With government funding set to expire at the end of the month, Congress is once again scrambling to avoid a shutdown. Whether lawmakers move forward with a temporary stopgap or a more comprehensive legislative package, they would need to identify new sources of revenue to keep any new spending within budgetary constraints. As both parties jockey to get their policy priorities included, one pay-for both sides should return to is the litigation finance tax originally proposed by Senator Thom Tillis this May.
Senator Tillis’s proposal to tax litigation funders’ profits at 31.8% was included in the Senate’s version of the “One Big Beautiful Bill.” According to the Joint Committee on Taxation, the provision would have raised 2.5 billion dollars over ten years. But it was ultimately removed from the final bill after being struck by the Senate parliamentarian for violating the Byrd Rule, which governs what can be included in budget reconciliation legislation.
The tax would have shifted litigation funder profits away from preferential capital gains treatment and toward ordinary income rates, while removing loopholes that currently allow tax-exempt and foreign investors to avoid U.S. tax obligations altogether. The result would be a more level playing field where funders are taxed fairly rather than given favorable treatment compared to even the plaintiffs whose injuries they claim to support.
As we’ve covered previously on Patent Progress, some companies have reported that more than half of the patent infringement lawsuits they face involve confirmed or suspected third-party backing. The litigation funding industry now manages more than $15 billion in deployed capital—and that’s just what’s publicly reported. And year after year, patent litigation is consistently the largest category of new investment for funders.
While this measure would not bring about the kind of long overdue transparency requirements that are needed to deter some of the most abusive and nefarious funding practices and arrangements, it would at the least reduce some of the incentive for the kinds of aggressive and opaque litigation strategies that are enabled by third-party funding. As Senator Tillis noted when he originally introduced the legislation. “Predatory litigation financing allows outside funders, including foreign entities, to profit off our legal system, driving up costs and delaying justice. This legislation will bring much-needed transparency and accountability by taxing these profits and deterring abusive practices that undermine the integrity of our courts.” As the administration and Congress look for ways to promote U.S. industry, getting investor-backed shell company litigation off the backs of American companies makes for a sound policy choice regardless of the fiscal context, but especially now as Congress looks for offsets.
Patent Progress reported, earlier this month, that Burford Capital (the largest litigation funder in the world) is exploring direct ownership stakes in law firms. Moves like this blur the line between financier and legal advocate and raise significant ethical concerns about where funding arrangements begin to violate longstanding principles of common law. When investment firms can profit not only from case outcomes but from owning the firms themselves, there is even greater risk that litigation strategy will be driven by undisclosed investor returns instead of client interests.
For lawmakers seeking responsible offsets that also align with good policy, the Tillis provision checks both boxes. It won’t solve every problem with litigation finance, but it will close a glaring loophole a much-needed time.
