Why Sen. Tillis' H.R. 3512, the Inaccurately-Named “Tackling Predatory Litigation Funding Act" is a Danger to American Innovation and Patent Owners

Summary of the Tackling Predatory Litigation Funding Act

Senator Thom Tillis has introduced the "Tackling Predatory Litigation Funding Act," which would impose substantial additional taxes on litigation funding investments. Representative Kevin Hern (R-OH) has introduced corresponding legislation in the House of Representatives.

Senator Tillis' bill unfairly penalizes patent owners and undermines U.S. innovation and national security in several critical ways. The punitive 40.8% tax rate—nearly double standard corporate rates—will severely restrict access to litigation funding that many patent holders, particularly individual inventors and small companies, depend on to enforce their intellectual property rights against well-funded infringers.

Without litigation funding, patent owners lacking substantial resources cannot afford the millions required for patent litigation, effectively rendering their patents worthless. This creates a system where only large corporations can meaningfully protect their intellectual property, stifling innovation from smaller entities that drive technological advancement.

From a national security perspective, this legislation weakens America's competitive position by making it harder to protect critical technologies from foreign competitors. When U.S. inventors cannot enforce their patents, foreign companies can freely copy American innovations without consequence. The bill's extraordinarily broad scope, potentially affecting international investors and non-U.S. litigation, further complicates global technology protection efforts, ultimately harming America's technological leadership and economic security.

Introduction: When “Reform” Means Stacking the Deck

In the ever-shifting landscape of American innovation, the debate over intellectual property protection has never been more urgent. The latest skirmish comes in the form of H.R. 3512, the so-called "Tackling Predatory Litigation Funding Act," introduced in Congress with the stated aim of curbing abuses in the litigation funding industry. If the title sounds righteous, don’t be fooled. The reality is far from what its sponsors claim. This bill is neither a blow against “predatory” anything, nor a protection for the public; it’s a thinly veiled effort to make it harder for America’s independent inventors and small companies to defend their rights. Worse, it invites large companies—many of them household names in Silicon Valley and beyond—to steal technology with near impunity. The ripple effects could hand America’s global competitors, particularly China, a decisive technological advantage.

Let’s call it what it is: a policy disaster masquerading as reform, and a textbook example of regulatory capture in action.

What Does H.R. 3512 Actually Do? (Including Financial Penalties)

To understand why this bill is so dangerous, you first have to wade through the legalese. H.R. 3512 is framed as a transparency measure for patent litigation funding. In practice, it:

• Requires plaintiffs in patent cases to disclose in detail any third-party funding, including the identity of the funder, the nature and amount of funding, and the precise terms of the agreement.

• Imposes strict penalties—including possible dismissal of a case, the entry of adverse inferences, or the awarding of attorney’s fees to the opposing party—for failing to comply.

• Restricts the involvement of litigation funders in legal strategy or settlement decisions.

• Requires these disclosures at the outset of litigation, meaning the accused infringer gets a full view of the patent owner’s financial backers and legal resources before the fight has even begun.

  
  

But most alarming for patent owners and funders alike is the specter of massive financial penalties. In related proposals and legislative discussions, policymakers have threatened an excise tax of up to 40% on litigation funding arrangements deemed “predatory.” In effect, this is a 40% government cut—nearly half of any proceeds that could go to the funder, and, by extension, to the small inventor fighting to protect their rights.

Supporters claim this is about curbing “frivolous litigation” and “predatory” practices by financiers who bankroll lawsuits in return for a share of the recovery. In reality, it’s a naked attempt to tip the litigation playing field even further toward the largest, best-resourced companies in America—companies that already have every advantage money and influence can buy.

Key Provisions

1. When It Would Take Effect The proposed legislation would be effective for taxable years beginning after December 31, 2025, and may apply to future payments under existing arrangements.

2. Tax Rate and Application The legislation would impose a tax rate equal to the highest individual tax rate plus 3.8% (totaling 40.8% under current law) on qualified litigation proceeds received by covered parties. This rate would apply in lieu of standard corporate tax rates for applicable entities.

