California Enacts Legal Funding Reforms and Considers Advertising Restrictions for Attorneys

California has taken significant steps to reform legal funding practices and potentially restrict attorney advertising through two legislative measures. Governor Gavin Newsom signed Assembly Bill 931 into law on October 13, 2025, implementing immediate changes to how attorneys handle financial arrangements with clients and third parties. The legislation prohibits California-licensed attorneys from fee-sharing with non-lawyer entities and bans lawyers from accepting referral fees from non-lawyer organizations. These provisions aim to eliminate potential conflicts of interest and ensure that legal representation remains independent from financial influences outside the legal profession.

The new law also establishes comprehensive consumer protection measures for legal funding arrangements. Attorneys are now required to provide clients with a five-day cancellation window for funding agreements, allowing consumers time to reconsider their financial commitments. Transparency requirements mandate that client-attorney contracts clearly disclose all terms and conditions, eliminating hidden fees and prohibiting compound interest structures in payment arrangements. These changes address concerns about predatory lending practices in legal financing and ensure clients fully understand their financial obligations before proceeding with legal representation.

While AB 931 is already in effect, Senate Bill 37 remains pending and would impose additional restrictions on how attorneys advertise their services to potential clients. The proposed legislation would require law firms to limit advertising language to verifiable facts and prohibit content that references potential case results or compares current matters to past verdicts. SB 37 would also ban any advertising language that could be interpreted as misleading or deceptive, including the promotion of awards where attorneys or law firms pay for the recognition. These measures aim to prevent consumers from being influenced by unrealistic expectations about case outcomes.

Both legislative measures include enforcement mechanisms through compensatory damages and civil liability provisions. The combination of these bills represents a comprehensive approach to regulating the legal industry in California, addressing both financial practices and marketing methods. While designed to protect consumers from predatory practices, these regulations will require significant adjustments from legal professionals in how they attract clients and structure their financial arrangements. The legislation reflects growing concerns about transparency in legal services and aims to balance consumer protection with maintaining access to legal representation.