and regulation of attorneys by the State Bar of California (State Bar), a public corporation governed by a board of trustees. Existing law makes it a misdemeanor for a person who is not a member of the State Bar, or authorized to practice law, to practice law in this state.

Existing law regulates, among other things, fee agreements, legal advertising and referral services, the sale of financial products to a client, and the allowable forms of organization of a law practice, including a law corporation. Existing law, until January 1, 2030, prohibits an attorney licensed or otherwise authorized to practice in the state from sharing legal fees directly or indirectly with an out-of-state entity that provides legal services while allowing nonlawyer ownership or decisionmaking authority, except as specified. Existing law authorizes the board of trustees, with the approval of the Supreme Court to formulate and enforce rules of professional conduct on all licensees. A violation of these provisions may result in disciplinary action against a licensed attorney or other remedies.

This bill would make a corporate legal funder interfering with a substantive litigation decision or exercising control over a litigation function, an unauthorized practice of law. The bill would prohibit a litigation practice from contracting with a corporate legal funder for specific terms, including restricting an attorney or client from withdrawing from representation in the event of a nonlawyer engaging in the unauthorized practice of law under these provisions.

This bill would prohibit a corporate legal funder, or an entity it controls, from entering into any contract, agreement, or arrangement with a litigation practice if the contract would constitute an unauthorized practice of law under these provisions, and would further prohibit and void a contract or terms that would permit or facilitate an unauthorized practice of law under these provisions, as specified.

This bill would provide that these provisions shall not be construed to prohibit the practice of nonrecourse litigation finance and that the practice of nonrecourse litigation finance shall not constitute impermissible fee sharing under the above-described provisions or the rules of professional conduct, as provided. The bill would deem a violation of these provisions by an attorney as grounds for the imposition of discipline by the State Bar and subject an attorney and the corporate legal funder to statutory or actual damages, attorneys fees and costs, and other relief, as specified. The bill would define terms for these purposes.

This bill would exempt violation of its provisions from the criminal prohibitions.

This bill would specify that its provisions only apply to contracts entered into on and after January 1, 2027.

Existing law, the State Bar Act, provides for the licensure and regulation of attorneys by the State Bar of California (State Bar), a public corporation governed by a board of trustees. Existing law makes it a misdemeanor for a person who is not a member of the State Bar, or authorized to practice law, to practice law in this state.

Existing law regulates, among other things, fee agreements, legal advertising and referral services, the sale of financial products to a client, and the allowable forms of organization of a law practice, including a law corporation. Existing law, until January 1, 2030, prohibits an attorney licensed or otherwise authorized to practice in the state from sharing legal fees directly or indirectly with an out-of-state entity that provides legal services while allowing nonlawyer ownership or decisionmaking authority, except as specified. Existing law authorizes the board of trustees, with the approval of the Supreme Court to formulate and enforce rules of professional conduct on all licensees. A violation of these provisions may result in disciplinary action against a licensed attorney or other remedies.

This bill would make a corporate legal funder interfering with a substantive litigation decision or exercising control over a litigation function, an unauthorized practice of law. The bill would prohibit a litigation practice from contracting with a corporate legal funder for specific terms, including restricting an attorney or client from withdrawing from representation in the event of a nonlawyer engaging in the unauthorized practice of law under these provisions.

This bill would prohibit a corporate legal funder, or an entity it controls, from entering into any contract, agreement, or arrangement with a litigation practice if the contract would constitute an unauthorized practice of law under these provisions, and would further prohibit and void a contract or terms that would permit or facilitate an unauthorized practice of law under these provisions, as specified.

This bill would provide that these provisions shall not be construed to prohibit the practice of nonrecourse litigation finance and that the practice of nonrecourse litigation finance shall not constitute impermissible fee sharing under the above-described provisions or the rules of professional conduct, as provided. The bill would deem a violation of these provisions by an attorney as grounds for the imposition of discipline by the State Bar and subject an attorney and the corporate legal funder to statutory or actual damages, attorneys fees and costs, and other relief, as specified. The bill would define terms for these purposes.

This bill would exempt violation of its provisions from the criminal prohibitions.

This bill would specify that its provisions only apply to contracts entered into on and after January 1, 2027.

Existing law, the State Bar Act, provides for the licensure and regulation of attorneys by the State Bar of California (State Bar), a public corporation governed by a board of trustees. Existing law makes it a misdemeanor for a person who is not a member of the State Bar, or authorized to practice law, to practice law in this state.

Existing law regulates, among other things, fee agreements, legal advertising and referral services, the sale of financial products to a client, and the allowable forms of organization of a law practice, including a law corporation. Existing law, until January 1, 2030, prohibits an attorney licensed or otherwise authorized to practice in the state from sharing legal fees directly or indirectly with an out-of-state entity that provides legal services while allowing nonlawyer ownership or decisionmaking authority, except as specified. Existing law authorizes the board of trustees, with the approval of the Supreme Court to formulate and enforce rules of professional conduct on all licensees. A violation of these provisions may result in disciplinary action against a licensed attorney or other remedies.

This bill would make a corporate lender legal funder interfering with a substantive litigation decision or exercising control over a litigation function, an unauthorized practice of law. The bill would prohibit a litigation practice from contracting with a corporate legal funder for specific terms, including restricting an attorney or client from withdrawing from representation in the event of a nonlawyer engaging in the unauthorized practice of law under these provisions.

This bill would prohibit a corporate lender, legal funder, or an entity it controls, from entering into any contract, agreement, or arrangement with a litigation practice if the contract would constitute an unauthorized practice of law under these provisions, and would further prohibit and void a contract or terms that would permit or facilitate an unauthorized practice of law under these provisions, as specified.

This bill would provide that these provisions shall not be construed to prohibit the practice of nonrecourse litigation finance and that the practice of nonrecourse litigation finance shall not constitute impermissible fee sharing under the above-described provisions or the rules of professional conduct, as provided. The bill would deem a violation of these provisions as cause by an attorney as grounds for the imposition of discipline by the State Bar and subject an attorney and the corporate lender legal funder to statutory or actual damages, attorneys fees and costs, and other relief, as specified. The bill would define terms for these purposes.

This bill would exempt violation of its provisions from the criminal prohibitions.

This bill would specify that its provisions only apply to contracts entered into on and after January 1, 2027.

Existing law, the State Bar Act, provides for the licensure and regulation of attorneys by the State Bar of California (State Bar), a public corporation governed by a board of trustees. Existing law makes it a misdemeanor for a person who is not a member of the State Bar, or authorized to practice law, to practice law in this state.

Existing law regulates, among other things, fee agreements, legal advertising and referral services, the sale of financial products to a client, and the allowable forms of organization of a law practice, including a law corporation. Existing law, until January 1, 2030, prohibits an attorney licensed or otherwise authorized to practice in the state from sharing legal fees directly or indirectly with an out-of-state entity that provides legal services while allowing nonlawyer ownership or decisionmaking authority, except as specified. Existing law authorizes the board of trustees, with the approval of the Supreme Court to formulate and enforce rules of professional conduct on all licensees. A violation of these provisions may result in disciplinary action against a licensed attorney or other remedies.

This bill would prohibit make a corporate investor involved in any litigation practice, among other things, from lender interfering with a substantive litigation decision or exercising control over a litigation function. function, an unauthorized practice of law.

This bill would prohibit a corporate investor, lender, or an entity it controls, from entering into any contract, agreement, or arrangement with a litigation practice if the contract would enable prohibited interference or control constitute an unauthorized practice of law under these provisions, and would further prohibit and void a contract or terms that would permit or facilitate prohibited interference or control, an unauthorized practice of law under these provisions, as specified.

This bill would provide that these provisions shall not be construed to prohibit the practice of nonrecourse litigation finance and that the practice of nonrecourse litigation finance shall not constitute impermissible fee sharing under the above-described provisions or the rules of professional conduct, as provided. The bill would deem a violation of these provisions as cause for the imposition of discipline by the State Bar and subject an attorney and the corporate investor lender to statutory or actual damages, attorneys fees and costs, and other relief, as specified. The bill would define terms for these purposes.

Existing law, the State Bar Act, provides for the licensure and regulation of attorneys by the State Bar of California (State Bar), a public corporation governed by a board of trustees. Existing law regulates, among other things, fee agreements, legal advertising and referral services, the sale of financial products to a client, and the allowable forms of organization of a law practice, including a law corporation. A violation of these provisions may result in disciplinary action against a licensed attorney or other remedies.

This bill would prohibit a corporate investor involved in any litigation practice, among other things, from interfering with a substantive litigation decision or exercising control over a litigation function.

This bill would prohibit a corporate investor, or an entity it controls, from entering into any contract, agreement, or arrangement with a litigation practice if the contract would enable prohibited interference or control under these provisions, and would further prohibit and void a contract or terms that would permit or facilitate prohibited interference or control, as specified.

This bill would deem a violation of these provisions as cause for the imposition of discipline by the State Bar and subject an attorney and the corporate investor to statutory or actual damages, attorneys fees and costs, and other relief, as specified. The bill would define terms for these purposes.

Existing law, the State Bar Act, provides for the licensure and regulation of attorneys by the State Bar of California, a public corporation. The act imposes various requirements and limits on the ownership of a lawyer referral service. Existing law imposes a civil penalty, as defined, for a violation of those provisions, to be assessed and recovered in a civil action brought in accordance with certain procedures. Existing law defines that civil penalty by referencing certain other provisions, including, among others, a section that provides for a civil penalty not exceeding $2,500 for each violation, as specified.

This bill would delete the above-described reference to that code section.

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 2305

Author:(Kalra)

As Amended Ver:August 17, 2026

Majority vote

SUMMARY

Prohibits a corporate investor in a legal practice from interfering with the independent judgment of attorneys.

Major Provisions

1. Prohibits, and deems such conduct to be the unauthorized practice of law, a corporate legal funder from doing any of the following:
   1. Determining which clients 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; and
   8. Advising on appeals, procedural choices, or any litigation timing.
2. Prohibits a corporate lender involved in any litigation practice in this state from, directly or indirectly, exercising control or being delegated authority to control any of the following:
   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.
3. Clarifies that a litigation practice cannot contract with a corporate legal funder to impose specified restrictions on attorneys or the client.
4. Prohibits a corporate investor, or an entity it controls, from entering into any contract, agreement, or arrangement with a litigation practice if the contract would constitute the unauthorized practice of law as described in this bill.
5. Prohibits a contract between a litigation practice and a corporate lender from including a clause that does any of the following:
   1. Restricts an attorney or client from withdrawing from representation in the event of corporate interference;
   2. Prohibits an attorney or client from speaking publicly or reporting corporate interference to the State Bar or other authority; or
   3. Imposes financial penalties for reporting or resisting corporate influence.
6. Provides that any contractual provision that permits or facilitates prohibited interference or control pursuant to this bill is void, unenforceable, and against public policy.
7. Clarifies that nothing in the bill is to be construed to prohibit the practice of nonrecourse litigation finance, and notwithstanding any other laws or regulations, and that the practice of nonrecourse litigation finance does not constitute impermissible fee sharing or the California Rules of Professional Conduct provided the following are met:
   1. The nonrecourse litigation finance contract contains a specific dollar amount or maximum dollar amount to be paid to the lawyer or law firm;
   2. The nonrecourse litigation finance contract return is limited to a multiple of the funded amount or a rate of interest thereon;
   3. The nonrecourse litigation finance contract expressly precludes use of money for the solicitation or acquisition of future clients or matters, the purchase of a lead for one or more potential clients, cases, or to seek the referral of those clients or cases; and
   4. The funding is provided solely for the fees or expenses of specific, identified legal representations that have been commenced or for which the lawyer or law firm has been retained, and not for the solicitation or acquisition of future clients or matters.
8. Defines the following terms:
   1. ″Corporate investor″ means any entity, including, but not limited to, a private equity group, hedge fund, investment firm, or any nonattorney corporation, with the primary purpose of raising or managing capital and which participates in a litigation practice through an ownership, financing, or management arrangement;
   2. ″Control″ includes, but is not limited to, directing, dictating, or influencing which clients to represent, the scope of client representation, the financial terms of client representation, litigation strategy, settlement decisions, litigation funding decisions, selection or management of counsel, or any other substantive legal determinations;
   3. “Corporate legal funder” to mean a business entity, no matter how it is legally structured, labeled, organized, or operated, created for, and with the primary purpose of raising or managing capital and which is involved in a litigation practice through an ownership, service, financing, or management arrangement or agreement.
   4. ″Litigation practice″ means the representation of parties in judicial, administrative, arbitration, or other adversarial dispute resolution settings by licensed attorneys.
   5. “Nonlawyer” means any person or entity that is not licensed by, or permitted by, the State Bar to practice law in the State of California; and
   6. “Nonrecourse litigation finance” to mean the provision of capital to a litigation practice, the repayment of which is contingent on the successful resolution of a specific, identified legal representation.

