US Security is Threatened by Some Third-Party Litigation Funders‍

A vast network of technologies and patent property rights, whether it is in defense, high-tech, energy, or health care, today form a backbone for national and economic security. Every industry of national and economic importance relies on a vast network of technology and patent property rights that are all interrelated.

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Whenever lawmakers hear stories about espionage or intellectual property theft, they are rightfully concerned and captivated by them. What if, in addition to stealing US IP, foreign adversaries also used legal, well-established channels to accomplish many of the same goals, besides stealing US intellectual property? In the current situation, there is no oversight or transparency available to the litigation investment companies or third-party litigation funders utilizing US courts and patents for their benefit.

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There has been a growing trend in the US legal landscape where third-party litigation funds have become a common feature, as have litigation investment firms. Funders such as hedge funds, private equity funds, or sovereign wealth funds that are involved in litigation either pay for the litigation costs of plaintiffs in exchange for receiving a large share of any eventual payment, or they own shell companies that exist only to profit from litigation.

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In the last year, there have been an additional $3.2 billion in new investments in the US litigation funding market, putting the market value at $13.5 billion in a matter of months. IP investments are disproportionately affected by litigation investments. The majority of new litigation financing capital commitments in 2013 were directed toward patent litigation, following nearly 30% of capital commitments in 2012.

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The fact that most of these investments go undetected is even more troubling than the growth of a legal industry which monetizes IP litigation and the courts. Several courts have instituted funding transparency requirements for litigation, but most of the time investment companies are able to conduct lawsuits behind the scenes without revealing who they are.

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There is a clear danger associated with the US Chamber of Commerce Institute for Legal Reform report issued in November 2022, citing the fact that foreign adversaries have the opportunity to undermine American national interests through the infiltration of the American litigation system, pointing out that it provides a clear path for foreign adversaries to do so.

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In particular, foreign entities can damage the reputation of US competitors and drain their resources by controlling litigation from overseas, thus gaining access to sensitive information during litigation proceedings, while in the process damaging their reputation. As a result of the ILR report, it was highlighted that TPLF is a good indicator of the risks associated with litigation investment models generally.

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In spite of the fact that the threat posed by litigation investment entities is only just beginning to be recognized by lawmakers, it is still a relatively young issue. In a letter to the Department of Justice, a group of state attorneys general expressed concerns about TPLF being utilized to harm our states and threaten the country's economic and national security, and that foreign adversaries could weaponize the judicial system by lending to our States through strategic lending.

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As a member of the Republican Party, Senator Kennedy (R-LA) echoed this sentiment in a letter he sent to Merrick Garland and Chief Justice John Roberts in which he stated, “A foreign actor can advance its strategic interests in the shadows of little to no disclosure requirements in jurisdictions across our country if they simply finance litigation in the United States against influential individuals, corporations, or highly sensitive sectors.”

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In recent weeks, Chinese competitors, including some of the most powerful industrial powers in the world, have sent strong signals that they are ramping up their focus on intellectual property rights in a significant way. These signals are a sign that not only our competitors but a growing number of rivals are looking to exploit those rights.

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There was an increase in the level of authority of the China National Intellectual Property Administration by the Chinese National People's Congress, in order to expedite the “building of a powerful intellectual priority nation” by the Chinese National People’s Congress. The US must do the same, as China and others are investing more in promoting and protecting their intellectual property, or otherwise they will suffer the consequences.

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As part of our efforts to protect ourselves against ill-intentioned investment entities, it is imperative that we examine the true extent of the issue. Addressing this massive blind spot in the system will prevent litigation funders from manipulating U.S. innovators and our IP system in order to undermine our legal protections.

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TPLF and ownership information is being required by several courts to be disclosed by plaintiffs in order to implement transparency requirements. This is a positive step, but to be effective, transparency must be mandated nationally as well.

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I believe that it is vital that our courts and intellectual property are used clearly and efficiently, for the benefit of defendants, judges, juries, and lawmakers, whether through congressional action or amending the Federal Rules of Civil Procedure.

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It is important that we do not wait too long to put a spotlight on litigation investment entities, because the threat is only likely to grow, and we are farther from finding solutions the longer we wait. To combat the new threats posed by litigation investment entities to our security in a timely manner, we must first take steps to increase transparency in our courts.