There is a secretive multibillion-dollar global industry that operates with no oversight, impacting our lawsuit system. Third party litigation funding (TPLF) allows hedge funds and other financial entities to invest in lawsuits in exchange for a portion of any settlement or award, and there is currently no universally applicable mandatory disclosure requirement safeguarding our courts.
Originally sprouting in Australia, TPLF has grown roots in Europe and the U.S., now extending its reach globally. This growth comes without important disclosure requirements and safeguards, leading to significant concerns about the integrity of litigation and the justice system at large.
Litigation Funders Are Attempting to Exert Control Over Lawsuits
One of the most significant issues with TPLF is its potential to incentivize frivolous or non-meritorious litigation. Since the financial backers of TPLF typically cover much, if not all, of the legal expenses, plaintiffs face minimal risk in bringing forward claims, legitimate or not. This dynamic often pressures businesses to settle out of court to avoid the costs and uncertainties of protracted litigation, even when the claims against them lack merit.
TPLF funders also may have undue influence and control over strategic litigation decisions, including whether and when to settle a case. Their control over the litigation can conflict with the plaintiff's desire to settle their claim, as funders are looking to maximize their return on investment rather than justice for the plaintiffs.
A recent example of a litigation funder’s attempt to control litigation exhibits the serious concerns about the role of funders in the system. Burford Capital, one of the largest global litigation funders, tried to take control of the food distributor Sysco's antitrust lawsuit, prioritizing its own financial gain over the plaintiff’s desire to settle the litigation. This case is another example of the need for careful consideration of how much influence financial backers should have in legal proceedings and calls for a closer look at the impact of TPLF on the fairness of the legal process.
TPLF Is a Risk to National Security
Aside from the ethical implications, there is a growing concern that a large volume of foreign-sourced money may be pouring into U.S. courts via TPLF, raising significant national and economic security risks. A foreign actor could control the litigation, influence strategy, and encourage and exploit commercial disputes involving U.S. companies to advance their own national interests—in defense, technology, and other highly sensitive industries— while gaining important intellectual property (IP) about U.S. companies. There are already reports indicating that sovereign wealth funds and non-U.S. citizens are investing in U.S. litigation.
A recent Bloomberg Law report shows that Russian billionaires tied to President Putin are secretly pouring money into U.S. courts through TPLF. A1, a subsidiary of Russian financial giant Alfa Group, has funded lawsuits in New York and London and is funding at least a dozen cases around the world and is using the TPLF business as a way to avoid sanctions.
In another case, PurpleVine IP, a Chinese third-party litigation investment firm, is financing many IP lawsuits in U.S. courts against Samsung and a subsidiary.
States Enact Legislation to Put Limits on Litigation Funding
Recognizing the multifaceted risks posed by TPLF, several states are moving to enact legislation to curtail its unchecked expansion.
Last year, Montana Gov. Greg Gianforte signed into law SB 269, which, among many things, requires disclosing TPLF agreements in all civil cases before Montana courts. The law will bring much-needed transparency to Montana courts by publicly disclosing who might be funding a lawsuit and if they’re controlling it.
Indiana’s HB 1160, recently signed into law by Gov. Eric Holcomb, will prevent foreign adversaries from influencing the litigation process, prohibit funders from accessing proprietary data, and ban funders from influencing or controlling lawsuits. It also requires funding to be disclosed during litigation.
West Virginia’s newly signed SB 850 expands the scope of an existing law on consumer litigation finance. The state legislature acted in 2019 to provide transparency when loans are linked to litigation and protect individual consumers from funder misconduct and control. SB 850 will extend this transparency and protection to encompass developing large-scale litigation funding models. This wider scope will protect West Virginia businesses, as well as individuals.
Other states like Louisiana, Kansas, and Oklahoma are considering legislation to require disclosure of TPLF. These initiatives aim to introduce transparency, accountability, and limitations to mitigate the adverse effects of litigation funding.
Bipartisan Federal Legislation Tackles Foreign Influence in TPLF
A bipartisan group of lawmakers has taken a first step toward mandatory disclosure of foreign litigation funders investing in U.S. litigation. Senators John Kennedy (R-LA), Joe Manchin (D-WV), and Speaker Mike Johnson (R-LA) introduced the Protecting Our Courts from Foreign Manipulation Act of 2023, which would require transparency to courts, parties, and the Department of Justice when foreign persons and entities invest in U.S. litigation and would prohibit foreign governments and sovereign wealth funds from investing in U.S. litigation.
Plaintiffs, defendants, judges, and enforcement officials all need to know when a third-party funder is present in litigation—especially when that funder is a foreign entity. The sooner the Protecting Our Courts from Foreign Manipulation Act is enacted into law, the sooner we can strengthen our defenses against potential threats to our federal court system.
The potential for TPLF to distort legal outcomes, compromise ethical standards, and endanger national security requires a proactive approach from policymakers at all levels. Safeguards and transparency are paramount to preserving the integrity of the legal system and protecting individuals, businesses, and the nation.
About the authors
Matt Webb
Matt Webb oversees the development and advocacy of ILR’s position and policy on key federal legal reform issues including securities litigation, preemption, alternative dispute resolution mechanisms, class action reform, tobacco-Medicaid litigation, the False Claims Act, attorney fee shifting, shareholder activism, and campaign finance reform.
