A bill introduced by US Senator Thom Tillis (R-NC) puts reasonable checks on third-party litigation finance, and legal reform advocates and consumers should support this initiative.
Not only will the proposed reasonable limits restore integrity to our justice system, but they will also pump the brakes on the unaccountable funding mechanism fueling aggressive lawsuits that clog courts, risk innovation, and raise prices for consumers.
The Tackling Predatory Litigation Funding Act proposed in the Senate – and its equivalent in the House introduced by Rep. Kevin Hern (R-OK) – addresses the tax treatment of litigation funders’ bets on lawsuits in our courts.
It mandates that proceeds from court settlements earned by third parties (neither the plaintiffs nor the defendants) are not pure investment vehicles, but should be taxed as ordinary income at the highest rate. This waters down the potential windfall from outside financial interests that gamble on the outcomes of civil litigation.
As we’ve written about on other platforms, including The National Interest, Townhall, Legal Newsline, The American Spectator, and DC Journal, as well as the Consumer Choice Center’s own YouTube page, litigation funding is a booming industry that is quickly reshaping our system of justice.
Estimated to be a $13.5 billion sector of the economy, litigation funding has risen from the costly legal process. Individuals who allege some harm raise capital from outside interests in order to fund better lawyers and cases against defendants.
Increasingly, many of these litigation funders are connected to firms located in China, seeking to break patents or nullify intellectual property of business competitors. A new crop of these funders are explicitly seeking to bet on suits backing claims that promote ESG (Environmental, Social, and Governance goals) and other progressive goals.
Investor George Soros’s Soros Economic Development Fund, for example, was a lead investor in Aristata Capital, a litigation funder that pursues “social and environmental change with an attractive financial return,” and backs climate and environmental litigation.
Other litigation funders like the Australia-based Intergenerational Environmental Justice Fund have had a hand in the dozens of climate change lawsuits that threaten to upend energy prices for consumers. President Donald Trump has issued strong declarations to limit this climate lawfare and lawsuit abuse, and for good reason.
While this arrangement is legal – and should continue to be – if we aim to have neutral justice that is both fair and transparent, it will mean ensuring we know who is funding various legal actions that often have impact on more people and industries than those involved in a case, as well as putting modest limits on the ability for courts to be a profit center.
Investors have created a new avenue for massive gains in a new market and they want to protect that ability. But this isn’t the Indonesia palm oil market or futures contracts on the New York Stock Exchange. It’s the civil justice system that weighs evidence between sparring parties and issues settlements and judgments that can impact our livelihoods as consumers, workers, and citizens. That should warrant some scrutiny.
Putting reasonable limits on the influence and incentive for litigation funders to intervene in a case without declaring themselves is not just sound for our civil courts, but it’s also sound policy for consumers who may face higher prices as a result of frivolous litigation.
Unchecked, third-party litigation finance from foreign and even hostile nations will continue to grow and put American innovation and consumer welfare at risk. Supporting legislative efforts to curb and render transparent the profit-seeking in our courts, as laid out in Sen. Tillis’ bill is not only common sense, but a necessity.
Those who believe that our courts shouldn’t be cordoned off from outside financial and commercial interests may like unlimited and opaque third-party litigation funding. But for most Americans, they want transparency in our courts.
Supporting legislative efforts to curb and render transparent the profit-seeking in our courts, as laid out in Sen. Tillis’ bill is not only common sense, but a necessity.
Yaël Ossowski writes about legal reform and is deputy director at the Consumer Choice Center.