3. Covered Parties A covered party is defined as any third party to a civil action that receives funds under a litigation financing agreement and is not an attorney representing a party to the civil action. The tax applies at the entity level for partnerships, S-corporations, and other pass-through entities. U.S. corporations would be subject to the 40.8% rate instead of the standard 21% corporate tax rate. The legislation extends to tax-exempt U.S. investors and non-U.S. investors, including those described in Section 892 of the Internal Revenue Code. The scope appears to include non-U.S. investors without U.S. connections, though this broad application may not have been intended. Treaty benefits may remain available to eligible investors.

4. Qualified Litigation Proceeds Qualified litigation proceeds encompass realized gains, net income, or other profits received by a covered party during a taxable year that derive from litigation financing arrangements. These amounts are not reduced by ordinary or capital losses, including losses from other litigation funding investments. The definition is not limited to U.S.-source litigation proceeds and may include proceeds from international litigation funding investments.

5. Litigation Financing Agreements A litigation financing agreement is defined as a written agreement relating to civil actions, administrative proceedings, claims, or causes of action where a third party provides funds to named parties or affiliated law firms and creates a direct or collateralized interest in the proceeds. The agreement must be executed with attorneys representing parties, co-counsel with contingent fee interests, third parties with collateral-based interests in contingency fees, or named parties in the civil action. The Treasury Secretary may determine that substantially similar arrangements also qualify. This definition appears to encompass virtually all litigation funding agreements regardless of structure.

6. Limited Exceptions The legislation provides narrow exceptions for: (1) agreements involving less than $10,000 in total funding per civil action, (2) agreements where the third party's proceeds are limited to principal repayment, principal plus interest not exceeding specified rates, or attorney's fee reimbursement, and (3) arrangements between related parties as defined in Section 267(b) of the Internal Revenue Code. These exceptions are expected to have limited practical application.

7. Withholding Requirements Parties with control, receipt, or custody of civil action proceeds must withhold 20.4% (under current law) of payments required under litigation financing agreements. The withholding obligation is based on gross payments without reduction for original funding amounts, potentially resulting in over-withholding. The withholding requirement appears to apply globally, including to parties without U.S. connections making payments to other non-U.S. persons regarding non-U.S. litigation, though this extraordinarily broad scope may not have been intended.

   
   

The Real World: Patents as the “Great Equalizer”

To appreciate just how lopsided this bill is, you have to understand what patents are supposed to do. The U.S. patent system was created with a simple, powerful idea: that an individual, no matter how small, could invent something new and have the legal right to stop others—no matter how big—from taking it. This right, enshrined in the Constitution and recognized by centuries of American law, is the “great equalizer.” When it works, a small business or even a solo inventor can defend their idea against giants with armies of lawyers and deep pockets.

But here’s the rub: litigation is expensive—sometimes prohibitively so. The cost of a single patent lawsuit can run into the millions. Large corporations budget for this; for them, litigation is just a line item. For everyone else, the choice is often bleak: find outside funding or forfeit your rights to the very companies the patent system was meant to restrain.

Enter litigation funding. For many small inventors and startups, third-party funding is the only way to survive a bruising legal battle with a tech titan. Funders do their homework; they back cases with real merit because their returns depend on the outcome. This levels the playing field and gives teeth to the only real protection small players have.

But if the government skims 40% off the top of any recovery—or if even the threat of such a penalty is present—most funders will simply walk away. No rational investor will risk 40% of their upside on a venture as risky as patent litigation. The result? Funding dries up, and small inventors are left defenseless.

H.R. 3512: The Death of Leverage for Small Inventors

If H.R. 3512 becomes law, this fragile balance is destroyed. Here’s why:

1. Chilling Effect on Litigation Funding: The bill’s disclosure requirements, combined with the threat of a 40% excise tax on “improper” funding, make litigation funding a riskier proposition for both funders and patent owners. Funders may balk at revealing sensitive business information or exposing themselves to harassment from well-heeled defendants. The likely result? Less funding available, higher costs, and more inventors forced to walk away.

2. Gift to Big Tech: Who benefits from a world where patent owners can’t afford to fight? The biggest companies in the world—many of whom have a history of appropriating technology and “litigating to the last dollar.” With the threat of real enforcement weakened, large companies are free to infringe, knowing their smaller adversaries lack the means to stop them.

