Lawmakers push for transparency to combat foreign influence in litigation funding

Discussions around litigation funding disclosure regulations have floated around state legislatures and Congress for several decades, and while some judges across the country have implemented local rules, third-party financing remains largely unregulated. 

However, as concerns around foreign influence in commercial litigation have cropped up in recent years, several states have taken steps toward requiring greater transparency about which parties are bankrolling lawsuits. Notably, Florida lawmakers proposed HB 1179 and SB 1276, intended to guard sensitive information against hostile countries like China, according to the bill's Republican sponsors. The companion bills, which died last month, were backed by the U.S. Chamber of Commerce, which has long pushed for reform in this area. 

Some members of the litigation funding industry, including Burford Capital managing director Andrew Cohen, believe that broad disclosure requirements may be burdensome rather than helpful to the parties involved. "The concerns about foreign interference in litigation are completely without evidence," said Cohen. "You can cherry-pick some examples of Chinese entities that bring a claim in the U.S. but there are tons of U.S. companies with Chinese investors that exist, so there's nothing nefarious or strange about these situations." 

Disclosure regulations are pending in at least 10 states, but Burford has not seen any reasonable proposal to make it easier for litigants to receive funding, said Cohen. "These efforts are funded and supported by industry groups opposed to litigation generally," he added. 

Maya Steinitz, a professor at Boston University School of Law and one of the nation's top experts in litigation finance, said she had not observed an inherent risk of foreign influence and investment in U.S. litigation. "Anything can happen in any given case as the parties have due process rights to conduct discovery and understand who and what they're dealing with," she said. "But do I think that we have again a systemic problem and a threat to our justice system? No, I don't think that we do."  

Third-party litigation finance has exploded into a multibillion-dollar industry since the practice started in Australia in the 1990s. In a letter last fall to the chief judges of Florida's three federal districts, U.S. Senators Marco Rubio and Rick Scott said the effects of allowing "unfettered and undisclosed" foreign third-party litigation funders could include frivolous lawsuits and excessive domestic disclosures. "Tactics such as these, which seek to exploit the openness of American institutions and undermine critical infrastructure sectors, are frequently done by foreign adversaries, particularly China, are not in the strategic interest of the United States and serve as an example of the need to defend the U.S. against hostile foreign actors seeking to undermine our national interests," they wrote. 

While California lawmakers have yet to address third-party commercial litigation funding, state Sen. Anna Caballero introduced SB 581 last March, intended to protect consumer litigants from predatory lenders. The bill failed after drawing opposition from groups like the Consumer Attorneys of California. An email from Gov. Gavin Newsom's deputy communications director said legislation requiring additional disclosures from third-party funders was "possible."

Other states wading into litigation finance regulations include Arizona and Georgia, although they have not been as explicit about the perceived threat of foreign influence as Florida. In September, U.S. Senators Joe Manchin (D-WV) and John Kennedy (R-LA) introduced the bipartisan Protecting Our Courts from Foreign Manipulation Act. "Foreign actors such as China and Russia use third-party litigation funding to support targeted lawsuits in the United States, undermining our economic and national security. This legislation would provide a commonsense strategy to protect our legal system by requiring greater transparency and accountability from third-party groups and preventing foreign governments and sovereign wealth funds from funding litigation," said Manchin. The bill has not yet been heard in committee. 

A Bloomberg investigation last month revealed that Russian investment firm A1, connected to Vladimir Putin, spent millions of dollars in New York and London bankruptcy courts to recover $2 billion embezzled from a Moscow bank. When asked about the findings at a Senate hearing on Apr. 9, U.S. Treasury Department deputy secretary Wally Adeyemo noted that Russia has become "quite expert" at avoiding sanctions, including through cryptocurrency, and said the issue needed to be addressed.  A1 said that it stopped funding all lawsuits in the U.S. after being sanctioned by the Treasury Department last fall.