Senate Amendments

1. Clarify that the bill is not intended to prohibit the practice of nonrecourse litigation finance so long as specified criteria is met.
2. Clarify that specific activities conducted by a corporate legal funder are not simply prohibited by the bill but constitute the unauthorized practice of law.
3. Adopt several clarifying definitions.

COMMENTS

While much has been made about private equity firms′ secretive loans to private companies and those loans potential impact on the stock market, these firms have also been quietly seeding money into professional practices that traditionally have not been accessible to large private investment firms. In recent years, private equity firms have sought to profit from medical and dental practices, as well as law firms. While private equity provides some worth in the broader business market, its attempt to push into private professional practices that are heavily regulated by codes of professional ethics is troubling as private equity′s drive for profit threatens to undermine the relationship between trained professionals and their clients. Seeking to address this growing problem in the medical field, last year the Legislature enacted both AB 1415 (Bonta) Chapter. 641, Statutes. 2025 and SB 351 (Cabaldon) Chapter. 409, Statutes. 2025, to reign in private equity in the medical profession. This bill, which is modeled in large part on provisions of those two measures, seeks to do the same for the legal profession.

Across professions California law has long required licensed professions to put professional judgement and client needs above all else. California law has long required licensed professionals – typically doctors, attorneys, dentists, and others with significant professional training – to put their client′s needs and their professional judgement above all else when serving the public. For example, the Osteopathic Medical Board′s Canon′s of Ethics, as codified in the Business and Professions Code, mandates that doctors must first and foremost practice in accordance with a body of systemized and scientific knowledge and provide patients freedom to direct their care. (Business and Professions Code Sections 2190.5 and 125.6.) Similarly, the Rules of Professional Conduct dictate that attorneys must, ″abide by a client′s decisions concerning the objectives of representation and, reasonably consult with the client as to the means by which they are to be pursued.″ (Rules of Professional Conduct Rule 1.2 (a) and Business and Professions Code Section 6068.)

To ensure, to the extent possible, that financial motives do not override professional competence, many licensed professionals must organize their practices in a manner to ensure that professional judgement and client services are the dominant factor in business decision-making. For example, law firms in California cannot share legal fees directly or indirectly with a nonlawyer or with an organization that is not authorized to practice law. (Rules of Professional Conduct, Rule 5.4 (a).) While some exceptions exist for paying salaried non-attorney staff and other business obligations (i.e. rent, IT services, bank loans, etc…), the crux of Rule 5.4 is that attorneys must run their businesses with the interests of their clients at the front of mind. Throughout all regulated professions, California imposes significant penalties, including the potential loss of licensure, for putting profit above the needs of their client.

This bill adopts a model similar to the one utilized by AB 1415 and SB 351 to limit private equity′s influence in the medical field and applies the model to the legal profession. The bill explicitly prohibits corporate investors, described as ″any entity, including, but not limited to, a private equity group, hedge fund, investment firm, or any non-attorney corporation, with the primary purpose of raising or managing capital and which participates in a litigation practice through an ownership, financing, or management arrangement″ from interfering with the professional judgment of a California attorney. The bill expressly prohibits the corporate lender from making decisions about client representation, settlement offers and litigation strategy, and appeals. The bill also bans all contract terms authorizing a party, other than an attorney and their client, from making such decisions. The bill makes a violation an offense disciplinable by the State Bar of California and subject offending attorney and corporate investors to civil actions for damages from aggrieved clients.

According to the Author

Last year, California led the country when we passed AB 931 (Kalra, 2025) to prohibit for-profit corporations from owning law firms. But despite this safeguard, private equity interests continue to seek ways to creatively restructure their involvement in the legal industry and sidestep long-standing ethical prohibitions. Consequently, this risks litigation decisions, including whether to file a case, how to resolve the case, or to pursue a particular strategy, being influenced by investor return expectations rather than putting the interests of injured individuals or consumers first.

To more broadly account for ever-changing financing structures, AB 2305 directly prohibits private equity firms, hedge funds, and other corporate investors from directing or influencing the practice of law. In doing so, this bill closes emerging loopholes, protects the independence of the legal profession, and preserves the integrity of the justice system.

Arguments in Support

This bill is supported by a coalition of plaintiff′s attorneys and consumer advocates. In support of the bill their coalition letter states:

We write in support of AB 2305, a measure that strengthens safeguards to ensure that legal representation and litigation decisions remain guided by the interests of clients and the professional judgment of licensed attorneys. The bill reinforces longstanding principles in California law that the practice of law must remain independent and free from improper outside influence. By establishing clear guardrails around outside control or financial interests that could interfere with litigation strategy or legal decision-making, AB 2305 helps protect consumers and preserve confidence in California′s civil justice system.

Maintaining the independence of attorneys and the integrity of the judicial process is essential to ensuring that individuals—particularly injured consumers and working families—can rely on fair and ethical representation. AB 2305 promotes transparency and accountability while reinforcing the ethical duties attorneys owe to their clients and the courts. For these reasons, we respectfully urge your AYE vote on AB 2305.

Arguments in Opposition

None on file

FISCAL COMMENTS

None

VOTES:

ASM JUDICIARY: 12-0-0

YES: Kalra, Macedo, Bauer-Kahan, Bryan, Connolly, Dixon, Harabedian, Pacheco, Papan, Sanchez, Stefani, Zbur

ASSEMBLY FLOOR: 68-0-12

YES: Addis, Aguiar-Curry, Ahrens, Alanis, Alvarez, Arambula, Bains, Berman, Boerner, Bonta, Bryan, Calderon, Carrillo, Castillo, Chen, Connolly, Davies, DeMaio, Dixon, Elhawary, Ellis, Flora, Fong, Gallagher, Garcia, Gipson, Jeff Gonzalez, Mark González, Hadwick, Haney, Hart, Hoover, Irwin, Jackson, Johnson, Kalra, Krell, Lee, Lowenthal, Macedo, McKinnor, Nguyen, Ortega, Pacheco, Papan, Patel, Pellerin, Petrie-Norris, Ramos, Ransom, Michelle Rodriguez, Rogers, Blanca Rubio, Sanchez, Schiavo, Sharp-Collins, Solache, Soria, Stefani, Ta, Tangipa, Valencia, Wallis, Ward, Wicks, Wilson, Zbur, Rivas

ABS, ABST OR NV: Ávila Farías, Bauer-Kahan, Bennett, Caloza, Gabriel, Harabedian, Lackey, Muratsuchi, Patterson, Quirk-Silva, Celeste Rodriguez, Schultz

SENATE FLOOR: 40-0-0

YES: Allen, Alvarado-Gil, Archuleta, Arreguín, Ashby, Becker, Blakespear, Cabaldon, Caballero, Cervantes, Choi, Cortese, Dahle, Durazo, Gonzalez, Grayson, Grove, Hurtado, Jones, Laird, Limón, McGuire, McNerney, Menjivar, Niello, Ochoa Bogh, Padilla, Pérez, Reyes, Richardson, Rubio, Seyarto, Smallwood-Cuevas, Stern, Strickland, Umberg, Valladares, Wahab, Weber Pierson, Wiener

UPDATED

VERSION: August 17, 2026

CONSULTANT: Nicholas Liedtke / JUD. / (916) 319-2334 FN: 0004058

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 2305

Author:(Kalra)

As Amended Ver:August 17, 2026

Majority vote

SUMMARY

Prohibits a corporate investor in a legal practice from interfering with the independent judgment of attorneys.

Major Provisions

1. Prohibits, and deems such conduct to be the unauthorized practice of law, a corporate legal funder from doing any of the following:
   1. Determining which clients 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; and
   8. Advising on appeals, procedural choices, or any litigation timing.
2. Prohibits a corporate lender involved in any litigation practice in this state from, directly or indirectly, exercising control or being delegated authority to control any of the following:
   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.
3. Clarifies that a litigation practice cannot contract with a corporate legal funder to impose specified restrictions on attorneys or the client.
4. Prohibits a corporate investor, or an entity it controls, from entering into any contract, agreement, or arrangement with a litigation practice if the contract would constitute the unauthorized practice of law as described in this bill.
5. Prohibits a contract between a litigation practice and a corporate lender from including a clause that does any of the following:
   1. Restricts an attorney or client from withdrawing from representation in the event of corporate interference;
   2. Prohibits an attorney or client from speaking publicly or reporting corporate interference to the State Bar or other authority; or
   3. Imposes financial penalties for reporting or resisting corporate influence.
6. Provides that any contractual provision that permits or facilitates prohibited interference or control pursuant to this bill is void, unenforceable, and against public policy.
7. Clarifies that nothing in the bill is to be construed to prohibit the practice of nonrecourse litigation finance, and notwithstanding any other laws or regulations, and that the practice of nonrecourse litigation finance does not constitute impermissible fee sharing or the California Rules of Professional Conduct provided the following are met:
   1. The nonrecourse litigation finance contract contains a specific dollar amount or maximum dollar amount to be paid to the lawyer or law firm;
   2. The nonrecourse litigation finance contract return is limited to a multiple of the funded amount or a rate of interest thereon;
   3. The nonrecourse litigation finance contract expressly precludes use of money for the solicitation or acquisition of future clients or matters, the purchase of a lead for one or more potential clients, cases, or to seek the referral of those clients or cases; and
   4. The funding is provided solely for the fees or expenses of specific, identified legal representations that have been commenced or for which the lawyer or law firm has been retained, and not for the solicitation or acquisition of future clients or matters.
8. Defines the following terms:
   1. ″Corporate investor″ means any entity, including, but not limited to, a private equity group, hedge fund, investment firm, or any nonattorney corporation, with the primary purpose of raising or managing capital and which participates in a litigation practice through an ownership, financing, or management arrangement;
   2. ″Control″ includes, but is not limited to, directing, dictating, or influencing which clients to represent, the scope of client representation, the financial terms of client representation, litigation strategy, settlement decisions, litigation funding decisions, selection or management of counsel, or any other substantive legal determinations;
   3. “Corporate legal funder” to mean a business entity, no matter how it is legally structured, labeled, organized, or operated, created for, and with the primary purpose of raising or managing capital and which is involved in a litigation practice through an ownership, service, financing, or management arrangement or agreement.
   4. ″Litigation practice″ means the representation of parties in judicial, administrative, arbitration, or other adversarial dispute resolution settings by licensed attorneys.
   5. “Nonlawyer” means any person or entity that is not licensed by, or permitted by, the State Bar to practice law in the State of California; and
   6. “Nonrecourse litigation finance” to mean the provision of capital to a litigation practice, the repayment of which is contingent on the successful resolution of a specific, identified legal representation.

