ROWAN SAYDLOWSKI: Our Courts Are Awash With Outside-Funded Lawsuits. Republicans Have A Way To Fix It

Editor’s note: Big Tent Ideas always aims to provide balancing perspectives on the hottest issues of the day. Below is a column from Americans for Tax Reform federal affairs manager Rowan Saydlowski, where he argues that Republicans’ attempt to crack down on outside-funded lawsuits is a win for taxpayers. You can find a counterpoint here from Save our States founder Trent England, where he argues that the GOP’s legislation is really a win for big corporations.

Trial lawyers are imposing massive costs on American families. And the current tax code incentivizes them to do it.

The amount of frivolous litigation in the U.S. court system has ballooned in recent years, and American households often bear the brunt of the costs. A study by the U.S. Chamber of Commerce Institute for Legal Reform (ILR) found that total tort costs and compensation grew to more than $529 billion in 2022, representing 2.1% of GDP and $4,200 per U.S. household.

These costs grew by an average of 7.1% each year between 2016-2022, far above the rate of inflation.

The impact on American households is twofold: First, the growing amount of frivolous litigation clogs up the court system, delaying legitimate cases and imposing higher costs on taxpayers. Second, the costs of litigation imposed on businesses are inevitably passed onto consumers in the form of higher prices.

As frivolous litigation increases and targets a broader range of companies, an inflationary effect can be felt across the economy.

A study conducted by The Perryman Group last year found that prices on everything from groceries to auto insurance rose due to excessive tort costs. Prescription medications were the hardest-hit, with a 9.02 percent price increase due to litigation costs.

One major contributor to this problem is third-party litigation funding (TPLF), where a third-party entity funds one of the parties involved in a case, often with a promise of financial reward for the funder if the case results in a victory or a settlement. The TPLF industry has exploded in recent years, reaching $15.3 billion in annual revenue.

While some of these third-party funders are domestic investment corporations, others are more nefarious. A hearing held by the House Judiciary Subcommittee on Courts, Intellectual Property, Artificial Intelligence, and the Internet last year exposed how hostile foreign governments like the Chinese Communist Party (CCP) exploit weaknesses in the U.S. legal system, engaging in practices like TPLF to manipulate the outcomes of civil cases.

According to the hearing witnesses, this foreign TPLF abuse can extract money from Americans to be sent overseas, allow foreign entities to steal trade secrets, and kneecap American companies against their foreign competitors.

TPLF is also abused for partisan political aims. Trial lawyers, who give the vast majority of their political donations to Democrats and gave more than $47 million to Kamala Harris in 2024, have made it their mission to target conservatives in court, including thousands of cases targeting Trump businesses directly.

Leftwing billionaires like George Soros use TPLF to bankroll lawsuits against conservative organizations and target key energy and infrastructure projects with environmental lawsuits.

Despite all of these harms posed to Americans, third-party litigation funding is currently incentivized by the government with tax advantages.

When a third-party funder profits from a case, that profit is not taxed at the ordinary income tax rate. Instead, they pay the significantly lower capital gains tax rate. This stands in contrast to the plaintiff and defendant themselves, who each have to pay the ordinary income tax rate on any taxable award from litigation.

To address this disparity, Senator Thom Tillis (R-N.C.) has introduced the Tackling Predatory Litigation Funding Act (S. 1821), alongside Senators Jon Husted (R-Ohio), Bernie Moreno (R-Ohio), Ashley Moody (R-Fla.), Chuck Grassley (R-Iowa), Steve Daines (R-Mont.), Tim Sheehy (R-Mont.), and Pete Ricketts (R-Neb.).

The Tackling Predatory Litigation Funding Act would remove the existing tax incentives for abusive TPLF practices by taxing the profits at income tax rates instead of capital gains tax rates.

Since this adjustment would increase the total amount of tax revenue, Americans for Tax Reform (ATR) recommends offsetting this additional revenue with more pro-growth tax cuts. ATR previously recommended using this policy as a pay-for in a reconciliation bill to build on President Trump’s legacy of across-the-board, pro-growth tax cuts.

There are many taxes affecting everyday Americans that could be reduced while using the revenue from TPLF reform as an offset. One example is restoring the full, 100% deductibility of gambling losses, which was recently reduced to only 90% deductibility.

Senator Ted Cruz (R-Texas) and Congressman Max Miller (R-Ohio) have introduced legislation to return to full deductibility, which would restore fairness by not forcing Americans to pay taxes on “phantom income” that they did not actually receive. TPLF reform would generate the appropriate amount of revenue to serve as an offset for this tax reform.

Addressing TPLF abuse in a way that delivers tax cuts for everyday Americans is a win-win policy. The financial impact on households from excessive litigation can be reduced, Americans can be more protected from nefarious foreign or partisan actors, and the tax burden on individuals can be reduced.

Congress should move quickly to reform third-party litigation funding.

Rowan Saydlowski is a federal affairs manager at Americans for Tax Reform.

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.