Senators Push for Disclosure of Foreign Ties in US Lawsuits

Policemen take part in a raid on entertainment venues in Beijing on Oct. 25, 2006. The raid is part of Beijing police's efforts to crackdown on drug abuses, gambling, and prostitution at entertainment venues in the Chinese capital. Photo by China Photos/Getty Images

Senators across the political spectrum are calling for transparency in third-party funding of litigations in U.S. courts, citing large amounts of “foreign-sourced” money pouring into U.S. civil suits against companies and industries that pose significant national and economic security threats.

Last week, in a letter to the chief judges of Florida’s three federal districts—a total of 15 district courts—Sens. Marco Rubio (R-Fla.) and Rick Scott (R-Fla.) sought the enforcement of disclosure rules for foreign third-party litigation funding.

“Foreign Third-Party Litigation Funding (TPLF) poses a threat to our judicial system as it allows for foreign actors, including adversaries, to represent their interests in U.S. courts,” the two senators wrote. “This is especially troubling as they are not parties in the suit.”

Sen. Marco Rubio (R-Fla.) in Washington on July 11, 2023. Madalina Vasiliu/The Epoch Times

Lawmakers have a responsibility to safeguard the independence of the court and prevent the strategic advantages of the United States from falling into the hands of hostile foreign entities, they said. This responsibility includes the duty to protect the legal system from being used as a tool by foreign actors.

The senators’ push follows the introduction of the Protecting Our Courts from Foreign Manipulation Act of 2023 in September by Sens. Joe Manchin (D-W.Va.) and John Kennedy (R-La.), which, if passed, would stop foreign entities and governments from funding litigation in the United States.

“Foreign actors such as China and Russia use third-party litigation funding to support targeted lawsuits in the United States, undermining our economic and national security,“ Mr. Manchin said. ”This legislation would provide a commonsense strategy to protect our legal system by requiring greater transparency and accountability from third-party groups and preventing foreign governments and sovereign wealth funds from funding litigation. I urge senators on both sides of the aisle to support this bipartisan bill to ensure that our federal courts are protected from foreign influence.”

Sen. Joe Manchin (D-W.V.) in Washington on Feb. 16, 2023. Kevin Dietsch/Getty Images

Mr. Kennedy said: “Leaving our courts unprotected from foreign influence—such as from China—poses a major risk to U.S. national security. The Protecting Our Courts from Foreign Manipulation Act would put necessary safeguards in place to ensure that foreign nations, private equity funds and sovereign wealth funds linked to hostile governments are not tipping the scale in federal courtrooms.”

The act has several linked goals, including better tracking and reporting of foreign fundraising, a ban on funding from foreign governments and sovereign wealth funds, and more.

Multibillion-Dollar Stake

TPLF is a practice by which interests that aren’t directly engaged in a lawsuit provide funds to litigants in exchange for potential monetary returns from such litigation.

A global industry worth billions of dollars—$13.5 billion with $3.2 billion in new investments last year, according to Bloomberg Law estimates—TPLF also allows hedge funds and other foreign financiers to invest in a lawsuit.

“Foreign TPLF may come from several sources, including the foreign state directly through sovereign wealth funds, as well as de facto arms of the state,” Mr. Rubio and Mr. Scott wrote. “These funds are typically not disclosed, and funders are able to exert an exorbitant amount of influence on the nature and direction of litigation through their financial contributions. The potential impacts of allowing unfettered and undisclosed foreign TPLF throughout the judiciary could be severe, unless properly addressed.”

According to the U.S. Chamber of Commerce Institute for Legal Reform (ILR), in recent years, TPLF has proliferated to such a degree that it permeates virtually every aspect of civil litigation in the United States. However, despite this proliferation, numerous courts remain unaware of this phenomenon, primarily because of the fact that TPLF arrangements don’t have to be disclosed and are seldom disclosed to the court.

