By Lauren Zelt

Full story in DC Journal

There’s a loophole in our current tax code that allows for foreign entities to bankroll lawsuits against American businesses, small and large alike. Didn’t know that? You’d be forgiven if so, because a very elite class of investors, including sanctioned Russian Oligarchs, are doing everything possible to preserve the status quo and evade taxes.

Over the past thirty years, lawsuit abuse has exploded in the United States. The reasons for this are many, including the proliferation of a largely unregulated system of personal injury attorneys. And for the purposes of this discussion, the third-party, outside financiers that fund them.

America’s predatory legal system is partly funded by third-party litigation funding, a rapidly growing financial practice where hedge funds, private equity firms, and foreign investors bankroll civil lawsuits in exchange for any cut of the settlement. They provide the upfront cash, and collect the riches of the settlement. What started as a niche industry has ballooned into an unregulated multibillion-dollar industry. Lack of transparency has created a shadow system of private control over America’s courts, creating an environment in which profit, not justice, reigns supreme.

Essentially, these financiers have commoditized misfortune. They find a vulnerable victim who says they have been wronged, pay for their legal fees, and then take a large portion of the settlement money. It’s not justice, it’s profit seeking. What’s worse is that many of these funders reside out of the country, which means they pay zero taxes on their earnings.

As lawsuit abuse becomes commonplace in America, the cost to pay for frivolous lawsuits is passed along to the average taxpayer. For example, major cities such as Los Angeles, Detroit, Chicago and others are facing budget crises due to the high volume of legal settlements and jury verdicts against the city. In Los Angeles, the amount of money the city pays annually for lawsuits has skyrocketed from “$64 million a decade ago to $254 million last year and $289 million this fiscal year.” The rise in legal payouts means that cities are often forced to consider spending cuts and elimination of essential services in order to balance the budget.

Cities aren’t the only ones facing the financial pressure from lawsuit abuse in the United States. Likewise, families across the country are struggling to keep up with the hidden tax created by lawsuit abuse, which amounts to an average of $4200 per family, according to multiple studies. This hidden tax creates a significant burden for all, but especially for families already struggling to cover basic necessities.

In Washington, Republicans assert that the Big, Beautiful Bill is “a once-in-a-generation opportunity to cut spending, fuel growth, and level the fiscal footing of the American economy.”

While some Democrats may disagree, one provision that lawmakers from both parties can and should agree upon is the Tackling Predatory Litigation Funding Act provision in the bill. This legislation would close the tax loopholes for foreign and domestic litigation funders by cracking down on sanctioned individuals and hostile foreign entities from secretly funding U.S. litigation.

The Tackling Predatory Litigation Funding Act would also dissuade predatory litigation investment by taxing litigation finance profits at a higher threshold than the current rate, thereby discouraging sham lawsuits and jackpot verdicts. Curbing predatory litigation funding would go a long way in reining in excessive litigation in the United States.

Further, this legislation would protect plaintiffs’ ability to access a fair and transparent legal system by making it more difficult for lenders to exploit them. At present, vulnerable individuals who are injured are lured into high-interest cash advances and legal funding deals that often leave them with little, nothing, or worse – more debt – when they win at trial. By fairly taxing litigation finance profits at ordinary income tax rates, nefarious investors are likely to find another investment scheme to exploit.

Much more can and should be done to reform lawsuit abuse in our nation, and there exist pathways at both the federal and state levels to ensure a balanced, just, and trustworthy legal system. The Tackling Predatory Litigation Funding Act provision in the Big, Beautiful Bill presents an opportunity to ensure that plaintiffs can access litigation funding without falling victim to outrageous financial terms with shady foreign actors. It further discourages elite investors from taking advantage of victims in their time of need by ensuring that proper taxation of litigation profits occurs. It’s a step in the right direction, and Congress has an opportunity to act.