Having adopted President Trump’s “One Big Beautiful Bill” (OBBB) by the narrowest of margins, congressional Republicans are preparing to advance a second reconciliation bill.
Reconciliation bills are powerful legislative vehicles. They empower congressional majorities—even tiny ones—to avoid Senate filibusters and, if necessary, to pass legislation along partisan lines.
But as powerful as reconciliation is, it is subject to restrictions concerning “extraneous” provisions. Those restrictions are commonly referred to as the “Byrd Rule,” after the late Senator Robert Byrd (D-WV). If the Senate parliamentarian determines that a provision violates a restriction, legislators typically rewrite the provision to comply or drop it to maintain the reconciliation bill’s protected status.
Elizabeth MacDonough, the incumbent Senate parliamentarian, determined that several provisions proposed by Republicans for inclusion in the OBBB violated the Byrd Rule. Some of those provisions were rewritten to comply. Others were dropped.
Consequently, Senate Finance Committee Chairman Mike Crapo (R-ID) wants a second bite at the reconciliation apple. He remarked earlier this month, “We didn’t clear the deck in the last bill,” adding that Republicans had hoped to include 200 tax policies in OBBB, several of which were dropped.
Of the provisions forced out of the OBBB by the Senate parliamentarian, the provision addressing third-party litigation funding (TPLF) is a no-brainer for inclusion in the forthcoming reconciliation bill.
TPLF is the practice whereby investors provide funding to a plaintiff or their legal team in exchange for a share of the financial recovery from the lawsuit or settlement. If the case succeeds, the funder takes a portion of the award; if it fails, the funder typically loses their investment, much like a high-risk financial asset.
TPLF is a multibillion-dollar industry. The U.S. commercial litigation finance industry managed $16.1 billion in assets across 42 active capital providers from mid-2023 to mid-2024, according to the Westfleet Advisors 2024 Litigation Finance Report. The market is expected to grow to $25.8 billion by 2030.
Why is the TPLF market growing so rapidly? It is extremely profitable.
Given its profitability, TPLF is, understandably, fueling a surge in legal advertisements … and lawsuit abuse. Based on figures provided by the American Tort Reform Association, “In 2024, trial lawyers’ $2.5 billion in spending on nearly 27 million legal ads exceeded the $1.1 billion spent by pizza chains on 4.1 million ads nationwide.” Television advertising alone jumped to 16.4 million ads in 2023, a 44% increase from 2017.
Foreign hedge funds and sovereign entities, meanwhile, are increasingly using TPLF to take advantage of U.S. courts to extract billions of dollars annually from American companies. To make matters worse, they do so while routinely avoiding U.S. taxes. And, shockingly, it’s legal!
TPLF has evolved into a product with characteristics more akin to private equity than legal aid. Its growing footprint in commercial litigation raises concerns not only about transparency, fairness, and judicial integrity but also about distortions created by the U.S. tax code.
TPLF contracts are often structured to claim capital gains treatment, enabling foreign investors to extract litigation-based profits from U.S. courts without paying U.S. tax. Plaintiffs, by contrast, are generally taxed at ordinary income rates on any taxable award they receive.
Correcting this loophole by forcing foreign-based litigation funders to pay the same U.S. tax American plaintiffs pay would promote tax fairness and reduce harmful incentives.
The Senate parliamentarian’s unilateral, unchecked decision to tank the TPLF provision dealt a blow to conservative supporters, including a coalition of 18 center-right organizations led by prominent taxpayer watchdogs like Americans for Tax Reform, the National Taxpayers Union, and the Taxpayer Protection Alliance.
More than 50 companies and associations representing a broad cross-section of the economy also lined up behind this tax fix for profit-seeking foreign entities flooding U.S. courts with lawsuits, making it a slam dunk for the Trump administration and Congress’ America First agenda.
Fortunately, the 119th Congress is poised to take another bite at the reconciliation apple. Pursuing third-party litigation funding reform is a no-brainer.
James Carter is a Principal with Navigators Global. He previously headed President-elect Donald Trump’s tax team during the 2016-17 transition and served as a Deputy Assistant Secretary of the Treasury (2002-06).
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.
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