Consequently, this litigation funding industry operates in secret, ILR President Harold Kim said on the institute’s website.

“This threatens the U.S. judicial system by allowing foreign actors to represent their interests in U.S. courts, which is especially alarming, given that they are not parties in the suit,” Matt Webb, ILR’s senior vice president of legal reform policy, told The Epoch Times.

The federal government, for instance, has taken steps to restrict foreign access to some types of U.S. technology, but there’s no provision in the legal system to stop foreign adversaries from gaining access to sensitive information about U.S. technology through the discovery process in litigation.

A gavel, in a file photo. Demetrius Freeman/Pool/Getty Images

The China Threat

While TPLF is a global phenomenon, it has been especially prevalent in the United States. According to Swiss Re, a reinsurance company, more than half of the $17 billion invested in litigation funds globally in 2020, for example, was pumped into the United States.

Nevertheless, although U.S. courts have witnessed TPLF from the UK and Australia for many years, the recent disclosure of a Chinese interest paying for a suit in a U.S. litigation case has alarmed the senators and legal experts.

According to a news article by RPX Insight, Staton Techiya LLC filed a pair of Delaware cases this July against the Harman Kardon division of Samsung subsidiary Harman International Industries, targeting the provision of automobile audio systems and earbuds, including those offered by Harman’s JBL and AKG Acoustics.

Reportedly, Staton Techiya filed a statement identifying PurpleVine IP Operating (Shenzen) Co. as a “Third-Party Funder with which it has made arrangements to receive funding for its attorneys’ fees and expenses to litigate this action on a non-recourse basis in exchange for a financial interest that is contingent upon the results of the litigation that is not in the nature of a personal loan, bank loan, or insurance.”

Staton Techiya revealed that “PurpleVine IP’s approval is not necessary for litigation or settlement decisions in this action” and that it “has no authority to make litigation decisions or settlement decisions.” According to Staton Techiya’s statement, PurpleVine IP “is a company organized under the laws of the People’s Republic of China.”

A recent ILR note also warned that the Chinese sovereign wealth fund China Investment Corporation could fund a suit against an American company in a sensitive industry, such as military technology, and obtain highly confidential documents containing proprietary information about sensitive technologies in the process.

High Costs

“TPLF has a direct impact on U.S. businesses and consumers as well,” Mr. Webb said.

An ILR study published in November 2022 found that spending and compensation in the U.S. tort system shot up to $443 billion in 2020, “the highest tort cost levels since at least 2016” and equal to 2.1 percent of U.S. gross domestic product, or $3,621 per American household.

A study by the Swiss Re Institute also revealed that TPLF contributes to higher awards, lengthier cases, and higher legal expenses. Longer lawsuits, on average, increase claim costs because of higher legal charges, yet TPLF transfers a larger portion of legal awards to the fund provider rather than the plaintiff.

The returns are attractive, too. TPLF investments have achieved internal rates of return of 25 percent or higher in recent years, beating even risky asset groups such as venture capital.

“We see TPLF as a contributor to social inflation in the US, by incentivizing litigants to initiate and prolong lawsuits,“ the study reads. ”Higher claims costs drive up insurance premiums, can reduce the availability of liability cover, and lead to higher uninsured legal liability risks for US businesses. These costs are ultimately paid by consumers.”

Hurdles

Still, despite the growing support from the lawmakers, the act must overcome several obstacles before it can be passed.

“For one, the bill is in the early stage of the legislative process,” Mr. Webb said, and it could be changed during the legislative process, delaying or even preventing it from becoming law.

The bill could also attract opposition from lawmakers who disagree with its provisions or are swayed by outside interests.

If the bill is approved by the Senate, it‘ll be submitted to the House of Representatives for consideration, and if approved there, it’ll be sent to the president for signature before becoming law.

“We urge Congress [then] to quickly pass it to protect consumers, businesses, and U.S. national and economic security,” Mr. Kim wrote.