During a congressional hearing last week, Treasury Secretary Scott Bessent signaled interest in examining third-party litigation financing — the practice of outside investors funding lawsuits in exchange for a share of the proceeds.
Testifying before the House Ways and Means Committee, Treasury Secretary Scott Bessent was pressed by Rep. Kevin Hern on the topic.
Hern's concern was straightforward: Are foreign investors, including sovereign wealth funds, using American courts as an investment vehicle?
That is why Hern introduced the Tackling Predatory Litigation Funding Act — to prevent this practice from continuing to occur on the taxpayers’ dime.
Bessent did not wave off the concern. He said he looked forward to working with Hern on the “international foreign money that is coming in and gumming up the works and sponsoring these lawsuits in our system.”
The exchange moved litigation finance beyond a narrow legal-policy debate and into the mainstream political arena.
This was long overdue. Third-party litigation financing, once a niche practice, has become a serious business. It is currently valued at $20.6 billion annually and is expected to explode to over $49 billion a year by 2035.
In simple terms, a funder—sometimes a foreign investor—advances money to a plaintiff or law firm in exchange for a share of any future recovery.
Beyond creating a pattern of frivolous litigation in hopes of a settlement payday, a major concern is that foreign investors may gain visibility into important American industries.
Patent and intellectual property court disputes can often require the disclosure of highly sensitive technical information, including manufacturing processes, proprietary research, and other commercially valuable data. This is highly concerning because many of the industries most likely to be involved in these disputes are not only closely tied to America’s national security needs, but they are also closely watched by America’s adversaries that have a history of stealing intellectual property.
Artificial intelligence, advanced semiconductors, pharmaceuticals, aerospace technologies, and high-performance computing all depend on IP that America’s competitors—including adversarial nations—would be eager to obtain.
As the American Security Project puts it:
"This is especially so because the governments of two of America’s foreign adversaries—the People’s Republic of China and the Russian Federation—have extensive influence and, on some matters, actual control over their commercial industries. In the PRC, the government acting through the Chinese Communist Party has adopted both de jure influence over virtually all high-tech companies and de facto control over their governance. This extends to a vast array of sectors, including the internet generally, social media, and AI. The People’s Liberation Army has partnered with or directed a host of Chinese firms to weaponize IT technologies, so the possibility of the PRC employing government-controlled commercial entities to exploit TPLF is not far-fetched."
As the group details, reports have documented cases in which foreign-linked litigation funders, including firms tied to sanctioned Russian interests, financed litigation in U.S. courts. These episodes have fueled concerns that litigation finance can be used not only to pursue profits but also to advance the geopolitical objectives of America’s adversaries that have little to do with using the court system to pursue justice.
I do not object to private financing. That said, I firmly believe that every court should require disclosure of such funding.
In the hearing, Rep. Hern suggested that these foreign interests are even getting away with writing off the profits from these lawsuits from their taxes. His legislation would stop them from continuing to receive capital gains tax breaks off the profits they make from these oft-frivolous and dangerous suits.
The American legal system exists to resolve disputes under law. It was not designed to serve as an opaque market for investors seeking tax-advantaged returns from lawsuits. And it certainly wasn’t designed to be a tax haven for global hedge funds.
Hern and Bessent were right to flag the issue. Their exchange should not disappear into the hearing transcript. It should prompt a serious review of how litigation finance is taxed, disclosed, and governed.
If litigation finance is going to remain a growing part of the American legal system, the rules governing it should be clear, consistent, and aligned with the public interest. Congress and Treasury's interest in the issue is a welcome first step.
Thomas Stratmann is a senior research fellow at the Mercatus Center and professor of economics and law at George Mason University.