End the Tax Perks for Foreign Lawfare

There’s a growing threat to American prosperity that too few in Washington are talking about. While most people assume our courts exist to deliver justice, a shadow industry has emerged that treats our legal system like a Wall Street trading floor.

The result is a system becoming more driven not by fairness or facts, but by profit, politics, and foreign manipulation.

TPLF gives outside investors—who often have no direct stake in a case—the ability to inject capital into lawsuits in exchange for a percentage of any settlement or judgment. These funders operate in the shadows, with no obligation to disclose their identity or motives. In effect, it turns our civil courts into investment vehicles for anonymous speculators.

While the plaintiffs involved may think they’re getting support, they often lose control of their own cases as funders manipulate strategy to prolong litigation and inflate settlements—all in the name of maximizing returns.

But the most troubling development is the rise of foreign-backed litigation in U.S. courts. China and Russia have increasingly invested in TPLF vehicles that can be used to harass American companies, extract sensitive information through discovery, and tie up critical industries in court battles.

These activities don’t just weaken individual firms—they threaten America’s economic security and competitive edge. Foreign governments should never be allowed to exploit our justice system to gain strategic or economic leverage. Yet under current law, they can do just that—and even enjoy favorable tax treatment while doing so.

Right now, litigation funders often structure their investments so that their earnings are taxed as capital gains rather than ordinary income. This gives them a lower effective tax rate than the plaintiffs who are the victims of the alleged harm and see any proceeds taxed as ordinary income. In fact, in many cases foreign investors can avoid U.S. tax liability altogether. That’s a loophole big enough to drive a class action lawsuit through, and it needs to be closed.

That’s why legislation introduced by Senator Thom Tillis (R-NC) and Representative Kevin Hern (R-OK) deserves swift and bipartisan support. The Tackling Predatory Litigation Funding Act would finally impose ordinary tax rates on TPLF profits and begin the process of introducing long-overdue checks on such arrangements.

Specifically, the bill creates a new tax category for profits earned through litigation financing agreements and eliminates the ability for funders to treat such gains as capital assets. It also introduces withholding requirements and expands definitions to ensure that sovereign wealth funds are covered. It’s a thoughtful, well-constructed solution to a serious and growing problem.

In addition to restoring fairness to the legal system and bolstering national security, the bill is also fiscally smart. The Joint Committee on Taxation estimates it would raise $3.5 billion over 10 years—funds that could be used to help offset President Trump’s proposed tax cuts now being considered in Congress. Americans for Tax Reform has even gone so far as to identify the measure as a “Good Reform” that supports tax relief for working families while rooting out abuse in the system.

Litigation should never be a business model for foreign governments or hedge funds. Yet without reform, that’s exactly what our court system is becoming: a marketplace for anonymous profiteers to manipulate outcomes, delay justice, and drive up costs for everyone else. If we care about economic growth, job creation, and American sovereignty, we cannot allow this to continue unchecked.

The Tackling Predatory Litigation Funding Act is a pro-growth, pro-taxpayer, pro-America solution. Congress should pass it without delay and send a clear message: American courts are not for sale.

Jack Yoest is an Associate Professor at The Catholic University of America in the Busch School of Business. He was an Assistant Secretary for the Commonwealth of Virginia and is the author of The Memo: How the Classified Military Document That Helped the U.S. Win WWII Can Help You Succeed in Business