Senate Amendments

1. Clarify that the bill is not intended to prohibit the practice of nonrecourse litigation finance so long as specified criteria is met.
2. Clarify that specific activities conducted by a corporate legal funder are not simply prohibited by the bill but constitute the unauthorized practice of law.
3. Adopt several clarifying definitions.

COMMENTS

While much has been made about private equity firms′ secretive loans to private companies and those loans potential impact on the stock market, these firms have also been quietly seeding money into professional practices that traditionally have not been accessible to large private investment firms. In recent years, private equity firms have sought to profit from medical and dental practices, as well as law firms. While private equity provides some worth in the broader business market, its attempt to push into private professional practices that are heavily regulated by codes of professional ethics is troubling as private equity′s drive for profit threatens to undermine the relationship between trained professionals and their clients. Seeking to address this growing problem in the medical field, last year the Legislature enacted both AB 1415 (Bonta) Chapter. 641, Statutes. 2025 and SB 351 (Cabaldon) Chapter. 409, Statutes. 2025, to reign in private equity in the medical profession. This bill, which is modeled in large part on provisions of those two measures, seeks to do the same for the legal profession.

Across professions California law has long required licensed professions to put professional judgement and client needs above all else. California law has long required licensed professionals – typically doctors, attorneys, dentists, and others with significant professional training – to put their client′s needs and their professional judgement above all else when serving the public. For example, the Osteopathic Medical Board′s Canon′s of Ethics, as codified in the Business and Professions Code, mandates that doctors must first and foremost practice in accordance with a body of systemized and scientific knowledge and provide patients freedom to direct their care. (Business and Professions Code Sections 2190.5 and 125.6.) Similarly, the Rules of Professional Conduct dictate that attorneys must, ″abide by a client′s decisions concerning the objectives of representation and, reasonably consult with the client as to the means by which they are to be pursued.″ (Rules of Professional Conduct Rule 1.2 (a) and Business and Professions Code Section 6068.)

To ensure, to the extent possible, that financial motives do not override professional competence, many licensed professionals must organize their practices in a manner to ensure that professional judgement and client services are the dominant factor in business decision-making. For example, law firms in California cannot share legal fees directly or indirectly with a nonlawyer or with an organization that is not authorized to practice law. (Rules of Professional Conduct, Rule 5.4 (a).) While some exceptions exist for paying salaried non-attorney staff and other business obligations (i.e. rent, IT services, bank loans, etc…), the crux of Rule 5.4 is that attorneys must run their businesses with the interests of their clients at the front of mind. Throughout all regulated professions, California imposes significant penalties, including the potential loss of licensure, for putting profit above the needs of their client.

This bill adopts a model similar to the one utilized by AB 1415 and SB 351 to limit private equity′s influence in the medical field and applies the model to the legal profession. The bill explicitly prohibits corporate investors, described as ″any entity, including, but not limited to, a private equity group, hedge fund, investment firm, or any non-attorney corporation, with the primary purpose of raising or managing capital and which participates in a litigation practice through an ownership, financing, or management arrangement″ from interfering with the professional judgment of a California attorney. The bill expressly prohibits the corporate lender from making decisions about client representation, settlement offers and litigation strategy, and appeals. The bill also bans all contract terms authorizing a party, other than an attorney and their client, from making such decisions. The bill makes a violation an offense disciplinable by the State Bar of California and subject offending attorney and corporate investors to civil actions for damages from aggrieved clients.

According to the Author

Last year, California led the country when we passed AB 931 (Kalra, 2025) to prohibit for-profit corporations from owning law firms. But despite this safeguard, private equity interests continue to seek ways to creatively restructure their involvement in the legal industry and sidestep long-standing ethical prohibitions. Consequently, this risks litigation decisions, including whether to file a case, how to resolve the case, or to pursue a particular strategy, being influenced by investor return expectations rather than putting the interests of injured individuals or consumers first.

To more broadly account for ever-changing financing structures, AB 2305 directly prohibits private equity firms, hedge funds, and other corporate investors from directing or influencing the practice of law. In doing so, this bill closes emerging loopholes, protects the independence of the legal profession, and preserves the integrity of the justice system.

Arguments in Support

This bill is supported by a coalition of plaintiff′s attorneys and consumer advocates. In support of the bill their coalition letter states:

We write in support of AB 2305, a measure that strengthens safeguards to ensure that legal representation and litigation decisions remain guided by the interests of clients and the professional judgment of licensed attorneys. The bill reinforces longstanding principles in California law that the practice of law must remain independent and free from improper outside influence. By establishing clear guardrails around outside control or financial interests that could interfere with litigation strategy or legal decision-making, AB 2305 helps protect consumers and preserve confidence in California′s civil justice system.

Maintaining the independence of attorneys and the integrity of the judicial process is essential to ensuring that individuals—particularly injured consumers and working families—can rely on fair and ethical representation. AB 2305 promotes transparency and accountability while reinforcing the ethical duties attorneys owe to their clients and the courts. For these reasons, we respectfully urge your AYE vote on AB 2305.

Arguments in Opposition

None on file

FISCAL COMMENTS

None

VOTES:

ASM JUDICIARY: 12-0-0

YES: Kalra, Macedo, Bauer-Kahan, Bryan, Connolly, Dixon, Harabedian, Pacheco, Papan, Sanchez, Stefani, Zbur

ASSEMBLY FLOOR: 68-0-12

YES: Addis, Aguiar-Curry, Ahrens, Alanis, Alvarez, Arambula, Bains, Berman, Boerner, Bonta, Bryan, Calderon, Carrillo, Castillo, Chen, Connolly, Davies, DeMaio, Dixon, Elhawary, Ellis, Flora, Fong, Gallagher, Garcia, Gipson, Jeff Gonzalez, Mark González, Hadwick, Haney, Hart, Hoover, Irwin, Jackson, Johnson, Kalra, Krell, Lee, Lowenthal, Macedo, McKinnor, Nguyen, Ortega, Pacheco, Papan, Patel, Pellerin, Petrie-Norris, Ramos, Ransom, Michelle Rodriguez, Rogers, Blanca Rubio, Sanchez, Schiavo, Sharp-Collins, Solache, Soria, Stefani, Ta, Tangipa, Valencia, Wallis, Ward, Wicks, Wilson, Zbur, Rivas

ABS, ABST OR NV: Ávila Farías, Bauer-Kahan, Bennett, Caloza, Gabriel, Harabedian, Lackey, Muratsuchi, Patterson, Quirk-Silva, Celeste Rodriguez, Schultz

SENATE FLOOR: 40-0-0

YES: Allen, Alvarado-Gil, Archuleta, Arreguín, Ashby, Becker, Blakespear, Cabaldon, Caballero, Cervantes, Choi, Cortese, Dahle, Durazo, Gonzalez, Grayson, Grove, Hurtado, Jones, Laird, Limón, McGuire, McNerney, Menjivar, Niello, Ochoa Bogh, Padilla, Pérez, Reyes, Richardson, Rubio, Seyarto, Smallwood-Cuevas, Stern, Strickland, Umberg, Valladares, Wahab, Weber Pierson, Wiener

UPDATED

VERSION: August 17, 2026

CONSULTANT: Nicholas Liedtke / JUD. / (916) 319-2334 FN: 0004058

 THIRD READING  

Bill No: AB 2305

Author: Kalra (D), et al.

Amended: 8/14/26 in Senate

Vote: 21

SENATE JUDICIARY COMMITTEE: 12-0, 6/9/26

AYES: Umberg, Niello, Allen, Ashby, Caballero, Durazo, Laird, Reyes, Valladares, Wahab, Weber Pierson, Wiener

NO VOTE RECORDED: Stern

ASSEMBLY FLOOR: 68-0, 4/6/26 - See last page for vote

SUBJECT: Attorneys: corporate lenders

SOURCE: Consumer Attorneys of California

DIGEST:

This bill 1) prohibits a corporate legal funder, or an entity it controls, from entering into any contract, agreement, or arrangement with a litigation practice if the contract would constitute the unauthorized practice of law, and specifies what types of actions by a corporate legal funder constitute the unauthorized practice of law; and 2) provides that these provisions are not to be construed to prohibit the practice of nonrecourse litigation finance and that the practice of nonrecourse litigation finance is not considered impermissible fee sharing if certain conditions are met.

Senate Floor Amendments of 8/14/26 define “corporate legal funder” and “nonrecourse litigation finance;” specify that certain actions of a corporate legal funder are considered the unauthorized practice of law; and make various other clarifying changes.

ANALYSIS:

Existing law:

1. Establishes the State Bar Act and provides for the licensure and regulations of attorneys practicing in California. (Business & Professions Code §§ 6000 et seq.)
2. Requires all attorneys who practice law in California to be licensed by the California State Bar (State Bar). (Cal. Const., art. VI, § 9; Bus. & Prof. Code §§ 6000 et seq.)
3. Requires an attorney who contracts to represent a client on a contingency fee basis to, at the time the contract is entered into, provide a duplicate copy of the signed contract to the plaintiff, as specified, which must include the following:
   1. a statement of the contingency fee rate that the client and attorney have agreed upon;
   2. a statement as to how disbursements and costs incurred in connection with the prosecution or settlement of the claim will affect the contingency fee and the client’s recovery;
   3. a statement as to what extent, if any, the client could be required to pay any compensation to the attorney for related matters that arise out of their relationship not covered by their contingency fee contract, which may include any amounts collected for the plaintiff by the attorney;
   4. unless the claim is subject to the provisions of Section 6146^[1], a statement that the fee is not set by law but is negotiable between attorney and client;
   5. if the claim is subject to the provisions of Section 6146, a statement that the rates set forth in that section are the maximum limits for the contingency fee agreement, and that the attorney and client may negotiate a lower rate. (Bus. & Prof. Code § 6147(a).)
4. Prohibits attorneys from directly or indirectly sharing legal fees with an out-of-state alternative business structure, except as specified. (Bus. & Prof. Code § 6156.)
5. Provides that a written fee agreement is subject to the attorney-client privilege. (Bus. & Prof. Code § 6149.)
6. Prohibits an individual, partnership, corporation, association, or any other nongovernmental entity from operating for the direct or indirect purpose, in whole or in part, of referring potential clients to attorneys, and no attorney can accept a referral of such potential clients, unless specified requirements are met. (Bus. & Prof. Code § 6155.)

This bill:

1. Provides that a corporate legal funder doing any of the following constitutes the unauthorized practice of law:
   1. Interfering or attempting to influence the professional judgment of a licensed attorney or litigant regarding any substantive litigation decision, including;
      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; or
      8. advising on appeals, procedural choices, or any litigation timing.
   2. Exercising control over, or being 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; or
      4. requiring that litigation decisions be predicated on investor return metrics rather than client objectives and professional ethics.
2. Prohibits a litigation practice from contracting with a corporate legal funder to do any of the following:
   • 1. restrict an attorney or client from withdrawing from representation in the event of a nonlawyer engaging in the unlawful practice of law;
     2. prohibit an attorney or client from speaking publicly or reporting a nonlawyer engaging in the unlawful practice of law; or
     3. impose financial penalties for reporting or a nonlawyer engaging in the unlawful practice of law.
3. Provides that a violation of these provisions constitutes a cause for discipline by the State Bar.
4. Provides that a violation of these provisions subjects the attorney and the corporate legal funder to the following penalties to be recovered in an action brought by the client:
   1. statutory damages of $10,000 per violation or three times the actual damages incurred by the client, whichever is greater;
   2. attorney’s costs and fees; and
   3. injunctive or declaratory relief.
5. Provides that a violation of these provisions is not a crime.
6. Provides that these provisions are not to be construed to prohibit the practice of nonrecourse litigation finance and that the practice of nonrecourse litigation finance is not considered impermissible fee sharing provided the following conditions are met:
   1. the nonrecourse litigation finance contract contains a specific dollar amount or maximum dollar amount to be paid to the lawyer or law firm;
   2. the nonrecourse litigation finance contract return is limited to a multiple of the funded amount or a rate of interest thereon;
   3. the nonrecourse litigation finance contract expressly precludes use of money for the solicitation or acquisition of future clients or matters, the purchase of a lead for one or more potential clients, cases, or to seek the referral of those clients or cases; and
   4. the funding is provided solely for the fees or expenses of specific, identified legal representations that have been commenced or for which the lawyer or law firm has been retained, and not for the solicitation or acquisition of future clients or matters.
7. Provides that these provisions apply only to contracts entered into on and after January 1, 2027.

