U.S. Sen. Thom Tillis (R-NC) on May 20 sponsored legislation to establish a new tax on income earned by third-party entities that finance civil litigation with the expectation of financially profiting off the outcome.
“Predatory litigation financing allows outside funders, including foreign entities, to profit off our legal system, driving up costs and delaying justice,” Sen. Tillis said. “This legislation will bring much-needed transparency and accountability by taxing these profits and deterring abusive practices that undermine the integrity of our courts.”
Sen. Tillis introduced the Tackling Predatory Litigation Funding Act, S. 1821, alongside lead original cosponsor U.S. Sen. John Husted (R-OH). U.S. Reps. Randy Feenstra (R-IA) and Kevin Hern (R-OK) on May 20 offered the same-named H.R. 3512 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 Rep. Hern. “Taxing these third-party entities will limit unmeritorious lawsuits and provide economic relief to the middle class.”
Third-party litigation funding (TPLF) is the practice of an outside party to a legal dispute paying for a lawsuit, what the lawmakers describe as a “highly questionable practice” that adds higher costs to U.S. consumers by encouraging and extending litigation.
TPLF contracts are structured as complex investment vehicles, and 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, according to a bill summary provided by Sen. Tillis’ staff.
The involvement of otherwise uninterested parties gambling on the outcome of litigation also raises concerns that the funding disrupts the attorney-client relationship, while the practice remains hidden in the shadows due to a lack of a comprehensive disclosure regime for when a TPLF contract exists for a lawsuit, according to the summary.
Several organizations have expressed support for a congressional fix for this tax loophole, such as the American Consumer Institute, Advancing American Freedom, Americans for Tax Reform, Citizens Against Lawsuit Abuse, the Council for National Policy Action, Less Government, and the National Taxpayers Union, among others.