There’s a tool that could give foreign adversaries a way to disrupt the U.S. economy and political system—funding litigation in U.S. courts.
Third-party litigation funding turns the American justice system into a financial playground by transforming lawsuits into investment vehicles. Hedge funds, specialty firms and others fund plaintiffs in exchange for a share of a lawsuit’s proceeds.
Some arrangements get exposed.
was revealed as the secret funder behind
lawsuit against Gawker. As the Journal reported in May 2020, Elliott Management planned to finance a lawsuit against streaming company Quibi and take an equity stake in the outcome. And foreign-funded shell companies underwrite many patent-infringement lawsuits against U.S. firms in industries critical to national security.
Beyond headliner cases, big litigation funders like
Gerchen Keller Capital and
report investing hundreds of millions of dollars in pursuit of profit from litigation outcomes, spreading risks across broad portfolios. They don’t report on the specific cases they fund.
Litigation financing is normally done through confidential contracts, and disclosure generally isn’t required. Researchers are mostly in the dark about the extent of control by funders or the number and types of cases they influence. Thus the overall effects of litigation financing on American innovation and economic dynamism can’t be measured.
The U.S. Chamber of Commerce Institute for Legal Reform warns of the foreign danger in a Nov. 2 report titled “A New Threat: The National Security Risk of Third Party Litigation Funding.” Foreign financiers might see this opaque third-party funding mechanism as an exploitable fissure in the U.S. legal system through which to weaponize the courts for strategic goals.
Foreign adversaries can fund frivolous litigation to overwhelm U.S. courts, target lawsuits to weaken critical industries, or obtain confidential materials through the discovery process. Enemy funders might also push theories or use court filings as part of the well-documented disinformation campaigns they already wage through social media.
The report recommends disclosure and transparency requirements to reveal the existence of litigation financing by foreign states or their agents. But this threat requires an even more serious response: If a foreign adversary is funding lawsuits in the U.S., that country should be deemed to have waived its immunity from being sued in U.S. courts. This should apply to all cases, even those it isn’t funding. Congress should amend the Foreign Sovereign Immunities Act accordingly.
States that invest in U.S. court cases implicitly endorse the basic fairness of the American justice system. They shouldn’t be able to turn around and say they deserve sovereign immunity because they don’t think they’ll get a fair shake from our courts. Would-be foreign state litigation funders might think twice before meddling in American courts if the price was the loss of sovereign immunity.
Mr. Kochan is a professor of law and deputy executive director of the Law & Economics Center at George Mason University’s Antonin Scalia Law School.
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Appeared in the November 25, 2022, print edition.