Foreign hedge funds and sovereign entities are increasingly using U.S. courts to extract billions of dollars annually from American companies. To make matters worse, they do so while routinely avoiding U.S. taxes on those gains. And, shockingly, it’s perfectly legal!
Third-party litigation funding (TPLF) is the practice in which outside investors provide funding to a plaintiff or legal team in exchange for a share of the financial recovery from the lawsuit or settlement. In simpler terms, TPLF is the act of investing in someone’s lawsuit. If the case succeeds, the funder takes a part of the award; if it fails, the funder typically loses their investment, much like a high-risk financial asset.
TPLF is a multibillion-dollar industry. The U.S. commercial litigation finance industry managed $16.1 billion in assets across 42 active capital providers from mid-2023 to mid-2024, according to the Westfleet Advisors 2024 Litigation Finance Report. The market is projected to grow to $25.8 billion by 2030.
Why is the TPLF market growing so rapidly? In short, it is highly profitable.
Two illustrative cases highlight the strong return potential of litigation finance. Apex Litigation Finance, with a 12 percent market share, has funded 500 cases, averaging $400,000 each. With a reported success rate of around 70 percent, Apex’s selective approach to case underwriting has yielded an average return on investment of 30 percent.
Similarly, Longford Capital Management LP raised $56.5 million for its first fund, which focused on claims involving contracts, antitrust issues and other commercial disputes. That fund delivered impressive early returns, reportedly ranging between 70 percent and 90 percent, underscoring the outsized gains possible in this asset class when managed effectively.
While initially intended to improve access to justice, TPLF has evolved into a financial product with characteristics more akin to private equity than legal aid. Its growing footprint in commercial litigation raises concerns not only about transparency, fairness and judicial integrity, but also about distortions created by the U.S. tax code.
TPLF contracts are often structured to qualify for capital gains treatment, enabling foreign investors to extract litigation-based profits from U.S. courts without paying U.S. tax. Plaintiffs, by contrast, are generally taxed at ordinary income rates on any taxable award they receive.
Left unaddressed, this tax treatment undermines the neutrality of the tax code, encourages foreign capital inflows into speculative U.S. litigation, and allows unregulated offshore actors to profit from U.S. legal outcomes without incurring any tax obligation.
Correcting this loophole — by forcing foreign-based litigation funders to pay the same U.S. tax American plaintiffs pay — would promote tax fairness and reduce harmful incentives.
It would also generate billions of dollars in federal tax revenue.
Fortunately, less than a month ago, Sen. Thom Tillis, R-N.C., introduced legislation aimed at targeting predatory litigation financing. Tillis aims to revoke the unwarranted tax treatment enjoyed by third-party litigation funders. If Congress were to add similar language to the reconciliation bill it is considering, the U.S. Congress’s Joint Committee on Taxation estimates the provision would raise $3.5 billion over 10 years and could be used to help finance an extension of President Trump’s 2017 tax cuts.
Republicans are notoriously opposed to tax increases. But Americans for Tax Reform, also known for its opposition to tax increases, recommends closing this loophole, going so far as to highlight it in a report titled “List of Good Reforms that Raise Revenue for Trump’s Tax Cuts.”
Unlike proposals that would raise taxes on U.S. households or businesses, this common-sense reform targets foreign entities profiting from the U.S. legal system without contributing to its fiscal upkeep. It is a fiscally responsible, politically palatable step that supports economic and legal sovereignty.
Correcting this loophole is one of the few tax increases Republicans will love.
