In mid-September, the House Committee on Oversight and Accountability held a hearing titled Unsuitable Litigation: Oversight of Third-Party Litigation Funding. Then, Senators Joe Manchin (D-WA) and Joe Kennedy (R-LA) introduced the Protecting Our Courts from Foreign Manipulation Act (with a House companion bill), which aims to shed light on foreign private equity funding U.S. litigation.
It is encouraging that Congress has taken an interest in third-party litigation funding (TPLF) transparency, but unfortunately—except for a few brief moments—the hearing last month did not address the core threats that TPLF poses to US innovation and national and economic security. Thankfully, the Manchin-Kennedy bill does just that. It is critical that lawmakers seriously consider how to confront the looming threat of China and other competitive adversaries using litigation investment entities (LIEs) to undermine American industry and enrich themselves in the process.
LIEs—hedge funds, sovereign wealth funds, and other well-heeled competitive entities—spent $13.5 billion investing in plaintiffs in 2022, with nearly $1.5 billion going toward patent litigation alone over the last two years. TPLF is now widely debated—if still shrouded in mystery—but the debate thus far fails to capture the full scope of the bad actors who are bending our justice system for their own purposes. For example, investment firms that own non-practicing entities (NPEsNon-Practicing Entity. A broad term associated with trolls but now disfavored because it includes universities and legitimate technology developers that seek to license technology in advance rather than after a producing company has independently developed it. More) fund the practice of acquiring patents and monetizing them in vexatious litigation, but aren’t necessarily entering into proper third-party funding agreements with the entities they own. These LIEs aren’t technically litigation funders under the traditional (industry-supervised) definition, but that doesn’t mean the damage they inflict is any less serious.
Patent litigation is an attractive target for LIEs, given the enormous windfalls that juries have awarded litigants in some recent cases based on patents that were acquired for far less than the size of the eventual jury verdict. This activity is not only a threat to individual American companies; it is also, in the context of semiconductors and other key industries, a threat to American competitiveness in strategically important industries. A greater risk exists to our country’s national security and economic competitiveness if LIEs continue to act without oversight.
The full extent to which LIEs are backed by China or other countries with adverse interests remains unclear due to a near-total lack of transparency as to who is bankrolling lawsuits in our courts. One of the brief exchanges during the House hearing—between Representative Tim Burchett and Professor Maya Steinitz—got to the crux of the threat LIEs pose:
Q: Are there federal laws that require the disclosureOne of the primary objectives of the patent system. In return for the government-granted right to exclude that is embodied in the patent, the inventor must disclose to the public through his patent the invention for which protection is sought. Inventors unwilling to disclose their invention to the public may instead opt for trade secret protection. of third-party litigation financing?
A: Currently there are no laws that directly require that, no.
Q: Do you know the total number of litigation investors operating in the US?
A: No, the total number is not known.
Q: Do you generally know the rate of return for these investors?
A: No, that is also private information.
Q: So foreign countries can fund US litigation?
A: They can invest in third-party funders that invest in the US, yes.
Q: Would this mean that foreign adversaries and other bad actors could potentially exploit our litigation system to advance their home industries?
A: Potentially, yes.
Q: Could litigation funded by foreign adversaries potentially delay technology critical to national security?
A: Potentially, yes.
Q: Could third-party litigation funding potentially allow foreign adversaries to access privileged information?
A: Potentially, yes.
Q: Without federal regulations is it possible to determine the extent to which non-US persons or entities are engaged in third-party litigation funding?
A: No, without regulation there is no way to do so.
Rep. Burchett’s questioning echoes the concerns raised in a letter sent by 14 state attorneys general to US Attorney General Merrick Garland last December regarding the ways foreign adversaries may be using litigation investment tactics to weaken the US. They warned that foreign countries such as China and Russia could use TPLF to fuel targeted lawsuits designed to weaken defense companies in the business of protecting our national security interests.
Of particular concern to the attorneys general is the activity of China, a country that is already well-positioned to manipulate the American patent system and that announced at its 14th National People’s Congress that it will elevate its focus on intellectual property as part of its efforts to shore up its own national security priorities. As Reuters reports, “Even the patent regulator will be promoted in the bureaucratic hierarchy: the National Intellectual Property Administration is set to sit directly under the powerful cabinet-like State Council, giving it a bit more heft.”
If China is going to use patent litigation as a resource in its national security toolbox, the United States must be prepared to counter it.
So, too, for investments originating in the Middle East. Many of the largest funders claim sovereign nation wealth funds—SWFs—as their primary (and perhaps majority) funders. While the identity of those SWFs is likewise unclear, press releases and other information suggest countries with troubling human rights records are likely benefitting from litigation against competitive US businesses.
All options should be on the table for confronting overseas LIEs. When confronting foreign adversaries, the United States uses a wide array of economic sanctions and restrictions. For example, the US stopped granting export licenses for Huawei, building on other restrictions it has imposed on the company since 2019 given the national security threat it poses. Yet, despite these measures, patents and intellectual property have largely been absent from the discussion.
Indeed, ad hoc disclosureOne of the primary objectives of the patent system. In return for the government-granted right to exclude that is embodied in the patent, the inventor must disclose to the public through his patent the invention for which protection is sought. Inventors unwilling to disclose their invention to the public may instead opt for trade secret protection. requirements by the Chief Judge in Delaware has revealed that Chinese companies have funded some patent litigation there—for instance, patent plaintiff Staton Techniya recently revealed non-recourse funding from a PRC-based entity of unknown origin.
The threat from LIEs is unlikely to go away anytime soon. Patent litigation remains an attractive target for foreign adversaries both due to the potential for lucrative rewards and the ability to hamstring US innovators. It’s critical, therefore, that policymakers take this threat seriously, consider transparency requirements for and restrictions on LIEs, and use the full suite of economic tools at their disposal when dealing with bad actors based abroad.
The Judicial Conference and Congress are now considering broader disclosureOne of the primary objectives of the patent system. In return for the government-granted right to exclude that is embodied in the patent, the inventor must disclose to the public through his patent the invention for which protection is sought. Inventors unwilling to disclose their invention to the public may instead opt for trade secret protection. requirements. But until broader action is taken, more judges should follow District of Delaware Chief Judge Colm Connolly’s lead and require plaintiffs to disclose any LIEs that are funding litigation. Transparency is a simple and enormously effective tool in combating threats posed by any bad actors in the litigation funding industry. It is a basic premise of America’s legal system that we know the identity of the parties appearing in court and using taxpayer money to reap the benefit of the judiciary. For now, however, the full extent of the threat we face remains murky at best.