After narrowly adopting what President Trump called the “One Big Beautiful Bill” (OBBB), Congressional Republicans are gearing up to push forward with a second settlement bill.
This settlement bill is an important legislative tool. It grants the Congressional majority, even if slim, the power to pass laws along partisan lines, sidestepping the Senate filibuster when necessary. Still, there are limitations; “unrelated” provisions can be problematic. These are known as the “Bird Rules,” named after the late Senator Robert Byrd. If a senator deems a provision non-compliant, it usually gets reworked or dropped to keep the bill’s protected status intact.
Elizabeth McDonough, the sitting Senate parliamentarian, has ruled that some Republican proposals for the OBBB did not comply with these Bird Rules. Some of these provisions have been modified, while others have been eliminated.
Consequently, Senate Finance Committee Chairman Mike Crapo (R-ID) is optimistic about another opportunity with the settlement. He mentioned recently that the previous bill didn’t clear much from the agenda, adding that they wanted the OBBB to encompass 200 tax policies.
Among the provisions in the OBBB is one concerning third-party litigation funding (TPLF), which may appear in future settlement bills.
Typically, TPLF facilitates investors funding a plaintiff or their legal team in exchange for a cut of any financial recovery from a lawsuit. If the case succeeds, the funder gets a share of the award; if it doesn’t, they generally lose their investment, akin to a risky financial venture.
The TPLF sector is a multi-billion-dollar industry. A report from WestFleet Advisors notes that the US commercial litigation finance industry managed $16.1 billion in assets across 42 active capital providers from mid-2023 to mid-2024. This sector is expected to grow to $25.8 billion by 2030.
So, why is TPLF expanding so rapidly? Profitability plays a significant role.
That profitability is, naturally, fueling a rise in legal advertising, as well as, some might argue, a surge in lawsuit abuse. According to data from the American Tort Reform Association, trial lawyers spent $2.5 billion on almost 27 million legal ads in 2024, outpacing the $1.1 billion spent by pizza chains on their 4.1 million ads nationwide. Television ads alone surged to 16.4 million in 2023, up 44% compared to 2017.
At the same time, foreign hedge funds and sovereign entities are increasingly leveraging TPLF, extracting billions from US companies each year while often sidestepping US taxes. It’s surprising but, legally speaking, entirely permissible.
Some argue that TPLF had transformed into something akin to private equity rather than traditional legal aid. This increased presence in commercial litigation raises questions about transparency, fairness, and judicial integrity, along with distortions stemming from US tax law.
Typically, TPLF contracts are structured to claim capital gains treatment, allowing foreign investors to benefit from litigation in US courts without incurring US taxes. In contrast, plaintiffs are typically taxed at their regular income rate on any awards they receive.
Addressing this loophole and ensuring foreign-based litigation funders pay taxes similarly to US plaintiffs would promote tax fairness and help diminish harmful incentives.
The unilateral and unconfirmed decisions made by some senators regarding TPLF regulations have drawn criticism from conservative supporters. A coalition of 18 right-leaning organizations, including prominent taxpayer watchdogs, has emerged in favor of tax fairness in litigation funding.
More than 50 businesses and associations from various sectors are rallying behind this tax amendment for foreign entities profiting from lawsuits in US courts, presenting a substantial opportunity for the Trump administration and the Congress agenda.
Fortunately, the 119th Congress looks ready to explore the reconciliation process again. Pursuing reforms in third-party litigation financing should be manageable.
