Litigation Funders’ Tax Bill Escape Spurs Industry Reckoning

Litigation funders dodged a major bullet when a 40% tax was thrown out of the reconciliation bill, but their brush with death exposed a vulnerability.

“The industry as a whole is not well represented from a lobbying perspective because there’s a lot of divergent interests,” said Gian Kull, regional portfolio manager for the UK at funder Omni Bridgeway. “It’s not one unified entity, like private equity or private credit.”

Litigation finance is relatively new asset class whose players include asset management firms Fortress Investment Group and D. E. Shaw & Co. and publicly traded funders Burford Capital and Omni Bridgeway. They’re under attack by a wide range of corporations with sway on Capitol Hill and in statehouses.

Several funders turned to the International Legal Finance Association, an industry trade group, for a last-minute lobbying blitz after the tax provision was lobbed onto the massive legislation. The fight over the proposed tax hike, which many considered an existential threat, has some of the industry’s players seeking a more united front to ward off future attacks.

Two insurance industry executives said shortly after the litigation funding tax was removed from the reconciliation bill that they will need to go state-by-state to try to slow “the flood of money funding runaway litigation.”

“We still need tax changes,” Evan Greenberg, CEO of Chubb and John Doyle, CEO of Marsh McLennan, wrote in a July 7 Wall Street Journal op-ed. “We also need basic transparency and an emphasis on pro-consumer reforms at federal and state levels.”

Shot to the Heart

The litigation funding tax bill, first introduced by Senator Thom Tillis (R-NC) in May, was at least the fifth attempt at federal legislation regulating the industry. It differed from previous efforts by directly targeting funders’ profits, rather than seeking to require disclosure of outside funding in US court cases.

The measure would have imposed a tax on profits earned by third-party entities that finance civil litigation equal to the highest individual rate, 37%, plus an additional 3.8%. It also included an “anti-netting” provision to bar funders from offsetting their gains with other ordinary or capital losses in the same tax year and a provision to remove shields from tax-exempt organizations. Tillis said the bill would raise $3.5 billion in revenue over 10 years.

“I don’t think this is gonna be a one-off bill,” said Michael Kelley, a partner at Parker Poe who advises on funding deals. “It’s a rifle shot that is right to the heart of the industry.”

ILFA quickly became the “war room” as members strategized how to kill the tax, according to executive director Paul Kong.

The organization, with financial help from many of its 30 members, hired GOP lobbyist Pete Kirkham.

Contingency Capital was among members to hire their own lobbyists, turning to the Vogel Group. Others, such as Fortress, DE Shaw, and Stonehill Capital, proposed changes to the bill.

DE Shaw and Stonehill did not respond to requests for comment.

The differences in size and structures of the varying litigation funding vehicles “creates some difficulties in alignment ... particularly if the attack is tax based,” said Omni Bridgeway’s Kull.

Prominent conservative figures took up the cause on social media, offering differing viewpoints. Trump ally Laura Loomer slammed the bill on X, saying litigation finance needs to be protected. Conservative activist Riley Gaines tweeted that litigation funding allows foreign entities to bankroll lawsuits.

The industry’s strategy was to eliminate the bill via the Byrd Rule, which restricts items that are not primarily budgetary in nature from reconciliation proposals. If that didn’t work, Senator Mike Lee (R-Utah) had already submitted an amendment to strike the bill if it reached the senate floor. The Byrd challenge was eventually brought by Senator Ron Wyden (D-Ore.) and on June 30 the parliamentarian ruled for its removal.

‘Under the Tent’

The US Chamber of Commerce, a vocal and well-resourced litigation finance critic, has been behind the push for regulation on the state and federal level. Johnson & Johnson, Exxon Mobil Corp., and Liberty Mutual are among the large companies that also urged Congress to impose the new tax on funders.

Matt Webb, the chamber’s senior vice president of legal reform policy, said efforts to regulate the industry continue in Congress, state legislatures and courts.

“As policymakers ... continue to learn about the problems associated with outside financiers making money by secretly funding and controlling lawsuits, more reforms will advance throughout the country,” he said.

ILFA’s Kong, a former senate staffer and US Chamber of Commerce employee, has made recruitment a priority since taking the helm in January. The organization has announced two new members, Certum Group and Juris Capital, in that time.

“We’ve seen membership jump and I think they saw the benefits of being under the tent,” Kong said. “They understand that this isn’t just a one-off, that this is gonna be kind of a long battle and if disclosure wasn’t animating enough for certain members, the tax issue is.”

Although ILFA members pay a fee there is no requirement to contribute further. Not everyone chipped in to finance the fight.

“We as an industry are a target, and we’re trying to do really good things with our investor dollars,” said Kull. “But also everybody needs to contribute, right? This free-rider problem where very few do the work for very many, it’s not ideal.”

Joe Dunn, co-chief investment officer of Fortress’ legal assets group, touted cooperation across the industry to get the tax shot down. He said funders need to do more to educate people about how litigation finance helps consumers.

“I don’t think that we should all overreact just because there was a bad proposal that was put forward and killed,” he said.