Comments

The ban on the corporate practice of law stems from common law and has been codified in statute. (See People v. Cal. Protective Corp. (1926) 76 Cal.App.354; Bus. & Prof. Code § 6125.) The public policy reason is for the protection of consumers and concerns regarding the inherent conflict of interest corporate ownership places on the duties attorneys owe to their clients. Corporations are motivated by profits, have no ethical duties to clients, and are not subject to regulatory oversight. Existing Rules of Professional Conduct prohibit law firms in California from sharing legal fees directly or indirectly with a nonlawyer or with an organization that is not authorized to practice law. (Rul. of Prof. Conduct 5.4 (a).) Last year, the Legislature enacted AB 931(Kalra, Ch. 565, Stats. 2025) to prohibit attorneys from directly or indirectly sharing legal fees with an out-of-state alternative business structure (ABS) based on the concerns that an out-of-state ABS may have owners who are not licensed attorneys.

This bill prohibits a corporate legal funder from interfering or attempting to influence the professional judgment of a licensed attorney or litigant regarding any substantive litigation decision. The bill also prohibits a corporate legal funder from exercising control over, or being delegated authority for, certain litigation functions, including: selecting or directing 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 or budgeting that may affect case strategy; or requiring litigation decisions be predicated on investor return metrics rather than client objectives and professional ethics. Any contract entered into that violates these prohibitions is void and unenforceable.

The Consumer Attorneys of California, the source of the bill, write:

Private equity investment in the legal industry has expanded rapidly in recent years. Although longstanding ethics rules prohibit non-lawyer ownership and fee-sharing with attorneys, investors have developed increasingly sophisticated structures designed to circumvent these protections. These arrangements can involve management services organizations (MSOs), affiliated litigation services companies, or other financial relationships that create leverage over law firms.

These models create a dangerous risk that litigation decisions—including whether to file a case, how aggressively to pursue claims, and when to settle—may be influenced by investor return expectations rather than the best interests of clients. The core principle of attorney independence exists precisely to prevent these conflicts. When profit-seeking investors gain leverage over legal decision-making, the integrity of the justice system itself is threatened.

The bill provides that it is not to be construed to prohibit the practice of nonrecourse litigation finance. Additionally, the bill specifies that the practice of nonrecourse litigation finance is not considered impermissible fee sharing provided certain conditions are met, including, among others, that the nonrecourse litigation finance contract expressly precludes use of money for the solicitation or acquisition of future clients or matters, the purchase of a lead for one or more potential clients, cases, or to seek the referral of those clients or cases.

A violation of the bill constitutes a cause for discipline by the State Bar. It also authorizes a client to bring an action against an attorney and the corporate legal funder who violate these provisions for statutory damages of $10,000 per violation or three times the actual damages incurred by the client, whichever is greater, attorney’s costs and fees, and injunctive or declaratory relief.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 6/10/26)

Consumer Attorneys of California (source)
Civil Justice Association of California

OPPOSITION: (Verified 6/10/26)

None received

ARGUMENTS IN SUPPORT: The author writes:

Last year, California led the country when we passed AB 931 (Kalra, 2025) to prohibit for-profit corporations from owning law firms. But despite this safeguard, private equity interests continue to seek ways to creatively restructure their involvement in the legal industry and sidestep long-standing ethical prohibitions. Consequently, this risks litigation decisions, including whether to file a case, how to resolve the case, or to pursue a particular strategy, being influenced by investor return expectations rather than putting the interests of injured individuals or consumers first.

To more broadly account for ever-changing financing structures, AB 2305 directly prohibits private equity firms, hedge funds, and other corporate investors from directing or influencing the practice of law. In doing so, this bill closes emerging loopholes, protects the independence of the legal profession, and preserves the integrity of the justice system.

The Consumer Attorneys of California write in support stating:

AB 2305 safeguards the independence of the legal profession by prohibiting private equity firms, hedge funds, and other corporate legal funders from directing or influencing the practice of law. When a Californian hires an attorney, litigation decisions—including case strategy, representation, and resolution—must be made solely by the attorney and client, not by lenders seeking financial returns. AB 2305 closes emerging loopholes that allow corporate legal funders to exert indirect influence over litigation practices through complex financial or operational arrangements.

ASSEMBLY FLOOR: 68-0, 4/6/26

AYES: Addis, Aguiar-Curry, Ahrens, Alanis, Alvarez, Arambula, Bains, Berman, Boerner, Bonta, Bryan, Calderon, Carrillo, Castillo, Chen, Connolly, Davies, DeMaio, Dixon, Elhawary, Ellis, Flora, Fong, Gallagher, Garcia, Gipson, Jeff Gonzalez, Mark González, Hadwick, Haney, Hart, Hoover, Irwin, Jackson, Johnson, Kalra, Krell, Lee, Lowenthal, Macedo, McKinnor, Nguyen, Ortega, Pacheco, Papan, Patel, Pellerin, Petrie-Norris, Ramos, Ransom, Michelle Rodriguez, Rogers, Blanca Rubio, Sanchez, Schiavo, Sharp-Collins, Solache, Soria, Stefani, Ta, Tangipa, Valencia, Wallis, Ward, Wicks, Wilson, Zbur, Rivas

NO VOTE RECORDED: Ávila Farías, Bauer-Kahan, Bennett, Caloza, Gabriel, Harabedian, Lackey, Muratsuchi, Patterson, Quirk-Silva, Celeste Rodriguez, Schultz

Prepared by: Amanda Mattson / JUD. / (916) 651-4113

8/18/26 16:13:35

**** END ****

1. Section 6146 of the Business and Professions Code places limits on contingency fees agreements in connection with an action for injury or damage against a health care provider based upon such person’s alleged professional negligence. ↑

 THIRD READING  

Bill No: AB 2305

Author: Kalra (D), et al.

Amended: 6/1/26 in Senate

Vote: 21

SENATE JUDICIARY COMMITTEE: 12-0, 6/9/26

AYES: Umberg, Niello, Allen, Ashby, Caballero, Durazo, Laird, Reyes, Valladares, Wahab, Weber Pierson, Wiener

NO VOTE RECORDED: Stern

ASSEMBLY FLOOR: 68-0, 4/6/26 - See last page for vote

SUBJECT: Attorneys: corporate lenders

SOURCE: Consumer Attorneys of California

DIGEST:

This bill 1) prohibits a corporate lender, or an entity it controls, from entering into any contract, agreement, or arrangement with a litigation practice if the contract would constitute the unauthorized practice of law; 2) specifies what types of actions by a corporate lender constitute the unauthorized practice of law; and 3) provides that these provisions are not to be construed to prohibit the practice of nonrecourse litigation finance and that the practice of nonrecourse litigation finance is not considered impermissible fee sharing if certain conditions are met.

ANALYSIS:

Existing law:

1. Establishes the State Bar Act and provides for the licensure and regulations of attorneys practicing in California. (Business & Professions Code §§ 6000 et seq.)
2. Requires all attorneys who practice law in California to be licensed by the California State Bar (State Bar). (Cal. Const., art. VI, § 9; Bus. & Prof. Code §§ 6000 et seq.)
3. Requires an attorney who contracts to represent a client on a contingency fee basis to, at the time the contract is entered into, provide a duplicate copy of the signed contract to the plaintiff, as specified, which must include the following:
   1. a statement of the contingency fee rate that the client and attorney have agreed upon;
   2. a statement as to how disbursements and costs incurred in connection with the prosecution or settlement of the claim will affect the contingency fee and the client’s recovery;
   3. a statement as to what extent, if any, the client could be required to pay any compensation to the attorney for related matters that arise out of their relationship not covered by their contingency fee contract, which may include any amounts collected for the plaintiff by the attorney;
   4. unless the claim is subject to the provisions of Section 6146^[1], a statement that the fee is not set by law but is negotiable between attorney and client;
   5. if the claim is subject to the provisions of Section 6146, a statement that the rates set forth in that section are the maximum limits for the contingency fee agreement, and that the attorney and client may negotiate a lower rate. (Bus. & Prof. Code § 6147(a).)
4. Prohibits attorneys from directly or indirectly sharing legal fees with an out-of-state alternative business structure, except as specified. (Bus. & Prof. Code § 6156.)
5. Provides that a written fee agreement is subject to the attorney-client privilege. (Bus. & Prof. Code § 6149.)
6. Prohibits an individual, partnership, corporation, association, or any other nongovernmental entity from operating for the direct or indirect purpose, in whole or in part, of referring potential clients to attorneys, and no attorney can accept a referral of such potential clients, unless specified requirements are met. (Bus. & Prof. Code § 6155.)

This bill:

1. Provides that a corporate lender doing any of the following constitutes the unauthorized practice of law:
   1. Interfering or attempting to influence the professional judgment of a licensed attorney or litigant regarding any substantive litigation decision, including;
      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; or
      8. advising on appeals, procedural choices, or any litigation timing.
   2. Exercising control over, or being 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; or
      4. requiring that litigation decisions be predicated on investor return metrics rather than client objectives and professional ethics.
2. Prohibits a corporate lender, or an entity it controls, from entering into any contract, agreement, or arrangement with a litigation practice if the contract would constitute the unauthorized practice of law as described in 1).
   1. Any contractual provision that permits or facilitates prohibited interference or control is void, unenforceable, and against public policy.
   2. A contract between a litigation practice and a corporate lender cannot include a clause that does any of the following:
      1. restrict an attorney or client from withdrawing from representation in the event of a nonlawyer engaging in the unlawful practice of law as described in 1);
      2. prohibit an attorney or client from speaking publicly or reporting a nonlawyer engaging in the unlawful practice of law as described in 1); or
      3. impose financial penalties for reporting or a nonlawyer engaging in the unlawful practice of law as described in 1).
3. Provides that a violation of these provisions constitutes a cause for discipline by the State Bar.
4. Provides that a violation of these provisions subjects the attorney and the corporate lender to the following penalties to be recovered in an action brought by the client:
   1. statutory damages of $10,000 per violation or three times the actual damages incurred by the client, whichever is greater;
   2. attorney’s costs and fees; and
   3. injunctive or declaratory relief.
5. Provides that a violation of these provisions is not a crime.
6. Provides that these provisions are not to be construed to prohibit the practice of nonrecourse litigation finance and that the practice of nonrecourse litigation finance is not considered impermissible fee sharing provided the following conditions are met:
   1. the nonrecourse litigation finance contract contains a specific dollar amount or maximum dollar amount to be paid to the lawyer or law firm;
   2. the nonrecourse litigation finance contract return is limited to a multiple of the funded amount or a rate of interest thereon;
   3. the nonrecourse litigation finance contract expressly precludes use of money for the solicitation or acquisition of future clients or matters, the purchase of a lead for one or more potential clients, cases, or to seek the referral of those clients or cases; and
   4. the funding is provided solely for the fees or expenses of specific, identified legal representations that have been commenced or for which the lawyer or law firm has been retained, and not for the solicitation or acquisition of future clients or matters.
7. Provides that these provisions apply only to contracts entered into on and after January 1, 2027.