Last fall, Staton Capital chairman Daniel Staton told news outlets that Purplevine IP, a Chinese intellectual property service provider, was funding four lawsuits in the U.S., including one against Samsung. The disclosure came after one of the lawsuits was filed before U.S. District Judge Colm F. Connolly in the District of Delaware, who has a standing order requiring third-party funders to be revealed for cases in his courtroom. The case has since been transferred to another judge. Staton Techiya LLC v. Harman International Industries Inc. et al., 1:23-cv-00802-JCG (Del. Dist. Ct., filed Jul. 25, 2023). 

In November, Connolly said he would refer some lawyers with Texas patent firm IP Edge LLC to the U.S. Justice Department, Patent & Trademark Office, and ethics officials. In a 105-page letter, the judge said these attorneys flouted professional conduct rules and violated his standing order by shielding IP Edge's identity. Nimitz Technologies LLC v. CNET Media, Inc., 1:21-cv-01247-CFC (Del. Dist. Ct., filed Aug. 30, 2021).

Pointing to Burford's announcement in October that it was expanding its partnership with an unidentified "sovereign wealth fund strategic partner," attorney Jonathan Stroud said there was clear evidence of overseas entities financing cases in U.S. courtrooms. According to a news release, the partnership had committed $872 million to direct capital provision assets, of which $435 million was remaining, as of June 2023. 

Noting that there was little data available about the prevalence of foreign third-party funders, Stroud said the news about the Russian firm and Abu Dhabi-based Mubadala Investment Co.'s $3 billion purchase of Fortress Investment Group showed that there is a real concern about the impact of international backers in U.S. litigation. The deal is under review by the Committee on Foreign Investment in the U.S.

For national security purposes, there should be a federal database for litigation funders, said Stroud, a lawyer with Unified Patents LLC. "But litigation funding disclosures would probably be most efficiently handled by the courts themselves, just because they are the vehicle for the investment and it's a financial outcome tied directly to the outcome of the litigation," he added. 

Thibault Denamiel, an associate fellow at the Center for Strategic and International Studies whose focus includes U.S. national security, said there is little data to determine whether the threat of foreign interference is significant. "The lack of transparency around third-party funders means that we do not know what kind of entities may have access to our legal system," he said. 

Denamiel highlighted an antitrust lawsuit in Minnesota involving wholesale food distributor Sysco, backed by Burford, as a notable case involving an overseas funder. In February, U.S. Magistrate Judge John F. Docherty denied Burford's request to allow a subsidiary to take over as the plaintiff, writing in his order that Burford was primarily motivated by financial interests. U.S. District Judge Thomas Durkin in Chicago granted Burford's request in a similar case a month later, saying the plaintiff substitution was "an unsurprising and logical result of the dispute between Sysco and Burford that arose from the funding agreement." 

Burford does not generally take control of litigation in which it invests, said Cohen. The Sysco situation "resulted from a lot of interaction between the parties and the resulting agreement was a workout between us and Sysco that is not the normal course of business for us," he said. 

While pressing issues need to be addressed within third-party litigation finance, Stroud said meaningful regulations will likely not be passed anytime soon, even though the topic has been debated since at least the 1970s. "You talk to people on the Hill or at the state level, or even funders themselves, and most of them don't vociferously oppose disclosure as part of the next logical step for the industry ... but creating the political will to actually generate a new disclosure requirement, it's so much easier for the courts and Congress to do nothing," he said. 

In 2016, the Northern District of California considered amending its local rules to explicitly require the disclosure of litigation funders but decided against the change. Instead, the district updated its local rules the following year to require the disclosure of any party with a financial interest in the proceedings. 

Denamiel said reform in this area will likely gain traction for national security reasons rather than the other disadvantages that merit attention. Third-party litigation funding "risks skewing incentives by encouraging financial return over fair reparation for plaintiffs and perhaps provokes frivolous lawsuits. These issues are not tied to geopolitics and niche cases of espionage; they're probably the larger problem at hand because they're more likely to occur. Nevertheless, Washington's eyes are turned on managing economic competition with China, at the heart of which lies considerations around preventing IP theft by [Chinese] entities. That policy direction is here to stay, and third-party litigation funding reform will likely happen at the federal level under these auspices," said Denamiel.