WASHINGTON, D.C. – This week, Senator Thom Tillis introduced the Tackling Predatory Litigation Funding Act, legislation which would impose a new tax on profits earned by third-party entities that finance civil litigation and curb predatory practices in the litigation funding industry.
“Predatory litigation financing allows outside funders, including foreign entities, to profit off our legal system, driving up costs and delaying justice,” said Senator Tillis. “This legislation will bring much-needed transparency and accountability by taxing these profits and deterring abusive practices that undermine the integrity of our courts.”
Representative Kevin Hern (R-OK) introduced companion legislation in the House of Representatives.
“Foreign entities shouldn't be allowed to meddle tax-free in the American legal system. Frivolous lawsuits have gotten out of control in recent years, largely because of these third-party funders fueling a market that is ballooning,” said Representative Hern. “Taxing these third-party entities will limit unmeritorious lawsuits and provide economic relief to the middle class.”
Background:
Third-party litigation funding (TPLF) is the practice of an outside party to a legal dispute paying for a lawsuit with the expectation of financially profiting off the outcome. This highly questionable practice adds tremendous costs to U.S. consumers by encouraging and needlessly extending litigation. It is also arguably violative of several common law principles that seek to prevent profit-seeking and abusive practices in the tort system.
The involvement of otherwise uninterested parties gambling on the outcome of litigation also raises significant concerns that this funding disrupts the attorney-client relationship. This practice remains hidden in the shadows, as there is no comprehensive disclosure regime for when a TPLF contract exists for a lawsuit. Despite this lack of disclosure, TPLF market participants acknowledge that the litigation funding industry has exploded over the last decade, with the largest year-over-year growth in capital commitments reported in 2022.
There is now estimated to be well over $15 billion deployed for U.S. litigation financing, with the leading firm seeing a 355% increase in its assets over the last several years, including the addition of nearly $1 billion at the end of 2018 by an unknown, foreign sovereign wealth fund.
While these TPLF investment firms are treating the U.S. court system like a casino, there are real questions about the tax treatment of the financial returns from litigation funding. By structuring TPLF contracts as complex investment vehicles, funders pay a more favorable tax rate on their share of a court award when compared to the actual injured plaintiff – while in many cases receiving more total money than the injured party.
With capital gains treatment, foreign investors can create a situation in which they avoid any U.S. tax obligation on their returns despite using the U.S. court system to generate profit. Perversely, this incentivizes foreign investment in more U.S. litigation because of the potential for lucrative, tax-free returns. The current situation is unfair and untenable and the time has come for lawmakers to update current tax law to address these issues.
The following organizations support the Tackling Predatory Litigation Funding Act:American Consumer Institute, 60 Plus Association, Advancing American Freedom, American Association of Senior Citizens, Americans for Tax Reform, Center for Individual Freedom, Citizens Against Lawsuit Abuse, Consumer Action for a Strong Economy, Consumer Choice Center, Council for National Policy Action, Frontiers of Freedom, Heartland Impact, Institute for Liberty, Less Government, National Taxpayers Union, Taxpayers Protection Alliance, Heartland Institute, and the James Madison Institute.
Full text of the bill is available HERE.
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