Comments

The ban on the corporate practice of law stems from common law and has been codified in statute. (See People v. Cal. Protective Corp. (1926) 76 Cal.App.354; Bus. & Prof. Code § 6125.) The public policy reason is for the protection of consumers and concerns regarding the inherent conflict of interest corporate ownership places on the duties attorneys owe to their clients. Corporations are motivated by profits, have no ethical duties to clients, and are not subject to regulatory oversight. Existing Rules of Professional Conduct prohibit law firms in California from sharing legal fees directly or indirectly with a nonlawyer or with an organization that is not authorized to practice law. (Rul. of Prof. Conduct 5.4 (a).) Last year, the Legislature enacted AB 931(Kalra, Chapter 565, Statutes of 2025) to prohibit attorneys from directly or indirectly sharing legal fees with an out-of-state alternative business structure (ABS) based on the concerns that an out-of-state ABS may have owners who are not licensed attorneys.

This bill prohibits a corporate lender from interfering or attempting to influence the professional judgment of a licensed attorney or litigant regarding any substantive litigation decision. The bill also prohibits a corporate lender from exercising control over, or being delegated authority for, certain litigation functions, including: selecting or directing 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 or budgeting that may affect case strategy; or requiring litigation decisions be predicated on investor return metrics rather than client objectives and professional ethics. Any contract entered into that violates these prohibitions is void and unenforceable.

The Consumer Attorneys of California, the source of the bill, write:

Private equity investment in the legal industry has expanded rapidly in recent years. Although longstanding ethics rules prohibit non-lawyer ownership and fee-sharing with attorneys, investors have developed increasingly sophisticated structures designed to circumvent these protections. These arrangements can involve management services organizations (MSOs), affiliated litigation services companies, or other financial relationships that create leverage over law firms.

These models create a dangerous risk that litigation decisions—including whether to file a case, how aggressively to pursue claims, and when to settle—may be influenced by investor return expectations rather than the best interests of clients. The core principle of attorney independence exists precisely to prevent these conflicts. When profit-seeking investors gain leverage over legal decision-making, the integrity of the justice system itself is threatened.

The bill provides that it is not to be construed to prohibit the practice of nonrecourse litigation finance. Additionally, the bill specifies that the practice of nonrecourse litigation finance is not considered impermissible fee sharing provided certain conditions are met, including, among others, that the nonrecourse litigation finance contract expressly precludes use of money for the solicitation or acquisition of future clients or matters, the purchase of a lead for one or more potential clients, cases, or to seek the referral of those clients or cases.

A violation of the bill constitutes a cause for discipline by the State Bar. It also authorizes a client to bring an action against an attorney and the corporate lender who violate these provisions for statutory damages of $10,000 per violation or three times the actual damages incurred by the client, whichever is greater, attorney’s costs and fees, and injunctive or declaratory relief.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 6/10/26)

Consumer Attorneys of California (source)
Civil Justice Association of California

OPPOSITION: (Verified 6/10/26)

None received

ARGUMENTS IN SUPPORT: The author writes:

Last year, California led the country when we passed AB 931 (Kalra, 2025) to prohibit for-profit corporations from owning law firms. But despite this safeguard, private equity interests continue to seek ways to creatively restructure their involvement in the legal industry and sidestep long-standing ethical prohibitions. Consequently, this risks litigation decisions, including whether to file a case, how to resolve the case, or to pursue a particular strategy, being influenced by investor return expectations rather than putting the interests of injured individuals or consumers first.

To more broadly account for ever-changing financing structures, AB 2305 directly prohibits private equity firms, hedge funds, and other corporate investors from directing or influencing the practice of law. In doing so, this bill closes emerging loopholes, protects the independence of the legal profession, and preserves the integrity of the justice system.

The Consumer Attorneys of California write in support stating:

AB 2305 safeguards the independence of the legal profession by prohibiting private equity firms, hedge funds, and other corporate lenders from directing or influencing the practice of law. When a Californian hires an attorney, litigation decisions—including case strategy, representation, and resolution—must be made solely by the attorney and client, not by lenders seeking financial returns. AB 2305 closes emerging loopholes that allow corporate lenders to exert indirect influence over litigation practices through complex financial or operational arrangements.

ASSEMBLY FLOOR: 68-0, 4/6/26

AYES: Addis, Aguiar-Curry, Ahrens, Alanis, Alvarez, Arambula, Bains, Berman, Boerner, Bonta, Bryan, Calderon, Carrillo, Castillo, Chen, Connolly, Davies, DeMaio, Dixon, Elhawary, Ellis, Flora, Fong, Gallagher, Garcia, Gipson, Jeff Gonzalez, Mark González, Hadwick, Haney, Hart, Hoover, Irwin, Jackson, Johnson, Kalra, Krell, Lee, Lowenthal, Macedo, McKinnor, Nguyen, Ortega, Pacheco, Papan, Patel, Pellerin, Petrie-Norris, Ramos, Ransom, Michelle Rodriguez, Rogers, Blanca Rubio, Sanchez, Schiavo, Sharp-Collins, Solache, Soria, Stefani, Ta, Tangipa, Valencia, Wallis, Ward, Wicks, Wilson, Zbur, Rivas

NO VOTE RECORDED: Ávila Farías, Bauer-Kahan, Bennett, Caloza, Gabriel, Harabedian, Lackey, Muratsuchi, Patterson, Quirk-Silva, Celeste Rodriguez, Schultz

Prepared by: Amanda Mattson / JUD. / (916) 651-4113

6/12/26 12:50:11

**** END ****

1. Section 6146 of the Business and Professions Code places limits on contingency fees agreements in connection with an action for injury or damage against a health care provider based upon such person’s alleged professional negligence. ↑

SENATE JUDICIARY COMMITTEE

Senator Thomas Umberg, Chair

2025-2026 Regular Session

Bill No: AB 2305 (Author:Kalra)

Version: June 1, 2026

Hearing Date: June 9, 2026

Fiscal: No

Urgency: No

Consultant: AM

SUBJECT

Corporate investment in litigation practice

DIGEST

This bill prohibits a corporate lender, or an entity it controls, from entering into any contract, agreement, or arrangement with a litigation practice if the contract would constitute the unauthorized practice of law, and specifies what types of actions by a corporate lender constitute the unauthorized practice of law. The bill provides that these provisions are not to be construed to prohibit the practice of nonrecourse litigation finance and that the practice of nonrecourse litigation finance is not considered impermissible fee sharing if certain conditions are met.

EXECUTIVE SUMMARY

Longstanding public policy has prohibited the ownership of law firms by individuals who are not licensed attorneys based on the need to protect the attorney-client relationship and ensure decisions made are in the best interest of the client. This prohibits the ability of private equity firms or hedge funds from owning or purchasing a stake in law practices in this state. However, these entities have found a work-around to this ban by acting as a private lender without taking any ownership interests. This bill seeks to ensure that this cannot serve as a loophole and prohibit these firms or funds from exerting pressure on the decisions of a law firm. Similar bans on the corporate practice of medicine and dentistry exist based on the same concerns around the doctor-patient relationship. Last year, the Legislature enacted AB 1415 (Bonta, Ch. 641, Stats. 2025) and SB 351 (Cabaldon, Ch. 409, Stats. 2025), to address concerns of private equity investment in the medical profession. This bill is modeled on these two bills and seeks to enact similar safeguards for the legal profession.

The bill is sponsored by the Consumer Attorneys of California and supported by the Civil Justice Association of California. No timely opposition was received by the Committee.

PROPOSED CHANGES TO THE LAW

Existing law:

1. Establishes the State Bar Act and provides for the licensure and regulations of attorneys practicing in California. (Bus. & Prof. Code §§ 6000 et seq.)
2. Requires all attorneys who practice law in California to be licensed by the California State Bar (State Bar). (Cal. Const., art. VI, § 9; Bus. & Prof. Code §§ 6000 et seq.)
3. Requires an attorney who contracts to represent a client on a contingency fee basis to, at the time the contract is entered into, provide a duplicate copy of the signed contract to the plaintiff, as specified, which must include the following:
   1. a statement of the contingency fee rate that the client and attorney have agreed upon;
   2. a statement as to how disbursements and costs incurred in connection with the prosecution or settlement of the claim will affect the contingency fee and the client’s recovery;
   3. a statement as to what extent, if any, the client could be required to pay any compensation to the attorney for related matters that arise out of their relationship not covered by their contingency fee contract, which may include any amounts collected for the plaintiff by the attorney;
   4. unless the claim is subject to the provisions of Section 6146^[1], a statement that the fee is not set by law but is negotiable between attorney and client;
   5. if the claim is subject to the provisions of Section 6146, a statement that the rates set forth in that section are the maximum limits for the contingency fee agreement, and that the attorney and client may negotiate a lower rate. (Bus. & Prof. Code § 6147(a).)
4. Prohibits attorneys from directly or indirectly sharing legal fees with an out-of-state alternative business structure, except as specified. (Bus. & Prof. Code § 6156.)
5. Provides that a written fee agreement is subject to the attorney-client privilege. (Bus. & Prof. Code § 6149.)
6. Prohibits an individual, partnership, corporation, association, or any other nongovernmental entity from operating for the direct or indirect purpose, in whole or in part, of referring potential clients to attorneys, and no attorney can accept a referral of such potential clients, unless specified requirements are met. (Bus. & Prof. Code § 6155.)

This bill:

1. Provides that a corporate lender doing any of the following constitutes the unauthorized practice of law:
   1. Interfering or attempting to influence the professional judgment of a licensed attorney or litigant regarding any substantive litigation decision, including;
      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; or
      8. advising on appeals, procedural choices, or any litigation timing.
   2. Exercising control over, or being 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; or
      4. requiring that litigation decisions be predicated on investor return metrics rather than client objectives and professional ethics.
2. Prohibits a corporate lender, or an entity it controls, from entering into any contract, agreement, or arrangement with a litigation practice if the contract would constitute the unauthorized practice of law as described in 1).
   1. Any contractual provision that permits or facilitates prohibited interference or control is void, unenforceable, and against public policy.
   2. A contract between a litigation practice and a corporate lender cannot include a clause that does any of the following:
      1. restrict an attorney or client from withdrawing from representation in the event of a nonlawyer engaging in the unlawful practice of law as described in 1);
      2. prohibit an attorney or client from speaking publicly or reporting a nonlawyer engaging in the unlawful practice of law as described in 1); or
      3. impose financial penalties for reporting or a nonlawyer engaging in the unlawful practice of law as described in 1).
3. Provides that a violation of these provisions constitutes a cause for discipline by the State Bar.
4. Provides that a violation of these provisions subjects the attorney and the corporate lender to the following penalties to be recovered in an action brought by the client:
   1. statutory damages of $10,000 per violation or three times the actual damages incurred by the client, whichever is greater;
   2. attorney’s costs and fees; and
   3. injunctive or declaratory relief.
5. Provides that a violation of these provisions is not a crime.
6. Provides that these provisions are not to be construed to prohibit the practice of nonrecourse litigation finance and that the practice of nonrecourse litigation finance is not considered impermissible fee sharing provided the following conditions are met:
   1. the nonrecourse litigation finance contract contains a specific dollar amount or maximum dollar amount to be paid to the lawyer or law firm;
   2. the nonrecourse litigation finance contract return is limited to a multiple of the funded amount or a rate of interest thereon;
   3. the nonrecourse litigation finance contract expressly precludes use of money for the solicitation or acquisition of future clients or matters, the purchase of a lead for one or more potential clients, cases, or to seek the referral of those clients or cases; and
   4. the funding is provided solely for the fees or expenses of specific, identified legal representations that have been commenced or for which the lawyer or law firm has been retained, and not for the solicitation or acquisition of future clients or matters.
7. Provides that these provisions apply only to contracts entered into on and after January 1, 2027.

