U.S. Chamber Institute for Legal Reform says taxing litigation funding will help reform industry

The U.S. Chamber Institute for Legal Reform has announced on X that a tax on litigation funding could aid in reforming the third-party litigation financing industry. The proposed tax aims to create parity among providers, plaintiffs, and lawyers while closing a loophole that currently benefits funders.

According to Bloomberg Law, the U.S. third-party litigation funding (TPLF) industry was valued at $13.5 billion in 2023 and continues to grow as private investors increasingly fund lawsuits in exchange for a share of settlements or judgments. The rapid rise of TPLF has raised concerns among legal experts and policymakers regarding transparency, conflicts of interest, and the underlying motives behind large-scale litigation. The industry's expansion has led to renewed calls for regulatory and tax reforms, with advocates stressing the importance of fair tax treatment to ensure justice is prioritized over financial gain for funders.

The Wall Street Journal reports that TPLF providers have historically structured their investments to minimize tax burdens by exploiting deductions unavailable to plaintiffs and lawyers. These tax loopholes can significantly increase funders' profits, sometimes at the expense of those whom the litigation is intended to protect. Experts argue that closing these loopholes would not only provide tax parity but also discourage investments aimed solely at financial return rather than legal justice.

The U.S. Chamber Institute for Legal Reform highlights that many TPLF deals are not disclosed to courts or defendants, resulting in a lack of transparency and increased risks of conflicts of interest in civil litigation. Without proper oversight and tax regulation, funders can sometimes influence the direction and outcome of cases for profit. Their analysis supports the proposal for a dedicated tax on litigation funding as detailed in their research on closing tax loopholes in the TPLF industry.

According to its official website, the U.S. Chamber Institute for Legal Reform is a nonprofit advocacy organization affiliated with the U.S. Chamber of Commerce. It focuses on promoting legal reforms to create a fair, transparent, and predictable civil justice system while conducting research on litigation trends and industry practices. The Institute advocates for policy changes to ensure that legal systems serve the interests of justice, businesses, and society as a whole.