Innovation is one of the foremost strategic assets that the United States possesses and has long been a differentiator for both national security and economic competitiveness. But today, foreign adversaries are increasingly working to neutralize this advantage. In fact, shortcuts to overcome America’s technological superiority, such as reverse engineering, intellectual property theft, corporate espionage and cyber intrusions now constitute official state policy in counties such as China and Russia.
Against the backdrop of these threats, it now appears that lax regulations and non-existent disclosure requirements surrounding the financing of mass tort litigation may be providing these adversaries yet another avenue to steal American secrets and skirt western sanctions – and one that is entirely legal. This has serious national and economic security implications that must be addressed.
Specifically, third party litigation financing, where outside investors in pursuit of profits provide the upfront money needed to mount civil lawsuits against American innovators and strategically important industries, has become a big business. Investors, attracted by the potential for huge returns that are not tied to economic or market conditions are sinking billions of dollars into litigations annually, and made litigation finance a $39 billionindustry in 2019.
Financiers have historically been in American hedge funds and private equity. But now it appears that sovereign wealth funds and other agents and entities controlled by or close to foreign governments are increasingly participating in such pursuits, and it may be for reasons other than financial gain.
They can do this largely in secret because current rules do not require the attorneys pursuing these cases to reveal their funding sources. This may very well be a prime motivator for foreign interests who want to invest in litigation and is especially true when their goal may not be monetary but rather to gain access to sensitive information about American industrial competitiveness or, even more concerning, inside insights into technologies and assets that support U.S. national defense superiority.
A new twist in the issues surrounding foreign third-party litigation financing has recently surfaced in the wake of sanctions imposed on Putin-associated Russian oligarchs and other Russian interests in response to the war in Ukraine. While the effect has been to largely keep these individuals and entities out of the U.S. financial system, the opacity of litigation finance has allowed Russian oligarchs to still invest in court cases when ties to banks, financial firms, and other market investments would be scrutinized and put their assets at risk of being seized.
The recent activities of the firm A1, a subsidiary of the giant Russian financial corporation Alfa Group are illustrative of the issue at hand. The company has backed litigation in both New York and London, even after three of the company’s billionaire founders were sanctioned in 2022 for their support of Putin, and has used such litigation funding arrangements to open a new “cross-border cash spigot” which not only undermines U.S. sanctions but also poses a potentially serious threat to American interests.
These incidents are deeply concerning and emphasize the need for the U.S. to reassess how it controls access to litigation investment opportunities for foreign nations or agents acting on their behalf. Fortunately, policymakers appear to be waking up to the threat and groups like the U.S. Chamber of Commerce have taken a leadership role in calling attention to the national security threats that could come from unregulated foreign litigation financing.
In a letter to the House Committee on Oversight and Accountability, which held a hearing on oversight of third-party litigation funding in 2023, the Chamber warned how as a result of the limited information available on foreign investors, “a foreign actor could control the litigation and influence its strategy to advance their own national interests, such as to gain access to sensitive information, damage U.S. companies, and influence U.S. policy to advance its own strategic interests at the expense of competing U.S. priorities.”
The Chamber then went on to endorse a 2023 bipartisan bill, the Protecting our Courts from Foreign Manipulation Act, introduced by Sens. John Kennedy (R-LA), Joe Manchin (D-WV) in the Senate, and now-Speaker Mike Johnson (R-LA) in the House that would require more transparency regarding foreign persons and entities who invest in U.S. civil litigation. The legislation would also totally prohibit foreign governments and sovereign wealth funds from investing in U.S. lawsuits and demonstrates the kind of proactive approaches that lawmakers must take to confronting this threat.
Instituting such rules and reforms to introduce more transparency into the actions of third-party funders and to keep those that would do America harm out of the process should be one of the top priorities for elected officials. As things stand now it is almost impossible to know whether many civil lawsuits are jeopardizing national security or the competitiveness of American companies, and that is simply unacceptable.
Michael Marks is the former Assistant Director of the Office of Science and Technology Policy and a Managing Partner at Intelligent Decision Partners, LLC which focuses on producing mission critical information to develop comprehensive risk management strategies concerning national security, competitive and opposition intelligence, and information defense, among other areas of importance.
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