COMMENTS

1. Stated need for the bill

The author writes:

Last year, California led the country when we passed AB 931 (Kalra, 2025) to prohibit for-profit corporations from owning law firms. But despite this safeguard, private equity interests continue to seek ways to creatively restructure their involvement in the legal industry and sidestep long-standing ethical prohibitions. Consequently, this risks litigation decisions, including whether to file a case, how to resolve the case, or to pursue a particular strategy, being influenced by investor return expectations rather than putting the interests of injured individuals or consumers first.

To more broadly account for ever-changing financing structures, AB 2305 directly prohibits private equity firms, hedge funds, and other corporate investors from directing or influencing the practice of law. In doing so, this bill closes emerging loopholes, protects the independence of the legal profession, and preserves the integrity of the justice system.

1. Private equity and concerns for consumers of legal services

The ban on the corporate practice of law stems from common law and has been codified in statute. (See People v. Cal. Protective Corp. (1926) 76 Cal.App.354; Bus. & Prof. Code § 6125.) The public policy reason is for the protection of consumers and concerns regarding the inherent conflict of interest corporate ownership places on the duties attorneys owe to their clients. Corporations are motivated by profits, have no ethical duties to clients, and are not subject to regulatory oversight. Existing Rules of Professional Conduct prohibit law firms in California from sharing legal fees directly or indirectly with a nonlawyer or with an organization that is not authorized to practice law. (Rul. of Prof. Conduct 5.4 (a).) Last year, the Legislature enacted AB 931(Kalra, Ch. 565, Stats. 2025) to prohibit attorneys from directly or indirectly sharing legal fees with an out-of-state alternative business structure (ABS) based on the concerns that an out-of-state ABS may have owners who are not licensed attorneys.

This bill prohibits a corporate lender from interfering or attempting to influence the professional judgment of a licensed attorney or litigant regarding any substantive litigation decision. The bill also prohibits a corporate lender from exercising control over, or being delegated authority for, certain litigation functions, including:

selecting or directing 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 or budgeting that may affect case strategy; or requiring litigation decisions be predicated on investor return metrics rather than client objectives and professional ethics. Any contract entered into that violates these prohibitions is void and unenforceable.

The Consumer Attorneys of California, the sponsor of the bill, write:

Private equity investment in the legal industry has expanded rapidly in recent years. Although longstanding ethics rules prohibit non-lawyer ownership and fee-sharing with attorneys, investors have developed increasingly sophisticated structures designed to circumvent these protections. These arrangements can involve management services organizations (MSOs), affiliated litigation services companies, or other financial relationships that create leverage over law firms.

These models create a dangerous risk that litigation decisions—including whether to file a case, how aggressively to pursue claims, and when to settle—may be influenced by investor return expectations rather than the best interests of clients. The core principle of attorney independence exists precisely to prevent these conflicts. When profit-seeking investors gain leverage over legal decision-making, the integrity of the justice system itself is threatened.

The bill provides that it is not to be construed to prohibit the practice of nonrecourse litigation finance. Additionally, the bill specifies that the practice of nonrecourse litigation finance is not considered impermissible fee sharing provided certain conditions are met, including, among others, that the nonrecourse litigation finance contract expressly precludes use of money for the solicitation or acquisition of future clients or matters, the purchase of a lead for one or more potential clients, cases, or to seek the referral of those clients or cases.

A violation of the bill constitutes a cause for discipline by the State Bar. It also authorizes a client to bring an action against an attorney and the corporate lender who violate these provisions for statutory damages of $10,000 per violation or three times the actual damages incurred by the client, whichever is greater, attorney’s costs and fees, and injunctive or declaratory relief.

1. Statements in support

The Consumer Attorneys of California, the sponsor of the bill, write in support stating:

AB 2305 safeguards the independence of the legal profession by prohibiting private equity firms, hedge funds, and other corporate lenders from directing or influencing the practice of law. When a Californian hires an attorney, litigation decisions—including case strategy, representation, and resolution—must be made solely by the attorney and client, not by lenders seeking financial returns. AB 2305 closes emerging loopholes that allow corporate lenders to exert indirect influence over litigation practices through complex financial or operational arrangements.

SUPPORT

Consumer Attorneys of California (sponsor)
Civil Justice Association of California

OPPOSITION

None received

RELATED LEGISLATION

Pending Legislation: None known.

Prior Legislation:

SB 351 (Cabaldon, Ch. 409, Stats. 2025) prohibited a private equity group or hedge fund involved in any manner with a physician or dental practice, including as an investor, from interfering with the professional judgment of physicians or dentists in making health care decisions and authorized the Attorney General to seek injunctive relief for a violation of these prohibitions.

AB 931 (Kalra, Ch. 565, Stats. 2025) creates a regulatory framework for the litigation financing industry, and prohibited attorneys from directly or indirectly sharing legal fees with an out-of-state alternative business structure, except as specified.

AB 1415 (Bonta, Ch. 641, Stats. 2025) established definitions of “hedge fund,” “private equity,” “management services organizations,” and “noticing entity” for the purposes of data reporting to the Office of Health Care Affordability (OHCA) to carry out functions of OHCA related to monitoring and analyzing the health care market and cost drivers of spending, and creating a state strategy for controlling the cost of health care.

PRIOR VOTES

Assembly Floor (Ayes 68, Noes 0)

Assembly Judiciary Committee (Ayes 12, Noes 0)

**************

1. Section 6146 of the Business and Professions Code places limits on contingency fees agreements in connection with an action for injury or damage against a health care provider based upon such person’s alleged professional negligence. ↑

ASSEMBLY THIRD READING

ATR Bill Id:AB 2305

Author:(Kalra)

As Amended Version :March 25, 2026

Majority vote

SUMMARY

Prohibits a corporate investor in a legal practice from interfering with the independent judgment of attorneys.

Major Provisions

1. Prohibits a corporate investor involved in any litigation practice in this state from, directly or indirectly, interfering with or attempting to influence the professional judgment of a licensed attorney or litigant regarding any substantive litigation decision, including, but not limited to, any of the following:
   1. Determining which clients 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; and
   8. Advising on appeals, procedural choices, or any litigation timing.
2. Prohibits a corporate investor involved in any litigation practice in this state from, directly or indirectly, exercising control or being delegated authority to control any of the following:
   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.
3. Prohibits a corporate investor, or an entity it controls, from entering into any contract, agreement, or arrangement with a litigation practice if the contract would enable prohibited interference or control described in this bill.
4. Prohibits a contract between a litigation practice and a corporate investor from including a clause that does any of the following:
   1. Restricts an attorney or client from withdrawing from representation in the event of corporate interference;
   2. Prohibits an attorney or client from speaking publicly or reporting corporate interference to the State Bar or other authority; or
   3. Imposes financial penalties for reporting or resisting corporate influence.
5. Provides that any contractual provision that permits or facilitates prohibited interference or control pursuant to this bill is void, unenforceable, and against public policy.
6. Provides that a violation of any of the provisions of 1) through 5) constitutes cause for the imposition of discipline by the State Bar.
7. Provides that a violation of any of the provisions of 1) through 5) subjects an attorney or corporate investor to the following to be recovered in a civil action brought by the client:
   1. Statutory damages of ten thousand dollars ($10,000) per violation or three times the actual damages incurred by the client, whichever is greater;
   2. Attorney′s costs and fees; and
   3. Injunctive or declaratory relief.
8. Defines the following terms:
   1. ″Corporate investor″ means any entity, including, but not limited to, a private equity group, hedge fund, investment firm, or any nonattorney corporation, with the primary purpose of raising or managing capital and which participates in a litigation practice through an ownership, financing, or management arrangement;
   2. ″Control″ includes, but is not limited to, directing, dictating, or influencing which clients to represent, the scope of client representation, the financial terms of client representation, litigation strategy, settlement decisions, litigation funding decisions, selection or management of counsel, or any other substantive legal determinations; and
   3. ″Litigation practice″ means the representation of parties in judicial, administrative, arbitration, or other adversarial dispute resolution settings by licensed attorneys.
9. Makes various findings and declarations about the pervasive influence of corporate investors on the practice of law.

COMMENTS

While much has been made about private equity firms′ secretive loans to private companies and those loans potential impact on the stock market, these firms have also been quietly seeding money into professional practices that traditionally have not been accessible to large private investment firms. In recent years, private equity firms have sought to profit from medical and dental practices, as well as law firms. While private equity provides some worth in the broader business market, its attempt to push into private professional practices that are heavily regulated by codes of professional ethics is troubling as private equity′s drive for profit threatens to undermine the relationship between trained professionals and their clients. Seeking to address this growing problem in the medical field, last year the Legislature enacted both AB 1415 (Bonta) Chapter. 641, Statutes. 2025 and SB 351 (Cabaldon) Chapter. 409, Statutes. 2025, to reign in private equity in the medical profession. This bill, which is modeled in large part on provisions of those two measures, seeks to do the same for the legal profession.

Across professions California law has long required licensed professions to put professional judgement and client needs above all else. California law has long required licensed professionals – typically doctors, attorneys, dentists, and others with significant professional training – to put their client′s needs and their professional judgement above all else when serving the public. For example, the Osteopathic Medical Board′s Canon′s of Ethics, as codified in the Business and Professions Code, mandates that doctors must first and foremost practice in accordance with a body of systemized and scientific knowledge and provide patients freedom to direct their care. (Business and Professions Code Sections 2190.5 and 125.6.) Similarly, the Rules of Professional Conduct dictate that attorneys must, ″abide by a client′s decisions concerning the objectives of representation and, reasonably consult with the client as to the means by which they are to be pursued.″ (Rules of Professional Conduct Rule 1.2 (a) and Business and Professions Code Section 6068.)

To ensure, to the extent possible, that financial motives do not override professional competence, many licensed professionals must organize their practices in a manner to ensure that professional judgement and client services are the dominant factor in business decision-making. For example, law firms in California cannot share legal fees directly or indirectly with a nonlawyer or with an organization that is not authorized to practice law. (Rules of Professional Conduct, Rule 5.4 (a).) While some exceptions exist for paying salaried non-attorney staff and other business obligations (i.e. rent, IT services, bank loans, etc…), the crux of Rule 5.4 is that attorneys must run their businesses with the interests of their clients at the front of mind. Throughout all regulated professions, California imposes significant penalties, including the potential loss of licensure, for putting profit above the needs of their client.

This bill adopts a model similar to the one utilized by AB 1415 and SB 351 to limit private equity′s influence in the medical field and applies the model to the legal profession. The bill explicitly prohibits corporate investors, described as ″any entity, including, but not limited to, a private equity group, hedge fund, investment firm, or any non-attorney corporation, with the primary purpose of raising or managing capital and which participates in a litigation practice through an ownership, financing, or management arrangement″ from interfering with the professional judgment of a California attorney. The bill expressly prohibits the corporate investor from making decisions about client representation, settlement offers and litigation strategy, and appeals. The bill also bans all contract terms authorizing a party, other than an attorney and their client, from making such decisions. The bill makes a violation an offense disciplinable by the State Bar of California and subject offending attorney and corporate investors to civil actions for damages from aggrieved clients.

