China, Russia could use U.S. courts to get military tech, intellectual property, experts warn

China, Russia could use U.S. courts to get military tech, intellectual property, experts warn

Sen. John Kennedy is sounding the alarm over a potential misuse of the U.S. legal system that would allow adversaries such as Russia and China to fund lawsuits against American companies and use the discovery process to obtain military technology or intellectual property.

Mr. Kennedy, Louisiana Republican and a member of the Senate Judiciary Committee, sent a letter this month to U.S. Chief Justice John G. Roberts Jr. and Attorney General Merrick Garland raising the national security risks linked to third-party litigation funding, which has little to no transparency requirements.

“Few safeguards exist in any form of law, rule, or regulation to prevent foreign adversaries from participating in civil litigation as an undisclosed third-party in our country’s federal courtrooms — this resulting in our national security and our entire government being vulnerable to manipulation,” Mr. Kennedy wrote in his Jan. 6 letter.

“As a member of the Judiciary Committee, I ask that the Department of Justice provide details about any course of action that has been taken to mitigate this threat. I also recommend that the Judicial Conference of the United States consider proactively providing guidance to courts from coast to coast as means of preventing foreign entities from hijacking our federal judiciary,” he said.

Third-party litigation funding, or TPLF, is a commercial enterprise in which a third party — potentially a hedge fund or even a sovereign wealth fund connected to a government — pays a plaintiff’s legal costs to fund a lawsuit with the intent to reap a portion of the awards if the litigation prevails.

Unregulated industry

The practice has grown in the United States to become an annual $2.5 billion to $5 billion industry, according to the Institute for Legal Reform, a tort reform advocacy group affiliated with the U.S. Chamber of Commerce.

The Government Accountability Office studied the practice and issued a report in December. It found that the enterprise began in the United States around 2010.

The GAO report emphasizes that the TPLF industry is not “specifically” regulated under federal law and that there is no nationwide requirement to disclose litigation funding agreements.

“Publicly available data on the market are limited. Some policymakers have raised concerns about the transparency of funding arrangements and other issues,” the report reads.

“Funders and stakeholders [interviewed by the GAO] identified several advantages and disadvantages of third-party litigation financing for users and investors,” the report reads. “For example, this funding can help underfunded plaintiffs litigate their cases. However, it is expensive and may deter plaintiffs from accepting a settlement offer because they may want to make up the amount they will repay the funder.”

An appendix of the GAO report identifies members of the International Legal Finance Association, a collection of global funding sources for commercial lawsuits, and members of the American Legal Finance Association, a similar collection for U.S. litigation.

A spokesperson for the International Legal Finance Association, whose members include Burford Capital, Omni Bridgeway and Parabellum Capital, dismissed some of the concerns raised by Mr. Kennedy and the Institute for Legal Reform.

“The claims in this letter come directly from baseless Chamber of Commerce talking points, which are unsupported by any evidence. The primary takeaway from this should be the desperation of the Chamber of Commerce. Having unsuccessfully achieved their preferred policy goals, they have now sunken to fearmongering in their efforts to impose regulations that benefit some of their donors,” the spokesperson said. “The commercial legal finance industry provides an essential financing tool that significantly benefits business, especially its ability to level the playing field.”

A spokesperson for the American Legal Finance Association did not immediately respond to a request for comment. The group’s members include Bridgeway Legal Funding, Law Street Capital and Plaintiff Support.

Funding lawsuits

In the discovery process, a company being sued may have to give the plaintiffs access to its records and communications. An undisclosed funder could use the information to obtain intellectual property or other sensitive information.

A spokesperson for the Supreme Court did not respond to a request for comment about Mr. Kennedy’s letter. A spokesperson for the Justice Department confirmed that it had received and would respond to the letter.

In his letter, Mr. Kennedy points to a lengthy November report from the Institute for Legal Reform that detailed several third-party litigation funding sources, including Burford Capital, Ryval and Omni Bridgeway.

According to the institute, Burford Capital invested $4 million into a lawsuit against Chevron in Ecuador in 2020 claiming pollution in exchange for a share of the awards.

Page Faulk, the Institute for Legal Reform’s senior vice president for legal reform initiatives, said it’s unclear who is putting money into groups such as Burford Capital that are backing such lawsuits.

However, Burford Capital spokesperson David Helfenbein took issue with that assessment.

“Burford is a publicly listed company on both the NYSE and LSE, which requires us to be transparent in our finances and business operations,” Mr. Helfenbein said in an email. “We have gone through the highest levels of scrutiny to list publicly, and we also file public reports throughout the year. We would encourage anyone interested in our business to visit our website and review our financial materials and the publicly available information on our business.”

Spokespersons for Ryval and Omni Bridgeway declined to comment on their activities or Mr. Kennedy’s concerns.

“We make the playing field level. And that’s what people should be wanting in litigation,” Mr. Bogart said. “We are a multibillion-dollar company because litigation is expensive. And there’s an awful lot of demand from businesses for this kind of solution.”

Burford Capital backed Craig Underwood, a small jalapeno farmer in California who sought to recover more than $20 million from a breach of contract deal that caused his farming business to crumble. He won in court with funding from Burford but ended up paying $8 million to the company, which had invested $4 million into the legal fight.

“They stepped in and helped us out when we couldn’t have gotten money from anybody else. They basically rescued us,” Mr. Underwood told CBS.

Chinese connection?

The Institute for Legal Reform’s report cautioned that China Investment Corp., Beijing’s sovereign wealth fund, may be financing litigation within the U.S.

“Although the extent of foreign TPLF investment in U.S. litigation remains largely unknown due to the current lack of TPLF transparency (which is itself a national security concern), the limited information available suggests that non-U.S. citizens, including sovereign wealth funds, are in fact participating in the U.S. TPLF market,” the report says.

Liu Pengyu, a spokesperson for the Chinese Embassy, dismissed speculation about Chinese interference in U.S. courts.

“The Chinese side firmly opposes such claims, which are purely subjective and fabricated. China has always adhered to the principle of non-interference in other countries’ internal affairs. We will not interfere in the judicial process in the United States,” Mr. Liu said.

“Some U.S. politicians continue to generalize the concept of national security and put obstacles in the way of China-U.S. relations and cooperation in various fields. We urge the U.S. to abandon its zero-sum mentality and stop slandering and attacking China under the pretext of national security,” he said.

To bring transparency, Ms. Faulk said, Congress or the executive branch could require foreign actors to disclose in court filings that they are funding litigation.  » …
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