Thought Leadership

Key Points:
• The Consumer Litigation Funding Act establishes New York’s first comprehensive regulatory framework governing consumer litigation funding transactions.
• The Act strengthens consumer protections through fee caps, attorney-independence safeguards, and limitations on funders’ involvement, among others, in litigation.
• Despite these reforms, questions remain regarding the discoverability of litigation-funding arrangements and the scope of the Act’s new confidentiality protections.

New York has joined a growing number of jurisdictions seeking to regulate the rapidly expanding litigation funding industry. On December 19, 2025, Governor Hochul signed the Consumer Litigation Funding Act ("CLFA"), A804-C/S1104A, into law. Following amendments in 2026, the statute took effect on June 17, 2026.

The CLFA provides a regulatory framework to govern consumer litigation funding transactions, in which a third-party funding company advances money to an individual with a pending or anticipated civil claim in exchange for a contingent right to repayment from any future recovery. The statute requires funding companies to register with the State, provide specified disclosures, use plain-language contracts, and comply with restrictions governing fees, recoveries, and business practices.

The CLFA's most significant consumer protection is its limitation on recoveries. A funding company cannot require a consumer to pay charges exceeding 25% of the gross proceeds of the legal claim, plus the funded amount. This cap encompasses all charges, including administrative fees, origination fees, underwriting fees, and interest, regardless of how those charges are denominated. Furthermore, the funded amount and charges are only payable from the proceeds of the resolution of the claim. As such, consumers are prohibited to pay anything that exceeds the available proceeds, establishing a true nonrecourse structure. Consumers are also afforded a 10-business-day right of rescission and may prepay without penalty.

The CLFA defines a consumer litigation funding company as one that enters into a contract of no more than $500,000 with a consumer. This figure operates as both a definitional ceiling and a substantive prohibition: transactions exceeding that amount fall outside the statute's regulatory framework and thus, are not governed by the statute. Consequently, high-value cases involving larger funding arrangements are not guaranteed the protections afforded by the CLFA.

Beyond regulating fees and recovery, the CLFA includes provisions designed to preserve attorney independence and ensure that litigation decisions remain exclusively with the consumer and its attorneys. To that end, litigation funding companies are prohibited from entering into contracts with consumers represented by attorneys holding a financial interest in the funding company. The law further prohibits funding companies from influencing, or attempting to influence, decisions concerning litigation strategy, settlement, or the disposition of a claim. Those decisions remain exclusively between the plaintiff and its attorney.

The statute also provides confidentiality protections for certain communications between attorneys and litigation funding companies. It provides that all communications between the consumer's attorney and the funding company pertaining to the legal funding falls within the scope of attorney-client privilege and the work-product doctrine. While intended to facilitate funding-related discussions and protect sensitive information, those protections raise a question the CLFA does not directly answer: to what extent are litigation funding arrangements discoverable in civil litigation?

Even before the CLFA took effect, New York courts had begun addressing those questions. In Lituma v. Liberty Coca-Cola Beverages LLC, the First Department held that litigation funding information was discoverable because the defendants established that it was "material and necessary" to their defense. Lituma v. Liberty Coca-Cola Beverages LLC, 243 A.D.3d 504, 505 (1st Dep't 2025). The court relied on evidence suggesting a broader scheme involving suspicious accidents, medical providers, and other participants, concluding that funding information could reveal a financial motive for fabricating the accident.

Just three months later, however, the First Department clarified that litigation funding information is not automatically discoverable. In Perdomo v. 361 E. Realty Assoc. LLC, the court rejected efforts to compel disclosure absent a factual basis suggesting that the requested materials would reveal an improper motive or fraudulent conduct. Perdomo v. 361 E. Realty Assoc. LLC, 246 A.D.3d 541, 541-542 (1st Dep't 2026).

Together, Lituma and Perdomo establish that litigation funding agreements are neither automatically discoverable nor categorically protected from disclosure. Rather, discoverability depends on whether a defendant presents sufficient evidence suggesting fraud or an improper financial motive. Absent such a showing, courts are unlikely to permit broad inquiries into a plaintiff's funding arrangements. However, the enactment of the CLFA complicates this landscape by extending attorney-client privilege and work-product protections to communications regarding legal funding, leaving open questions regarding the interaction between those protections and existing discovery standards.

The CLFA represents an important step toward regulating an industry that previously operated with limited statutory oversight. By imposing consumer protections through its capped fees and recoveries, restrictions in funding company involvement in litigation decisions, and preservation of attorney independence, the statute creates a framework that did not previously exist. Yet significant questions remain. The statute does not resolve how litigation funding arrangements will be treated in discovery, particularly in light of its newly- enacted confidentiality provisions. As litigation funding continues to expand in New York, courts will play a central role in defining the practical limits of both the CLFA and the evolving case law surrounding third-party litigation funding more broadly.

Deeba is an Associate in our New York, NY office. She can be reached at 212-376-6436 or DDhaeri@mdwcg.com.