According to the Author

Last year, California led the country when we passed AB 931 (Kalra, 2025) to prohibit for-profit corporations from owning law firms. But despite this safeguard, private equity interests continue to seek ways to creatively restructure their involvement in the legal industry and sidestep long-standing ethical prohibitions. Consequently, this risks litigation decisions, including whether to file a case, how to resolve the case, or to pursue a particular strategy, being influenced by investor return expectations rather than putting the interests of injured individuals or consumers first.

To more broadly account for ever-changing financing structures, AB 2305 directly prohibits private equity firms, hedge funds, and other corporate investors from directing or influencing the practice of law. In doing so, this bill closes emerging loopholes, protects the independence of the legal profession, and preserves the integrity of the justice system.

Arguments in Support

This bill is supported by a coalition of plaintiff′s attorneys and consumer advocates. In support of the bill their coalition letter states:

We write in support of AB 2305, a measure that strengthens safeguards to ensure that legal representation and litigation decisions remain guided by the interests of clients and the professional judgment of licensed attorneys. The bill reinforces longstanding principles in California law that the practice of law must remain independent and free from improper outside influence. By establishing clear guardrails around outside control or financial interests that could interfere with litigation strategy or legal decision-making, AB 2305 helps protect consumers and preserve confidence in California′s civil justice system.

Maintaining the independence of attorneys and the integrity of the judicial process is essential to ensuring that individuals—particularly injured consumers and working families—can rely on fair and ethical representation. AB 2305 promotes transparency and accountability while reinforcing the ethical duties attorneys owe to their clients and the courts. For these reasons, we respectfully urge your AYE vote on AB 2305.

Additionally, the Civil Justice Association of California hope to be able to support this measure with additional amendments following ongoing stakeholder discussions. Further elaborating on the Civil Justice Association′s position they write:

The bill imposes restrictions on conduct, but does nothing to ensure that such conduct can be detected. It does not require third-party funders to identify themselves, disclose their financial interest, notify the court or opposing parties of their involvement, or even ensure that clients are fully informed of the existence and terms of these arrangements. As a result, courts may be asked to adjudicate disputes without knowing who is truly driving litigation strategy or settlement decisions. This lack of disclosure undermines judicial integrity, obscures conflicts of interest, and erodes public confidence in the civil justice system. Courts should have clear authority to review these arrangements and limit improper influence, and enforcement mechanisms must extend beyond self-reporting by potentially conflicted actors.

Arguments in Opposition

None on file

FISCAL COMMENTS

None

VOTES

ASM JUDICIARY: 12-0-0

YES: Kalra, Macedo, Bauer-Kahan, Bryan, Connolly, Dixon, Harabedian, Pacheco, Papan, Sanchez, Stefani, Zbur

UPDATED

VERSION: March 25, 2026

CONSULTANT: Nicholas Liedtke / JUD. / (916) 319-2334 FN: 0002321

Date of Hearing: March 24, 2026

ASSEMBLY COMMITTEE ON JUDICIARY

Ash Kalra, Chair

ABPCA Bill Id:AB 2305

Author:(Kalra) – As Amended Ver:March 16, 2026

As Proposed to be Amended

SUBJECT: Corporate investment in litigation practice

KEY ISSUE: should corporate investors be prohibited from interfering with the independent authority of California attorneys to UTILIZE their legal judgment AND ADOPT LITIGATION STRATEGIES THAT advance THEIR client’s interests?

SYNOPSIS

Traditional private equity funding involves a private lender buying a stake in a company and then using the equity firm’s business acumen to help the company grow in return for significant returns to the equity firm. However, in recent years, the growth of the private lending industry has allowed private equity firms and hedge funds to “invest” in companies without taking a direct financial stake in the company. The rise of private lending, accordingly, has permitted private equity to “invest” in businesses that have traditionally been off-limits to private equity. For example, due to the strict legal obligations to put client needs first, the medical and legal professions had previously been outside the reach of private equity, as the law limited ownership of these firms to the licensed professionals who were obligated to put client needs above all else. However, now that private equity can “loan” these firms sizable sums of money without ever taking an ownership interest in the firm, private equity can now access these industries and influence their day-to-day professional decision making.

This measure seeks to limit corporate investments into the legal industry and protect the integrity of the attorney-client relationship. The measure, which is modeled after similar efforts to keep private equity out of the practice of medicine, would prohibit outside corporate money interests from directing litigation strategies. The bill would prohibit any contract giving litigation decision making authority to any outside interest and would authorize a client who was harmed by outside interference in their case to sue the attorney and corporate investor. The bill also strengthens the State Bar of California’s ability to crackdown on the burgeoning practice.

This measure is supported by the Consumer Attorneys of California as well as several consumer advocacy organizations. The bill is supported, if amended to further crackdown on corporate influence in the practice of law, by the Civil Justice Association of California who seeks additional disclosures of the funding arrangements between law firms and private capital. As discussed in the analysis, the opaque nature of these financing agreements requires all stakeholders to further study the agreements in order to craft a legislative solution that cannot easily be side-stepped by bad actors. The author and stakeholders have agreed to continue these discussions, as all stakeholders share a common goal of stopping the growing influence of outside capital in California civil justice system. This bill has no recorded opposition.

SUMMARY: Prohibits a corporate investor in a legal practice from interfering with the independent judgment of attorneys. Specifically, this bill:

1. Prohibits a corporate investor involved in any litigation practice in this state from, directly or indirectly, interfering with or attempting to influence the professional judgment of a licensed attorney or litigant regarding any substantive litigation decision, including, but not limited to, any of the following:
   1. Determining which clients 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; and
   8. Advising on appeals, procedural choices, or any litigation timing.
2. Prohibits a corporate investor involved in any litigation practice in this state from, directly or indirectly, exercising control or being delegated authority to control any of the following:
   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.
3. Prohibits a corporate investor, or an entity it controls, from entering into any contract, agreement, or arrangement with a litigation practice if the contract would enable prohibited interference or control described in this bill.
4. Prohibits a contract between a litigation practice and a corporate investor from including a clause that does any of the following:
   1. Restricts an attorney or client from withdrawing from representation in the event of corporate interference;
   2. Prohibits an attorney or client from speaking publicly or reporting corporate interference to the State Bar or other authority; or
   3. Imposes financial penalties for reporting or resisting corporate influence.
5. Provides that any contractual provision that permits or facilitates prohibited interference or control pursuant to this bill is void, unenforceable, and against public policy.
6. Provides that a violation of any of the provisions of 1) through 5) constitutes cause for the imposition of discipline by the State Bar.
7. Provides that a violation of any of the provisions of 1) through 5) subjects an attorney or corporate investor to the following to be recovered in a civil action brought by the client:
   1. Statutory damages of ten thousand dollars ($10,000) per violation or three times the actual damages incurred by the client, whichever is greater;
   2. Attorney’s costs and fees; and
   3. Injunctive or declaratory relief.
8. Defines the following terms:
   1. “Corporate investor” means any entity, including, but not limited to, a private equity group, hedge fund, investment firm, or any nonattorney corporation, with the primary purpose of raising or managing capital and which participates in a litigation practice through an ownership, financing, or management arrangement;
   2. “Control” includes, but is not limited to, directing, dictating, or influencing which clients to represent, the scope of client representation, the financial terms of client representation, litigation strategy, settlement decisions, litigation funding decisions, selection or management of counsel, or any other substantive legal determinations; and
   3. “Litigation practice” means the representation of parties in judicial, administrative, arbitration, or other adversarial dispute resolution settings by licensed attorneys.
9. Makes various findings and declarations about the pervasive influence of corporate investors on the practice of law.

EXISTING LAW:

1. Establishes the State Bar Act and provides for the licensure and regulations of attorneys practicing in California. (Business and Professions Code Section 6000 et seq.)
2. Requires an attorney who contracts to represent a client on a contingency fee basis to, at the time the contract is entered into, provide a duplicate copy of the contract, signed by both the attorney and the client, or the client’s guardian or representative, to the plaintiff, or to the client’s guardian or representative, as specified. (Business and Professions Code Section 6147 (a).)
3. Requires the contract outlines in 2) to contain the following terms:
   1. A statement of the contingency fee rate that the client and attorney have agreed upon;
   2. A statement as to how disbursements and costs incurred in connection with the prosecution or settlement of the claim will affect the contingency fee and the client’s recovery;
   3. A statement as to what extent, if any, the client could be required to pay any compensation to the attorney for related matters that arise out of their relationship not covered by their contingency fee contract, including any amounts collected for the plaintiff by the attorney;
   4. A statement that the fee is not set by law but is negotiable between attorney and client, as specified;
   5. A statement that the rates set forth in that section are the maximum limits for the contingency fee agreement, and that the attorney and client may negotiate a lower rate. (Ibid.)
4. Provides that a written fee agreement is subject to the attorney-client privilege. (Business and Professions Code Section 6149.)
5. Prohibits, generally, an attorney licensed or otherwise authorized to practice in this state from sharing legal fees directly or indirectly with an out-of-state alternative business structure unless all of the following apply:
6. The attorney is also licensed in the state in which the alternative business structure is approved;
7. The fees are compensation for the provision of legal services in that state; and
8. The law of that state is controlling pursuant to Rule 8.5 of the California Rules of Professional Conduct or any successor rule. (Business and Professions Code Section 6156 (a).
9. Defines, for the purposes of 5), “alternative business structure” to mean any entity that provides legal services while allowing nonattorney ownership or decisionmaking authority. (Business and Professions Code Section 6156 (c)(1).)
10. Prohibits a lawyer or law firm from sharing legal fees directly or indirectly with a nonlawyer or with an organization that is not authorized to practice law, except as specified. (California Rules of Professional Conduct, Rule 5.4 (a).)

FISCAL EFFECT: As currently in print this bill is keyed non-fiscal.

COMMENTS: While much has been made about private equity firms’ secretive loans to private companies and those loans potential impact on the stock market, these firms have also been quietly seeding money into professional practices that traditionally have not been accessible to large private investment firms. In recent years, private equity firms have sought to profit from medical and dental practices, as well as law firms. While private equity provides some worth in the broader business market, its attempt to push into private professional practices that are heavily regulated by codes of professional ethics is troubling as private equity’s drive for profit threatens to undermine the relationship between trained professionals and their clients. Seeking to address this growing problem in the medical field, last year the Legislature enacted both AB 1415 (Bonta) Chap. 641, Stats. 2025 and SB 351 (Cabaldon) Chap. 409, Stats. 2025, to reign in private equity in the medical profession. This bill, which is modeled in large part on provisions of those two measures, seeks to do the same for the legal profession. In support of this critical bill to protect Californians involved in the civil justice system, the author writes:

Last year, California led the country when we passed AB 931 (Kalra, 2025) to prohibit for-profit corporations from owning law firms. But despite this safeguard, private equity interests continue to seek ways to creatively restructure their involvement in the legal industry and sidestep long-standing ethical prohibitions. Consequently, this risks litigation decisions, including whether to file a case, how to resolve the case, or to pursue a particular strategy, being influenced by investor return expectations rather than putting the interests of injured individuals or consumers first.

To more broadly account for ever-changing financing structures, AB 2305 directly prohibits private equity firms, hedge funds, and other corporate investors from directing or influencing the practice of law. In doing so, this bill closes emerging loopholes, protects the independence of the legal profession, and preserves the integrity of the justice system.

