Litigation Funding Tax Proposal Solves Nothing Besides Optics

The Tackling Predatory Litigation Funding Act, proposed in the House and Senate by Republican lawmakers last month, would implement a nearly 41% tax on litigation finance profits. The bill targets deep-pocketed third parties that bankroll lawsuits in exchange for a percentage of the recovery.

Supporters may think it would curb shadowy foreign investors from using the court system to wage economic warfare, but the policy’s effectiveness likely wouldn’t live up to such rhetoric.

If the goal is to protect the so-called victims of litigation finance—mostly wealthy US corporations—this bill is a deeply flawed method to go about it. It wouldn’t reduce litigation or reduce litigation financing as a method of funding it. It also doesn’t distinguish between foreign and domestic financers, wouldn’t subsidize defense costs for US companies, and wouldn’t fund broader legal reforms.

The levy would make litigation more expensive rather than stopping financing or even meaningfully deterring foreign investment in US litigation. It doesn’t account for the distinction between legal incidence—which concerns who writes the check to pay the tax—and economic incidence, which addresses who bears the payment’s economic burden.

Litigation funders wouldn’t absorb a 41% hit to their bottom line; they would simply price that tax into the financing costs for plaintiffs, which would also affect defendant businesses. This would mandate steeper returns on funded claims and ultimately larger settlement demands to cover those additional costs.

Unless foreign litigation finance investors are somehow less able to absorb this tax (compared with domestic ones), the bill does nothing to curtail foreign influence. It taxes all funders equally and leaves their behavior and identity unchanged and unchallenged. The capital would still flow, and litigation would still be financed.

There are some historical examples of litigation cost increases that are instructive—when upfront retainers for plaintiff’s attorneys were largely replaced by contingent fee arrangements. Despite early concerns that attorneys would prioritize rapid settlement and an economy of scale, actual outcomes proved the opposite was true. Contingent-fee arrangements often increased settlement demands and reduced settlement rates.

Contingent-fee attorneys, with an interest in the outcome, pushed for higher settlements than an hourly-fee client would. Clients, seeking to still recover their losses, similarly must hold out for higher settlements to cover their increased legal fees.

The same logic would apply to a tax on third-party litigation financing. Once you place a levy on investors with expected returns, plaintiffs will need bigger outcomes to satisfy all actors with an economic interest in the case. Lawmakers who think taxing that return will substantially disrupt a $15.2 billion industry are misreading the math.

Higher costs will flow through the transaction and land on the party with their checkbook out. In the case of a successful plaintiff action, that will be the defendant. And according to the proposal’s advocates, that will be an unjustly maligned US corporation.

A tax might make sense if Congress wanted to internalize social costs and redistribute the burdens of litigation more transparently—but that isn’t the current sales pitch. If that were the intent, there would need to be additional steps to ensure plaintiffs don’t pass the costs to defendants. Instead of well-considered policy, we’re seeing political posturing: a tax pitched as protective that is actually punitive.

An advertisement backing the proposal warned of “shadowy overseas funders” using US courts to wage an economic war against US companies—which indicates that even supporters recognize this as a national security issue, not a tax one. The appropriate solution in that case is mandatory disclosure of litigation finance arrangements, which some federal courts already require in limited form. Congress could expand those rules, even considering outright bans in certain jurisdictions.

A foreign policy bill disguised as a revenue measure is unhelpful on both fronts. Taxation would be the wrong tool here for the same reason tariffs would be the wrong choice for regulating foreign contributions to campaign financing. Just as you can’t place a cost on supposed economic warfare, you can’t price electoral influence.

The concern seems to focus on litigation costs for domestic companies. But absent a corresponding spending plan, a tax only generates revenue for the government while leaving the underlying problem unresolved.

The proposal’s shortcomings show it isn’t about protecting national interests as much as it’s about helping corporate defendants discredit litigation by tacitly suggesting nefarious foreign actors are paying for it. In the process, it implies the judiciary can’t separate spurious claims from those with merit—and that the distinction is directly tied to who finances a claim.

It seems the bill’s backers want to look tough on foreign meddling and plaintiff excess, but their policy resolves neither. If enacted, it will do little more than distort the economic incentives around litigation, raise related costs, and signal to the market that the government taxes disfavored markets purely for optics.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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