The fundamental premise of our civil litigation system is simple: it exists to help people who have been wronged obtain compensation or equitable relief, to restore justice and to penalize those who have done wrong. Unfortunately, the newly passed House Bill 26-1421 appears at odds with that very purpose.
For those unfamiliar with it, HB 26-1421 effectively bans any fee sharing with nonlawyers, except in very narrow contexts. In doing so, it codifies the traditional partnership structure currently in use by private law firms, and places new restrictions on their ability to access capital. Of particular importance, it places significant restrictions on the circumstances in which a litigation funder may advance funds to a law firm that in turn brings cases on contingency.
Proponents of the bill argued that sweeping regulations on litigation finance were necessary to prevent meritless claims from flooding Colorado courts. However, we already have a fairly robust structure within our legal system for weeding out claims that are not meritorious. There are motions to dismiss, motions for summary judgment, and plenty of other ways that non-meritorious claims can be thrown out.
Even if someone does bring a claim that has no basis whatsoever and no evidence to put forth, there are significant penalties from both the courts and the bar associations for pursuing those actions. Judges can sniff out invalid claims, and they have a large panoply of ways to dismiss those cases and assign appropriate sanctions.
The Legal Resource Gap and Litigation Finance
From my vantage point, having worked on both the defense and plaintiff sides for as long as I have been practicing, there is already a thumb on the scale in defendants’ favor. The cost of bringing a claim to court is substantial. You may have a great claim, but if it requires seven figures to prosecute and you do not have seven figures on hand, there is a good chance it will never be brought. There are numerous cases that could be brought right now, but the plaintiff never comes forward because of a lack of resources.
Commercial litigation funding bridges this resource gap. Funders do not back frivolous suits; they evaluate portfolios with extreme scrutiny because they are assuming substantial financial exposure. If they do not believe a portfolio will succeed, they will not fund it.
By strictly limiting the collateral that law firms can use to secure outside capital, HB 26-1421 overshoots the mark and limits the valid claims that are likely to be filed in Colorado on behalf of Colorado citizens. That, in turn, could allow fraud, antitrust violations and major economic crimes to go unchecked because victims will be unable to retain counsel capable of absorbing massive upfront costs on a contingency basis. Additionally, small and midsize firms will certainly be deterred from taking on capital-intensive cases unless a client can pay for litigation out of pocket.
Anticompetitive Mechanisms
Perhaps the most problematic element of HB 26-1421 is a provision that allows “a law firm doing substantial business in Colorado that has suffered or may suffer a loss in revenue” from the purported violation by another law firm to sue for an injunction and disgorgement of some or all of an attorney fee. This means that competitors and perhaps even opposing counsel have an incentive to bring lawsuits collateral to the underlying suit if it gives them an upper hand. Far from deterring excessive lawsuits, this provision seems designed to incur a new spate of litigation between law firms.
Furthermore, defending against a competitor’s lawsuit would inevitably force the disclosure of confidential attorney-client communications and work product during discovery. It is hard to see how such a claim could be litigated without stripping away these fundamental privileges.
This portion of the bill seems ill-designed if the intention is to prevent bad lawsuits, as it instead creates a powerful tool for massive, established contingency firms to muscle out rising competitors who rely on outside capital to scale. It feels more like helping big firms protect established turf, not protecting the public.
The Flaws of the Traditional Partnership Model
The bill’s absolute ban on alternative business structures and nonlawyer ownership is also a mistake in my view. Traditionally, there has been no allowance for a non-attorney to be part of a law firm, a rigid structure that I believe actually increases the cost of legal services.
Indeed, it is difficult to imagine a structure that encourages greater profit maximization than the one already in place at traditional law firms and among law firm partners. The margins of large law firms dwarf those of most businesses, yet profits are typically shared by only a small number of attorneys at the very top of the food chain. Equity is not widely shared, to say the least. By perpetuating a structure in which a small number of people earn very large amounts of money while many others do not, we block alternative models in which lawyers could do better as employees under a more widely distributed ownership structure.
Corporate structures with more widespread employee ownership are often far more focused on strict compliance and robust state-level regulation than traditional law firm partnerships. The traditional concern about sharing fees with a nonlawyer is that an outside investor will always prioritize profits over ethics. But if there is any question that lawyers in a partnership structure would gladly choose profits over the sanctity of the law, the recent settlements by some of the country’s top firms with the Trump administration should dispel the notion that attorney-only ownership guarantees the moral high ground. And it is hard to make any argument about prioritizing profits over ethics when $3,000 per hour is fast becoming the new benchmark for top partners.
Lessons from Arizona and Utah
Colorado’s approach in HB 26-1421 seems to be a direct legislative pushback against experiments happening in other jurisdictions that attempted to solve these exact structural problems. In 2021, Arizona became the first state to allow non-lawyer ownership of law firms through Alternative Business Structures. Around the same time, Utah created a regulatory pilot program permitting certain non-traditional legal service ownership and fee arrangements.
The Deborah L. Rhode Center on the Legal Profession at Stanford Law School has been studying the impact of the reforms in Arizona and Utah on access to justice and issued reports in 2022 and 2025. In a nutshell, the research reflects that the reforms did indeed improve access to justice, as they intended. Research reflected minimal individual consumer harm, while providing additional access to justice, thus benefitting consumers overall.
In my view, it was short-sighted of Colorado to pass a premature ban that completely outlawed these models. Instead, we should have waited to see how these alternative structures continue to mature and perform in other states and applied those learnings here. Colorado prides itself on innovation, yet here it rejected any consideration of the data that was available before choosing this path.
A Better Path to Accountability
If the legislature genuinely wants to protect Colorado clients and improve the profession, we should beef up funding and enforcement for the Office of Attorney Regulation Counsel. Giving our existing regulatory framework more teeth and increasing fee-shifting penalties for groundless tort claims would be equally effective at deterring bad behavior.
We do not need overbearing regulations on agreements between sophisticated parties, especially when those regulations tilt the scales further toward corporate defendants and market monopolies. HB 26-1421 contradicts what we want out of the justice system, and Colorado judges must now carefully police the anticompetitive lawsuits this new law will inevitably invite.