Across professions California law has long required licensed professions to put professional judgement and client needs above all else. California law has long required licensed professionals – typically doctors, attorneys, dentists, and others with significant professional training – to put their client’s needs and their professional judgement above all else when serving the public. For example, the Osteopathic Medical Board’s Canon’s of Ethics, as codified in the Business and Professions Code, mandates that doctors must first and foremost practice in accordance with a body of systemized and scientific knowledge and provide patients freedom to direct their care. (Business and Professions Code Sections 2190.5 and 125.6.) Similarly, the Rules of Professional Conduct dictate that attorneys must, “abide by a client’s decisions concerning the objectives of representation and, reasonably consult with the client as to the means by which they are to be pursued.” (Rules of Professional Conduct Rule 1.2 (a) and Business and Professions Code Section 6068.)

To ensure, to the extent possible, that financial motives do not override professional competence, many licensed professionals must organize their practices in a manner to ensure that professional judgement and client services are the dominant factor in business decision-making. For example, law firms in California cannot share legal fees directly or indirectly with a nonlawyer or with an organization that is not authorized to practice law. (Rules of Professional Conduct, Rule 5.4 (a).) While some exceptions exist for paying salaried non-attorney staff and other business obligations (i.e. rent, IT services, bank loans, etc…), the crux of Rule 5.4 is that attorneys must run their businesses with the interests of their clients at the front of mind. Throughout all regulated professions, California imposes significant penalties, including the potential loss of licensure, for putting profit above the needs of their client.

Private equity’s insatiable need for profit raises ethical questions when these firms invest in professional corporations. According to the American Investment Council, private equity firms invest capital into businesses they believe have growth potential if proper financial support is rendered and business direction is provided. (American Investment Council’s Private Equity FAQs available at: https://www.investmentcouncil.org/private-equity-faqs/.) Traditionally, this model functioned with investors finding innovative new start-ups to provide seed capital in return for a share of the company’s ownership. Once the company was capable of upscaling, the private equity firm would assist in taking the company public or selling its stake for a substantial financial gain. Because private equity only makes money when the company it invests in makes money, the traditional model frequently saw private equity firms providing significant operational business guidance to the firm in which it invested. For the purposes of a start-up managed by staff with strong technical skills but potentially lacking in business acumen, this model made sense; the technical experts develop the product and the equity experts direct the business growth.

However, in recent years, private equity is now moving into a private credit market. Rather than directly investing and managing a business, the private credit market provides sizable loans to established companies to permit them to grow and expand market share. As of June 2025, according to Moody’s, there were upwards of $300 billion in outstanding loans from private-credit providers and an additional $340 billion in capital available for such loans. (Pritam Biswas & Arasu K. Basil, Private credit strains ripple through Wall Street as investors grow wary, Reuters (Mar. 16, 2026) available at: https://www.reuters.com/business/finance/private-credit-strains-ripple-through-wall-street-investors-grow-wary-2026-03-16/.) Because these “loans” are not traditional investments they face far less scrutiny than traditional equity investments even if, in practice, these loans open the door for corporate investors to dictate the professional decision making of another business entity.

The structure of these loans has also enabled private equity to expand the nature of business in which they invest. As noted above, the strict regulatory rules preventing fee sharing and investment in businesses operated by licensed professionals (i.e. medical practices and law firms) largely kept these practices out of the reach of private equity. Lawyers and medical professionals seeking to expand their businesses typically obtained lines of credit from banks. As traditional lending devices, these loans were structured to mitigate the bank’s risk and offer the professional corporation structured interest rates and repayment plans. However, with the rise of private credit, professional corporations became ripe targets for private equity firms. Using private credit, the equity firms can now loan professional corporations significant sums of money. As a result of the greater risk to the equity firm posed by the larger loans, they can charge sizable interest rates, seek aggressive repayment timelines, and generally keep the details of the arrangement obscured from professional licensing regulators and financial regulators.

While the opaque nature of these loans makes determining their prevalence a difficult task, the issues surrounding Los Angeles County’s $4 billion settlement of childhood sexual assault cases is shedding some light on the practice in California. In recent months, advertisements have blanketed Los Angeles County in search of plaintiffs in childhood sexual assault cases. In many cases these advertisements come from law firms with very little presence in California. For example, the Los Angeles Times reported that one of the largest advertising campaigns is emanating from the Sheldon Law Group, a Washington DC-based law firm whose website does not list any California attorneys on staff, and that according to records from the United States Securities and Exchange Commission has received loans from private investment firms. (Rebecca Ellis, How private investors stand to profit from billions in L.A. County sex abuse settlements, Los Angeles Times (Dec. 22, 2025) available at: https://www.latimes.com/california/story/2025-12-22/california-sex-abuse-lawsuits-investors.) The fact that advertisements appear to be targeting lower income neighborhoods across the county, and that many potential plaintiffs may have little to no connection with the juvenile detention facilities is raising ethical questions. (Ibid.)

While a law firm advertising for clients or obtaining private loans to spur firm growth is not unlawful, it is not without risk. For a law firm with aggressive loan repayment timelines, the need to repay the loan may cloud attorneys’ professional judgment and open the door for outside influence in litigation strategy. The need to avoid defaulting on a loan may spur attorneys to encourage clients to settle cases prematurely and for lower settlement amounts. Even more troubling, the need to repay loans may entice some firms to go beyond legitimate advertisements and entice clients to sign up for large lawsuits, a practice known as capping. Indeed, although California-based and not clearly linked to private equity, the Downtown LA Law Group was accused of capping by, allegedly, offering county welfare recipients money in return for agreeing to sign-up as a client of the firm and sue Los Angeles County over sex abuse claims. (Rebecca Ellis, In the biggest sex abuse settlement in U.S. history, some claim they were paid to sue, Los Angeles Times (Oct. 2, 2025) available at: https://www.latimes.com/california/story/2025-10-02/settlement-story-ab218-sex-abuse.)

Due to the nature of private loans in the legal industry, the rapid growth of out-of-state law firms moving into California, and the known rise in fraudulent activities by attorneys, the Legislature has begun taking steps to further tighten ethical rules for attorneys. Last year, seeking to reign in some of the corporate influence on the practice of law, the Legislature enacted AB 931 (Kalra) Chap. 565, Stats, 2025, which prohibited fee sharing with out-of-state law firms that permitted non-attorneys to have an ownership stake in law firms. Furthermore, the Legislature enacted SB 37 (Umberg) Chap. 645, Stats. 2025, to strengthen penalties against capping. Both measures were designed to limit corporate investors’ ability to undermine attorney decision making and stop attorneys from using aggressive, and potentially unethical, litigation tactics. However, neither bill fully addressed the growing use of private credit in the legal profession.

This bill adopts a model similar to the one utilized by AB 1415 and SB 351 to limit private equity’s influence in the medical field and applies the model to the legal profession. The bill explicitly prohibits corporate investors, described as “any entity, including, but not limited to, a private equity group, hedge fund, investment firm, or any non-attorney corporation, with the primary purpose of raising or managing capital and which participates in a litigation practice through an ownership, financing, or management arrangement” from interfering with the professional judgment of a California attorney. The bill expressly prohibits the corporate investor from making decisions about client representation, settlement offers and litigation strategy, and appeals. The bill explicitly bans all contract terms authorizing a party, other than an attorney and their client, from making such decisions. The bill would make a violation an offense disciplinable by the State Bar of California and subject offending attorney and corporate investors subject to civil actions for damages from aggrieved clients.

Proposed technical amendments. As currently in print, the bill’s enforcement provisions are drafted in a manner that insufficiently delineates the State Bar’s disciplinary authority from the client’s private right of action. Seeking to clarify the enforcement provisions of this bill, the author is proposing the following technical amendment to the proposed Business and Professions Code Section 6134.10 to read as follows:

6134.10. (a) A violation of this article shall constitute cause for the imposition of discipline by the State Bar. and

(b) In addition to any discipline imposed pursuant to (a), a violation of this article shall subject the attorney and the corporate investor to the following penalties to be recovered in an action brought by the client:

1. (a) Statutory damages of ten thousand dollars ($10,000) per violation or three times the actual damages incurred by the client consumer, whichever is greater.
2. (b) Attorney’s costs and fees.
3. (c) Injunctive or declaratory relief.

Ongoing stakeholder discussions seek to add loan disclosure provisions and further strengthen the bill’s attempt to reign in private finance in the legal industry. This bill is supported, if amended, by the Civil Justice Association of California on behalf of the insurers and litigators who defend against many of the lawsuits filed by firms funded by corporate investors. The Civil Justice Association states:

We believe the bill could go further to curb the abusive practices associated with third-party litigation funding by requiring transparency and enforceable accountability. At a minimum, the bill should require disclosure of litigation funding agreements to the court and all parties, identification of all funders with a financial interest in the case, and full disclosure to clients of the terms and risks of such agreements. Courts should have clear authority to review these arrangements and limit improper influence, and enforcement mechanisms must extend beyond self-reporting by potentially conflicted actors.

The author and proponents of this bill note that this comment is well taken. However, all stakeholders appear to concede that due to the opaque nature of these loan and funding agreements additional study and discussions are necessary in order to craft provisions that effectively promote transparency and regulatory oversight. For example, the Civil Justice Association of California’s letter sought information on “funders with a financial interest in a case.” Given that some of the private loans appear to simply go to the firm to help them “grow,” and are not tied to a specific case, focusing on case-specific disclosures would make it too easy for a bad acting law firm to claim a loan is not case-specific, even if the corporate investor is using the broader loan to dictate litigation strategy in a specific case. Accordingly, the author and all stakeholders have agreed to continue discussions to make this bill as effective as possible at reigning in the pernicious practice of letting outside financial interests drive litigation in this state.

ARGUMENTS IN SUPPORT: This bill is supported by a coalition of plaintiff’s attorneys and consumer advocates. In support of the bill their coalition letter states:

We write in support of AB 2305, a measure that strengthens safeguards to ensure that legal representation and litigation decisions remain guided by the interests of clients and the professional judgment of licensed attorneys. The bill reinforces longstanding principles in California law that the practice of law must remain independent and free from improper outside influence. By establishing clear guardrails around outside control or financial interests that could interfere with litigation strategy or legal decision-making, AB 2305 helps protect consumers and preserve confidence in California’s civil justice system.

Maintaining the independence of attorneys and the integrity of the judicial process is essential to ensuring that individuals—particularly injured consumers and working families—can rely on fair and ethical representation. AB 2305 promotes transparency and accountability while reinforcing the ethical duties attorneys owe to their clients and the courts. For these reasons, we respectfully urge your AYE vote on AB 2305.

Additionally, the Civil Justice Association of California hope to be able to support this measure with additional amendments following ongoing stakeholder discussions. Further elaborating on the Civil Justice Association’s position they write:

The bill imposes restrictions on conduct, but does nothing to ensure that such conduct can be detected. It does not require third-party funders to identify themselves, disclose their financial interest, notify the court or opposing parties of their involvement, or even ensure that clients are fully informed of the existence and terms of these arrangements. As a result, courts may be asked to adjudicate disputes without knowing who is truly driving litigation strategy or settlement decisions. This lack of disclosure undermines judicial integrity, obscures conflicts of interest, and erodes public confidence in the civil justice system. Courts should have clear authority to review these arrangements and limit improper influence, and enforcement mechanisms must extend beyond self-reporting by potentially conflicted actors.

REGISTERED SUPPORT / OPPOSITION:

Support

Alameda Contra-Costa Trial Lawyers Association
California Employment Lawyers Association
Capitol City Trial Lawyers Association
Central Valley Trial Lawyers Association

Civil Justice Association of California (if amended)
Community Legal Services in East Palo Alto
Consumer Attorneys of California
Consumer Attorneys of Inland Empire
Consumer Attorneys of San Diego
Consumer Watchdog
Orange County Trial Lawyers Association
San Mateo County Trial Lawyers Association
United Policyholders

Opposition

None on file

Analysis Prepared by: Nicholas Liedtke / JUD. / (916) 319-2334