The American justice system exists to peacefully resolve disputes, protect our rights, and hold wrongdoers accountable. Too often, though, it’s misused, turned into an investment vehicle for overseas financiers in pursuit of jackpot verdicts who purchase stakes in lawsuits against American companies.
Third-party litigation funding, or TPLF, is dangerous to the integrity of the system, especially when the money comes from foreign investors, sovereign wealth funds, or entities whose motives may extend well beyond the fair resolution of a legal claim.
Product liability cases are particularly vulnerable to TPLF abuse. These lawsuits often involve large companies, technical evidence, and highly charged, emotional rhetoric. They can be expensive to defend against, even when a claim is weak. That makes them attractive to litigation funders looking for leverage. A funder need not prevail on the merits in every case if it can apply enough pressure, slow things down, and create the risk of a runaway verdict to force a lucrative settlement.
TPLF supporters argue it expands access to justice. It may help a legitimate plaintiff pursue a meritorious claim, but that argument is weakened by the proliferation of overseas investors seeking a high-yield stake in American torts. The system isn’t working if foreign asset classes can go after the resources of a U.S. manufacturer, pharmaceutical company, technology firm, or defense contractor.
This is a consensus position, opposed only by the trial lawyers and their allies. In a recent letter to Capitol Hill, the heads of multiple free-market organizations urged Congress to eliminate the favorable tax treatment afforded to TPLF funders, thereby forcing them to pay the same U.S. tax rate on money awarded in damages or settlements as the actual plaintiffs.
The Joint Committee on Taxation estimates that, if enacted, the provision would raise $3.5 billion over 10 years. Until it does, things will only get worse.
A Westfleet Advisors 2024 Litigation Finance Market Report estimates overseas third-party funding at $16.1 billion annually, excluding mass-tort law firm financing. In 2024, the U.S. Chamber of Commerce’s Institute for Legal Reform found that the annual costs and compensation from the U.S. tort system amounted to $4,207 per American household.
Closing this loophole would discourage sophisticated foreign funders from countries such as China and Russia from investing in frivolous lawsuits in the U.S. court system, which is where the danger lies. Litigation sponsored by not-for-profit sector groups would be unaffected by the change, which is why the idea has such strong support. The few who have voiced objections are on the fringe, putting the interests of their billionaire donors who profit from the status quo ahead of everyone else.
Congress also needs to address the severe transparency problem. In many jurisdictions, courts, defendants, and sometimes even claimants don’t know who is financing a case or what rights the funder has secured. Through their investments, foreign interests may have purchased veto power over settlements or access to confidential discovery. This is not a side issue. It goes to the integrity of the judicial process.
TPLF also imposes economic costs. Product liability litigation contributes to higher insurance premiums and prices, defensive business practices, and discourages innovation. The costs are passed along to consumers, workers, and shareholders. Rewarding litigation as an investment strategy diverts capital away from factories, laboratories, payrolls, and research into the pursuit of non-productive legal payouts.
Congress can preserve access to justice while drawing a bright line. Plaintiffs may still hire lawyers on a contingency basis. Nonprofit legal assistance can be protected, but we cannot continue to let secret foreign financial interests steer high-stakes litigation through the American courts without paying a cent of U.S. tax on any awards. That’s not America First.
THE MORAL HAZARD OF MONETIZED JUSTICE
In addition to closing the tax loophole, other sensible reforms include the following:
Mandatory early disclosure of third-party funding agreements in any product liability, mass-tort, multidistrict litigation, and class-action proceedings; identification of any overseas funders of litigation, including foreign nationals, organizations, firms, and sovereign wealth funds; a ban on funders controlling settlement decisions, litigation strategy, or access to protected discovery; and meaningful penalties for evasion, including the possible forfeiture of any funds recovered.
Congress should not wait. It is time to require litigants to disclose how much foreign money they are bringing into the system. The time to close the loophole and impose transparency, accountability, and limits is now. Justice should be meted out according to facts and the law, out in the open, not as the result of secretive overseas investors treating American lawsuits as bets on the next big payout.
Peter Roff is a veteran journalist and former columnist for several major news outlets and is now affiliated with several Washington, D.C.-based public policy groups, including the Transatlantic Leadership Network. You can reach him at [email protected] and follow him on social media @TheRoffDraft.