Senator Thom Tillis Introduces Tax Bill to Curb Foreign Litigation Funding

In an effort to increase oversight and regulation of third-party litigation funding (TPLF), Senator Thom Tillis has introduced legislation that seeks to close tax loopholes currently benefiting domestic and foreign entities involved in funding U.S. litigation. The bill, titled the Tackling Predatory Litigation Funding Act, proposes to apply ordinary income tax rates, including Medicare surtaxes, on profits derived from litigation funding arrangements, eliminating favorable capital gains treatment.

Under the proposed framework, litigation funders would face a 40.8% tax on profits reflecting a combination of the top individual income tax rate (37%) and the 3.8% Medicare investment surtax. This change is intended to bring parity between funders and wage-earning taxpayers while also curbing what Tillis has described as predatory litigation financing, a practice that, he warns, allows foreign entities to profit off the U.S. legal system, driving up costs and delaying justice.

A Loophole Worth Billions

The growing TPLF industry, now estimated at over $15 billion in assets under management, has attracted substantial interest from global hedge funds, sovereign wealth entities, and private equity firms. Many of these investors operate with limited transparency and are able to secure large returns from U.S. litigation outcomes, sometimes without disclosing their involvement to courts, litigants, or regulators.

Tillis’ legislation seeks to close this loophole, particularly for foreign-based funders, who may currently escape taxation on U.S. litigation profits altogether. The bill has been applauded by some policymakers and corporate stakeholders who worry about foreign influence in strategic litigation, especially in patent-heavy sectors like pharmaceuticals, tech, and manufacturing.

Transparency Remains a Parallel Front

Senator Tillis has long advocated for greater transparency in litigation finance. In 2018, he co-sponsored the Litigation Funding Transparency Act, which would have required disclosure of funding relationships in federal civil cases. Although that bill stalled, the renewed push aligns with calls from large corporations for mandatory disclosure of third-party financial backing. Recent developments, including a Justice Department review of foreign influence in patent litigation, have added urgency to these efforts. 

Implications for IP Litigation

For intellectual property stakeholders, including those in the patent litigation ecosystem, the outcome of this legislative push could be far-reaching. Litigation funders have become increasingly active in patent and ANDA litigation, financing both innovators and challengers. A stricter tax regime could reshape the financial calculus behind which cases move forward and how settlements are structured.

As litigation funding continues to grow in influence and controversy, Patexia will closely follow the progress of this bill and its potential impact on patent and IP-related disputes in the U.S.

 

This article was assisted by AI and reviewed by the editor.