THIRD-PARTY LITIGATION FUNDING IS FUELING LAWSUITS AND DRIVING UP COSTS

Most Americans assume profits earned in the United States are taxed fairly. But a little-known practice called third-party litigation funding (TPLF) allows outside investors—including foreign hedge funds and investment firms—to profit from American lawsuits through a major tax loophole.

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Under TPLF, investors finance lawsuits in exchange for a share of any settlement or court award. In many cases, these profits can avoid U.S. taxation entirely, even as American businesses, consumers, and taxpayers bear the costs. What was intended to be a legal system focused on justice is increasingly being transformed into a profit-driven investment market.

The growing influence of foreign-backed litigation funding raises serious concerns about transparency, economic fairness, and the integrity of the American legal system. A recent report from the Perryman Group highlights the significant economic impact TPLF is having across the country.

This issue is not about banning litigation funding outright. It is about ensuring that all entities profiting from America’s legal system are held to the same tax standards. Closing this loophole would restore fairness, protect taxpayers, and help prevent foreign interests from exploiting the U.S. legal system for financial gain.

Congress has the power to act. Lawmakers should close the TPLF tax loophole and restore accountability to a system that Americans depend on for justice.

RESOURCES

TRIAL LAWYERS HIT THE DIGITAL JACKPOT—AND EVERYONE ELSE PAYS

America is an incredibly litigious society, spending more than $300 billion per year, or nearly $1,000 per person, on tort litigation. Every day, trial lawyers searching for hefty payouts are finding new products to target and new clients to take on. They may have just found the ultimate jackpot: the digital domain.

AVERAGE MEDICAL MALPRACTICE PAYOUTS REACHED RECORD $415,000 IN 2023

Medical malpractice payouts are getting bigger. Across the U.S., the average payment topped $415,000 in 2023, a record high and up 33% from a decade earlier. The consequences of medical mistakes can be severe, slowing patients’ recovery, creating new health issues, or even resulting in death.

ECONOMISTS URGE CONGRESS TO REVISIT TAX BREAK FOR THIRD-PARTY LAWSUIT FUNDERS

In an open letter to lawmakers, more than 80 economists argue that profits earned by litigation funders are often treated as lower-taxed capital gains, even as plaintiffs and attorneys pay ordinary income taxes on the same legal recoveries.

INSURERS WARNED TPLF COULD ADD $50B TO INDUSTRY COSTS

Recent analysis by Ernst & Young (EY) estimates that TPLF could impose up to $50 billion in additional costs on the American insurance industry over the next five years, which translates roughly to a 4%-5.2% drag on annual loss ratios.

CURBING LAWSUIT ABUSE WILL RESTORE FAIRNESS TO AMERICA’S COURTS

Spurred by the promise of endless recovery dollars, billboard lawyers have spun up increasingly aggressive cases—divorced from reality—in front of judges and jurors. The resulting costly judgments bankrupt small businesses and property owners, drive up prices, and make it exceptionally difficult for housing complexes to charge affordable rents.

KENNEDY, GRASSLEY, COLLEAGUES INTRODUCE BILL TO EXPOSE THIRD-PARTY FUNDING BEHIND LAWSUITS

Sens. John Kennedy (R-La.), Chuck Grassley (R-Ia.), Thom Tillis (R-Nc.), and John Cornyn (R-Tx.), members of the Senate Judiciary Committee, introduced the Litigation Funding Transparency Act, which would require third-party funders of class action or mass tort lawsuits to disclose their payments.