Third-party litigation funding (TPLF) involves outside investors providing nonrecourse funding to plaintiffs in exchange for a share of any settlement or judgment, treating it as a high-return alternative asset class in a multibillion-dollar industry. The loophole stems from structuring these arrangements as “prepaid forward contracts,” which qualify as derivatives under tax rules (IRC §1234A), enabling capital gains treatment rather than ordinary income. Crucially, for nonresident aliens and foreign corporations, such capital gains are generally not subject to U.S. withholding tax or treated as effectively connected income (ECI) if there’s no U.S. presence, meaning foreign funders can extract profits from U.S. court outcomes entirely tax-free.
The energy industry faces particularly acute risks from this practice. High-stakes disputes have surged over climate change claims, intellectual property in emerging technologies, mergers, joint ventures, and environmental regulations. The litigation finance market has exploded, with commercial funding assets estimated at around $16 billion in recent years and projections for continued rapid growth. Yet most funding arrangements remain secret, with courts, defendants, and the public unaware of outside backers or their potential control over cases. In contrast, U.S. plaintiffs typically face ordinary income taxation on the full recovery amount.
Foreign investors, including sovereign wealth funds and entities from adversarial nations, have poured significant capital into U.S. energy-related litigation. This raises serious national security concerns: prolonged suits can harass American energy firms, tie them up in expensive proceedings, access sensitive proprietary information through discovery, weaken domestic production, and advance foreign geopolitical agendas.
A prominent recent example unfolded in early 2025, when ExxonMobil filed a federal countersuit in Texas against California Attorney General Rob Bonta, several U.S. environmental nonprofits, and the Intergenerational Environment Justice Fund (IEJF). The IEJF is an Australian nonprofit linked to billionaire Andrew Forrest’s Minderoo Foundation. The original lawsuit, brought by California in 2024, accused ExxonMobil of misleading the public about the recyclability of its plastics as part of broader low-carbon and energy transition efforts.
ExxonMobil alleged that IEJF, tied to Forrest’s Fortescue company, a direct competitor in hydrogen markets, provided foreign funding to orchestrate the litigation and associated public criticism for competitive advantage. This prompted the U.S. Department of Justice to require the plaintiffs’ law firm to register as a foreign agent under the Foreign Agents Registration Act (FARA). ExxonMobil’s countersuit claims defamation, business disparagement, tortious interference, and civil conspiracy, arguing that such foreign-backed funding weaponizes U.S. courts against American energy companies, harming workers, consumers, and national interests.
Additionally, environmental activists have found a lifeboat for advancing their unpopular policy agenda through the TPLF. Last month, Nature Sustainability published an article titled “Leveraging third-party litigation funding for environmental litigation,” authored by Masaki Iwasaki from Seoul National University. It explains how third-party litigation funding can play a significant role in advancing environmental causes. It should be no surprise then that the broader trends show TPLF fueling climate litigation against American energy companies, where funders help plaintiffs seek damages for alleged climate damages. Since the Paris Agreement in 2015, a total of 86 climate lawsuits have been filed against the world’s largest oil, gas, and coal companies. The annual number of cases brought against fossil fuel corporations has nearly tripled over this period.
Third-party litigation funding has quietly turned America’s judicial system into a high-return investment opportunity for foreign entities, with the energy sector particularly exposed. Foreign capital, including from sovereign wealth funds and entities linked to geopolitical competitors, flows into these cases, often in secrecy and with the potential to harass U.S. energy firms, access sensitive information, prolong costly litigation, and advance external agendas. In 2026, Congress should look for ways to close the tax loophole that allows foreign investors to extract tax-free gains from U.S. litigation proceeds to prevent the weaponization of American judicial processes against domestic energy producers and critical infrastructure.