3. A Playbook for Patent Theft: In the new world envisioned by H.R. 3512, stealing technology from the “little guy” becomes a calculated business decision. If the worst consequence is a lawsuit the inventor can’t afford to maintain, why wouldn’t they do it? The law’s effect is to sanction patent theft as a viable, low-risk corporate strategy.

4. Strategic Targeting and Retaliation: The required disclosures give infringers a roadmap for attacking the patent owner’s funding sources, undermining the case through side litigation, public pressure, or even settlement manipulation. In other words, the deck isn’t just stacked—it’s loaded.

   
   

“Predatory Litigation”? The Existing System Already Has Answers

Proponents of H.R. 3512 argue that it will prevent “predatory litigation” and protect the public. This is a smokescreen. Courts already have ample tools to punish bad-faith litigation, from sanctions to fee-shifting. Frivolous lawsuits are routinely tossed out, and Rule 11 of the Federal Rules of Civil Procedure penalizes meritless claims.

What H.R. 3512 does is not to stop abuse, but to block legitimate claims by those who can least afford to lose their rights. It confuses the weapon (the right to sue) with the target (actual abusers), and punishes everyone for the sins of a tiny minority.

The International Consequences: Helping China Overtake America

Here is the bitter irony: while the U.S. Congress contemplates making it harder for American inventors to defend their patents, China is moving in the opposite direction. Over the last decade, China has aggressively reformed its IP system to favor domestic innovation, streamline enforcement, and encourage technological entrepreneurship. Chinese courts are now known for fast, efficient resolution of patent cases—and are increasingly willing to rule in favor of inventors against large companies.

The signal sent by H.R. 3512 is clear: if you invent in America, your patent is only as strong as your bank account. If you invent in China, the state will back you up. It’s no wonder Chinese technology companies are catching up—and, in some areas, pulling ahead.

Worse, as American inventors struggle to enforce their rights, large companies will simply take what they want, confident that the risk of being held accountable is minimal. This means fewer startups, less investment in R&D, and a weaker, less innovative America. China, meanwhile, continues to rise.

Patents Protect the “Little Guy”—But Only If They Can Be Enforced

The argument that patents are only for big corporations is an outright myth. In reality, the vast majority of patents are filed and owned by small businesses and individual inventors. For these innovators, a patent is often their only asset. Without the ability to enforce it, that asset is functionally worthless.

Large companies don’t need the help. They already have lobbying power, market dominance, and deep pockets. H.R. 3512 hands them one more advantage, making it harder for challengers to hold them accountable and easier for them to copy and crush competitors.

Real Stories: Innovation Lost

Imagine the medical device inventor whose technology saves lives but is copied by a multinational before it even hits the market. Or the small software company whose breakthrough is “borrowed” by a tech giant with more lawyers than engineers. These are not hypotheticals; they happen every day. Without access to funding, these inventors have no recourse. H.R. 3512 doesn’t just close the courtroom doors—it locks them shut.

What Should Be Done Instead? Real Solutions, Not Window Dressing

If Congress truly wants to protect against abusive litigation, there are sensible reforms available:

• Maintain transparency, but limit disclosures to the court and under seal, so sensitive information is protected from abuse.

• Strengthen existing sanctions against truly predatory or frivolous lawsuits.

• Encourage mediation and early resolution of disputes, but don’t punish legitimate claims.

• Support mechanisms that make it possible for small inventors to enforce their rights—rather than making it harder.

  
  

Conclusion: H.R. 3512 and Sen. Tillis' Gift to BigTech Must Be Defeated

In summary, H.R. 3512 is a dangerous, unfair bill that punishes the very people patents were meant to protect and rewards the worst actors in our economy. It gives large tech companies a license to steal, undermines American innovation, and cedes the competitive advantage to China. If America wants to remain a leader in technology and entrepreneurship, it must defend the rights of inventors, not sacrifice them on the altar of corporate convenience.

The future of American innovation is at stake. H.R. 3512 should be defeated—and replaced with real, balanced reform that strengthens, not weakens, the patent system for all.

Speak out! You can call the U.S. Capitol switchboard at (202) 224-3121, and they will connect you to your senator or representative's office. Alternatively, you can find direct contact information for your members of Congress by visiting Congress.gov and entering your address. This will provide you with a list of your representatives and their contact details.

Now is the time! We must fight back against BigTech taking over!