New York’s response to mass tort financing practices centers not on a single lawsuit but rather on comprehensive regulatory reform signed into law in December 2025. Governor Kathy Hochul signed the Consumer Litigation Funding Act to address systematic problems in how companies finance class action and mass tort claims, capping the percentage funders can recover and implementing consumer protections that didn’t exist before. The legislation became necessary because litigation funding companies had been extracting excessive returns while operating in a regulatory vacuum—a plaintiff suing over a defective product might receive funding from a company that charges 40% to 50% of recovery, effectively doubling their debt burden before the case settles.
What made these financing practices controversial enough to warrant state-level legislation was the pattern of abuse documented in the industry. Plaintiffs reported that funding companies were influencing settlement negotiations, charging interest rates that would be illegal in traditional lending, and sometimes funding cases involving statutes of limitations that had already expired. The regulatory action reflects growing recognition that litigation funding, while sometimes necessary for claimants who lack resources to pursue justice, had become a mechanism for extracting wealth from settlements rather than enabling access to the legal system.
Table of Contents
- How Mass Tort Financing Created the Problems Behind New York’s Reform
- The New York Consumer Litigation Funding Act’s Specific Protections and Limitations
- The 10-Day Rescission Right and Consumer Exit Options
- What Prompted New York to Act: Patterns of Abuse in the Industry
- The Difference Between Consumer and Commercial Litigation Funding
- Implementation and Compliance Challenges
- The Broader Question: Does Financing Enable or Drive Mass Tort Claims?
How Mass Tort Financing Created the Problems Behind New York’s Reform
Litigation funding firms operate by advancing money to plaintiffs during the pendency of their cases, with repayment contingent on winning or settling. In theory, this allows people without capital to pursue valid legal claims. In practice, the industry operated without state oversight for decades, allowing companies to impose whatever terms they could negotiate with desperate claimants. A plaintiff waiting years for a mass tort settlement might accept funding at 45% recovery simply because they needed money for medical bills or living expenses today.
Once the settlement came, that 45% fee meant they kept substantially less than they initially expected. The Yale Law Journal’s analysis of “Opaque Capital and Mass-Tort Financing” documented cases where plaintiffs claimed they had never even used the product they sued for—suggesting that funding companies were sometimes driving claim volume rather than enabling legitimate claims. Additionally, funders had no obligation to disclose the effective interest rates they were charging, which often exceeded 100% when calculated on an annualized basis. This opacity allowed the industry to grow largely unexamined.
The New York Consumer Litigation Funding Act’s Specific Protections and Limitations
The legislation, effective for registration on February 13, 2027, establishes clear caps and prohibitions that fundamentally reshape the business model. Funders can now recover no more than 25% of gross recovery, a hard ceiling that eliminates the 40%-50% charges that had characterized the industry. The law also prohibits prepayment penalties, preventing companies from charging additional fees if a plaintiff wants to exit the agreement early. Attorneys cannot hold financial interests in funding companies, and companies cannot pay referral fees for steering claimants toward their products.
However, a critical limitation undermines the law’s reach: it covers only consumer litigation funding—cases where individuals sue over consumer products or services. Commercial litigation funding, used in business-to-business disputes, remains entirely unregulated. This gap matters because critics argue that litigation financing of commercial cases contributes to frivolous lawsuits by making it economically possible for companies to pursue claims they otherwise couldn’t afford. The law’s consumer focus left that entire sector untouched, reflecting political constraints rather than a comprehensive solution.
The 10-Day Rescission Right and Consumer Exit Options
One of the law’s most significant protections is the 10-day right of rescission, which allows any plaintiff to cancel a litigation funding agreement within 10 days of signing without penalty. This cooling-off period acknowledges that people under financial stress sometimes make hasty decisions about funding agreements without fully understanding the terms. A plaintiff facing eviction might sign away 45% of a future settlement recovery because they needed $500 immediately; the rescission right gives them a brief window to reconsider once they’ve addressed the immediate crisis.
In practice, this protection works only for claimants who know about it and understand its value—a problem because funders have no obligation to prominently display the rescission right. The law requires disclosure, but enforcement depends on state regulators investigating complaints or settlements. If a plaintiff never hears about the rescission period, they can’t use it.
What Prompted New York to Act: Patterns of Abuse in the Industry
The problems that drove regulation were documented across multiple cases and funder practices. Some funders were advancing money to finance cases in which statutes of limitations had expired, essentially funding legally baseless claims. Others were charging such high effective interest rates that plaintiffs who received $10,000 in funding owed back $25,000 when their case settled—creating a debt burden worse than many credit cards.
Additionally, funding companies sometimes influenced settlement dynamics by refusing to agree to settlements that would provide them lower returns, even if the settlement was favorable to the plaintiff. Yale researchers and consumer advocates documented cases where plaintiffs claimed they had never used the product at the center of their claim—suggesting that funding companies or their agents were sometimes recruiting plaintiffs rather than funding claims that plaintiffs had independently decided to pursue. These weren’t isolated incidents but patterns that repeated across multiple funders and claim types.
The Difference Between Consumer and Commercial Litigation Funding
The law’s scope reveals important political and economic constraints. Litigation funding for consumer claims—a person suing over a defective appliance or contaminated product—is now regulated. But litigation funding for commercial disputes remains completely outside the law’s reach.
A software company funding another company’s patent infringement lawsuit, or a manufacturer financing a competitor’s product liability case against a third party, faces no caps, no interest rate limits, and no disclosure requirements. This distinction matters because some of the most aggressive litigation funding happens in the commercial sector, where the sums are much larger and the potential returns are higher. Bloomberg Law identified “litigation finance for commercial disputes” as one of the “four big questions for the litigation finance industry in 2026” precisely because that sector remains largely unregulated and continues to grow. New York’s law leaves that market untouched, meaning the broader question of whether litigation funding drives unnecessary lawsuits remains unanswered.
Implementation and Compliance Challenges
Funders will need to register with New York by February 13, 2027, submitting to regulatory oversight that they’ve never faced before. This registration requirement creates a baseline for state oversight—regulators will know who is operating in the market and can enforce the 25% cap and prohibition on certain fee structures. However, enforcement depends on resources and complaints.
If a funder disguises fees in creative ways, or if plaintiffs don’t understand the new rules well enough to recognize violations, the caps may be circumvented through creative structuring. Additionally, the law doesn’t address funders operating across state lines. A New York resident could potentially use a funder registered in a state with less stringent rules, creating a workaround if state regulators lack jurisdiction over out-of-state companies.
The Broader Question: Does Financing Enable or Drive Mass Tort Claims?
The question embedded in the original legislative concern—are litigation funders enabling legitimate claims or driving frivolous ones?—remains only partially answered. In the consumer context, the 25% cap and disclosure requirements make it less likely that funders will recruit marginal claimants, since the profit margins are lower and the regulatory scrutiny is higher. But in commercial litigation, where funding remains unregulated, the incentive to maximize case volume persists unchanged.
Some plaintiff attorneys argue that litigation funding is essential for holding corporate defendants accountable—without it, only wealthy plaintiffs can afford to pursue claims against well-funded corporations. Others argue that it systematizes the pursuit of weak claims by making it profitable to litigate cases that should never have been filed. New York’s legislation tips toward the first view by regulating consumer funding but remaining silent on commercial funding, effectively saying that individual claimants deserve protection from predatory terms while commercial litigants do not.